-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MgG3Fkk+ewirLss749lZzlBPOPLqKXmul9v8ZehVaWZgeAIo+zQvrdsTFBT7Z4Ru m2+fLn5MbMbRtXGAZbrD/w== 0000950152-98-002030.txt : 19980317 0000950152-98-002030.hdr.sgml : 19980317 ACCESSION NUMBER: 0000950152-98-002030 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980316 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST FINANCIAL BANCORP /OH/ CENTRAL INDEX KEY: 0000708955 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 311042001 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12379 FILM NUMBER: 98566692 BUSINESS ADDRESS: STREET 1: THIRD & HIGH ST CITY: HAMILTON STATE: OH ZIP: 45011 BUSINESS PHONE: 5138674700 MAIL ADDRESS: STREET 1: THIRD & HIGH ST CITY: HAMILTON STATE: OH ZIP: 45011 10-K 1 FIRST FEDERAL 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K -------------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT Of 1934 For the fiscal year ended December 31, 1997 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 2,1998, there were issued and outstanding 16,554,190 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 2, 1998, was $893,926,000. (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, 1997 are incorporated by reference into Parts I, II and IV. Portions of the proxy statement dated March 16, 1998 for the annual meeting of shareholders to be held April 28, 1998 are incorporated by reference into Part III. ================================================================================ 2 FORM 10-K CROSS REFERENCE INDEX
Page ---- PART I Item 1 Business F-1 Item 2 Properties F-7 Item 3 Legal Proceedings F-7 Item 4 Submission of Matters to a Vote of Security Holders (during the fourth quarter of 1997) F-7 Additional Item - Executive Officers F-7 PART II Item 5 Market for the Registrant's Common Equity and Related Shareholder Matters F-9 Item 6 Selected Financial Data F-9 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations F-9 Item 7a Quantitative and Qualitative Disclosures about Market Risk F-13 Item 8 Financial Statements and Supplementary Data F-13 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure F-13 - ----------------------------------------------------------------------------------------------------------- PART III Item 10 Directors and Executive Officers of the Registrant F-14 Item 11 Executive Compensation F-14 Item 12 Security Ownership of Certain Beneficial Owners and Management F-14 Item 13 Certain Relationships and Related Transactions F-14 - ----------------------------------------------------------------------------------------------------------- PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K F-15 - ----------------------------------------------------------------------------------------------------------- SIGNATURES F-17
3 F-1 PART I ITEM 1. BUSINESS. First Financial Bancorp. - ------------------------ First Financial Bancorp., an Ohio corporation (Bancorp), is a bank and savings and loan holding company that engages in the business of commercial banking, and other permissible activities closely related to banking, through fifteen wholly owned subsidiary financial institutions: First National Bank of Southwestern Ohio (First Southwestern), Bright National Bank (Bright National), and National Bank of Hastings (Hastings), all national banking associations, Community First Bank & Trust (Community First), The Clyde Savings Bank Company (Clyde), both Ohio banking corporations, Union Trust Bank (Union Trust), Indiana Lawrence Bank (Indiana Lawrence), Citizens First State Bank (Citizens First), Union Bank & Trust Company (Union Bank), Peoples Bank and Trust Company (Peoples Bank), Farmers State Bank (Farmers) and Vevay Deposit Bank (Vevay), all Indiana banking corporations, Fidelity Federal Savings Bank (Fidelity Federal), and Home Federal Bank, a Federal Savings Bank (Home Federal), both federal savings banks. First Finance Mortgage Company of Southwestern Ohio (dba Community First Finance) is Bancorp's only finance company. Bancorp provides management and similar services for its subsidiary financial institutions. Since it does not itself conduct any operating businesses, Bancorp must depend largely upon its fifteen 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 39 of Bancorp's Annual Report to Shareholders, which is incorporated by reference in response to this item. Bancorp was formed in 1982 for the purpose of becoming the parent holding company of First Southwestern. For additional information, please see "Subsidiaries" on page F-2. Bancorp is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Bancorp is also a savings and loan holding company under the savings and loan holding company provisions of the Home Owners' Loan Act of 1933, as amended by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). As such, Bancorp is subject to strict regulation regarding the acquisition of additional financial institutions and the conduct, through subsidiaries, of non-banking activities (see "Regulation" on page F-4). Bancorp faces strong competition from both financial institutions and other non-financial organizations. Its competitors include local and regional financial institutions, savings and loans, and bank holding companies, as well as some of the largest banking organizations in the United States. In addition, other types of financial institutions, such as credit unions, also offer a wide range of loan and deposit services that are directly competitive with those offered by Bancorp's subsidiaries. The consumer is also served by brokerage firms and mutual funds that provide checking services, credit cards, and other services similar to those offered by Bancorp's subsidiaries. Major stores compete for loans by offering credit cards and retail installment contracts. It is anticipated that competition from entities other than financial institutions will continue to grow. The range of banking services provided by Bancorp's subsidiaries to their customers includes commercial lending, real estate lending, consumer credit, credit card, and other personal loan financing. Fidelity Federal and Home Federal are full service savings banks with their primary 4 F-2 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 Southwestern, Community First, Citizens First, Clyde, and Bright National also offer lease financing. In addition, the institutions offer deposit services that include interest-bearing and noninterest-bearing deposit accounts and time deposits. Most subsidiaries provide safe deposit facilities. A full range of trust and asset management services is provided by Bancorp's subsidiaries, excluding the savings banks and the finance company. Each subsidiary retains its local identity and operates under the direction of its own board of directors and officers. Bancorp and its subsidiaries operate in one business segment--the financial institutions industry. Foreign transactions are nominal. Information regarding statistical disclosure required by Industry Guide 3 is included in Bancorp's Annual Report to Shareholders for the year ended December 31, 1997, and is incorporated herein by reference. At December 31, 1997, Bancorp and its subsidiaries employed 1,317 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, 1997, First Southwestern had 30 offices located in Butler, Warren, Preble, and Hamilton Counties in Ohio with total deposits of $772 million. First Southwestern has a total of 29 automated teller machines (ATM) of which four ATMs are at sites other than branches. Community First Bank & Trust joined Bancorp on November 1, 1997, as the merger of two of Bancorp's subsidiaries, the Citizens Commercial Bank & Trust Company and Van Wert National Bank, was completed. On December 8, 1997 Community First purchased the assets and assumed the liabilities of eleven branches of KeyBank National Association. As of December 31, 1997, Community First had deposits of $506 million and operates 21 offices in Auglaize, Allen, Mercer, Paulding, Williams and Van Wert Counties in Ohio. Community First operates nine ATMs, of which one is at a remote site. Union Trust merged with Bancorp on September 1, 1989, as a wholly owned subsidiary. Union Trust has one ATM and operates three offices in Randolph County, Indiana and had $38 million in deposits on December 31, 1997. 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. Upon merger in April 1996, Bancorp's new subsidiary, Farmers & Merchants Bank of Rochester, Rochester, Indiana was merged with Indiana Lawrence. As of December 31, 1997, Indiana Lawrence had deposits of $130 million, two ATMs, of which one is at a remote site, and operated five offices in Wabash County, Indiana and three offices in Fulton County, Indiana. 5 F-3 Fidelity Federal merged with Bancorp on September 21, 1990 as a wholly owned subsidiary. Fidelity Federal operates three offices in Grant County, Indiana and has one ATM. Total deposits at December 31, 1997 were $60 million. Citizens First joined Bancorp on October 1, 1990 as two separate entities, Trustcorp Bank, Hartford City, and Trustcorp Bank, Dunkirk. These two entities were purchased from Society Corporation for cash. On that same date, Trustcorp Bank, Hartford City was renamed Citizens First State Bank of Hartford City and Trustcorp Bank, Dunkirk was renamed Citizens First State Bank of Dunkirk. On July 1, 1991, those two banks merged to become one wholly owned subsidiary of Bancorp. Citizens First operates four offices in Blackford County, Indiana, one office in Jay County, Indiana, and one office in Delaware County, Indiana. Citizens First has four ATMs of which one is at a site other than branches, and had total deposits of $82 million at December 31, 1997. 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 four 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 $231 million at December 31, 1997. Home Federal has six ATMs 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, 1997 of $73 million. Union Bank has three ATMs, two of which are at sites other than branches. On June 1, 1994, First Clyde Banc Corp., the parent holding company of Clyde, merged into and out of existence with Bancorp leaving Clyde as a wholly owned subsidiary of Bancorp. Clyde operates two offices and one ATM in Sandusky County, Ohio, with $58 million in total deposits as of December 31, 1997. On July 16, 1995, Peoples Bank and Trust Company merged with Bancorp. Located in Sunman, Indiana, Peoples Bank operates two ATMs and one office in Ripley County, Indiana and one office in Dearborn County, Indiana with total deposits of $42 million at December 31, 1997. On October 1, 1995, Bright Financial Services, Inc., Flora, Indiana merged with and into Bancorp leaving its subsidiary, Bright National, as a wholly owned Bancorp subsidiary. With deposits at December 31, 1997 of $108 million, Bright National operates four offices in Carroll County, Indiana, two offices in Tippecanoe County, Indiana and one office in Clinton County, Indiana. Bright National has six ATMs. First Finance began full operations on May 8, 1996. First Finance, incorporated and wholly owned by Bancorp, is a retail finance company and operates from an office in Fairfield, Ohio. In November 1997, First Finance opened a second office in Middletown, Ohio. 6 F-4 Bancorp purchased Farmers State Bancorp, Liberty, Indiana, on December 1, 1996. Farmers State Bancorp was merged into Bancorp and out of existence, leaving its only subsidiary, Farmers, as a wholly owned Bancorp subsidiary. Farmers operates two offices in Union County, Indiana and three offices in Rush County, Indiana. At December 31, 1997, Farmers had total deposits of $52 million and has 1 ATM location. On January 1, 1997, Hastings Financial Corporation, a one bank holding company in Hastings, Michigan, was merged into Bancorp and out of existence. As a result of the merger, its only subsidiary, Hastings, became a wholly owned subsidiary of Bancorp. As of December 31, 1997, Hastings had $42 million in deposits and operates one office in Barry County, Michigan and one office in Allegan County, Michigan. Hastings operates three ATMs of which one is at a location other than a branch. Bancorp purchased Southeastern Indiana Bancorp (SIB) on June 1, 1997. As a result of the purchase, SIB was merged into Bancorp and out of existence and its only subsidiary, Vevay, became a wholly owned subsidiary of Bancorp. Vevay has two ATMs and four offices in Switzerland County, Indiana and had deposits of $48 million as of December 31, 1997. Regulation - ---------- First Southwestern, Bright National and Hastings, as national banking associations, are subject to supervision and regular examination by the Comptroller of the Currency. Community First and Clyde, as Ohio state chartered banks, are subject to supervision and regular examination by the Superintendent of Banks of the State of Ohio. First Southwestern, Community First, Clyde, Peoples Bank, Bright National, and Hastings are members of the Federal Reserve System and, as such, are subject to the applicable provisions of the Federal Reserve Act. Community First is also subject to regular examination by the Federal Reserve System. Union Trust, Indiana Lawrence, Citizens First, Union Bank, Peoples Bank, Farmers and Vevay, as Indiana state chartered banks, are subject to supervision and regular examination by the Indiana Department of Financial Institutions. Fidelity Federal and Home Federal, as federal savings banks, are subject to supervision and regular examination by the Office of Thrift Supervision. Since Fidelity Federal is located in Indiana, it is also subject to examination by the Indiana Department of Financial Institutions. First Finance is subject to supervision and regular examinations by the State of Ohio Division of Consumer Finance. All depository institutions are insured by the Federal Deposit Insurance Corporation and are subject to the provisions of the Federal Deposit Insurance Act. To the extent that the information below consists of summaries of certain statutes or regulations, it is qualified in its entirety by reference to the statutory or regulatory provisions described. Bancorp is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the Act), which requires a bank holding company to register under the Act and to be subject to supervision and examination by the Board of Governors of the Federal Reserve System. As a bank holding company, Bancorp is required to file with the Board of Governors an annual report and such additional information as the Board of Governors may require pursuant to the Act. The Act requires prior approval by the Board of Governors of the acquisition by a bank holding company, or any subsidiary thereof, of 5% or more of the voting stock or substantially all the assets of any bank within the United States. Prior to the passage of FIRREA, it was not possible for bank holding companies, such as Bancorp, to acquire "healthy" thrift institutions. Although such acquisitions are now authorized, mergers between bank holding companies and thrift 7 F-5 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 association, operating a credit bureau and conducting certain real estate investment activities and acting as insurance agent for certain types of insurance, are closely related to banking within the meaning of the Act. It also has determined that certain other activities, including real estate brokerage and syndication, land development, and property management, are not related to credit transactions and are not permissible. The Act and the regulations of the Board of Governors prohibit a bank holding company and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services. The Act also imposes certain restrictions upon dealings by affiliated banks with the holding company and among themselves including restrictions on interbank borrowing and upon dealings in respect to the securities or obligations of the holding company or other affiliates. The earnings of banks, and therefore the earnings of Bancorp (and its subsidiaries), are affected by the policies of regulatory authorities, including the Board of Governors of the Federal Reserve System. An important function of the Federal Reserve Board is to regulate the national supply of bank credit in an effort to prevent recession and to restrain inflation. Among the procedures 8 F-6 used to implement these objectives are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These procedures are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use also may affect interest rates charged on loans or paid for deposits. Monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effect, if any, of such policies upon the future business and earnings of Bancorp cannot accurately be predicted. Bancorp makes no attempt to predict the effect on its revenues and earnings of changes in general economic, industrial, and international conditions or in legislation and governmental regulations. Year 2000 - --------- Many computer systems process transactions using two digits for the year of the transaction, rather than a full four digits. These systems may not function properly at the beginning of the year 2000. Bancorp has devoted significant time and attention to the Year 2000 issue, and will repair or replace non-compliant hardware and software prior to the new millennium. Several regulatory agencies and authorities have issued regulations and guidelines which regulated financial institutions must use in measuring their progress. Five commonly recognized phases of Year 2000 remediation are awareness, assessment, renovation, validation, and implementation. During 1997, the awareness phase was completed by Bancorp and each of its subsidiaries. Bancorp's Data Processing Steering Committee formalized their project plans for both Information Technology (IT) systems, computers and peripherals, and non-IT systems, elevators, security systems, etc. Bancorp assembled an Operating Committee, which meets at least weekly, to direct and implement all Year 2000 issues. In addition, Bancorp's work groups and consultants made several presentations to Bancorp's management and Board of Directors, who have pledged their support for this issue. Bancorp has inventoried and assessed the magnitude of hardware and software programs which must be remediated, contacted vendors, identified resource needs, and appropriately hired or contracted for qualified personnel to guide Bancorp through the Year 2000 issue. A Year 2000 Loan Committee, comprised of senior lenders of Bancorp's affiliates, is assessing the impact of Year 2000 on lending customers and the related risks inherent in those loans as they relate to the year 2000. Bancorp is currently in the renovation process, having completed the major demand deposit, savings, and certificate of deposit systems. Several ancillary systems have also been completed. Remaining mission critical systems are currently in the process of renovation or are scheduled to begin renovation during the second and third quarters of 1998. Management's goal is to have the renovation phase completed by the end of 1998. 9 F-7 Management has tested incremental changes made to renovated software applications, but has not yet validated overall Year 2000 compliance. Overall validation testing is anticipated to begin in the first quarter, 1999. Implementation will follow satisfactory results of validation testing and is anticipated to be completed during the third quarter, 1999. During 1997, Bancorp incurred approximately $700,000 in noninterest expense for costs related to Year 2000 issues. Based on management's current assessment and anticipated reprogramming costs, Bancorp expects to spend an additional $3,500,000 during 1998 and 1999, of which about $1,200,000 will be capitalized. However, there can be no assurance as to the accuracy of these estimates. ITEM 2. PROPERTIES. The registrant and its subsidiaries operate from 61 offices in Ohio, including Bancorp's executive office in Hamilton, Ohio, 42 offices in Indiana and two in Michigan. Thirty of the offices are located in Butler County, Ohio, of which four branches are built on leased land and there are seven branches wherein the land and building are leased. Excess space in three facilities is leased to third parties. Nine offices are located in Mercer County, Ohio, six in Van Wert County, Ohio, two in Preble County, Ohio, three in Warren County, Ohio, three in Hamilton County, Ohio, two in Sandusky County, Ohio, one in Paulding County, Ohio, one in Allen County, Ohio, three in Auglaize County, Ohio, and one in Williams County, Ohio. Five offices are located in Wabash County, Indiana, of which one office is built on leased land with a purchase option on the land. Three offices are in Randolph County, Indiana, three in Grant County, Indiana, one in Jay County, Indiana, four in Blackford County, Indiana, one in Fayette County, Indiana, one in Franklin County, Indiana, two in Jennings County, Indiana, four in Carroll County, Indiana, two in Tippecanoe County, Indiana, three in Fulton, County, Indiana, two in Union County, Indiana, three in Rush County, Indiana, one in Clinton County, Indiana, one in Ripley County, Indiana, one in Dearborn County, Indiana, and four in Switzerland, County, Indiana. One office is located in Delaware County, Indiana, of which both the land and building are leased. One office is located in Barry County, Michigan and one in Allegan County, Michigan. All leases are comparable to other leases in the respective market areas and do not contain provisions detrimental to the registrant or its subsidiaries. ITEM 3. LEGAL PROCEEDINGS. Except for routine litigation incident to their business, the registrant and its subsidiaries are not a party to any material pending legal proceedings and none of their property is the subject of any such proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to the shareholders during the fourth quarter of 1997. ADDITIONAL ITEM - EXECUTIVE OFFICERS. On the following page are the Executive Officers of Bancorp as of December 31, 1997. 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 28, 1998 or until their successors are elected and duly qualified. All Executive Officers are chosen by the Board of Directors by a majority vote. 10 F-8
Name Age Position - --------------------- --- ----------------------------------------------- Stanley N. Pontius 51 President and Chief Executive Officer, Director Rick L. Blossom 50 Senior Vice President, Chief Lending Officer Mark W. Immelt 52 Senior Vice President, Trust Services Brian D. Moriarty 55 Senior Vice President, Human Resources Michael R. O'Dell 46 Senior Vice President, Chief Financial Officer and Secretary Michael T. Riley 47 Senior Vice President, Consumer Banking and Operations Joseph M. Gallina 42 First Vice President, Comptroller
The following is a brief description of the business experience over the past five years of the individuals named above. Stanley N. Pontius became Chief Executive Officer of Bancorp in July 1992. Upon joining Bancorp in March 1991, he assumed the responsibilities of President and Chief Operating Officer, as well as a director. He served as Chief Operating Officer until July 1992. Also in March 1991, he became President, Chief Executive Officer, and a director of First Southwestern. Effective July 1, 1997, Mr. Pontius was promoted to Chairman of the Board of First Southwestern; he retains the position of Chief Executive Officer but no longer serves as President. Rick L. Blossom became Chief Lending Officer of Bancorp effective January 12, 1996. He remains Senior Vice President of Bancorp, a position he has held since September 26, 1990. On July 1, 1997, Mr. Blossom was promoted to President and Chief Operating Officer of First Southwestern. On January 12, 1996, he 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, a position he held since March 1991. Mark W. Immelt became Senior Vice President, Trust Services on July 1, 1997. Mr. Immelt joined Bancorp's lead bank, First Southwestern, in December 1996 as Senior Vice President and Senior Trust Officer, a position that he still retains. Before joining First Southwestern, he spent 28 years managing personal trust, corporate trust, employee benefit programs and private banking programs in the Northern Indiana Northeast Ohio area. Brian D. Moriarty became Senior Vice President of Bancorp, responsible for the human resources function, on January 12, 1996. Mr. Moriarty also became Senior Vice President of First Southwestern in January 1996, where he had been First Vice President since 1991. Michael R. O'Dell became Senior Vice President, Chief Financial Officer and Secretary of Bancorp on January 12, 1996. He had served as Bancorp's Comptroller since December 1994. Mr. O'Dell had served as Senior Vice President and Chief Financial Officer of First Southwestern from January 1996 to July 1997, and as First Vice President and Comptroller of First Southwestern from 1991 to July 1997. 11 F-9 Michael T. Riley became Senior Vice President of Bancorp, responsible for Marketing, data processing, operations and public relations, on January 12, 1996. Mr. Riley also became Senior Vice President of First Southwestern in January 1996, where his duties include marketing, data processing and operations. He had served as First Vice President of Consumer Banking for First Southwestern since 1989. Joseph M. Gallina became Comptroller of Bancorp effective January 12, 1996. He had served as Bancorp's Auditor since April 1, 1992. Prior to joining Bancorp in 1992, he worked for an international accounting firm and specialized in financial reporting and auditing of financial institutions. Mr. Gallina also served as First Vice President of Accounting and Financial Control of First Southwestern from January 1996 to July 1997. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. Bancorp had 4,119 common stock shareholders of record as of March 2, 1998. Bancorp's common equity is listed with the National Association of Securities Dealers, Inc. (NASDAQ) and is traded on The Nasdaq Stock Market. The information contained on page 50 of Bancorp's Annual Report to Shareholders for the year ended December 31, 1997 is incorporated herein by reference in response to this item. ITEM 6. SELECTED FINANCIAL DATA. The information contained in Table 1 on page 24 of Bancorp's Annual Report to Shareholders for the year ended December 31, 1997 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 23 through 32 of Bancorp's Annual Report to Shareholders for the year ended December 31, 1997 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 23 through 50 of Bancorp's Annual Report to Shareholders, provides a detailed review of Bancorp's business activities. Investment Portfolio - -------------------- At December 31, 1997, 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. 12 F-10 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 -------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ----------- (Dollars in thousands) Commercial $ 502,919 $ 398,034 $ 340,942 $ 286,635 $ 247,052 Real estate--construction 63,308 43,262 41,845 29,273 31,597 Real estate--mortgage 927,985 863,414 788,805 746,150 665,390 Installment 439,744 366,051 329,034 285,412 214,600 Credit card 17,369 16,107 15,406 15,599 16,703 Lease financing 27,260 14,821 16,557 16,102 14,872 ---------- ---------- ---------- ---------- ---------- Total loans $1,978,585 $1,701,689 $1,532,589 $1,379,171 $1,190,214 ========== ========== ========== ========== ==========
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 --------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- (Dollars in thousands) Nonaccrual loans $ 5,257 $ 4,850 $ 2,764 $ 2,412 $ 4,679 Restructured loans 1,581 890 517 1,429 605 OREO and ISF* 950 264 1,677 2,116 3,673 ------- ------- ------- ------- ------- Total nonperforming assets $ 7,788 $ 6,004 $ 4,958 $ 5,957 $ 8,957 ======= ======= ======= ======= ======= Nonperforming assets as a percent of total loans plus OREO and ISF 0.39% 0.35% 0.32% 0.43% 0.75% Accruing loans past due 90 days or more $ 1,203 $ 906 $ 1,071 $ 683 $ 1,321
*Other Real Estate Owned and In-Substance Foreclosures Potential Problem Loans - ----------------------- At December 31, 1997, Bancorp had $1,612,000 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, 1997. 13 F-11 Loan Loss Data - --------------
1997 1996 1995 1994 1993 ------- ------- ------- ------- ----- (Dollars in thousands) Transactions in the allowance for loan losses: Balance at January 1 $22,672 $20,437 $18,609 $18,380 $17,014 Loans Charged off: Commercial 1,072 1,210 790 648 1,634 Real estate--construction 28 Real estate--mortgage 247 226 26 124 320 Installment and other consumer financing 2,506 2,340 1,721 1,248 1,580 Lease financing 57 187 107 132 155 ------- ------- ------- ------- ------- Total loans charged off 3,910 3,963 2,644 2,152 3,689 ------- ------- ------- ------- ------- Recoveries of loans previously charged off: Commercial 273 346 546 384 538 Real estate--construction 8 Real estate--mortgage 92 54 39 41 65 Installment and other consumer financing 619 711 592 653 676 Lease financing 15 62 17 35 29 ------- ------- ------- ------- ------- Total recoveries 999 1,173 1,202 1,113 1,308 ------- ------- ------- ------- ------- Net charge-offs 2,911 2,790 1,442 1,039 2,381 Allowance acquired through mergers and acquisitions 3,013 1,592 1,162 Provision for loan losses 4,736 3,433 2,108 1,268 3,747 ------- ------- ------- ------- ------- Balance at December 31 $27,510 $22,672 $20,437 $18,609 $18,380 ======= ======= ======= ======= ======= Ratios: Net charge-offs as a percent of: Average loans outstanding 0.16% 0.17% 0.10% 0.08% 0.21% Provision 61.47% 81.27% 68.41% 81.94% 63.54% Allowance 10.58% 12.31% 7.06% 5.58% 12.95% Allowance as a percent of: 5 year moving average of net charge-offs 1,302.19% 759.79% 603.64% 402.18% 347.24% Year-end loans, net of unearned income 1.39% 1.33% 1.33% 1.35% 1.54%
14 F-12 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 ---------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------- ------------- ------------- ------------ ----------- $ % $ % $ % $ % $ % ------- ---- ------- ---- ------- ---- ------ ---- ------ --- Balance at End (Dollars in thousands) of Period Appli- cable to: Commercial $ 5,372 26% $ 4,826 23% $ 4,254 22% $ 4,395 21% $ 4,457 21% Real estate- construction 246 3% 172 3% 210 3% 340 2% 300 3% Real estate- mortgage 5,320 47% 3,510 51% 3,713 52% 2,552 54% 4,305 56% Installment & credit card 7,328 23% 5,419 22% 4,184 22% 3,298 22% 3,104 19% Lease financing 483 1% 327 1% 196 1% 154 1% 512 1% Unallocated 8,761 N/A 8,418 N/A 7,880 N/A 7,870 N/A 5,702 N/A ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- $27,510 100% $22,672 100% $20,437 100% $18,609 100% $18,380 100% ======= ==== ======= ==== ======= ==== ======= ==== ======= ====
$ - Dollar Amount % - Percent of Loans in Each Category to Total Loans Dividend Payout Ratio - --------------------- The dividend payout ratios for 1997, 1996 and 1995 were 47.0 %, 48.1%, and 42.5%, respectively. Forward-Looking Statements - -------------------------- Certain statements contained in this Annual Report on Form 10-K which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the "Act"). In addition, certain statements in future filings by Bancorp with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of Bancorp which are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to, projections of revenues; income or loss; earnings or loss per share; the payment or non-payment of dividends; capital structure and other financial items; statements of plans and objectives of Bancorp or its management or Board of Directors; and statements of future economic performance and statements of assumptions underlying such statements. Words such as "believes," "anticipates," "intends," and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, the strength of the local economies in which operations are conducted; the effects of and changes in policies and laws of regulatory agencies; inflation, interest rates, market and monetary fluctuations; technological changes; mergers and acquisitions; the ability to increase market share 15 F-13 and control expenses; the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board and the Securities and Exchange Commission; the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; the ability to achieve satisfactory results regarding the Year 2000 issue; and the success of Bancorp at managing the risks involved in the foregoing. Such forward-looking statements speak only as of the date on which such statements are made, and Bancorp undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained on pages 30 and 31 of Bancorp's Annual Report to Shareholders for the year ended December 31, 1997 is incorporated herein by reference in response to this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements and report of independent auditors included on pages 33 through 49 of the Annual Report to Shareholders for the year ended December 31, 1997 are incorporated herein by reference. The Quarterly Financial and Common Stock Data on page 50 of the Annual Report to Shareholders for the year ended December 31, 1997 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. 16 F-14 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 1 through 4 of Bancorp's Proxy Statement, dated March 16, 1998 with respect to the Annual Meeting of Shareholders to be held on April 28, 1998 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 6 through 11, and under "Compensation Committee Report" on pages 12 and 13 of Bancorp's Proxy Statement dated March 16, 1998 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 1 through 4 of Bancorp's Proxy Statement dated March 16, 1998 is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information appearing in Note 17 of the Notes to Consolidated Financial Statements included on page 46 of Bancorp's Annual Report to Shareholders is incorporated herein by reference in response to this item. 17 F-15 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 ......................................... 49 Consolidated Balance Sheets as of December 31, 1997 and 1996................................ 33 Consolidated Statements of Earnings for year ended December 31, 1997, 1996 and 1995 .......................................................... 34 Consolidated Statements of Cash Flows for year ended December 31, 1997, 1996 and 1995 .......................................................... 35 Consolidated Statements of Changes in Shareholders' Equity for year ended December 31, 1997, 1996 and 1995 ........................................... 36 Notes to Consolidated Financial Statements.................................................. 37 (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, 1997 WHICH ARE INCORPORATED HEREIN BY REFERENCE. 18 F-16 (3) Exhibits:
Exhibit Number ------ (3)a Articles of Incorporation, as amended as of April 22, 1997. (3)b Amended and Restated Regulations, as of April 22, 1997. (10)(iii)A(1) First Financial Bancorp. 1991 Stock Incentive Plan, dated September 24, 1991 and incorporated herein by reference to a Registration Statement on Form S-8, Registration No. 33-46819. (10)(iii)A(2) Agreement between Stanley N. Pontius and First Financial Bancorp dated January 27, 1998. (10)(iii)A(3) Agreement between Rick L. Blossom and First Financial Bancorp dated January 27, 1998. (10)(iii)A(4) Agreement between Michael R. O'Dell and First Financial Bancorp dated January 27, 1998. (10)(iii)A(5) Agreement between Mark W. Immelt and First Financial Bancorp dated January 27, 1998. (10)(iii)A(6) Agreement between Michael T. Riley and First Financial Bancorp dated January 27, 1998. (13) Registrant's annual report to security holders for the year ended December 31, 1997. (21) First Financial Bancorp. Subsidiaries. (23) Consent of Ernst & Young LLP, Independent Auditors. (27) Financial Data Schedule
- -------------------------------------------------------------------------------- THE COMPANY WILL FURNISH, WITHOUT CHARGE, TO A SECURITY HOLDER UPON REQUEST A COPY OF THE DOCUMENTS, PORTIONS OF WHICH ARE INCORPORATED BY REFERENCE (ANNUAL REPORT TO SHAREHOLDERS AND PROXY STATEMENT), AND WILL FURNISH ANY OTHER EXHIBIT UPON PAYMENT OF REPRODUCTIONS COSTS. (b) Reports on Form 8-K: During the fourth quarter of the year ended December 31, 1997, the registrant did not file any reports on Form 8-K. 19 F-17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST FINANCIAL BANCORP. By:/s/ Stanley N. Pontius ------------------------------------ Stanley N. Pontius, Director President and Chief Executive Officer Date 3/16/98 - --------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ F. Elden Houts /s/ Michael R. O'Dell - ----------------------------------- ---------------------------------------- F. Elden Houts, Director Michael R. O'Dell, Senior Vice President, Chief Financial Officer, and Secretary Date 3/16/98 Date 3/16/98 ------------------------------ ---------------------------------- /s/ Stanley N. Pontius /s/ Charles T. Koehler - ----------------------------------- ---------------------------------------- Stanley N. Pontius, Director Charles T. Koehler, Director President and Chief Executive Officer Date 3/16/98 Date 3/16/98 ------------------------------ ---------------------------------- /s/ Murph Knapke /s/ Barry S. Porter - ----------------------------------- ---------------------------------------- Murph Knapke, Director Barry S. Porter, Director Date 3/16/98 Date 3/16/98 ------------------------------ ---------------------------------- /s/ Don M. Cisle /s/ Thomas C. Blake - ----------------------------------- ---------------------------------------- Don M. Cisle, Director Thomas C. Blake, Director Date 3/16/98 Date 3/16/98 ------------------------------ ----------------------------------
20 F-18 SIGNATURES (CONT'D) /s/ Steve Posey /s/ Joseph M. Gallina - ----------------------------------- ---------------------------------------- Steve Posey, Director Joseph M. Gallina, First Vice President and Comptroller Date 3/16/98 Date 3/16/98 ------------------------------ ------------------------------------
EX-3.A 2 EXHIBIT 3(A) 1 Exhibit 3a ARTICLES OF INCORPORATION OF FIRST FINANCIAL BANCORP. The undersigned, a majority of whom are citizens of the United States, desiring to form a corporation, for profit, under Sections 1701.01 et seq. of the Revised Code of Ohio, do hereby certify: FIRST. The name of said corporation shall be First Financial Bancorp. SECOND. The place in Ohio where its principal office is to be located is Hamilton, Butler County. THIRD. The purposes for which it is formed are: to organize, purchase, acquire, own, invest in, or control banks and other companies, and the shares and securities of the same, in accordance with, and to the full extent permitted by, the Bank Holding Company Act of 1956 and other applicable laws of the United States, or of this State, as now or hereafter amended, and to carry on the business of a bank holding company in accordance with such laws; and to engage in any lawful act or activity for which corporations may be formed under Sections 1701.01 to 1701.98, inclusive, of the Ohio Revised Code. FOURTH. The total number of shares of stock which the corporation shall have authority to issue is Sixty Million (60,000,000) shares of common stock of the par value of Eight ($8.00) Dollars per share. (a) Dividends. The holders of shares of common stock shall be entitled to receive dividends, if and when declared payable from time to time by the Board of Directors, from any funds legally available therefor. (b) Voting. Each outstanding share of the common stock of the corporation shall entitle the holder thereof to one vote and the exclusive voting power for all purposes shall be vested in the holders of common stock. 2 -2- (c) Preemptive Rights. No holder of shares of the common stock of the corporation shall have preemptive rights to subscribe for or to purchase any shares of the common stock of the corporation or any other securities of the corporation, whether such share or shares are now or hereafter authorized. (d) Purchase of Own Securities. The corporation shall be authorized to purchase or otherwise acquire, and to hold, own, pledge, transfer or otherwise dispose of, shares of its own common stock and other securities, subject, however, to the laws of the State of Ohio and to federal statutes, and without limitation to the Bank Holding Company Act of 1956 as amended and as hereinafter may be amended or supplemented. (e) The shareholders shall not have the right to vote cumulatively in the election of directors effective for the Annual Meeting occurring in 1988 and thereafter. FIFTH. The number and qualification of directors of the corporation shall be fixed from time to time by its Code of Regulations. The number of directors may be increased or decreased as therein provided but the number thereof shall in no event be less than nine. The Board of Directors shall be divided into three classes as nearly equal in number as the then total number of directors constituting the whole board permits, with the term of office of one class expiring each year. At the first annual meeting of stockholders, directors of Class I shall be elected to hold office for a term expiring at the next succeeding annual meeting, directors of Class II shall be elected to hold office for a term expiring at the second succeeding annual meeting, and directors of Class III shall be elected to hold office for a term expiring at the third succeeding annual meeting. In no event shall there be less than three directors per class. Subject to the foregoing, at each annual meeting of stockholders the successors to the class of directors whose terms shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting. In the event of any increase in the number of directors of the corporation, the additional directors shall be so classified that all classes of directors shall be increased equally as nearly as may be possible. In the event of any decrease in the number of directors of the corporation, all classes of directors shall be decreased as equal as possible. No reduction in number of directors shall of itself have the effect of shortening the term of an incumbent director. SIXTH. Each person who is or was a director, officer, employee or agent of the corporation shall be indemnified by the corporation to the full extent permitted by the Revised Code of Ohio against any liability, cost or expense incurred by him in his capacity as a director, officer, employee or agent, or arising out of his status as a director, officer, employee or agent. The corporation may, but shall not be obligated to, maintain insurance, at its expense, to protect itself and any such person against any such liability, cost or expense. SEVENTH. The corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation in the manner now or hereafter prescribed by the laws of Ohio, and all rights and powers conferred herein upon stockholders and directors are granted subject to this reservation. 3 -3- EIGHTH. The amount of capital with which the corporation shall begin business is Five Hundred ($500.00) Dollars. IN WITNESS WHEREOF, we have hereunto subscribed our names, this 20th day of July, 1982. FIRST FINANCIAL BANCORP /s/Robert Q. Millan ---------------------------------- Robert Q. Millan /s/Richard J. Fitton ---------------------------------- Richard J. Fitton /s/Elliott D. Levey ---------------------------------- Elliott D. Levey EX-3.B 3 EXHIBIT 3(B) 1 Exhibit 3b AMENDED AND RESTATED REGULATIONS OF FIRST FINANCIAL BANCORP. ARTICLE I MEETINGS OF SHAREHOLDERS SECTION 1.1. ANNUAL MEETING. The regular annual meeting of the shareholders for the election of directors and the transaction of whatever other business may properly come before the meeting, shall be held at the principal office of the Corporation, 300 High Street, Hamilton, Ohio, or such other place as the Board of Directors may designate, at 2:00 P.M., on the fourth Tuesday of April each year. Notice of such meeting shall be mailed, postage prepaid, at least ten days prior to the date thereof, addressed to each shareholder at his address appearing on the books of the Corporation. SECTION 1.2. SPECIAL MEETINGS. Special meetings of shareholders for any purpose or purposes may be called by the Chairman of the Board, by the President, by the Vice President authorized to exercise the authority of the President in the case of the President's absence, death or disability, by resolution of the directors or by the holders of not less than one-half of the outstanding voting power of the Corporation. SECTION 1.3. QUORUM. At all meetings of shareholders, the holders of record of a majority of shares entitled to vote at each meeting, present in person or by proxy, shall constitute a quorum, but no action required by law the (Amended) Articles or these Amended and Restated Regulations to be authorized or taken by the holders of a designated proportion of the shares of any particular class or of each class, may be authorized or taken by a lesser proportion. The holders of a majority of the voting shares represented at a meeting, whether or not a quorum is present, may adjourn such meeting from time to time. SECTION 1.4. PROXIES. Any shareholder entitled to vote at a meeting of shareholders may be represented and vote thereat by proxy appointed by an instrument in writing subscribed by the shareholder or his duly authorized agent, and submitted to the secretary of the Corporation or the inspectors of election at or before said meeting. ARTICLE II DIRECTORS SECTION 2.1. NOMINATION. Nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or a committee appointed by the Board of Directors or by any shareholder entitled to vote in the election of directors generally. Shareholders intending to nominate director candidates for election must deliver written notice thereof to the Secretary of the Corporation not later than (i) with respect to an election to be held at any annual meeting of shareholders, 90 days prior to the date one year from the date of the immediately preceding annual meeting of shareholders, and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to shareholders. Such a notice timely given by a shareholder shall set forth certain information concerning such shareholder and his or her nominee(s), including: the name and address of the shareholder and each nominee; the age and principal occupation or employment of each nominee; the number of shares of equity securities beneficially owned by each nominee; a representation that the shareholder is a holder of record of 2 -2- shares entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; a description of all arrangements or understandings between the shareholder and each nominee; such other information regarding each nominee as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated by the Board of Directors; and the consent of each nominee to serve as a director of the corporation if elected. The corporation may also require any proposed nominee to furnish other information reasonably required by the corporation to determine the proposed nominee's eligibility to serve as a director. The presiding officer at the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedures and any person not nominated in accordance with the foregoing procedures shall not be eligible for election as a director. SECTION 2.2. NUMBER. The number of directors of the Corporation, which shall not be less than nine nor more than twenty-five, shall be fifteen until increased or decreased at any time by the affirmative vote of two-thirds of the whole authorized number of directors or, at a meeting of the shareholders called for the purpose of electing directors at which a quorum is present, by the affirmative vote of the holders of at least two-thirds of the outstanding voting power of the Corporation voting as a single class. Directors shall hold office in their respective classes for three-year terms. The election of directors shall be held at the annual meeting of shareholders for the class year of directors whose terms expire at the annual meeting, except that a majority of the directors in office at any time, though less than a majority of the whole authorized number of directors, may, by the vote of a majority of their number, fill any director's office that is created by an increase in the number of directors or by a vacancy; provided, however, that in any period between annual meetings of shareholders, the directors will not increase the number of directors by more than three. A vacancy is created by the death, resignation, removal or incapacity of a director prior to the end of his term or by the failure of the shareholders at any time to elect the whole authorized number of directors. A director may be removed for cause. Cause if defined to exist if a court of law finds a director guilty of a felony or has breached his fiduciary duty under the laws of Ohio. SECTION 2.3. CLASSES OF DIRECTORS. The directors' terms are divided into three classes of terms consecutively expiring. The classes are known as Classes I, II and III. The directors of each class are shown on the Proxy Statement issued to shareholders of record. SECTION 2.4. MEETINGS. Meetings of the Board of Directors shall be held at the principal office of the Corporation or at such other place, within or without the State of Ohio, as may be determined by the Board. Two day's notice of such meeting shall be given to each director, unless the Board of Directors has fixed a regular time and place for such meetings, in which case no notice shall be required for meetings held at such time and place. Meetings may be called by the Chairman of the Board, the President, or by any seven directors, upon giving the notice as herein required. SECTION 2.5. MANDATORY RETIREMENT. No person shall be elected or re-elected a director after reaching his seventieth (70th) birthday. 3 -3- SECTION 2.6. DIRECTOR EMERITUS. The Board shall have the right from time to time to choose as Directors Emeritus persons who have had prior service as members of the Board and who may receive such compensation as shall be fixed from time to time by the Board of Directors. SECTION 2.7. COMMITTEES. The Board of Directors is authorized to create an Executive Committee of not less than three (3) members of the Board and such other committees as it sees fit, which, to the extent authorized by the Board of Directors, may exercise all powers of the Board of Directors between meetings of said Board, other than that of filling vacancies among the directors or any committee of the directors.The Board of Directors may designate any one of the directors of the Corporation as an alternate member of any committee to replace any absent or disqualified member at any meeting of such committee. ARTICLE III OFFICERS SECTION 3.1. CHAIRMAN OF THE BOARD. The Board of Directors may appoint one of its members to be Chairman of the Board to serve at the pleasure of the Board. He shall preside at all meetings of the Board of Directors. He shall exercise such powers and duties, as from time to time may be conferred upon, or assigned to, him by the Board of Directors. SECTION 3.2. PRESIDENT. The Board of Directors shall appoint one of its members to be President of the Corporation. In the absence of the Chairman, he shall preside at any meeting of the Board. The President shall have general executive powers, and shall have and may exercise any and all other powers and duties pertaining by law, regulation, or practice, to the office of President, or imposed by these Amended and Restated Regulations. He shall also have and may exercise such further powers and duties as from time to time may be conferred upon, or assigned to, him by the Board of Directors. SECTION 3.3. VICE PRESIDENTS. The Board of Directors may appoint one or more Vice Presidents. Each Vice President shall have such powers and duties as may be assigned to him by the Chief Executive Officer. SECTION 3.4. SECRETARY. The Board of Directors shall appoint a Secretary who shall keep accurate minutes of all meetings. He shall attend to the giving of all notices required by these Amended and Restated Regulations to be given. He shall be custodian of the corporate seal, records, documents and papers of the Corporation. He shall provide for the keeping of proper records of all transactions of the Corporation. He shall have and may exercise any and all other powers and duties pertaining by law, regulation or practice, to the office of the Secretary or imposed by these Amended and Restated Regulations. He shall also perform such other duties as may be assigned to him, from time to time by the Chief Executive Officer. SECTION 3.5. OTHER OFFICERS. All other officers appointed by the Board of Directors shall have such duties as defined by law and as may from time to time be assigned to them by the Chief Executive Officer or the Board of Directors. 4 -4- SECTION 3.6. TERM OF OFFICE. All officers of the Corporation shall be chosen by the Board of Directors by a majority vote and shall hold office until the first meeting of the Board of Directors following the next annual meeting of shareholders or until their successors are elected and duly qualified. The Board of Directors may remove any officer at any time with or without cause by a majority vote. SECTION 3.7. RETIREMENT DATE. Normal retirement date for all employees is the employee's 65th birthday. ARTICLE III-A IV INDEMNIFICATION The Corporation shall, to the full extent permitted by the General Corporation Law of Ohio, indemnify all persons whom it may indemnify pursuant hereto. ARTICLE V CERTIFICATES SECTION 5.1. Certificates evidencing the ownership of shares of the Corporation shall be issued to those entitled to them by transfer or otherwise. Each certificate for shares shall bear a distinguishing number, the signature of the President or Chairman of the Board, and of the Secretary of the Corporation, the corporate seal, and such recitals as may be required by law. Such signatures and seal on the certificate may be facsimile signatures. SECTION 5.2. Subject to any applicable provision of law or the Articles, transfers of shares of the Corporation shall be made only upon its books, upon surrender and cancellation of a certificate or certificates for the shares so transferred. Any certificate so presented for transfer shall be endorsed or shall be accompanied by separate written assignment or a power of attorney, signed by the person appearing by the certificate to be the owner of the shares represented thereby. SECTION 5.3. Lost, Stolen, Destroyed, or Mutilated Certificates. The Corporation may, in its discretion, upon evidence satisfactory to it of the loss, theft, or destruction of any certificate for shares of the Corporation, authorize the issuance of a new certificate in lieu thereof, and may, in its discretion, require as a condition precedent to such issuance, the giving, by the owner of such alleged lost, stolen, or destroyed certificate, of a bond of indemnity, in form and amount, with surety, satisfactory to the Corporation, against any loss or damage which may result to, or claim which may be made against, the Corporation, or any transfer agent or registrar of its shares, in connection with such alleged lost, stolen, or destroyed, or such new, certificate. If any certificate for shares of the Corporation becomes worn, defaced, or mutilated, the Corporation may, upon production and surrender thereof, order that the same be canceled and that a new certificate be issued in lieu thereof. ARTICLE VI CORPORATE SEAL SECTION 6.1. CORPORATE SEAL. The Chairman of the Board, the President, Vice President, or Secretary or other officers designated by the Board of Directors, shall have authority to affix the corporate seal to any document requiring such seal, and to attest the same. The seal of the Corporation shall be such as the Board of Directors may from time to time determine. ARTICLE VII MISCELLANEOUS PROVISIONS 5 -5- SECTION 7.1. FISCAL YEAR. The fiscal year of the Corporation shall be the calendar year. SECTION 7.2. EXECUTION OF INSTRUMENTS. All agreements, deeds, conveyances, transfers, certificates, and any other documents may be signed on behalf of the Corporation by the Chairman of the Board, or the President, or such other designated officers that the Board may designate from time to time. SECTION 7.3. RECORDS. The Articles of the Corporation, the Amended and Restated Regulations and the proceedings of all meetings of the shareholders, the Board of Directors, standing committees of the Board, shall be recorded in appropriate minute books provided for the purpose. The minutes of each meeting shall be signed by the Secretary or other officer appointed to act as Secretary of the meeting. ARTICLE VIII AMENDMENT, ALTERATION OR REPEAL SECTION 8.1. INSPECTION. A copy of the Amended and Restated Regulations, with all amendments thereto, shall at all times be kept in a convenient place at the office of the Corporation, and shall be open for inspection during all business hours. SECTION 8.2. AMENDMENTS. The Amended and Restated Regulations may be amended, altered, repealed, or replaced only by the affirmative vote of the holders of at least two-thirds of the outstanding voting power of the Corporation voting as a single class at a meeting of shareholders called for such purpose, unless such amendment, alteration, repeal or replacement is recommended by the affirmative vote of two-thirds of the whole authorized number of directors, in which case these Amended and Restated Regulations may be amended, altered, repealed or replaced by the affirmative vote of the holders of a majority of the outstanding voting power of the Corporation voting as a single class at a meeting of shareholders called for such purpose. EX-10.III.A.2 4 EXHIBIT 10(III)A(2) 1 EXHIBIT 10(iii)A(2) CONFIDENTIAL - ------------ January 27, 1998 Stanley N. Pontius President & CEO First Financial Bancorp 300 High Street P.O. Box 476 Hamilton, OH 45012 Dear Stan: You are employed by First Financial Bancorp and First National Bank of Southwestern Ohio, a wholly owned subsidiary of FFBC, ("FFBC") in a key executive position. Continuity of the management of FFBC and its affiliate banks is a critical factor in the continued success of FFBC. The Board of Directors of FFBC believes it is in the best interest of FFBC to encourage the continued effort and dedication of key members of management to their assigned duties. In consideration of the mutual promises contained in this letter, FFBC shall provide to you, and you shall receive from FFBC, the benefits set forth in this letter ("Agreement"), if your employment with FFBC, or its affiliate bank, is terminated during the term of this Agreement. 1. Purpose. -------- This Agreement establishes certain basic terms and conditions relating to your employment with FFBC, and special arrangements and dispute resolution proceedings relating to the termination of your employment for any reason other than: (i) your retirement; (ii) your becoming totally and permanently disabled under the FFBC long- 2 Stanley N. Pontius January 27, 1998 Page 2 term disability plan or policy; or (iii) your death. This Agreement supersedes all prior agreements with FFBC and any of its affiliate banks or any predecessor businesses, except the Confidentiality Agreement concurrently entered, or previously entered, between you and FFBC, and the special severance benefits provided under this Agreement are to be provided instead of any other severance arrangements offered by FFBC or its affiliate banks. Notwithstanding the foregoing, neither your termination of employment nor anything contained in this Agreement shall have any affect upon your rights under any tax-qualified "pension benefit plan," as such term is defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); or under any "welfare benefit plan" as defined in ERISA, including by way of illustration and not limitation, any medical surgical or hospitalization benefit coverage or long-term disability benefit coverage; or under any non-qualified deferred compensation arrangement, including by way of illustration and not limitation, any stock incentive plan or non-qualified pension plan; or under the FFBC Performance Incentive Plan for any completed plan year. 2. Employment. ----------- FFBC agrees that, during the term of this Agreement, you will be employed with FFBC, and any other direct or indirect subsidiary or affiliate of FFBC to which you may be transferred, in your present position or in a position that is comparable to your present position in compensation, responsibility and stature and for which you are suited by education and background and that: (a) you are, and will continue to be, eligible to participate in any employee benefit plan of FFBC in accordance with its terms; and (b) you will be entitled to the same treatment under any generally applicable employment policy or practice as any other member of Executive Management Group whose position in the organization is comparable to yours. Those plans, policies and practices that generally apply to other members of the Executive Management Group will be referred to in this Agreement as your "Employment Benefits." Your Employment Benefits may be modified from time to time after the date hereof without violation of this Agreement if the changes apply generally to other members of the Executive Management Group. 3. Term of Agreement. ------------------ This Agreement shall become effective on the date of this Agreement ("Commencement Date") and shall continue in effect through the earlier of (i) the fifth anniversary of the 3 Stanley N. Pontius January 27, 1998 Page 3 Commencement Date; (ii) the date of your retirement, death or total and permanent disability; or (iii) the completion of full payment of all benefits promised hereunder. Absent your death, total and permanent disability or retirement, this Agreement shall be renewed annually from and after the fifth anniversary of the Commencement Date unless written notice to the contrary is given by you or by FFBC at least six (6) months prior to the expiration of the term, including any extension thereof. 4. Termination of Employment. -------------------------- Your employment may be terminated in accordance with any of the following paragraphs, but only upon one (1) month's advance written notice (which period shall be referred to in this Agreement as the "Notice Period"): (a) INVOLUNTARY TERMINATION. FFBC may terminate your employment without cause. In such an event, you shall continue to receive your full salary and Employment Benefits during the Notice Period. The expiration of the Notice Period shall be your "Date of Termination." Upon your Date of Termination, you shall be entitled to those benefits provided under Section 5, provided you give FFBC the release and covenant not to sue described in Section 5. (b) INVOLUNTARY TERMINATION FOR CAUSE. FFBC may terminate your employment for "Cause" with written notice setting forth the Cause for termination. "Cause" means a willful engaging in gross misconduct materially and demonstrably injurious to FFBC. "Willful" means an act or omission in bad faith and without reasonable belief that such act or omission was in, or not opposed to, the best interests of FFBC. The expiration of the Notice Period is your "Date of Termination for Cause." Upon your Date of Termination for Cause, you shall only be entitled to those benefits provided under Section 6. (c) VOLUNTARY TERMINATION. You may voluntarily terminate your employment. In such an event, you shall continue to receive your full salary and Employment Benefits during the Notice period provided you satisfactorily perform your duties during the Notice Period unless relieved of those duties by FFBC. The expiration of the Notice Period is your "Voluntary Date of Termination." Upon your Voluntary Date of Termination, you shall only be entitled to those benefits provided under Section 6. (d) VOLUNTARY TERMINATION FOR GOOD REASON. You may terminate your employment by notice setting forth a Good Reason for termination if the notice is delivered to FFBC within thirty (30) days following the occurrence of any "Good Reason." "Good Reason" means a (i) change in the duties of your position, or the transfer 4 Stanley N. Pontius January 27, 1998 Page 4 to a new position, in violation of Section 2; (ii) substantial alteration in the nature or status of your responsibilities in violation of Section 2; (iii) reduction in your base salary; (iv) refusal by FFBC, or its successor, to renew the term of this Agreement for any reason, prior to your reaching your normal retirement date under the FFBC Pension Benefit Plan; or (v) changes in your Employment Benefits in violation of Section 2. If you give notice of termination for Good Reason, you shall continue to receive your full base salary and Employment Benefits during the Notice Period as in effect prior to the event that is the Good Reason for termination, subject to the right of FFBC to make any changes to your Employment Benefits permitted in accordance with Section 2. The expiration of the Notice Period is your "Date of Termination." Upon your Date of Termination, you shall be entitled to those benefits provided under Section 5, provided you give FFBC the written release and covenant not to sue described in Section 5. 5. Special Severance Benefits. --------------------------- If your employment with FFBC is involuntarily terminated in accordance with Section 4(a) or you voluntarily terminate your employment for Good Reason in accordance with Section 4(d) and you provide FFBC with a separate, written release and covenant not to sue (on a form provided by and satisfactory to FFBC) which releases FFBC from all claims arising from your employment and termination of your employment, and you do not revoke this release and covenant not to sue, then you shall receive the following benefits, less any applicable withholding required for federal, state or local taxes: (a) your base salary shall be continued in effect for a period of thirty-six (36) months from your Date of Termination (hereinafter called your "Severance Pay Period"); (b) if, prior to your Date of Termination, you have participated in the FFBC Performance Incentive Plan for a complete calendar year, you will receive an incentive compensation payment within thirty (30) days of your Date of Termination in one lump-sum in an amount equal to 3.0 times the percentage of the incentive payment made or required to be made for the calendar year pursuant to the Performance Incentive Plan immediately preceding the calendar year in which your Date of Termination occurs; (c) if your Date of Termination is within twelve (12) months after a Change in Control, you will receive a payment within thirty (30) days of your Date of Termination in one lump-sum in an amount equal to the total of the following: (i) With respect to any shares of Stock subject to an Option granted to you 5 Stanley N. Pontius January 27, 1998 Page 5 as of the time of the Change in Control under the First Financial Bancorp 1991 Stock Incentive Plan (the "Incentive Plan") that you cannot exercise as a result of your termination of employment, the difference between the fair market value of such Stock, determined as of your Date of Termination, and the Option Price. (ii) With respect to any Restricted Stock granted to you under the Incentive Plan as of the time of the Change in Control which you forfeit as a result of your termination of employment, the fair market value of such Restricted Stock, determined as of your Date of Termination and as if all restrictions had been removed. (iii) For purposes of this Section 5, "Stock," "Options," "Option Price," "Restricted Stock" and "Committee" will have the meaning given those terms in the Incentive Plan, and your right to exercise Options or to receive Restricted Stock without forfeiture will be determined after any adjustments made by the Committee under Sections 8.8 and 11.1 of the Incentive Plan, and after any amendments made to the Incentive Plan in connection with the Change in Control. (iv) For purposes of this Section 5, "Change in Control" will have the following meaning: (a) a plan has been approved by the shareholders of FFBC and consummated for FFBC to be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation will be owned in the aggregate by the former shareholders of FFBC as the same shall have existed immediately prior to such merger or consolidation; (b) an agreement for the sale by FFBC of substantially all of its assets to another corporation which is not a wholly owned subsidiary has been approved by the shareholders (or the Board of Directors or appropriate officers if shareholder approval is not required) and consummated; (c) "beneficial ownership" as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") of twenty percent (20%) or more of the total voting capital stock of FFBC then issued and outstanding has been acquired by any person or "group" as defined in Section 13(d)(3) of the Exchange Act; or (d) individuals who were members of the Board of FFBC immediately prior to a meeting of the shareholders of FFBC involving a contest for the election of directors do not constitute a majority of the Board immediately following such election, unless the election of such new directors was recommended to the shareholders by the management of FFBC. The 6 Stanley N. Pontius January 27, 1998 Page 6 Board of FFBC has final authority to determine the exact date on which a Change in Control has occurred under the foregoing definitions. 7 Stanley N. Pontius January 27, 1998 Page 7 (d) your Employment Benefits shall be continued during your Severance Pay Period, subject to the right of FFBC to make any changes to your Employment Benefits permitted in accordance with Section 2; provided, however, that you shall not: (i) accumulate vacation pay for periods after your Date of Termination; (ii) first qualify for long-term disability benefits or sickness and accident plan benefits by reason of an illness, accident or disability occurring, or a sickness or illness first manifesting itself, after your Date of Termination; (iii) be eligible to continue to make contributions to any Internal Revenue Code ss. 401(k) plan maintained by FFBC or qualify for a share of any employer contribution made to any tax-qualified defined contribution plan; or (iv) be eligible to accumulate service for pension plan purposes; (e) you shall qualify for full COBRA health benefit continuation coverage upon the expiration of your Severance Pay Period; (f) you shall be entitled to full executive outplacement assistance with an agency selected by FFBC with the fee paid by FFBC in an amount not to exceed five percent (5%) of your annual base salary; (g) with respect to the Endorsement Method Split Dollar Plan Agreement (the "Split Dollar Agreement") to which you are a party (and solely for purposes of the Split Dollar Agreement), the duration of your Severance Pay Period shall be considered as if it were active employment for purposes of determining whether you were eligible to receive a retirement benefit under the early retirement provisions of First Financial Bancorp Employees' Pension Plan, as provided in Section VI(B) of the Split Dollar Agreement; and (h) if your Date of Termination is within twelve (12) months after a Change in Control, you will receive a payment (the "Split Dollar Payment") within ninety (90) days of your Date of Termination in one lump-sum equal to the present value of the death benefit you would have received under the Split Dollar Agreement, determined as if you had terminated on your Date of Termination, were then eligible to receive a retirement benefit under the early retirement provisions of First Financial Bancorp Employees' Pension Plan (whether or not this is actually the case), and died at age 75 when the Split Dollar Agreement was still in effect. For purposes of this Section 5, present value will be determined using an annual discount rate of 7%. Notwithstanding the prior two sentences, if you elect to receive an assignment of the policy under Section X of the Split Dollar 8 Stanley N. Pontius January 27, 1998 Page 8 Agreement, the Split Dollar Payment shall be applied to the cash payment to FFBC required under Section X of the Split Dollar Agreement, and any portion of the Split Dollar Payment in excess of the amount required under Section X shall be paid to you. (i) Notwithstanding any other provision of this Agreement, if the receipt of any payment under Section 5 of this Agreement, in combination with any other payments to you from FFBC or its affiliates, shall, in the opinion of independent tax counsel of recognized standing selected by FFBC, result in the payment by you of any excise tax provided for in Section 280G and Section 4999 of the Internal Revenue Code, then the amount of payments under Section 5 of this Agreement shall be reduced to the extent required, in the opinion of independent tax counsel, to prevent the imposition of such excise tax. The reduction of payments under this Agreement shall be made after any reduction made under Section 11.2 of the First Financial Bancorp 1991 Stock Incentive Plan and you will have the right to select the order in which payments under this Section 5 will be reduced. The release and covenant not to sue which you agree to provide prior to the receipt of special severance benefits under this Section 5 of this Agreement shall comply with the requirements of the Older Workers Benefit Protection Act and applicable state and federal laws and regulations. If you do not provide FFBC with a written release and covenant not to sue, any claims concerning this Agreement or otherwise arising from your employment with FFBC, or its affiliate banks, shall be subject to final and binding arbitration as described in Section 7. 6. Benefits Upon Voluntary Termination or Termination for Cause. ------------------------------------------------------------- Upon your Date of Termination for Cause in accordance with Section 4(b) or your Voluntary Date of Termination in accordance with Section 4(c), all special severance benefits under this Agreement will be void. In such an event, you shall be eligible for any benefits provided in accordance with the plans and practices of FFBC that are applicable to employees generally. 7. Arbitration. ------------ Any dispute under this Agreement, and any claims of wrongful or discriminatory termination based on any state or federal statute, tort, public policy, contract or promissory estoppel theory, including any dispute as to the cause or reason for termination, shall be submitted to final and binding arbitration, subject to the National Rules for the Resolution of Employment Disputes of the American Arbitration 9 Stanley N. Pontius January 27, 1998 Page 9 Association, effective June 1, 1997, except as hereinafter provided: (a) FFBC shall pay the arbitrator's fee; (b) Each party shall bear the cost of its own attorney's fees. However, if you prevail in a challenge to FFBC's determination as to cause for your termination or if you prevail on any claim that you were discriminated against in violation of any federal law or statute, you shall be reimbursed by FFBC for the filing fee and any reasonable costs or expenses incurred in such a challenge, including reasonable attorney's fees; (c) The arbitration hearing shall be held in Hamilton, Ohio, unless the parties mutually agree to another location; (d) Each party shall exchange documents to be utilized as exhibits in the arbitration hearing and each party shall be limited to two (2) pre-hearing depositions of two (2) hours each, unless the arbitrator orders additional discovery; (e) The arbitrator shall be appointed in accordance with Rule 12 of the above-referenced Rules of the American Arbitration Association, except that if, for any reason, an arbitrator cannot be selected by the process described in Rule 12, subparts (i) through (iii), the American Arbitration Association shall submit the names of seven (7) additional arbitrators from its Roster and the parties shall select the arbitrator by alternately striking names with the party requesting arbitration first striking; and (f) Either party shall be entitled to an injunction or other appropriate equitable relief to enforce the arbitration provisions of this Agreement and FFBC shall be entitled to an injunction to prevent any breach, pending arbitration, of the Confidentiality Agreement described below in paragraph 8 or the Covenant Not to Compete described below in paragraph 10. It is the intention of the parties to avoid litigation in any court of all claims concerning this Agreement, or otherwise arising from your employment with FFBC, or its affiliate bank, and that all such claims will be subject to this arbitration agreement. Neither party shall commence or pursue any litigation on any claim that is or was the subject of arbitration under this Agreement. Each party agrees that this agreement to arbitrate and the arbitration award are enforceable under and subject to the Federal Arbitration Act, 9 U.S.C. ss. I, et seq. ("FAA"). If the FAA is held not to apply for any reason and the law of the state in which you are employed recognizes the enforceability of this Agreement and the arbitration award, then this Agreement and the arbitration award are enforceable under the laws of the state in which you are employed. Both 10 Stanley N. Pontius January 27, 1998 Page 10 parties consent that judgment upon the arbitration award may be entered in any federal or state court that has jurisdiction. The acceptance of any benefit under this Agreement shall be deemed ratification of this agreement to arbitrate claims. In the event you breach this Agreement by filing a lawsuit, at the time your lawsuit is filed, you will return any Special Severance Benefits paid to you and be subject to injunctive relief enforcing this Agreement. 8. Confidentiality. ---------------- You will not disclose to any person or use for the benefit of yourself or any other person any confidential or proprietary information of FFBC without the prior written consent of the Chief Executive Officer of FFBC. Upon your termination of employment, you will return to FFBC all written or electronically stored memoranda, notes, plans, customer lists, records, reports or other documents of any kind or description (including all copies in any form whatsoever) relating to the business of FFBC and fully comply with any separate confidentiality agreement to which you and FFBC are parties. 9. Conflicts of Interest. ---------------------- You agree for so long as you are employed by FFBC to avoid dealings and situations that would create the potential for a conflict of interest with FFBC. In this regard, you agree to comply with the FFBC policy regarding conflicts of interest and all applicable state or federal regulations concerning conflicts of interest applicable to commercial bank or savings bank officers. 10. Covenant Not to Compete. ------------------------ During the term of this Agreement, and for a period of six (6) months following the termination of your employment for any reason other than as set forth in Section 4(b), you agree not to be employed by, serve as officer or director of, consultant to or advisor to any business that engages either directly or indirectly in commercial banking, savings banking or mortgage lending in the geographic area of Ohio, Indiana, Michigan or Kentucky or which is reasonably likely to engage in such businesses in the same geographic area during the six (6) month period following your termination of employment. 11. Notice. ------- Notices required or permitted under this Agreement shall be in writing and shall be deemed to have been given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, in a properly addressed envelope. Notices to 11 Stanley N. Pontius January 27, 1998 Page 11 FFBC shall be addressed to the Chief Executive Officer. 12. Modification; Waiver; Successors. --------------------------------- No provision of this Agreement may be waived, modified or discharged except pursuant to a written instrument signed by you and the Chief Executive Officer of FFBC. This Agreement is binding upon any successor to all or substantially all of the business or assets of FFBC. 13. Validity; Counterparts. ----------------------- This Agreement shall be governed by and construed under the law of the State of Ohio. The validity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other provision hereof. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. Sincerely yours, FIRST FINANCIAL BANCORP By: ---------------------------- and FIRST NATIONAL BANK OF SOUTHWESTERN OHIO By: ---------------------------- 12 Stanley N. Pontius January 27, 1998 Page 12 ACCEPTED AND AGREED TO THIS ____ DAY OF ________, 1998. - ---------------------------------- Stanley N. Pontius EX-10.III.A.3 5 EXHIBIT 10(III)A(3) 1 EXHIBIT 10(iii)A(3) CONFIDENTIAL January 27, 1998 Rick L. Blossom President & COO First National Bank of Southwestern Ohio 300 High Street P.O. Box 476 Hamilton, OH 45012 Dear Rick: You are employed by First Financial Bancorp and First National Bank of Southwestern Ohio, a wholly owned subsidiary of FFBC, ("FFBC") in a key executive position. Continuity of the management of FFBC and its affiliate banks is a critical factor in the continued success of FFBC. The Board of Directors of FFBC believes it is in the best interest of FFBC to encourage the continued effort and dedication of key members of management to their assigned duties. In consideration of the mutual promises contained in this letter, FFBC shall provide to you, and you shall receive from FFBC, the benefits set forth in this letter ("Agreement"), if your employment with FFBC, or its affiliate bank, is terminated during the term of this Agreement. 1. Purpose. ------- This Agreement establishes certain basic terms and conditions relating to your employment with FFBC, and special arrangements and dispute resolution proceedings relating to the termination of your employment for any reason other than: (i) your retirement; (ii) your becoming totally and permanently disabled under the FFBC long-term disability plan or policy; or (iii) your death. This Agreement supersedes all prior agreements with FFBC and any of its affiliate banks or any predecessor businesses, except the Confidentiality Agreement concurrently entered, or previously entered, between you and FFBC, and the special severance benefits provided under this Agreement are to be provided instead of any other severance arrangements offered by FFBC or its affiliate banks. Notwithstanding the foregoing, neither your termination of employment nor anything contained in this Agreement shall have any affect upon your 2 Rick L. Blossom January 27, 1998 Page 2 rights under any tax-qualified "pension benefit plan," as such term is defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); or under any "welfare benefit plan" as defined in ERISA, including by way of illustration and not limitation, any medical surgical or hospitalization benefit coverage or long-term disability benefit coverage; or under any non-qualified deferred compensation arrangement, including by way of illustration and not limitation, any stock incentive plan or non-qualified pension plan; or under the FFBC Performance Incentive Plan for any completed plan year. 2. EMPLOYMENT. FFBC agrees that, during the term of this Agreement, you will be employed with FFBC, and any other direct or indirect subsidiary or affiliate of FFBC to which you may be transferred, in your present position or in a position that is comparable to your present position in compensation, responsibility and stature and for which you are suited by education and background and that: (a) you are, and will continue to be, eligible to participate in any employee benefit plan of FFBC in accordance with its terms; and (b) you will be entitled to the same treatment under any generally applicable employment policy or practice as any other member of Executive Management Group whose position in the organization is comparable to yours. Those plans, policies and practices that generally apply to other members of the Executive Management Group will be referred to in this Agreement as your "Employment Benefits." Your Employment Benefits may be modified from time to time after the date hereof without violation of this Agreement if the changes apply generally to other members of the Executive Management Group. 3. TERM OF AGREEMENT. This Agreement shall become effective on the date of this Agreement ("Commencement Date") and shall continue in effect through the earlier of (i) the fifth anniversary of the Commencement Date; (ii) the date of your retirement, death or total and permanent disability; or (iii) the completion of full payment of all benefits promised hereunder. Absent your death, total and permanent disability or retirement, this Agreement shall be renewed annually from and after the fifth anniversary of the Commencement Date unless written notice to the contrary is given by you or by FFBC at least six (6) months prior to the expiration of the term, including any extension thereof. 3 Rick L. Blossom January 27, 1998 Page 3 4. TERMINATION OF EMPLOYMENT. Your employment may be terminated in accordance with any of the following paragraphs, but only upon one (1) month's advance written notice (which period shall be referred to in this Agreement as the "Notice Period"): (a) INVOLUNTARY TERMINATION. FFBC may terminate your employment without cause. In such an event, you shall continue to receive your full salary and Employment Benefits during the Notice Period. The expiration of the Notice Period shall be your "Date of Termination." Upon your Date of Termination, you shall be entitled to those benefits provided under Section 5, provided you give FFBC the release and covenant not to sue described in Section 5. (b) INVOLUNTARY TERMINATION FOR CAUSE. FFBC may terminate your employment for "Cause" with written notice setting forth the Cause for termination. "Cause" means a willful engaging in gross misconduct materially and demonstrably injurious to FFBC. "Willful" means an act or omission in bad faith and without reasonable belief that such act or omission was in, or not opposed to, the best interests of FFBC. The expiration of the Notice Period is your "Date of Termination for Cause." Upon your Date of Termination for Cause, you shall only be entitled to those benefits provided under Section 6. (c) VOLUNTARY TERMINATION. You may voluntarily terminate your employment. In such an event, you shall continue to receive your full salary and Employment Benefits during the Notice period provided you satisfactorily perform your duties during the Notice Period unless relieved of those duties by FFBC. The expiration of the Notice Period is your "Voluntary Date of Termination." Upon your Voluntary Date of Termination, you shall only be entitled to those benefits provided under Section 6. (d) VOLUNTARY TERMINATION FOR GOOD REASON. You may terminate your employment by notice setting forth a Good Reason for termination if the notice is delivered to FFBC within thirty (30) days following the occurrence of any "Good Reason." "Good Reason" means a (i) change in the duties of your position, or the transfer to a new position, in violation of Section 2; (ii) substantial alteration in the nature or status of your responsibilities in violation of Section 2; (iii) reduction in your base salary; (iv) refusal by FFBC, or its successor, to renew the term of this Agreement for any reason, prior to your reaching your normal retirement date under the FFBC Pension Benefit Plan; or (v) changes in your Employment Benefits in violation of Section 2. If you give notice of termination for Good Reason, you shall continue to receive your full base salary and Employment 4 Rick L. Blossom January 27, 1998 Page 4 Benefits during the Notice Period as in effect prior to the event that is the Good Reason for termination, subject to the right of FFBC to make any changes to your Employment Benefits permitted in accordance with Section 2. The expiration of the Notice Period is your "Date of Termination." Upon your Date of Termination, you shall be entitled to those benefits provided under Section 5, provided you give FFBC the written release and covenant not to sue described in Section 5. 5. SPECIAL SEVERANCE BENEFITS. If your employment with FFBC is involuntarily terminated in accordance with Section 4(a) or you voluntarily terminate your employment for Good Reason in accordance with Section 4(d) and you provide FFBC with a separate, written release and covenant not to sue (on a form provided by and satisfactory to FFBC) which releases FFBC from all claims arising from your employment and termination of your employment, and you do not revoke this release and covenant not to sue, then you shall receive the following benefits, less any applicable withholding required for federal, state or local taxes: (a) your base salary shall be continued in effect for a period of twenty-four (24) months from your Date of Termination (hereinafter called your "Severance Pay Period"); (b) if, prior to your Date of Termination, you have participated in the FFBC Performance Incentive Plan for a complete calendar year, you will receive an incentive compensation payment within thirty (30) days of your Date of Termination in one lump-sum in an amount equal to 2.0 times the percentage of the incentive payment made or required to be made for the calendar year pursuant to the Performance Incentive Plan immediately preceding the calendar year in which your Date of Termination occurs; (c) if your Date of Termination is within twelve (12) months after a Change in Control, you will receive a payment within thirty (30) days of your Date of Termination in one lump-sum in an amount equal to the total of the following: (i) With respect to any shares of Stock subject to an Option granted to you as of the time of the Change in Control under the First Financial Bancorp 1991 Stock Incentive Plan (the "Incentive Plan") that you cannot exercise as a result of your termination of employment, the difference between the fair market value of such Stock, determined as of your Date of Termination, and the Option Price. 5 Rick L. Blossom January 27, 1998 Page 5 (ii) With respect to any Restricted Stock granted to you under the Incentive Plan as of the time of the Change in Control which you forfeit as a result of your termination of employment, the fair market value of such Restricted Stock, determined as of your Date of Termination and as if all restrictions had been removed. (iii) For purposes of this Section 5, "Stock," "Options," "Option Price," "Restricted Stock" and "Committee" will have the meaning given those terms in the Incentive Plan, and your right to exercise Options or to receive Restricted Stock without forfeiture will be determined after any adjustments made by the Committee under Sections 8.8 and 11.1 of the Incentive Plan, and after any amendments made to the Incentive Plan in connection with the Change in Control. (iv) For purposes of this Section 5, "Change in Control" will have the following meaning: (a) a plan has been approved by the shareholders of FFBC and consummated for FFBC to be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation will be owned in the aggregate by the former shareholders of FFBC as the same shall have existed immediately prior to such merger or consolidation; (b) an agreement for the sale by FFBC of substantially all of its assets to another corporation which is not a wholly owned subsidiary has been approved by the shareholders (or the Board of Directors or appropriate officers if shareholder approval is not required) and consummated; (c) "beneficial ownership" as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") of twenty percent (20%) or more of the total voting capital stock of FFBC then issued and outstanding has been acquired by any person or "group" as defined in Section 13(d)(3) of the Exchange Act; or (d) individuals who were members of the Board of FFBC immediately prior to a meeting of the shareholders of FFBC involving a contest for the election of directors do not constitute a majority of the Board immediately following such election, unless the election of such new directors was recommended to the shareholders by the management of FFBC. The Board of FFBC has final authority to determine the exact date on which a Change in Control has occurred under the foregoing definitions. (d) your Employment Benefits shall be continued during your Severance Pay Period, subject to the right of FFBC to make any changes to your Employment Benefits permitted in accordance with Section 2; provided, however, that you shall not: 6 Rick L. Blossom January 27, 1998 Page 6 (i) accumulate vacation pay for periods after your Date of Termination; (ii) first qualify for long-term disability benefits or sickness and accident plan benefits by reason of an illness, accident or disability occurring, or a sickness or illness first manifesting itself, after your Date of Termination; (iii) be eligible to continue to make contributions to any Internal Revenue Code Section 401(k) plan maintained by FFBC or qualify for a share of any employer contribution made to any tax-qualified defined contribution plan; or (iv) be eligible to accumulate service for pension plan purposes; (e) you shall qualify for full COBRA health benefit continuation coverage upon the expiration of your Severance Pay Period; (f) you shall be entitled to full executive outplacement assistance with an agency selected by FFBC with the fee paid by FFBC in an amount not to exceed five percent (5%) of your annual base salary; (g) with respect to the Endorsement Method Split Dollar Plan Agreement (the "Split Dollar Agreement") to which you are a party (and solely for purposes of the Split Dollar Agreement), the duration of your Severance Pay Period shall be considered as if it were active employment for purposes of determining whether you were eligible to receive a retirement benefit under the early retirement provisions of First Financial Bancorp Employees' Pension Plan, as provided in Section VI(B) of the Split Dollar Agreement; and (h) if your Date of Termination is within twelve (12) months after a Change in Control, you will receive a payment (the "Split Dollar Payment") within ninety (90) days of your Date of Termination in one lump-sum equal to the present value of the death benefit you would have received under the Split Dollar Agreement, determined as if you had terminated on your Date of Termination, were then eligible to receive a retirement benefit under the early retirement provisions of First Financial Bancorp Employees' Pension Plan (whether or not this is actually the case), and died at age 75 when the Split Dollar Agreement was still in effect. For purposes of this Section 5, present value will be determined using an annual discount rate of 7%. Notwithstanding the prior two sentences, if you elect to receive an assignment of the policy under Section X of the Split Dollar Agreement, the Split Dollar Payment shall be applied to the cash payment to FFBC required under Section X of the Split Dollar Agreement, and any portion of the Split Dollar Payment in excess of the amount required under Section X shall be paid to you. 7 Rick L. Blossom January 27, 1998 Page 7 (i) Notwithstanding any other provision of this Agreement, if the receipt of any payment under Section 5 of this Agreement, in combination with any other payments to you from FFBC or its affiliates, shall, in the opinion of independent tax counsel of recognized standing selected by FFBC, result in the payment by you of any excise tax provided for in Section 280G and Section 4999 of the Internal Revenue Code, then the amount of payments under Section 5 of this Agreement shall be reduced to the extent required, in the opinion of independent tax counsel, to prevent the imposition of such excise tax. The reduction of payments under this Agreement shall be made after any reduction made under Section 11.2 of the First Financial Bancorp 1991 Stock Incentive Plan and you will have the right to select the order in which payments under this Section 5 will be reduced. (j) The release and covenant not to sue which you agree to provide prior to the receipt of special severance benefits under this Section 5 of this Agreement shall comply with the requirements of the Older Workers Benefit Protection Act and applicable state and federal laws and regulations. If you do not provide FFBC with a written release and covenant not to sue, any claims concerning this Agreement or otherwise arising from your employment with FFBC, or its affiliate banks, shall be subject to final and binding arbitration as described in Section 7. 6. BENEFITS UPON VOLUNTARY TERMINATION OR TERMINATION FOR CAUSE. Upon your Date of Termination for Cause in accordance with Section 4(b) or your Voluntary Date of Termination in accordance with Section 4(c), all special severance benefits under this Agreement will be void. In such an event, you shall be eligible for any benefits provided in accordance with the plans and practices of FFBC that are applicable to employees generally. 7. ARBITRATION. Any dispute under this Agreement, and any claims of wrongful or discriminatory termination based on any state or federal statute, tort, public policy, contract or promissory estoppel theory, including any dispute as to the cause or reason for termination, shall be submitted to final and binding arbitration, subject to the National Rules for the Resolution of Employment Disputes of the American Arbitration Association, effective June 1, 1997, except as hereinafter provided: (a) FFBC shall pay the arbitrator's fee; 8 Rick L. Blossom January 27, 1998 Page 8 (b) Each party shall bear the cost of its own attorney's fees. However, if you prevail in a challenge to FFBC's determination as to cause for your termination or if you prevail on any claim that you were discriminated against in violation of any federal law or statute, you shall be reimbursed by FFBC for the filing fee and any reasonable costs or expenses incurred in such a challenge, including reasonable attorney's fees; (c) The arbitration hearing shall be held in Hamilton, Ohio, unless the parties mutually agree to another location; (d) Each party shall exchange documents to be utilized as exhibits in the arbitration hearing and each party shall be limited to two (2) pre-hearing depositions of two (2) hours each, unless the arbitrator orders additional discovery; (e) The arbitrator shall be appointed in accordance with Rule 12 of the above-referenced Rules of the American Arbitration Association, except that if, for any reason, an arbitrator cannot be selected by the process described in Rule 12, subparts (i) through (iii), the American Arbitration Association shall submit the names of seven (7) additional arbitrators from its Roster and the parties shall select the arbitrator by alternately striking names with the party requesting arbitration first striking; and (f) Either party shall be entitled to an injunction or other appropriate equitable relief to enforce the arbitration provisions of this Agreement and FFBC shall be entitled to an injunction to prevent any breach, pending arbitration, of the Confidentiality Agreement described below in paragraph 8 or the Covenant Not to Compete described below in paragraph 10. It is the intention of the parties to avoid litigation in any court of all claims concerning this Agreement, or otherwise arising from your employment with FFBC, or its affiliate bank, and that all such claims will be subject to this arbitration agreement. Neither party shall commence or pursue any litigation on any claim that is or was the subject of arbitration under this Agreement. Each party agrees that this agreement to arbitrate and the arbitration award are enforceable under and subject to the Federal Arbitration Act, 9 U.S.C. Section I, et seq. ("FAA"). If the FAA is held not to apply for any reason and the law of the state in which you are employed recognizes the enforceability of this Agreement and the arbitration award, then this Agreement and the arbitration award are enforceable under the laws of the state in which you are employed. Both parties consent that judgment upon the arbitration award may be entered in any federal or state court that has jurisdiction. The acceptance of any benefit under this Agreement shall be deemed ratification of this agreement to arbitrate claims. In the event you breach 9 Rick L. Blossom January 27, 1998 Page 9 this Agreement by filing a lawsuit, at the time your lawsuit is filed, you will return any Special Severance Benefits paid to you and be subject to injunctive relief enforcing this Agreement. 8. CONFIDENTIALITY. You will not disclose to any person or use for the benefit of yourself or any other person any confidential or proprietary information of FFBC without the prior written consent of the Chief Executive Officer of FFBC. Upon your termination of employment, you will return to FFBC all written or electronically stored memoranda, notes, plans, customer lists, records, reports or other documents of any kind or description (including all copies in any form whatsoever) relating to the business of FFBC and fully comply with any separate confidentiality agreement to which you and FFBC are parties. 9. CONFLICTS OF INTEREST. You agree for so long as you are employed by FFBC to avoid dealings and situations that would create the potential for a conflict of interest with FFBC. In this regard, you agree to comply with the FFBC policy regarding conflicts of interest and all applicable state or federal regulations concerning conflicts of interest applicable to commercial bank or savings bank officers. 10. COVENANT NOT TO COMPETE. During the term of this Agreement, and for a period of six (6) months following the termination of your employment for any reason other than as set forth in Section 4(b), you agree not to be employed by, serve as officer or director of, consultant to or advisor to any business that engages either directly or indirectly in commercial banking, savings banking or mortgage lending in the geographic area of Ohio, Indiana, Michigan or Kentucky or which is reasonably likely to engage in such businesses in the same geographic area during the six (6) month period following your termination of employment. 11. NOTICE. Notices required or permitted under this Agreement shall be in writing and shall be deemed to have been given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, in a properly addressed envelope. Notices to FFBC shall be addressed to the Chief Executive Officer. 10 Rick L. Blossom January 27, 1998 Page 10 12. MODIFICATION; WAIVER; SUCCESSORS. No provision of this Agreement may be waived, modified or discharged except pursuant to a written instrument signed by you and the Chief Executive Officer of FFBC. This Agreement is binding upon any successor to all or substantially all of the business or assets of FFBC. 13. VALIDITY; COUNTERPARTS. This Agreement shall be governed by and construed under the law of the State of Ohio. The validity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other provision hereof. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. Sincerely yours, FIRST FINANCIAL BANCORP By:___________________________ and FIRST NATIONAL BANK OF SOUTHWESTERN OHIO By:___________________________ ACCEPTED AND AGREED TO THIS ____ DAY OF ________, 1998. - ---------------------------------- Rick L. Blossom EX-10.III.A.4 6 EXHIBIT 10 (III)A(4) 1 EXHIBIT 10(iii)A(4) CONFIDENTIAL January 27, 1998 Michael R. O'Dell Senior Vice President & CFO First Financial Bancorp 300 High Street P.O. Box 476 Hamilton, OH 45012 Dear Mike: You are employed by First Financial Bancorp ("FFBC") in a key executive position. Continuity of the management of FFBC is a critical factor in the continued success of FFBC. The Board of Directors of FFBC believes it is in the best interest of FFBC to encourage the continued effort and dedication of key members of management to their assigned duties. In consideration of the mutual promises contained in this letter, FFBC shall provide to you, and you shall receive from FFBC, the benefits set forth in this letter ("Agreement"), if your employment with FFBC is terminated during the term of this Agreement. 1. Purpose. This Agreement establishes certain basic terms and conditions relating to your employment with FFBC, and special arrangements and dispute resolution proceedings relating to the termination of your employment for any reason other than: (i) your retirement; (ii) your becoming totally and permanently disabled under the FFBC long-term disability plan or policy; or (iii) your death. This Agreement supersedes all prior agreements with FFBC and any of its affiliate banks or any predecessor businesses, except the Confidentiality Agreement concurrently entered, or previously entered, 2 Michael R. O'Dell January 27, 1998 Page 2 between you and FFBC, and the special severance benefits provided under this Agreement are to be provided instead of any other severance arrangements offered by FFBC or its affiliate banks. Notwithstanding the foregoing, neither your termination of employment nor anything contained in this Agreement shall have any affect upon your rights under any tax-qualified "pension benefit plan," as such term is defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); or under any "welfare benefit plan" as defined in ERISA, including by way of illustration and not limitation, any medical surgical or hospitalization benefit coverage or long-term disability benefit coverage; or under any non-qualified deferred compensation arrangement, including by way of illustration and not limitation, any stock incentive plan or non-qualified pension plan; or under the FFBC Performance Incentive Plan for any completed plan year. 2. EMPLOYMENT. FFBC agrees that, during the term of this Agreement, you will be employed with FFBC, and any other direct or indirect subsidiary or affiliate of FFBC to which you may be transferred, in your present position or in a position that is comparable to your present position in compensation, responsibility and stature and for which you are suited by education and background and that: (a) you are, and will continue to be, eligible to participate in any employee benefit plan of FFBC in accordance with its terms; and (b) you will be entitled to the same treatment under any generally applicable employment policy or practice as any other member of Executive Management Group whose position in the organization is comparable to yours. Those plans, policies and practices that generally apply to other members of the Executive Management Group will be referred to in this Agreement as your "Employment Benefits." Your Employment Benefits may be modified from time to time after the date hereof without violation of this Agreement if the changes apply generally to other members of the Executive Management Group. 3. TERM OF AGREEMENT. This Agreement shall become effective on the date of this Agreement ("Commencement Date") and shall continue in effect through the earlier of (i) the fifth anniversary of the Commencement Date; (ii) the date of your retirement, death or total and permanent disability; or (iii) the completion of full payment of all benefits promised hereunder. Absent your death, total and permanent disability or retirement, this Agreement shall be 3 Michael R. O'Dell January 27, 1998 Page 3 renewed annually from and after the fifth anniversary of the Commencement Date unless written notice to the contrary is given by you or by FFBC at least six (6) months prior to the expiration of the term, including any extension thereof. 4. TERMINATION OF EMPLOYMENT. Your employment may be terminated in accordance with any of the following paragraphs, but only upon one (1) month's advance written notice (which period shall be referred to in this Agreement as the "Notice Period"): (a) INVOLUNTARY TERMINATION. FFBC may terminate your employment without cause. In such an event, you shall continue to receive your full salary and Employment Benefits during the Notice Period. The expiration of the Notice Period shall be your "Date of Termination." Upon your Date of Termination, you shall be entitled to those benefits provided under Section 5, provided you give FFBC the release and covenant not to sue described in Section 5. (b) INVOLUNTARY TERMINATION FOR CAUSE. FFBC may terminate your employment for "Cause" with written notice setting forth the Cause for termination. "Cause" means a willful engaging in gross misconduct materially and demonstrably injurious to FFBC. "Willful" means an act or omission in bad faith and without reasonable belief that such act or omission was in, or not opposed to, the best interests of FFBC. The expiration of the Notice Period is your "Date of Termination for Cause." Upon your Date of Termination for Cause, you shall only be entitled to those benefits provided under Section 6. (c) VOLUNTARY TERMINATION. You may voluntarily terminate your employment. In such an event, you shall continue to receive your full salary and Employment Benefits during the Notice period provided you satisfactorily perform your duties during the Notice Period unless relieved of those duties by FFBC. The expiration of the Notice Period is your "Voluntary Date of Termination." Upon your Voluntary Date of Termination, you shall only be entitled to those benefits provided under Section 6. (d) VOLUNTARY TERMINATION FOR GOOD REASON. You may terminate your employment by notice setting forth a Good Reason for termination if the notice is delivered to FFBC within thirty (30) days following the occurrence of any "Good Reason." "Good Reason" means a (i) change in the duties of your position, or the transfer to a new position, in violation of Section 2; (ii) substantial alteration in the nature or status of your responsibilities in violation of Section 2; (iii) reduction in your base salary; (iv) refusal by FFBC, or its successor, to renew the term of this 4 Michael R. O'Dell January 27, 1998 Page 4 Agreement for any reason, prior to your reaching your normal retirement date under the FFBC Pension Benefit Plan; or (v) changes in your Employment Benefits in violation of Section 2. If you give notice of termination for Good Reason, you shall continue to receive your full base salary and Employment Benefits during the Notice Period as in effect prior to the event that is the Good Reason for termination, subject to the right of FFBC to make any changes to your Employment Benefits permitted in accordance with Section 2. The expiration of the Notice Period is your "Date of Termination." Upon your Date of Termination, you shall be entitled to those benefits provided under Section 5, provided you give FFBC the written release and covenant not to sue described in Section 5. 5. SPECIAL SEVERANCE BENEFITS. If your employment with FFBC is involuntarily terminated in accordance with Section 4(a) or you voluntarily terminate your employment for Good Reason in accordance with Section 4(d) and you provide FFBC with a separate, written release and covenant not to sue (on a form provided by and satisfactory to FFBC) which releases FFBC from all claims arising from your employment and termination of your employment, and you do not revoke this release and covenant not to sue, then you shall receive the following benefits, less any applicable withholding required for federal, state or local taxes: (a) your base salary shall be continued in effect for a period of thirty-six (36) months from your Date of Termination (hereinafter called your "Severance Pay Period"); (b) if, prior to your Date of Termination, you have participated in the FFBC Performance Incentive Plan for a complete calendar year, you will receive an incentive compensation payment within thirty (30) days of your Date of Termination in one lump-sum in an amount equal to 3.0 times the percentage of the incentive payment made or required to be made for the calendar year pursuant to the Performance Incentive Plan immediately preceding the calendar year in which your Date of Termination occurs; (c) if your Date of Termination is within twelve (12) months after a Change in Control, you will receive a payment within thirty (30) days of your Date of Termination in one lump-sum in an amount equal to the total of the following: (i) With respect to any shares of Stock subject to an Option granted to you as of the time of the Change in Control under the First Financial Bancorp 1991 Stock Incentive Plan (the "Incentive Plan") that you cannot exercise as a result of your termination of employment, the difference between the 5 Michael R. O'Dell January 27, 1998 Page 5 fair market value of such Stock, determined as of your Date of Termination, and the Option Price. (ii) With respect to any Restricted Stock granted to you under the Incentive Plan as of the time of the Change in Control which you forfeit as a result of your termination of employment, the fair market value of such Restricted Stock, determined as of your Date of Termination and as if all restrictions had been removed. (iii) For purposes of this Section 5, "Stock," "Options," "Option Price," "Restricted Stock" and "Committee" will have the meaning given those terms in the Incentive Plan, and your right to exercise Options or to receive Restricted Stock without forfeiture will be determined after any adjustments made by the Committee under Sections 8.8 and 11.1 of the Incentive Plan, and after any amendments made to the Incentive Plan in connection with the Change in Control. (iv) For purposes of this Section 5, "Change in Control" will have the following meaning: (a) a plan has been approved by the shareholders of FFBC and consummated for FFBC to be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation will be owned in the aggregate by the former shareholders of FFBC as the same shall have existed immediately prior to such merger or consolidation; (b) an agreement for the sale by FFBC of substantially all of its assets to another corporation which is not a wholly owned subsidiary has been approved by the shareholders (or the Board of Directors or appropriate officers if shareholder approval is not required) and consummated; (c) "beneficial ownership" as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") of twenty percent (20%) or more of the total voting capital stock of FFBC then issued and outstanding has been acquired by any person or "group" as defined in Section 13(d)(3) of the Exchange Act; or (d) individuals who were members of the Board of FFBC immediately prior to a meeting of the shareholders of FFBC involving a contest for the election of directors do not constitute a majority of the Board immediately following such election, unless the election of such new directors was recommended to the shareholders by the management of FFBC. The Board of FFBC has final authority to determine the exact date on which a Change in Control has occurred under the foregoing definitions. 6 Michael R. O'Dell January 27, 1998 Page 6 (d) your Employment Benefits shall be continued during your Severance Pay Period, subject to the right of FFBC to make any changes to your Employment Benefits permitted in accordance with Section 2; provided, however, that you shall not: (i) accumulate vacation pay for periods after your Date of Termination; (ii) first qualify for long-term disability benefits or sickness and accident plan benefits by reason of an illness, accident or disability occurring, or a sickness or illness first manifesting itself, after your Date of Termination; (iii) be eligible to continue to make contributions to any Internal Revenue Code ss. 401(k) plan maintained by FFBC or qualify for a share of any employer contribution made to any tax-qualified defined contribution plan; or (iv) be eligible to accumulate service for pension plan purposes; (e) you shall qualify for full COBRA health benefit continuation coverage upon the expiration of your Severance Pay Period; (f) you shall be entitled to full executive outplacement assistance with an agency selected by FFBC with the fee paid by FFBC in an amount not to exceed five percent (5%) of your annual base salary; (g) with respect to the Endorsement Method Split Dollar Plan Agreement (the "Split Dollar Agreement") to which you are a party (and solely for purposes of the Split Dollar Agreement), the duration of your Severance Pay Period shall be considered as if it were active employment for purposes of determining whether you were eligible to receive a retirement benefit under the early retirement provisions of First Financial Bancorp Employees' Pension Plan, as provided in Section VI(B) of the Split Dollar Agreement; and (h) if your Date of Termination is within twelve (12) months after a Change in Control, you will receive a payment (the "Split Dollar Payment") within ninety (90) days of your Date of Termination in one lump-sum equal to the present value of the death benefit you would have received under the Split Dollar Agreement, determined as if you had terminated on your Date of Termination, were then eligible to receive a retirement benefit under the early retirement provisions of First Financial Bancorp Employees' Pension Plan (whether or not this is actually the case), and died at age 75 when the Split Dollar Agreement was still in effect. For purposes of this Section 5, present value will be determined using an annual discount rate of 7%. Notwithstanding the prior two sentences, if you elect to receive an assignment of the policy under Section X of the Split Dollar 7 Michael R. O'Dell January 27, 1998 Page 7 Agreement, the Split Dollar Payment shall be applied to the cash payment to FFBC required under Section X of the Split Dollar Agreement, and any portion of the Split Dollar Payment in excess of the amount required under Section X shall be paid to you. (i) Notwithstanding any other provision of this Agreement, if the receipt of any payment under Section 5 of this Agreement, in combination with any other payments to you from FFBC or its affiliates, shall, in the opinion of independent tax counsel of recognized standing selected by FFBC, result in the payment by you of any excise tax provided for in Section 280G and Section 4999 of the Internal Revenue Code, then the amount of payments under Section 5 of this Agreement shall be reduced to the extent required, in the opinion of independent tax counsel, to prevent the imposition of such excise tax. The reduction of payments under this Agreement shall be made after any reduction made under Section 11.2 of the First Financial Bancorp 1991 Stock Incentive Plan and you will have the right to select the order in which payments under this Section 5 will be reduced. The release and covenant not to sue which you agree to provide prior to the receipt of special severance benefits under this Section 5 of this Agreement shall comply with the requirements of the Older Workers Benefit Protection Act and applicable state and federal laws and regulations. If you do not provide FFBC with a written release and covenant not to sue, any claims concerning this Agreement or otherwise arising from your employment with FFBC, or its affiliate banks, shall be subject to final and binding arbitration as described in Section 7. 6. BENEFITS UPON VOLUNTARY TERMINATION OR TERMINATION FOR CAUSE. Upon your Date of Termination for Cause in accordance with Section 4(b) or your Voluntary Date of Termination in accordance with Section 4(c), all special severance benefits under this Agreement will be void. In such an event, you shall be eligible for any benefits provided in accordance with the plans and practices of FFBC that are applicable to employees generally. 7. ARBITRATION. Any dispute under this Agreement, and any claims of wrongful or discriminatory termination based on any state or federal statute, tort, public policy, contract or promissory estoppel theory, including any dispute as to the cause or reason for termination, shall be submitted to final and binding arbitration, subject to the National Rules for the Resolution of Employment Disputes of the American Arbitration 8 Michael R. O'Dell January 27, 1998 Page 8 Association, effective June 1, 1997, except as hereinafter provided: (a) FFBC shall pay the arbitrator's fee; (b) Each party shall bear the cost of its own attorney's fees. However, if you prevail in a challenge to FFBC's determination as to cause for your termination or if you prevail on any claim that you were discriminated against in violation of any federal law or statute, you shall be reimbursed by FFBC for the filing fee and any reasonable costs or expenses incurred in such a challenge, including reasonable attorney's fees; (c) The arbitration hearing shall be held in Hamilton, Ohio, unless the parties mutually agree to another location; (d) Each party shall exchange documents to be utilized as exhibits in the arbitration hearing and each party shall be limited to two (2) pre-hearing depositions of two (2) hours each, unless the arbitrator orders additional discovery; (f) The arbitrator shall be appointed in accordance with Rule 12 of the above-referenced Rules of the American Arbitration Association, except that if, for any reason, an arbitrator cannot be selected by the process described in Rule 12, subparts (i) through (iii), the American Arbitration Association shall submit the names of seven (7) additional arbitrators from its Roster and the parties shall select the arbitrator by alternately striking names with the party requesting arbitration first striking; and (g) Either party shall be entitled to an injunction or other appropriate equitable relief to enforce the arbitration provisions of this Agreement and FFBC shall be entitled to an injunction to prevent any breach, pending arbitration, of the Confidentiality Agreement described below in paragraph 8 or the Covenant Not to Compete described below in paragraph 10. It is the intention of the parties to avoid litigation in any court of all claims concerning this Agreement, or otherwise arising from your employment with FFBC, or its affiliate bank, and that all such claims will be subject to this arbitration agreement. Neither party shall commence or pursue any litigation on any claim that is or was the subject of arbitration under this Agreement. Each party agrees that this agreement to arbitrate and the arbitration award are enforceable under and subject to the Federal Arbitration Act, 9 U.S.C. ss. I, et seq. ("FAA"). If the FAA is held not to apply for any reason and the law of the state in which you are employed recognizes the enforceability of this Agreement and the arbitration award, then this Agreement and the arbitration award are enforceable under the laws of the state in which you are employed. Both 9 Michael R. O'Dell January 27, 1998 Page 9 parties consent that judgment upon the arbitration award may be entered in any federal or state court that has jurisdiction. The acceptance of any benefit under this Agreement shall be deemed ratification of this agreement to arbitrate claims. In the event you breach this Agreement by filing a lawsuit, at the time your lawsuit is filed, you will return any Special Severance Benefits paid to you and be subject to injunctive relief enforcing this Agreement. 8. CONFIDENTIALITY. You will not disclose to any person or use for the benefit of yourself or any other person any confidential or proprietary information of FFBC without the prior written consent of the Chief Executive Officer of FFBC. Upon your termination of employment, you will return to FFBC all written or electronically stored memoranda, notes, plans, customer lists, records, reports or other documents of any kind or description (including all copies in any form whatsoever) relating to the business of FFBC and fully comply with any separate confidentiality agreement to which you and FFBC are parties. 9. CONFLICTS OF INTEREST. You agree for so long as you are employed by FFBC to avoid dealings and situations that would create the potential for a conflict of interest with FFBC. In this regard, you agree to comply with the FFBC policy regarding conflicts of interest and all applicable state or federal regulations concerning conflicts of interest applicable to commercial bank or savings bank officers. 10. COVENANT NOT TO COMPETE. During the term of this Agreement, and for a period of six (6) months following the termination of your employment for any reason other than as set forth in Section 4(b), you agree not to be employed by, serve as officer or director of, consultant to or advisor to any business that engages either directly or indirectly in commercial banking, savings banking or mortgage lending in the geographic area of Ohio, Indiana, Michigan or Kentucky or which is reasonably likely to engage in such businesses in the same geographic area during the six (6) month period following your termination of employment. 11. NOTICE. Notices required or permitted under this Agreement shall be in writing and shall be deemed to have been given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, in a properly addressed envelope. Notices to 10 Michael R. O'Dell January 27, 1998 Page 10 FFBC shall be addressed to the Chief Executive Officer. 12. MODIFICATION; WAIVER; SUCCESSORS. No provision of this Agreement may be waived, modified or discharged except pursuant to a written instrument signed by you and the Chief Executive Officer of FFBC. This Agreement is binding upon any successor to all or substantially all of the business or assets of FFBC. 13. VALIDITY; COUNTERPARTS. This Agreement shall be governed by and construed under the law of the State of Ohio. The validity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other provision hereof. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. Sincerely yours, FIRST FINANCIAL BANCORP By:___________________________ ACCEPTED AND AGREED TO THIS ____ DAY OF ________, 1998. - ---------------------------------- Michael R. O'Dell EX-10.III.A.5 7 EXHIBIT 10(III)A(5) 1 EXHIBIT 10(iii)A(5) - ------------------- CONFIDENTIAL January 27, 1998 Mark W. Immelt Senior Vice President Senior Trust Officer First Financial Bancorp 300 High Street P.O. Box 476 Hamilton, OH 45012 Dear Mark: You are employed by First Financial Bancorp and First National Bank of Southwestern Ohio, a wholly owned subsidiary of FFBC, ("FFBC") in a key executive position. Continuity of the management of FFBC and its affiliate banks is a critical factor in the continued success of FFBC. The Board of Directors of FFBC believes it is in the best interest of FFBC to encourage the continued effort and dedication of key members of management to their assigned duties. In consideration of the mutual promises contained in this letter, FFBC shall provide to you, and you shall receive from FFBC, the benefits set forth in this letter ("Agreement"), if your employment with FFBC, or its affiliate bank, is terminated during the term of this Agreement. 1. Purpose. -------- This Agreement establishes certain basic terms and conditions relating to your employment with FFBC, and special arrangements and dispute resolution proceedings relating to the termination of your employment for any reason other than: (i) your retirement; (ii) your becoming totally and permanently disabled under the FFBC long-term disability plan or policy; or (iii) your death. This Agreement supersedes all prior 2 Mark W. Immelt January 27, 1998 Page 2 agreements with FFBC and any of its affiliate banks or any predecessor businesses, except the Confidentiality Agreement concurrently entered, or previously entered, between you and FFBC, and the special severance benefits provided under this Agreement are to be provided instead of any other severance arrangements offered by FFBC or its affiliate banks. Notwithstanding the foregoing, neither your termination of employment nor anything contained in this Agreement shall have any affect upon your rights under any tax-qualified "pension benefit plan," as such term is defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); or under any "welfare benefit plan" as defined in ERISA, including by way of illustration and not limitation, any medical surgical or hospitalization benefit coverage or long-term disability benefit coverage; or under any non-qualified deferred compensation arrangement, including by way of illustration and not limitation, any stock incentive plan or non-qualified pension plan; or under the FFBC Performance Incentive Plan for any completed plan year. 2. Employment. ----------- FFBC agrees that, during the term of this Agreement, you will be employed with FFBC, and any other direct or indirect subsidiary or affiliate of FFBC to which you may be transferred, in your present position or in a position that is comparable to your present position in compensation, responsibility and stature and for which you are suited by education and background and that: (a) you are, and will continue to be, eligible to participate in any employee benefit plan of FFBC in accordance with its terms; and (b) you will be entitled to the same treatment under any generally applicable employment policy or practice as any other member of Executive Management Group whose position in the organization is comparable to yours. Those plans, policies and practices that generally apply to other members of the Executive Management Group will be referred to in this Agreement as your "Employment Benefits." Your Employment Benefits may be modified from time to time after the date hereof without violation of this Agreement if the changes apply generally to other members of the Executive Management Group. 3. Term of Agreement. ------------------ This Agreement shall become effective on the date of this Agreement ("Commencement Date") and shall continue in effect through the earlier of (i) the fifth anniversary of the Commencement Date; (ii) the date of your retirement, death or total and permanent 3 Mark W. Immelt January 27, 1998 Page 3 disability; or (iii) the completion of full payment of all benefits promised hereunder. Absent your death, total and permanent disability or retirement, this Agreement shall be renewed annually from and after the fifth anniversary of the Commencement Date unless written notice to the contrary is given by you or by FFBC at least six (6) months prior to the expiration of the term, including any extension thereof. 4. Termination of Employment. -------------------------- Your employment may be terminated in accordance with any of the following paragraphs, but only upon one (1) month's advance written notice (which period shall be referred to in this Agreement as the "Notice Period"): (a) INVOLUNTARY TERMINATION. FFBC may terminate your employment without cause. In such an event, you shall continue to receive your full salary and Employment Benefits during the Notice Period. The expiration of the Notice Period shall be your "Date of Termination." Upon your Date of Termination, you shall be entitled to those benefits provided under Section 5, provided you give FFBC the release and covenant not to sue described in Section 5. (b) INVOLUNTARY TERMINATION FOR CAUSE. FFBC may terminate your employment for "Cause" with written notice setting forth the Cause for termination. "Cause" means a willful engaging in gross misconduct materially and demonstrably injurious to FFBC. "Willful" means an act or omission in bad faith and without reasonable belief that such act or omission was in, or not opposed to, the best interests of FFBC. The expiration of the Notice Period is your "Date of Termination for Cause." Upon your Date of Termination for Cause, you shall only be entitled to those benefits provided under Section 6. (c) VOLUNTARY TERMINATION. You may voluntarily terminate your employment. In such an event, you shall continue to receive your full salary and Employment Benefits during the Notice period provided you satisfactorily perform your duties during the Notice Period unless relieved of those duties by FFBC. The expiration of the Notice Period is your "Voluntary Date of Termination." Upon your Voluntary Date of Termination, you shall only be entitled to those benefits provided under Section 6. (d) VOLUNTARY TERMINATION FOR GOOD REASON. You may terminate your employment by notice setting forth a Good Reason for termination if the notice is delivered to FFBC within thirty (30) days following the occurrence of any "Good Reason." "Good Reason" means a (i) change in the duties of your position, or the transfer to a new position, in violation of Section 2; (ii) substantial alteration in the nature 4 Mark W. Immelt January 27, 1998 Page 4 or status of your responsibilities in violation of Section 2; (iii) reduction in your base salary; (iv) refusal by FFBC, or its successor, to renew the term of this Agreement for any reason, prior to your reaching your normal retirement date under the FFBC Pension Benefit Plan; or (v) changes in your Employment Benefits in violation of Section 2. If you give notice of termination for Good Reason, you shall continue to receive your full base salary and Employment Benefits during the Notice Period as in effect prior to the event that is the Good Reason for termination, subject to the right of FFBC to make any changes to your Employment Benefits permitted in accordance with Section 2. The expiration of the Notice Period is your "Date of Termination." Upon your Date of Termination, you shall be entitled to those benefits provided under Section 5, provided you give FFBC the written release and covenant not to sue described in Section 5. 5. Special Severance Benefits. --------------------------- If your employment with FFBC is involuntarily terminated in accordance with Section 4(a) or you voluntarily terminate your employment for Good Reason in accordance with Section 4(d) and you provide FFBC with a separate, written release and covenant not to sue (on a form provided by and satisfactory to FFBC) which releases FFBC from all claims arising from your employment and termination of your employment, and you do not revoke this release and covenant not to sue, then you shall receive the following benefits, less any applicable withholding required for federal, state or local taxes: (a) your base salary shall be continued in effect for a period of twenty-four (24) months from your Date of Termination (hereinafter called your "Severance Pay Period"); (b) if, prior to your Date of Termination, you have participated in the FFBC Performance Incentive Plan for a complete calendar year, you will receive an incentive compensation payment within thirty (30) days of your Date of Termination in one lump-sum in an amount equal to 2.0 times the percentage of the incentive payment made or required to be made for the calendar year pursuant to the Performance Incentive Plan immediately preceding the calendar year in which your Date of Termination occurs; (c) if your Date of Termination is within twelve (12) months after a Change in Control, you will receive a payment within thirty (30) days of your Date of Termination in one lump-sum in an amount equal to the total of the following: (i) With respect to any shares of Stock subject to an Option granted to you 5 Mark W. Immelt January 27, 1998 Page 5 as of the time of the Change in Control under the First Financial Bancorp 1991 Stock Incentive Plan (the "Incentive Plan") that you cannot exercise as a result of your termination of employment, the difference between the fair market value of such Stock, determined as of your Date of Termination, and the Option Price. (ii) With respect to any Restricted Stock granted to you under the Incentive Plan as of the time of the Change in Control which you forfeit as a result of your termination of employment, the fair market value of such Restricted Stock, determined as of your Date of Termination and as if all restrictions had been removed. (iii) For purposes of this Section 5, "Stock," "Options," "Option Price," "Restricted Stock" and "Committee" will have the meaning given those terms in the Incentive Plan, and your right to exercise Options or to receive Restricted Stock without forfeiture will be determined after any adjustments made by the Committee under Sections 8.8 and 11.1 of the Incentive Plan, and after any amendments made to the Incentive Plan in connection with the Change in Control. (iv) For purposes of this Section 5, "Change in Control" will have the following meaning: (a) a plan has been approved by the shareholders of FFBC and consummated for FFBC to be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation will be owned in the aggregate by the former shareholders of FFBC as the same shall have existed immediately prior to such merger or consolidation; (b) an agreement for the sale by FFBC of substantially all of its assets to another corporation which is not a wholly owned subsidiary has been approved by the shareholders (or the Board of Directors or appropriate officers if shareholder approval is not required) and consummated; (c) "beneficial ownership" as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") of twenty percent (20%) or more of the total voting capital stock of FFBC then issued and outstanding has been acquired by any person or "group" as defined in Section 13(d)(3) of the Exchange Act; or (d) individuals who were members of the Board of FFBC immediately prior to a meeting of the shareholders of FFBC involving a contest for the election of directors do not constitute a majority of the Board immediately following such election, unless the election of such new directors was recommended to the shareholders by the management of FFBC. The 6 Mark W. Immelt January 27, 1998 Page 6 Board of FFBC has final authority to determine the exact date on which a Change in Control has occurred under the foregoing definitions. 7 Mark W. Immelt January 27, 1998 Page 7 (d) your Employment Benefits shall be continued during your Severance Pay Period, subject to the right of FFBC to make any changes to your Employment Benefits permitted in accordance with Section 2; provided, however, that you shall not: (i) accumulate vacation pay for periods after your Date of Termination; (ii) first qualify for long-term disability benefits or sickness and accident plan benefits by reason of an illness, accident or disability occurring, or a sickness or illness first manifesting itself, after your Date of Termination; (iii) be eligible to continue to make contributions to any Internal Revenue Code ss. 401(k) plan maintained by FFBC or qualify for a share of any employer contribution made to any tax-qualified defined contribution plan; or (iv) be eligible to accumulate service for pension plan purposes; (e) you shall qualify for full COBRA health benefit continuation coverage upon the expiration of your Severance Pay Period; (f) you shall be entitled to full executive outplacement assistance with an agency selected by FFBC with the fee paid by FFBC in an amount not to exceed five percent (5%) of your annual base salary; (g) with respect to the Endorsement Method Split Dollar Plan Agreement (the "Split Dollar Agreement") to which you are a party (and solely for purposes of the Split Dollar Agreement), the duration of your Severance Pay Period shall be considered as if it were active employment for purposes of determining whether you were eligible to receive a retirement benefit under the early retirement provisions of First Financial Bancorp Employees' Pension Plan, as provided in Section VI(B) of the Split Dollar Agreement; and (h) if your Date of Termination is within twelve (12) months after a Change in Control, you will receive a payment (the "Split Dollar Payment") within ninety (90) days of your Date of Termination in one lump-sum equal to the present value of the death benefit you would have received under the Split Dollar Agreement, determined as if you had terminated on your Date of Termination, were then eligible to receive a retirement benefit under the early retirement provisions of First Financial Bancorp Employees' Pension Plan (whether or not this is actually the case), and died at age 75 when the Split Dollar Agreement was still in effect. For purposes of this Section 5, present value will be determined using an annual discount rate of 7%. Notwithstanding the prior two sentences, if you elect to receive an assignment of the policy under Section X of the Split Dollar 8 Mark W. Immelt January 27, 1998 Page 8 Agreement, the Split Dollar Payment shall be applied to the cash payment to FFBC required under Section X of the Split Dollar Agreement, and any portion of the Split Dollar Payment in excess of the amount required under Section X shall be paid to you. (i) Notwithstanding any other provision of this Agreement, if the receipt of any payment under Section 5 of this Agreement, in combination with any other payments to you from FFBC or its affiliates, shall, in the opinion of independent tax counsel of recognized standing selected by FFBC, result in the payment by you of any excise tax provided for in Section 280G and Section 4999 of the Internal Revenue Code, then the amount of payments under Section 5 of this Agreement shall be reduced to the extent required, in the opinion of independent tax counsel, to prevent the imposition of such excise tax. The reduction of payments under this Agreement shall be made after any reduction made under Section 11.2 of the First Financial Bancorp 1991 Stock Incentive Plan and you will have the right to select the order in which payments under this Section 5 will be reduced. The release and covenant not to sue which you agree to provide prior to the receipt of special severance benefits under this Section 5 of this Agreement shall comply with the requirements of the Older Workers Benefit Protection Act and applicable state and federal laws and regulations. If you do not provide FFBC with a written release and covenant not to sue, any claims concerning this Agreement or otherwise arising from your employment with FFBC, or its affiliate banks, shall be subject to final and binding arbitration as described in Section 7. 6. Benefits Upon Voluntary Termination or Termination for Cause. ------------------------------------------------------------- Upon your Date of Termination for Cause in accordance with Section 4(b) or your Voluntary Date of Termination in accordance with Section 4(c), all special severance benefits under this Agreement will be void. In such an event, you shall be eligible for any benefits provided in accordance with the plans and practices of FFBC that are applicable to employees generally. 7. Arbitration. ------------ Any dispute under this Agreement, and any claims of wrongful or discriminatory termination based on any state or federal statute, tort, public policy, contract or promissory estoppel theory, including any dispute as to the cause or reason for termination, shall be submitted to final and binding arbitration, subject to the National Rules for the Resolution of Employment Disputes of the American Arbitration 9 Mark W. Immelt January 27, 1998 Page 9 Association, effective June 1, 1997, except as hereinafter provided: (a) FFBC shall pay the arbitrator's fee; (b) Each party shall bear the cost of its own attorney's fees. However, if you prevail in a challenge to FFBC's determination as to cause for your termination or if you prevail on any claim that you were discriminated against in violation of any federal law or statute, you shall be reimbursed by FFBC for the filing fee and any reasonable costs or expenses incurred in such a challenge, including reasonable attorney's fees; (c) The arbitration hearing shall be held in Hamilton, Ohio, unless the parties mutually agree to another location; (d) Each party shall exchange documents to be utilized as exhibits in the arbitration hearing and each party shall be limited to two (2) pre-hearing depositions of two (2) hours each, unless the arbitrator orders additional discovery; (e) The arbitrator shall be appointed in accordance with Rule 12 of the above-referenced Rules of the American Arbitration Association, except that if, for any reason, an arbitrator cannot be selected by the process described in Rule 12, subparts (i) through (iii), the American Arbitration Association shall submit the names of seven (7) additional arbitrators from its Roster and the parties shall select the arbitrator by alternately striking names with the party requesting arbitration first striking; and (f) Either party shall be entitled to an injunction or other appropriate equitable relief to enforce the arbitration provisions of this Agreement and FFBC shall be entitled to an injunction to prevent any breach, pending arbitration, of the Confidentiality Agreement described below in paragraph 8 or the Covenant Not to Compete described below in paragraph 10. It is the intention of the parties to avoid litigation in any court of all claims concerning this Agreement, or otherwise arising from your employment with FFBC, or its affiliate bank, and that all such claims will be subject to this arbitration agreement. Neither party shall commence or pursue any litigation on any claim that is or was the subject of arbitration under this Agreement. Each party agrees that this agreement to arbitrate and the arbitration award are enforceable under and subject to the Federal Arbitration Act, 9 U.S.C. ss. I, et seq. ("FAA"). If the FAA is held not to apply for any reason and the law of the state in which you are employed recognizes the enforceability of this Agreement and the arbitration award, then this Agreement and the arbitration award are enforceable under the laws of the state in which you are employed. Both 10 Mark W. Immelt January 27, 1998 Page 10 parties consent that judgment upon the arbitration award may be entered in any federal or state court that has jurisdiction. The acceptance of any benefit under this Agreement shall be deemed ratification of this agreement to arbitrate claims. In the event you breach this Agreement by filing a lawsuit, at the time your lawsuit is filed, you will return any Special Severance Benefits paid to you and be subject to injunctive relief enforcing this Agreement. 8. Confidentiality. ---------------- You will not disclose to any person or use for the benefit of yourself or any other person any confidential or proprietary information of FFBC without the prior written consent of the Chief Executive Officer of FFBC. Upon your termination of employment, you will return to FFBC all written or electronically stored memoranda, notes, plans, customer lists, records, reports or other documents of any kind or description (including all copies in any form whatsoever) relating to the business of FFBC and fully comply with any separate confidentiality agreement to which you and FFBC are parties. 9. Conflicts of Interest. ---------------------- You agree for so long as you are employed by FFBC to avoid dealings and situations that would create the potential for a conflict of interest with FFBC. In this regard, you agree to comply with the FFBC policy regarding conflicts of interest and all applicable state or federal regulations concerning conflicts of interest applicable to commercial bank or savings bank officers. 10. Covenant Not to Compete. ------------------------ During the term of this Agreement, and for a period of six (6) months following the termination of your employment for any reason other than as set forth in Section 4(b), you agree not to be employed by, serve as officer or director of, consultant to or advisor to any business that engages either directly or indirectly in commercial banking, savings banking or mortgage lending in the geographic area of Ohio, Indiana, Michigan or Kentucky or which is reasonably likely to engage in such businesses in the same geographic area during the six (6) month period following your termination of employment. 11 Mark W. Immelt January 27, 1998 Page 11 11. Notice. ------- Notices required or permitted under this Agreement shall be in writing and shall be deemed to have been given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, in a properly addressed envelope. Notices to FFBC shall be addressed to the Chief Executive Officer. 12. Modification; Waiver; Successors. --------------------------------- No provision of this Agreement may be waived, modified or discharged except pursuant to a written instrument signed by you and the Chief Executive Officer of FFBC. This Agreement is binding upon any successor to all or substantially all of the business or assets of FFBC. 13. Validity; Counterparts. ----------------------- This Agreement shall be governed by and construed under the law of the State of Ohio. The validity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other provision hereof. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. Sincerely yours, FIRST FINANCIAL BANCORP By: ----------------------------- and FIRST NATIONAL BANK OF SOUTHWESTERN OHIO By: ----------------------------- 12 Mark W. Immelt January 27, 1998 Page 12 ACCEPTED AND AGREED TO THIS ____ DAY OF ________, 1998. - ---------------------------------- Mark W. Immelt EX-10.III.A.6 8 EXHIBIT 10(III)A(6) 1 EXHIBIT 10(iii)A(6) - ------------------ CONFIDENTIAL - ------------- January 27, 1998 Michael T. Riley Senior Vice President Marketing - Operations First Financial Bancorp 300 High Street P.O. Box 476 Hamilton, OH 45012 Dear Mike: You are employed by First Financial Bancorp and First National Bank of Southwestern Ohio, a wholly owned subsidiary of FFBC, ("FFBC") in a key executive position. Continuity of the management of FFBC and its affiliate banks is a critical factor in the continued success of FFBC. The Board of Directors of FFBC believes it is in the best interest of FFBC to encourage the continued effort and dedication of key members of management to their assigned duties. In consideration of the mutual promises contained in this letter, FFBC shall provide to you, and you shall receive from FFBC, the benefits set forth in this letter ("Agreement"), if your employment with FFBC, or its affiliate bank, is terminated during the term of this Agreement. 1. Purpose. ------- This Agreement establishes certain basic terms and conditions relating to your employment with FFBC, and special arrangements and dispute resolution proceedings relating to the termination of your employment for any reason other than: (i) your retirement; (ii) your becoming totally and permanently disabled under the FFBC long- 2 Michael T. Riley January 27, 1998 Page 2 term disability plan or policy; or (iii) your death. This Agreement supersedes all prior agreements with FFBC and any of its affiliate banks or any predecessor businesses, except the Confidentiality Agreement concurrently entered, or previously entered, between you and FFBC, and the special severance benefits provided under this Agreement are to be provided instead of any other severance arrangements offered by FFBC or its affiliate banks. Notwithstanding the foregoing, neither your termination of employment nor anything contained in this Agreement shall have any affect upon your rights under any tax-qualified "pension benefit plan," as such term is defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); or under any "welfare benefit plan" as defined in ERISA, including by way of illustration and not limitation, any medical surgical or hospitalization benefit coverage or long-term disability benefit coverage; or under any non-qualified deferred compensation arrangement, including by way of illustration and not limitation, any stock incentive plan or non-qualified pension plan; or under the FFBC Performance Incentive Plan for any completed plan year. 2. EMPLOYMENT. FFBC agrees that, during the term of this Agreement, you will be employed with FFBC, and any other direct or indirect subsidiary or affiliate of FFBC to which you may be transferred, in your present position or in a position that is comparable to your present position in compensation, responsibility and stature and for which you are suited by education and background and that: (a) you are, and will continue to be, eligible to participate in any employee benefit plan of FFBC in accordance with its terms; and (b) you will be entitled to the same treatment under any generally applicable employment policy or practice as any other member of Executive Management Group whose position in the organization is comparable to yours. Those plans, policies and practices that generally apply to other members of the Executive Management Group will be referred to in this Agreement as your "Employment Benefits." Your Employment Benefits may be modified from time to time after the date hereof without violation of this Agreement if the changes apply generally to other members of the Executive Management Group. 3. TERM OF AGREEMENT. This Agreement shall become effective on the date of this Agreement ("Commencement Date") and shall continue in effect through the earlier of (i) the fifth anniversary of the 3 Michael T. Riley January 27, 1998 Page 3 Commencement Date; (ii) the date of your retirement, death or total and permanent disability; or (iii) the completion of full payment of all benefits promised hereunder. Absent your death, total and permanent disability or retirement, this Agreement shall be renewed annually from and after the fifth anniversary of the Commencement Date unless written notice to the contrary is given by you or by FFBC at least six (6) months prior to the expiration of the term, including any extension thereof. 4. TERMINATION OF EMPLOYMENT. Your employment may be terminated in accordance with any of the following paragraphs, but only upon one (1) month's advance written notice (which period shall be referred to in this Agreement as the "Notice Period"): (a) INVOLUNTARY TERMINATION. FFBC may terminate your employment without cause. In such an event, you shall continue to receive your full salary and Employment Benefits during the Notice Period. The expiration of the Notice Period shall be your "Date of Termination." Upon your Date of Termination, you shall be entitled to those benefits provided under Section 5, provided you give FFBC the release and covenant not to sue described in Section 5. (b) INVOLUNTARY TERMINATION FOR CAUSE. FFBC may terminate your employment for "Cause" with written notice setting forth the Cause for termination. "Cause" means a willful engaging in gross misconduct materially and demonstrably injurious to FFBC. "Willful" means an act or omission in bad faith and without reasonable belief that such act or omission was in, or not opposed to, the best interests of FFBC. The expiration of the Notice Period is your "Date of Termination for Cause." Upon your Date of Termination for Cause, you shall only be entitled to those benefits provided under Section 6. (c) VOLUNTARY TERMINATION. You may voluntarily terminate your employment. In such an event, you shall continue to receive your full salary and Employment Benefits during the Notice period provided you satisfactorily perform your duties during the Notice Period unless relieved of those duties by FFBC. The expiration of the Notice Period is your "Voluntary Date of Termination." Upon your Voluntary Date of Termination, you shall only be entitled to those benefits provided under Section 6. (d) VOLUNTARY TERMINATION FOR GOOD REASON. You may terminate your employment by notice setting forth a Good Reason for termination if the notice is delivered to FFBC within thirty (30) days following the occurrence of any "Good Reason." "Good Reason" means a (i) change in the duties of your position, or the transfer 4 Michael T. Riley January 27, 1998 Page 4 to a new position, in violation of Section 2; (ii) substantial alteration in the nature or status of your responsibilities in violation of Section 2; (iii) reduction in your base salary; (iv) refusal by FFBC, or its successor, to renew the term of this Agreement for any reason, prior to your reaching your normal retirement date under the FFBC Pension Benefit Plan; or (v) changes in your Employment Benefits in violation of Section 2. If you give notice of termination for Good Reason, you shall continue to receive your full base salary and Employment Benefits during the Notice Period as in effect prior to the event that is the Good Reason for termination, subject to the right of FFBC to make any changes to your Employment Benefits permitted in accordance with Section 2. The expiration of the Notice Period is your "Date of Termination." Upon your Date of Termination, you shall be entitled to those benefits provided under Section 5, provided you give FFBC the written release and covenant not to sue described in Section 5. 5. SPECIAL SEVERANCE BENEFITS. If your employment with FFBC is involuntarily terminated in accordance with Section 4(a) or you voluntarily terminate your employment for Good Reason in accordance with Section 4(d) and you provide FFBC with a separate, written release and covenant not to sue (on a form provided by and satisfactory to FFBC) which releases FFBC from all claims arising from your employment and termination of your employment, and you do not revoke this release and covenant not to sue, then you shall receive the following benefits, less any applicable withholding required for federal, state or local taxes: (a) your base salary shall be continued in effect for a period of twenty-four (24) months from your Date of Termination (hereinafter called your "Severance Pay Period"); (b) if, prior to your Date of Termination, you have participated in the FFBC Performance Incentive Plan for a complete calendar year, you will receive an incentive compensation payment within thirty (30) days of your Date of Termination in one lump-sum in an amount equal to 2.0 times the percentage of the incentive payment made or required to be made for the calendar year pursuant to the Performance Incentive Plan immediately preceding the calendar year in which your Date of Termination occurs; (c) if your Date of Termination is within twelve (12) months after a Change in Control, you will receive a payment within thirty (30) days of your Date of Termination in one lump-sum in an amount equal to the total of the following: 5 Michael T. Riley January 27, 1998 Page 5 (i) With respect to any shares of Stock subject to an Option granted to you as of the time of the Change in Control under the First Financial Bancorp 1991 Stock Incentive Plan (the "Incentive Plan") that you cannot exercise as a result of your termination of employment, the difference between the fair market value of such Stock, determined as of your Date of Termination, and the Option Price. (ii) With respect to any Restricted Stock granted to you under the Incentive Plan as of the time of the Change in Control which you forfeit as a result of your termination of employment, the fair market value of such Restricted Stock, determined as of your Date of Termination and as if all restrictions had been removed. (iii) For purposes of this Section 5, "Stock," "Options," "Option Price," "Restricted Stock" and "Committee" will have the meaning given those terms in the Incentive Plan, and your right to exercise Options or to receive Restricted Stock without forfeiture will be determined after any adjustments made by the Committee under Sections 8.8 and 11.1 of the Incentive Plan, and after any amendments made to the Incentive Plan in connection with the Change in Control. (iv) For purposes of this Section 5, "Change in Control" will have the following meaning: (a) a plan has been approved by the shareholders of FFBC and consummated for FFBC to be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation will be owned in the aggregate by the former shareholders of FFBC as the same shall have existed immediately prior to such merger or consolidation; (b) an agreement for the sale by FFBC of substantially all of its assets to another corporation which is not a wholly owned subsidiary has been approved by the shareholders (or the Board of Directors or appropriate officers if shareholder approval is not required) and consummated; (c) "beneficial ownership" as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") of twenty percent (20%) or more of the total voting capital stock of FFBC then issued and outstanding has been acquired by any person or "group" as defined in Section 13(d)(3) of the Exchange Act; or (d) individuals who were members of the Board of FFBC immediately prior to a meeting of the shareholders of FFBC involving a contest for the election of directors do not constitute a majority of the Board immediately following such election, unless the election of such new directors was 6 Michael T. Riley January 27, 1998 Page 6 recommended to the shareholders by the management of FFBC. The Board of FFBC has final authority to determine the exact date on which a Change in Control has occurred under the foregoing definitions. (d) your Employment Benefits shall be continued during your Severance Pay Period, subject to the right of FFBC to make any changes to your Employment Benefits permitted in accordance with Section 2; provided, however, that you shall not: (i) accumulate vacation pay for periods after your Date of Termination; (ii) first qualify for long-term disability benefits or sickness and accident plan benefits by reason of an illness, accident or disability occurring, or a sickness or illness first manifesting itself, after your Date of Termination; (iii) be eligible to continue to make contributions to any Internal Revenue Code ss. 401(k) plan maintained by FFBC or qualify for a share of any employer contribution made to any tax-qualified defined contribution plan; or (iv) be eligible to accumulate service for pension plan purposes; (e) you shall qualify for full COBRA health benefit continuation coverage upon the expiration of your Severance Pay Period; (f) you shall be entitled to full executive outplacement assistance with an agency selected by FFBC with the fee paid by FFBC in an amount not to exceed five percent (5%) of your annual base salary; (g) with respect to the Endorsement Method Split Dollar Plan Agreement (the "Split Dollar Agreement") to which you are a party (and solely for purposes of the Split Dollar Agreement), the duration of your Severance Pay Period shall be considered as if it were active employment for purposes of determining whether you were eligible to receive a retirement benefit under the early retirement provisions of First Financial Bancorp Employees' Pension Plan, as provided in Section VI(B) of the Split Dollar Agreement; and (h) if your Date of Termination is within twelve (12) months after a Change in Control, you will receive a payment (the "Split Dollar Payment") within ninety (90) days of your Date of Termination in one lump-sum equal to the present value of the death benefit you would have received under the Split Dollar Agreement, determined as if you had terminated on your Date of Termination, were then eligible to receive a retirement benefit under the early retirement provisions of First Financial Bancorp Employees' Pension Plan (whether or not this is actually 7 Michael T. Riley January 27, 1998 Page 7 the case), and died at age 75 when the Split Dollar Agreement was still in effect. For purposes of this Section 5, present value will be determined using an annual discount rate of 7%. Notwithstanding the prior two sentences, if you elect to receive an assignment of the policy under Section X of the Split Dollar Agreement, the Split Dollar Payment shall be applied to the cash payment to FFBC required under Section X of the Split Dollar Agreement, and any portion of the Split Dollar Payment in excess of the amount required under Section X shall be paid to you. (i) Notwithstanding any other provision of this Agreement, if the receipt of any payment under Section 5 of this Agreement, in combination with any other payments to you from FFBC or its affiliates, shall, in the opinion of independent tax counsel of recognized standing selected by FFBC, result in the payment by you of any excise tax provided for in Section 280G and Section 4999 of the Internal Revenue Code, then the amount of payments under Section 5 of this Agreement shall be reduced to the extent required, in the opinion of independent tax counsel, to prevent the imposition of such excise tax. The reduction of payments under this Agreement shall be made after any reduction made under Section 11.2 of the First Financial Bancorp 1991 Stock Incentive Plan and you will have the right to select the order in which payments under this Section 5 will be reduced. The release and covenant not to sue which you agree to provide prior to the receipt of special severance benefits under this Section 5 of this Agreement shall comply with the requirements of the Older Workers Benefit Protection Act and applicable state and federal laws and regulations. If you do not provide FFBC with a written release and covenant not to sue, any claims concerning this Agreement or otherwise arising from your employment with FFBC, or its affiliate banks, shall be subject to final and binding arbitration as described in Section 7. 6. BENEFITS UPON VOLUNTARY TERMINATION OR TERMINATION FOR CAUSE. Upon your Date of Termination for Cause in accordance with Section 4(b) or your Voluntary Date of Termination in accordance with Section 4(c), all special severance benefits under this Agreement will be void. In such an event, you shall be eligible for any benefits provided in accordance with the plans and practices of FFBC that are applicable to employees generally. 7. ARBITRATION. Any dispute under this Agreement, and any claims of wrongful or discriminatory 8 Michael T. Riley January 27, 1998 Page 8 termination based on any state or federal statute, tort, public policy, contract or promissory estoppel theory, including any dispute as to the cause or reason for termination, shall be submitted to final and binding arbitration, subject to the National Rules for the Resolution of Employment Disputes of the American Arbitration Association, effective June 1, 1997, except as hereinafter provided: (a) FFBC shall pay the arbitrator's fee; (b) Each party shall bear the cost of its own attorney's fees. However, if you prevail in a challenge to FFBC's determination as to cause for your termination or if you prevail on any claim that you were discriminated against in violation of any federal law or statute, you shall be reimbursed by FFBC for the filing fee and any reasonable costs or expenses incurred in such a challenge, including reasonable attorney's fees; (c) The arbitration hearing shall be held in Hamilton, Ohio, unless the parties mutually agree to another location; (d) Each party shall exchange documents to be utilized as exhibits in the arbitration hearing and each party shall be limited to two (2) pre-hearing depositions of two (2) hours each, unless the arbitrator orders additional discovery; (e) The arbitrator shall be appointed in accordance with Rule 12 of the above-referenced Rules of the American Arbitration Association, except that if, for any reason, an arbitrator cannot be selected by the process described in Rule 12, subparts (i) through (iii), the American Arbitration Association shall submit the names of seven (7) additional arbitrators from its Roster and the parties shall select the arbitrator by alternately striking names with the party requesting arbitration first striking; and (f) Either party shall be entitled to an injunction or other appropriate equitable relief to enforce the arbitration provisions of this Agreement and FFBC shall be entitled to an injunction to prevent any breach, pending arbitration, of the Confidentiality Agreement described below in paragraph 8 or the Covenant Not to Compete described below in paragraph 10. It is the intention of the parties to avoid litigation in any court of all claims concerning this Agreement, or otherwise arising from your employment with FFBC, or its affiliate bank, and that all such claims will be subject to this arbitration agreement. Neither party shall commence or pursue any litigation on any claim that is or was the subject of arbitration under this Agreement. Each party agrees that this agreement to arbitrate and the arbitration award are enforceable under and subject to the Federal 9 Michael T. Riley January 27, 1998 Page 9 Arbitration Act, 9 U.S.C. Section I, et seq. ("FAA"). If the FAA is held not to apply for any reason and the law of the state in which you are employed recognizes the enforceability of this Agreement and the arbitration award, then this Agreement and the arbitration award are enforceable under the laws of the state in which you are employed. Both parties consent that judgment upon the arbitration award may be entered in any federal or state court that has jurisdiction. The acceptance of any benefit under this Agreement shall be deemed ratification of this agreement to arbitrate claims. In the event you breach this Agreement by filing a lawsuit, at the time your lawsuit is filed, you will return any Special Severance Benefits paid to you and be subject to injunctive relief enforcing this Agreement. 8. CONFIDENTIALITY. You will not disclose to any person or use for the benefit of yourself or any other person any confidential or proprietary information of FFBC without the prior written consent of the Chief Executive Officer of FFBC. Upon your termination of employment, you will return to FFBC all written or electronically stored memoranda, notes, plans, customer lists, records, reports or other documents of any kind or description (including all copies in any form whatsoever) relating to the business of FFBC and fully comply with any separate confidentiality agreement to which you and FFBC are parties. 9. CONFLICTS OF INTEREST. You agree for so long as you are employed by FFBC to avoid dealings and situations that would create the potential for a conflict of interest with FFBC. In this regard, you agree to comply with the FFBC policy regarding conflicts of interest and all applicable state or federal regulations concerning conflicts of interest applicable to commercial bank or savings bank officers. 10. COVENANT NOT TO COMPETE. During the term of this Agreement, and for a period of six (6) months following the termination of your employment for any reason other than as set forth in Section 4(b), you agree not to be employed by, serve as officer or director of, consultant to or advisor to any business that engages either directly or indirectly in commercial banking, savings banking or mortgage lending in the geographic area of Ohio, Indiana, Michigan or Kentucky or which is reasonably likely to engage in such businesses in the same geographic area during the six (6) month period following your termination of employment. 11. NOTICE. 10 Michael T. Riley January 27, 1998 Page 10 Notices required or permitted under this Agreement shall be in writing and shall be deemed to have been given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, in a properly addressed envelope. Notices to FFBC shall be addressed to the Chief Executive Officer. 12. MODIFICATION; WAIVER; SUCCESSORS. No provision of this Agreement may be waived, modified or discharged except pursuant to a written instrument signed by you and the Chief Executive Officer of FFBC. This Agreement is binding upon any successor to all or substantially all of the business or assets of FFBC. 13. VALIDITY; COUNTERPARTS. This Agreement shall be governed by and construed under the law of the State of Ohio. The validity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other provision hereof. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. Sincerely yours, FIRST FINANCIAL BANCORP By:___________________________ and FIRST NATIONAL BANK OF SOUTHWESTERN OHIO By:___________________________ 11 Michael T. Riley January 27, 1998 Page 11 ACCEPTED AND AGREED TO THIS ____ DAY OF ________, 1998. - ---------------------------------- Michael T. Riley EX-13 9 EXHIBIT 13 1 Exhibit 13 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, 1997, Bancorp owned fifteen subsidiaries located in western Ohio, eastern and west-central Indiana, and southern Michigan. These subsidiaries include twelve commercial banks, two savings banks, and one finance company. Community First Finance (First Finance) began full operations on May 8, 1996. First Finance is a retail finance company and operates from offices located in Fairfield and Middletown, Ohio. On August 26, 1997, Bancorp's Board of Directors declared a 10% stock dividend distributed on October 1, 1997, to shareholders of record as of September 5, 1997. All per share data has been restated to reflect the stock dividend. On November 25, 1997, the Board of Directors approved a quarterly cash dividend of 30 cents per share payable January 2, 1998, to shareholders of record as of December 5, 1997. 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 32 through 50. RECENT MERGERS AND ACQUISITIONS Two of Bancorp's subsidiaries, The Citizens Commercial Bank & Trust Company and Van Wert National Bank, merged during November, 1997, to form Community First Bank & Trust (Community First). On December 8, 1997, Community First acquired 11 branches from KeyBank National Association. In addition to the 11 branches located in Mercer, Auglaize, Allen, Paulding, and Williams counties of Ohio, the transaction included the purchase of approximately $60 million of loans and the assumption of $246 million in deposits. Following the acquisition, Community First had total assets of $586 million and served 12 northwestern Ohio cities in six counties through a network of 21 offices. On June 1, 1997, Bancorp paid $7,800,000 for all the outstanding common stock of Southeastern Indiana Bancorp (SIB). Upon consummation of the merger, SIB was merged out of existence and its only subsidiary, Vevay Deposit Bank, became a wholly owned subsidiary of Bancorp. Vevay Deposit Bank has its main office and two other offices in Vevay, Indiana and an additional office in East Enterprise, Indiana. This merger was accounted for using the purchase method of accounting and, accordingly, the consolidated financial statements include Vevay Deposit Bank's results of operations from the date of acquisition. On January 1, 1997, Bancorp issued 322,386 shares of its common stock for all the outstanding common stock of Hastings Financial Corporation (Hastings Financial). Upon consummation of the merger, Hastings Financial was merged out of existence and its only subsidiary, National Bank of Hastings (National Bank), became a wholly owned subsidiary of Bancorp. National Bank has its main office in Hastings, Michigan and one other office in Wayland, Michigan. This merger represents Bancorp's first association with a Michigan bank. This transaction was accounted for using the pooling-of-interests method of accounting. The consolidated financial statements for prior periods have not been restated due to immateriality. On December 1, 1996, Bancorp paid $7,575,004 in cash for all the outstanding common stock of Farmers State Bancorp. Upon consummation of the merger, Farmers State Bancorp was merged out of existence and its only subsidiary, Farmers State Bank, became a wholly owned subsidiary of Bancorp. At the time of the merger, Farmers State Bank had its main office in Liberty, Indiana and one office in each of the following cities: West College Corner, Rushville, Glenwood, Carthage, and Mays, Indiana. The Glenwood office was closed during 1997. This merger was accounted for using the purchase method of accounting and, accordingly, the consolidated financial statements include Farmers State Bank's results of operations from the date of acquisition. On April 1, 1996, Bancorp issued 363,373 shares of its common stock for all the outstanding common stock of F & M Bancorp (F&M). Upon consummation of the merger, F&M was merged out of existence and its only subsidiary, Farmers & Merchants Bank of Rochester (Farmers & Merchants) was merged with and into Indiana Lawrence Bank, a wholly owned subsidiary of Bancorp. Farmers & Merchants' three offices - two in Rochester, Indiana and one in Kewanna, Indiana became branches of Indiana Lawrence Bank, the surviving entity. The merger was accounted for using the pooling-of-interests method of accounting. The consolidated financial statements for prior periods have not been restated due to immateriality. On October 1, 1995, Bancorp issued 442,876 shares of its common stock for all the outstanding common stock of Bright Financial Services, Inc. (Bright Financial). Upon consummation of the merger, Bright Financial was merged out of existence and its only subsidiary, Bright National Bank (Bright), became a wholly owned subsidiary of Bancorp. Bright has its main office and one other office in Flora, Indiana, two offices in Lafayette, Indiana, and one office in each of the following cities: Delphi, Rossville, and Burlington, Indiana. This merger was accounted for using the pooling-of-interests method of accounting. The consolidated financial statements for prior periods have not been restated due to immateriality. On July 16, 1995, Bancorp issued 354,645 shares of its common stock for all the outstanding common stock of Peoples Bank and Trust Company (Peoples). Upon consummation of the merger, Peoples became a wholly owned subsidiary of Bancorp. At the time of the merger, Peoples had one office located in Sunman, Indiana. Peoples opened a second office inside a Wal-Mart store located in Aurora, Indiana during 1997. The 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. PENDING MERGERS On December 23, 1997, Bancorp signed a Plan and Agreement of Merger with The Union State Bank (USB). Under the terms of the merger agreement, Bancorp will pay $13.6 million for all the outstanding common stock of USB. After consummation of the merger, USB will be merged into Community First and USB's only office in Payne, Ohio will become Community First's 22nd branch office. Subject to regulatory approval and approval by USB's shareholders, the merger is expected to occur during the first or second quarter of 1998. The merger will be accounted for using the purchase method of accounting. OVERVIEW OF OPERATIONS Bancorp's net earnings during 1997 were $40,308,000 or $2.44 per share, representing an 18.8% increase over 1996 net earnings and a 15.6% increase over 1996 earnings per share. The 1996 financial results include the effect of a $2,144,000 ($1,389,000 after tax) charge for a special assessment paid to the Savings Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC). (See "Noninterest Expenses" of this Management's Discussion and Analysis for more information concerning the special assessment.) If this charge is not included in 1996's financial results, Bancorp's 1997 net earnings were 14.1% greater than 1996 net earnings and 10.9% greater on a per share basis. The 1997 earnings increase was achieved primarily through increases in net interest income and noninterest income, partially offset by increases in provision for loan losses, noninterest expenses, and income tax expense. Net earnings in 1996 were $33,940,000 ($2.11 per share) reflecting a 6.77% increase over 1995 net earnings of $31,789,000 ($2.10 per share). The 1996 earnings increase was achieved primarily through increases in net interest income and noninterest income, partially offset by increases in provision for loan losses, noninterest expenses, and income tax expense. Not including the effect of FIRST FINANCIAL BANCORP 23 2 TABLE 1 - FINANCIAL SUMMARY
1997 1996 1995 1994 1993 (Dollars in thousands, except per share data) SUMMARY OF OPERATIONS Interest income $ 192,185 $ 171,275 $ 153,851 $ 133,504 $ 130,739 Tax equivalent adjustment 2,946 3,510 4,286 5,482 5,922 ---------- ---------- ---------- ---------- ---------- Interest income - tax equivalent 195,131 174,785 158,137 138,986 136,661 Interest expense 76,833 69,707 63,516 49,587 51,880 ---------- ---------- ---------- ---------- ---------- NET INTEREST INCOME - TAX EQUIVALENT $ 118,298 $ 105,078 $ 94,621 $ 89,399 $ 84,781 ========== ========== ========== ========== ========== Interest income $ 192,185 $ 171,275 $ 153,851 $ 133,504 $ 130,739 Interest expense 76,833 69,707 63,516 49,587 51,880 ---------- ---------- ---------- ---------- ---------- Net interest income 115,352 101,568 90,335 83,917 78,859 Provision for loan losses 4,736 3,433 2,108 1,268 3,747 Noninterest income 26,977 22,097 20,558 17,462 19,589 Noninterest expenses 77,677 71,261 63,345 62,139 62,038 ---------- ---------- ---------- ---------- ---------- Income before income taxes 59,916 48,971 45,440 37,972 32,663 Income tax expense 19,608 15,031 13,651 9,799 7,469 ---------- ---------- ---------- ---------- ---------- NET EARNINGS $ 40,308 $ 33,940 $ 31,789 $ 28,173 $ 25,194 ========== ========== ========== ========== ========== Tax equivalent basis was calculated using a 35.0% tax rate in all years presented PER SHARE DATA (1) NET EARNINGS - BASIC $ 2.44 $ 2.11 $ 2.10 $ 1.91 $ 1.71 ========== ========== ========== ========== ========== NET EARNINGS - DILUTED $ 2.43 $ 2.11 $ 2.10 $ 1.90 $ 1.70 ========== ========== ========== ========== ========== Cash dividends declared First Financial Bancorp $ 1.14 $ 1.01 $ 0.89 $ 0.81 $ 0.68 Average common shares outstanding (in thousands) 16,547 16,073 15,111 14,775 14,775 SELECTED YEAR-END BALANCES Total assets $2,636,111 $2,261,711 $2,103,375 $1,922,643 $1,810,673 Earning assets 2,390,255 2,087,190 1,941,274 1,764,616 1,670,009 Investment securities held-to-maturity 58,347 78,945 93,522 135,187 438,461 Investment securities available-for-sale 332,617 290,701 294,052 242,410 Loans, net of unearned income 1,977,031 1,700,264 1,532,016 1,378,867 1,189,790 Deposits 2,230,178 1,879,966 1,785,562 1,587,324 1,580,546 Noninterest-bearing demand deposits 314,051 238,415 220,061 201,331 182,192 Interest-bearing demand deposits 281,151 317,187 302,119 266,601 277,444 Savings deposits 521,372 381,903 359,638 374,378 403,845 Time deposits 1,113,604 942,461 903,744 745,014 717,065 Long-term borrowings 41,054 6,506 2,820 3,983 Shareholders' equity 286,259 258,482 234,175 194,673 181,252 RATIOS BASED ON AVERAGE BALANCES Loans to deposits 93.40% 89.16% 89.01% 80.79% 74.14% Net charge-offs to loans 0.16% 0.17% 0.10% 0.08% 0.21% Shareholders' equity to Total assets 11.60% 11.52% 10.98% 10.29% 9.73% Deposits 14.17% 13.75% 13.06% 12.05% 11.10% Return on Assets 1.71% 1.58% 1.64% 1.54% 1.41% Return on Equity 14.70% 13.72% 14.97% 14.93% 14.54% Net interest margin (tax equivalent basis) 5.39% 5.25% 5.24% 5.25% 5.14% (1) First Financial Bancorp's per share data has been restated for all stock dividends and material pooling-of-interests mergers through 1997. (2) 1996 net earnings includes the effect of a $2,144,000 ($1,389,000 after tax) charge for a special assessment paid to the Savings Association Insurance Fund which reduced earnings by 4.0%.
24 FIRST FINANCIAL BANCORP 3 the SAIF assessment, Bancorp's 1996 net earnings were 11.1% greater than 1995 net earnings and 4.76% greater on a per share basis. Bancorp's return on assets for 1997 was 1.71%. This compares with return on asset ratios of 1.65% (before the SAIF assessment) and 1.64% for 1996 and 1995, respectively. Bancorp's return on equity for 1997 was 14.7%, which compares to 14.3% (before the SAIF assessment) and 15.0% for 1996 and 1995, respectively. Bancorp's 1996 return on assets and return on equity including the SAIF special assessment were 1.58% and 13.7%, respectively. NET INTEREST INCOME Net interest income, Bancorp's principal source of earnings, is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. Bancorp's net interest income for the years 1993 through 1997 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 for all years presented. The amount of net interest income is determined by the volume and mix of earning assets, the rates earned on such earning assets and the volume, mix and rates paid for the deposits and borrowed money that support the earning assets. Table 2 describes the extent to which changes in interest rates 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 32. Tax equivalent total interest income was $195,131,000 in 1997, an increase of $20,346,000 or 11.6% over 1996. Substantially all of this increase was due to an increase of $196,863,000 in the volume of earning assets, from an average of $1,999,919,000 during 1996 to $2,196,782,000 during 1997. Average outstanding loan balances increased $203,438,000 and investment securities and other instruments decreased $6,575,000. A small portion of the increase was due to a 14 basis point (a basis point equals 0.01%) increase in average yields earned on total earning assets, from 8.74% during 1996 to 8.88% during 1997. Total interest expense was $76,833,000 in 1997, an increase of $7,126,000 over 1996. The increase was predominately due to an increase of $158,540,000 in total interest-bearing liabilities, from an average of $1,669,014,000 during 1996 to an average of $1,827,554,000 during 1997. Tax equivalent net interest income, the difference between tax equivalent total interest income and total interest expense, increased $13,220,000 during 1997 due primarily to the volume increases described above. The increased interest income was greater than the increased interest expense, thereby causing net interest income to increase. The interest rate spread and the net interest margin are two ratios frequently used to measure differences in net interest income. The interest rate spread (the average rate on earning assets minus the average rate on interest-bearing liabilities) was 4.68% for 1997 and 4.56% for 1996, a difference of 12 basis points. The net interest margin (net interest income on a tax equivalent basis divided by average earning assets) increased 14 basis points, to 5.39% during 1997 from 5.25% during 1996. 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 1997, 1996, and 1995 was $4,629,000, $3,677,000, and $2,928,000, respectively. During 1997, 1996, and 1995, approximately $20,480,000, $15,076,000, and $51,193,000, respectively, of tax-exempt municipal securities earning a tax equivalent yield of 15.3%, 12.0%, and 13.4%, respectively, were called by their issuers or matured. The result of these calls and maturities has been a continued decline in the average tax equivalent yields earned on tax-exempt securities, from 12.0% during 1995 to 11.2% during 1996, and 10.6% during 1997. The yield declines in tax-exempt securities during the past several years have been counterbalanced in part by yield increases in loans outstanding. Another $23,550,000 of municipal securities earning a tax equivalent yield of 12.3% are scheduled to mature or may be called during 1998. In the current economic environment, Bancorp may not be able to reinvest these funds TABLE 2 - VOLUME/RATE ANALYSIS - TAX EQUIVALENT BASIS(1)
1997 change from 1996 due to 1996 change from 1995 due to VOLUME RATE TOTAL VOLUME RATE TOTAL (Dollars in thousands) INTEREST INCOME Loans $ 18,702 $ 2,701 $ 21,403 $ 14,210 $ 1,645 $ 15,855 Investment securities(2) Taxable 405 276 681 2,912 (175) 2,737 Tax-exempt (1,185) (448) (1,633) (1,371) (761) (2,132) -------- -------- -------- -------- -------- -------- Total investment securities interest(2) (780) (172) (952) 1,541 (936) 605 Interest-bearing deposits with other banks (225) 28 (197) 105 (6) 99 Federal funds sold and securities purchased under agreements to resell 103 (11) 92 115 (26) 89 -------- -------- -------- -------- -------- -------- TOTAL 17,800 2,546 20,346 15,971 677 16,648 INTEREST EXPENSE Interest-bearing demand deposits (1,143) 121 (1,022) 881 186 1,067 Savings deposits 2,449 (227) 2,222 345 (240) 105 Time deposits 3,044 160 3,204 5,304 18 5,322 Short-term borrowings 1,913 84 1,997 (88) (442) (530) Long-term borrowings 748 (23) 725 228 (1) 227 -------- -------- -------- -------- -------- -------- TOTAL 7,011 115 7,126 6,670 (479) 6,191 -------- -------- -------- -------- -------- -------- NET INTEREST INCOME $ 10,789 $ 2,431 $ 13,220 $ 9,301 $ 1,156 $ 10,457 ======== ======== ======== ======== ======== ======== (1) Tax equivalent basis was calculated using a 35.0% tax rate. (2) Includes both investment securities held-to-maturity and investment securities available-for-sale.
FIRST FINANCIAL BANCORP 25 4 in similar earning assets at acceptable risk levels. The loss of such tax-exempt municipal securities will likely continue to negatively influence Bancorp's interest rate spread and net interest margin in the future. NONINTEREST INCOME AND NONINTEREST EXPENSES A listing of noninterest income and noninterest expenses for 1997, 1996, and 1995 is reported in Table 3. Although the mergers that occurred during 1995 through 1997 did not materially affect net earnings, they influenced the individual line items for noninterest income and expense. Affiliates that joined Bancorp during the past three years are included in the Consolidated Statements of Earnings starting with their date of acquisition. NONINTEREST INCOME 1997 vs. 1996. Noninterest income, excluding securities transactions, increased $4,818,000 or 21.8% in 1997. Service charges on deposit accounts increased $1,216,000 or 13.2% over 1996 primarily due to higher total deposits created by recent mergers and to pricing adjustments. Trust revenues, which are primarily calculated using the market value of trust assets managed, increased $1,627,000 or 19.7% over 1996. The increase was driven by the general strength of the stock market, superior investment results of the trust department common funds, strong investment management sales in 1996 and 1997, and by pricing adjustments. As a result of these factors, the market value of trust assets serviced increased $520,368,000 or 30.6%, from $1,701,799,000 on December 31, 1996 to $2,222,167,000 on December 31, 1997. Other noninterest income increased $1,975,000 or 42.5%. Contributing to the increase were ATM guest user fees, increased gains from sales of real estate loans, income from new affiliates, and other miscellaneous items. 1996 vs. 1995. Noninterest income, excluding securities transactions, increased $1,887,000 or 9.33% in 1996. Service charges on deposit accounts during 1996 increased $586,000 or 6.82% over 1995 primarily due to Bancorp's new affiliates. Trust revenues in 1996 increased $655,000 or 8.59% over 1995. The increase during 1996 was due to an increase of $137,367,000 in the market value of trust assets serviced, from $1,564,432,000 at December 31, 1995, to $1,701,799,000 at December 31, 1996. Other noninterest income during 1996 increased $646,000 or 16.2% over 1995 primarily due to fees received for lockbox services first offered by Bancorp's First Southwestern affiliate during 1996, increased gains on sales of real estate mortgage loans, and income contributed by the new affiliates. The increased gain on sale of loans was primarily due to a higher volume of loan sales during 1996 as compared to 1995. NONINTEREST EXPENSES 1997 vs. 1996. Noninterest expenses in 1997 increased $6,416,000 or 9.00% over 1996. The largest component of noninterest expenses is salaries and employee benefits, which increased $4,799,000 or 12.8% over 1996 primarily due to additional employees from the addition of new affiliates during 1997 and 1996, wage and salary increases, and increased health care costs. Net occupancy expense increased $235,000 or 4.91%, and furniture and equipment expense increased $463,000 or 11.8%, during 1997 largely because of Bancorp's new affiliates. Increased costs for service contracts on Bancorp's equipment also affected equipment expense. The addition of new affiliates and contractual fee increases paid to Bancorp's data service providers contributed to the $187,000 or 3.92% increase in data processing expense during 1997, as compared with 1996. Deposit insurance expense decreased substantially, from $2,889,000 during 1996 to $375,000 during 1997, an 87.0% decrease. Included in the 1996 expense is a $2,144,000 special assessment paid to the FDIC for recapitalization of the SAIF. The assessment was paid by Bancorp's two savings bank subsidiaries Fidelity Federal Savings Bank and Home Federal Bank, a Federal Savings Bank - and by one bank subsidiary, Bright National Bank, that had purchased SAIF insured deposits from the Resolution Trust Corporation. Not including the special assessment, deposit insurance expense for 1997 was $370,000 less than 1996's adjusted expense of $745,000. Because of the recapitalization of the SAIF during 1996, the premium for SAIF insured deposits declined from $0.23 per $100 of insured deposits to $0.0644 per $100 of insured deposits, effective January 1, 1997. Most deposits of commercial banks are insured by the FDIC's Bank Insurance Fund (BIF). Because BIF insured banks are now required to share in financing the interest on bonds issued by the Financing Corporation (the FICO), which savings institutions had been financing, BIF pre- TABLE 3 - NONINTEREST INCOME AND NONINTEREST EXPENSES
1997 1996 1995 % CHANGE % CHANGE % CHANGE INCREASE INCREASE INCREASE TOTAL (DECREASE) TOTAL (DECREASE) TOTAL (DECREASE) (Dollars in thousands) NONINTEREST INCOME Service charges on deposit accounts $ 10,398 13.2% $ 9,182 6.8% $ 8,596 4.5% Trust revenues 9,905 19.7% 8,278 8.6% 7,623 8.6% Other 6,620 42.5% 4,645 16.2% 3,999 0.6% -------- -------- -------- Subtotal 26,923 21.8% 22,105 9.3% 20,218 5.2% Investment securities gains (losses) 54 N/M (8) N/M 340 N/M -------- -------- -------- TOTAL $ 26,977 22.1% $ 22,097 7.5% $ 20,558 17.7% ======== ==== ======== === ======== ==== NONINTEREST EXPENSES Salaries and employee benefits $ 42,385 12.8% $ 37,586 13.0% $ 33,262 6.3% Net occupancy 5,025 4.9% 4,790 10.4% 4,340 3.1% Furniture and equipment 4,374 11.8% 3,911 16.7% 3,352 11.5% Data processing 4,960 3.9% 4,773 (7.6%) 5,165 (0.8%) Deposit insurance 375 (87.0%) 2,889 31.1% 2,204 (37.7%) State taxes 1,718 0.7% 1,706 4.2% 1,637 (5.2%) Other 18,840 20.7% 15,606 16.6% 13,385 1.7% -------- -------- -------- TOTAL $ 77,677 9.0% $ 71,261 12.5% $ 63,345 1.9% ======== ==== ======== === ======== ==== N/M = Not meaningful
26 FIRST FINANCIAL BANCORP 5 miums increased to $0.0129 per $100, also effective January 1, 1997. Before this increase, Bancorp's subsidiaries with BIF insured deposits paid the statutory minimum of $2,000 per institution during 1996. Because the aggregate decrease in the rate for Bancorp's SAIF insured deposits outweighed the aggregate increase in BIF rates, Bancorp's deposit insurance expense decreased. The FDIC currently intends to charge a deposit insurance rate for both SAIF and BIF insured deposits of $0.0243 per $100 beginning January 1, 2000, representing a decrease for SAIF insured deposits and an increase for BIF insured deposits. According to Bancorp estimates and assuming current deposit levels, the aggregate premium decrease for its SAIF insured deposits will be greater than the aggregate premium increase for its BIF insured deposits, so deposit insurance expense for Bancorp is therefore projected to decrease again. Other noninterest expenses increased $3,234,000 or 20.7%. Included in this category are costs related to the year 2000 computer issue, expenses related to the merger of The Citizens Commercial Bank & Trust Company and Van Wert National Bank to form Community First, expenses related to the purchase by Community First of 11 branches from KeyBank National Association, and costs incurred by Bancorp's new affiliates. Offsetting these costs was a gain recognized from the sale of property. The efficiency ratio (noninterest expenses as a percentage of noninterest income, excluding securities transactions, plus tax equivalent net interest income) reflects how much, on average, an institution expends to generate each dollar of revenue. Bancorp's 1997 efficiency ratio was 53.5%, compared to ratios of 54.3% (before the SAIF assessment) and 55.2% for 1996 and 1995, respectively. The 1996 efficiency ratio after the SAIF assessment was 56.0%. 1996 vs. 1995. Noninterest expenses in 1996 were $7,916,000 or 12.5% higher than the amount recorded during 1995. Salaries and employee benefits increased $4,324,000 or 13.0% over 1995 primarily due to the addition of new affiliates during 1996 and 1995 and to wage and salary increases. Net occupancy expense increased $450,000 or 10.4%, and furniture and equipment expense increased $559,000 or 16.7% during 1996, largely because of Bancorp's new affiliates. Increased costs for service contracts on Bancorp's equipment also affected equipment expense. The renegotiation of Bancorp's contract with its data service provider and benefits received from an ongoing effort to standardize computer applications among all affiliates contributed to a $392,000 or 7.59% decrease in data processing expenses during 1996, as compared with 1995. Not including the $2,144,000 special assessment paid to the SAIF, deposit insurance expense during 1996 was $745,000, which was a $1,459,000 decrease from the 1995 expense of $2,204,000. Bancorp's subsidiaries with deposits insured by BIF paid the statutory minimum of $2,000 per institution during 1996, compared with $0.23 per $100 of insured deposits during the first five months of 1995 and $0.04 per $100 during the rest of 1995. Other noninterest expenses increased $2,221,000 or 16.6% partially due to Bancorp's new affiliates and to smaller increases in a number of categories. YEAR 2000 ISSUES Many computer systems process transactions using two digits for the year of the transaction, rather than a full four digits. These systems may not function properly at the beginning of the year 2000. Bancorp has devoted significant time and attention to the Year 2000 issue, and will repair or replace non-compliant hardware and software prior to the new millennium. Several regulatory agencies and authorities have issued regulations and guidelines which regulated financial institutions must use in measuring their progress. Five commonly recognized phases of Year 2000 remediation are awareness, assessment, renovation, validation, and implementation. During 1997, the awareness phase was completed by Bancorp and each of its subsidiaries. Bancorp's Data Processing Steering Committee formalized their project plans for both Information Technology (IT) systems, computers and peripherals, and non-IT systems, elevators, security systems, etc. Bancorp assembled an Operating Committee, which meets at least weekly, to direct and implement all Year 2000 issues. In addition, Bancorp's work groups and consultants made several presentations to Bancorp's management and Board of Directors, who have pledged their support for this issue. Bancorp has inventoried and assessed the magnitude of hardware and software programs which must be remediated, contacted vendors, identified resource needs, and appropriately hired or contracted for qualified personnel to guide Bancorp through the Year 2000 issue. A Year 2000 Loan Committee, comprised of senior lenders of Bancorp's affiliates, is assessing the impact of Year 2000 on lending customers and the related risks inherent in those loans as they relate to the year 2000. Bancorp is currently in the renovation process, having completed the major demand deposit, savings, and certificate of deposit systems. Several ancillary systems have also been completed. Remaining mission critical systems are currently in the process of renovation or are scheduled to begin renovation during the second and third quarters of 1998. Management's goal is to have the renovation phase completed by the end of 1998. Management has tested incremental changes made to renovated software applications, but has not yet validated overall Year 2000 compliance. Overall validation testing is anticipated to begin in the first quarter, 1999. Implementation will follow satisfactory results of validation testing and is anticipated to be completed during the third quarter, 1999. During 1997, Bancorp incurred approximately $700,000 in noninterest expense for costs related to Year 2000 issues. Based on management's current assessment and anticipated reprogramming costs, Bancorp expects to spend an additional $3,500,000 during 1998 and 1999, of which about $1,200,000 will be capitalized. However, there can be no assurance as to the accuracy of these estimates. INCOME TAXES Net deferred tax assets at December 31, 1997, 1996, and 1995 were $3,070,000, $2,802,000, and $3,369,000, 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. Bancorp's income tax expense in 1997 totaled $19,608,000 compared to $15,031,000 in 1996 and $13,651,000 in 1995, resulting in effective tax rates of 32.7%, 30.7%, and 30.0% in 1997, 1996, and 1995, respectively. The increase in 1997 and 1996's effective rate was primarily due to a decline in the amount of tax-exempt investments held during those years. The tax effects of securities transactions were an expense of $5,000 during 1997, a benefit of $77,000 during 1996, and an expense of $17,000 during 1995. Further analysis of income taxes is presented in Note 11 of the Notes to Consolidated Financial Statements. LOANS Total loans, net of unearned income, increased $276,767,000 or 16.3% during 1997. Approximately $65,000,000 of the increase was due to the mergers with Hastings Financial Corporation and Southeastern Indiana Bancorp and another $60,000,000 of loans were purchased from KeyBank as part of the branch acquisition. In addition to the new affiliates and loan purchase, a favorable market with respect to loan demand, combined with aggressive loan campaigns and the pursuit of new business, led to net increases during 1997 of $104,885,000 or 26.4% in commercial loans, $20,046,000 or 46.3% in construction loans, $64,571,000 or 7.48% in mortgage loans, $73,564,000 or 20.2% in installment loans, $1,262,000 or 7.84% in credit card loans, and $12,439,000 or 83.9% in lease financing. Bancorp's loans cover a broad range of borrowers characterizing the western Ohio, southern Michigan and eastern and west-central Indiana markets. There were no loan concentrations of multiple borrowers in similar activities at December 31, 1997, 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 FIRST FINANCIAL BANCORP 27 6 TABLE 4 - LOAN MATURITY/RATE SENSITIVITY
DECEMBER 31, 1997 (Dollars in thousands) Maturity AFTER ONE WITHIN BUT WITHIN AFTER ONE YEAR FIVE YEARS FIVE YEARS TOTAL Commercial $ 320,302 $106,748 $ 75,869 $ 502,919 Real estate-construction 53,028 7,622 2,658 63,308 ---------- -------- --------- --------- TOTAL $ 373,330 $114,370 $ 78,527 $ 566,227 ========== ======== ========= ========= Sensitivity to changes in interest rates PREDETERMINED VARIABLE RATE RATE Due after one year but within five years $ 43,636 $ 70,734 Due after five years 17,998 60,529 -------- --------- TOTAL $ 61,634 $ 131,263 ======== =========
residential and commercial real estate mortgage loans, commercial loans, and installment loans. At December 31, 1997, real estate mortgage loans composed 46.9% of Bancorp's total loan portfolio and installment loans composed another 22.2% of the total loan portfolio. Commercial loans equaled 25.4% of the total portfolio and real estate construction, credit card lending, and lease financing made up the remaining 5.50% of the portfolio. Real estate mortgage loans are generally considered to be the safest loan investments because of the real estate securing the loans. Installment loans include unsecured loans, second mortgage loans, secured lines of credit, secured and unsecured home improvement loans, automobile loans, student loans, and loans secured by savings, stocks, or life insurance. Bancorp subsidiaries offer a wide variety of commercial loans, including small business loans, agricultural loans, equipment loans, and lines of credit. In accordance with Bancorp's decentralized management structure and subject to Bancorp guidelines, credit underwriting and approval occur within the subsidiary originating the loan. Depending on the subsidiary, loan applications are approved by either a loan committee or by one or more loan personnel with designated approval authority. Loan committees are composed of senior management and loan personnel and, at some subsidiaries, members of the subsidiary's board of directors. Loan applications for principal amounts greater than a designated amount, which varies by subsidiary, require Bancorp approval. Any plans to purchase or sell a participation in a loan also require Bancorp approval. 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, 1997. 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 historical loss and recovery experience, estimated future loss for loans, known deterioration in loans, periodic external loan evaluations, prevailing economic conditions that might have an impact on the portfolio, and ratios of delinquencies and nonaccrual loans. The evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, that may be susceptible to significant change. The evaluation of these factors is completed at Bancorp's subsidiaries through a group of senior officers from the financial and lending areas. The provision increased from $3,433,000 in 1996 to $4,736,000 in 1997. The provision recorded during 1996 was $1,325,000 greater than 1995's provision of $2,108,000. The increases during 1997 and 1996 were primarily due to the increase in loan volume mentioned previously. The 1997 increase also provided for a 6 basis point increase in the allowance to loan ratio. The allowance at December 31, 1997, was $27,510,000 or 1.39% of loans, net of unearned income, which compares to $22,672,000 or 1.33% of loans, net of unearned income, at December 31, 1996. The level of nonaccrual and restructured loans and leases is an important element in assessing asset quality. Loans are classified as nonaccrual when, in the opinion of management, collection of interest is doubtful. Nonaccrual loans at December 31, 1997, 1996, and 1995, were $5,257,000, $4,850,000, and $2,764,000, respectively. The increase in nonaccrual loans during 1997 occurred in the commercial mortgage, real estate mortgage, and consumer loan categories. Nonaccrual loans to total loans at December 31, 1997, 1996, and 1995, were 0.27%, 0.29%, and 0.18%, 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, 1997, 1996, and 1995, were $1,581,000, $890,000, and $517,000, respectively. The increase in restructured loans during 1997 is primarily due to the restructuring of a commercial loan during the year. 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, 1997, 1996, and 1995, were $950,000, $264,000, and $1,677,000, respectively. The increase in OREO during 1997 is comprised primarily of single family residences. The decrease during 1996 reflects the sale of vacant land that had a book value of $1,325,000 at December 31, 1995. Loans 90 days or more past due which were still accruing interest totaled $1,203,000, $906,000, and $1,071,000 at December 31, 1997, 1996, and 1995, respectively. Nonaccrual and restructured loans and leases and OREO are discussed or summarized in Notes 1 and 9 of the Notes to Consolidated Financial Statements. Bancorp adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures," in January, 1995. SFAS No. 114 and SFAS No. 118 require that lenders measure an impaired loan, as defined in the statements, at the 28 FIRST FINANCIAL BANCORP 7 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 $21,318,000 or 5.77% during 1997 to a balance of $390,964,000. Bancorp follows a conservative investment policy, investing primarily for interest rate risk management and liquidity management purposes. U.S. Treasury Securities, generally considered to have the least credit risk and the highest liquidity, composed 11.5% of Bancorp's investment portfolio at December 31, 1997. All U.S. Treasury Securities were classified as available-for-sale at that date and are available for liquidity management purposes. Another 25.7% 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, 1997, were structured notes totaling $2,000,000. The structured notes held by Bancorp are multi-step coupon debentures issued by the FHLB, FHLMC, FNMA, and SLMA and, accordingly, are rated AAA. All U.S. government agencies and corporations securities were classified as available-for-sale at December 31, 1997, and are available for liquidity management purposes. Due to the government guarantees, either expressed or implied, U.S. government agency and corporation obligations are considered to have low credit risk and high liquidity. Investments in mortgage-backed securities (MBSs), including collateralized mortgage obligations (CMOs), composed 39.1% of the investment portfolio at December 31, 1997. MBSs represent participations in pools of mortgage loans, the principal and interest payments of which are passed to the security investors. MBSs are subject to prepayment risk, especially during periods of decreasing interest rates. Prepayments of the underlying mortgage loans may shorten the lives of the securities, thereby affecting yields to maturity and market values. Bancorp invests primarily in MBSs issued by U.S. government agencies, such as FHLMC, FNMA, and the Government National Mortgage Association (GNMA). Such securities, because of government agency guarantees, are considered to have low credit risk and high liquidity. Accordingly, about 92.5% of Bancorp's MBSs are classified as available-for-sale. CMOs totaled $58,138,000 at December 31, 1997, all of which were classified as available-for-sale. CMOs are collateralized by pools of mortgage loans or MBSs. All of the CMOs held by Bancorp are rated AAA by Standard & Poor's Corporation or similar rating agencies. Bancorp does not own any interest only securities, principal only securities, accrual bonds, inverse floaters, or high risk CMOs, as defined by regulatory guidelines. All CMOs held as of December 31, 1997, 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 18.6% of Bancorp's investment portfolio at December 31, 1997. The securities are highly diversified as to states and issuing authorities within states, thereby decreasing portfolio risk. Bancorp management views investments in state, county, and municipal securities as primarily long-term investments and, accordingly, about 63.0% of such investments at December 31, 1997, were classified as held-to-maturity. The remaining 5.10% of Bancorp's investment portfolio at December 31, 1997, 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 taxable municipal securities. Table 5 sets forth the maturities of investment securities held-to-maturity and investment securities available-for-sale as of December 31, 1997, 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, 1997, the market value of Bancorp's held-to-maturity investment securities portfolio exceeded the carrying value by $2,614,000. The available-for-sale investment securities are reported at their market value of TABLE 5 - INVESTMENT SECURITIES
DECEMBER 31, 1997 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) $ 196 5.77% $ 472 9.06% $ 3,584 6.82% $ 7,146 8.87% State, county, and municipal securities 16,868 12.71% 17,001 10.85% 6,979 10.45% 5,033 13.03% Other securities 555 6.16% 513 6.38% ------- -------- ------- -------- TOTAL $17,619 12.43% $ 17,986 10.68% $10,563 9.22% $ 12,179 10.59% ======= ==== ======== ===== ======= ==== ======== ==== AVAILABLE-FOR-SALE U.S. Treasury securities $26,238 6.08% $ 18,641 6.22% Securities of other U.S. government agencies and corporations 9,767 6.37% 69,102 6.11% $20,425 7.08% $ 1,219 6.57% Mortgage-backed securities(2) 107 6.38% 22,076 6.62% 13,934 6.45% 105,439 6.95% State, county, and municipal securities 1,676 7.24% 12,043 8.25% 6,710 8.29% 6,471 8.28% Other securities 3,165 5.89% 766 7.61% 102 6.65% 14,736 7.33% ------- -------- ------- -------- TOTAL $40,953 6.18% $122,628 6.43% $41,171 7.06% $127,865 7.06% ======= ==== ======== ===== ======= ==== ======== ==== (1) Tax equivalent basis was calculated using a marginal federal income tax rate of 35.0%. (2) 39.4% of the mortgage-backed securities maturing after five years are variable rate.
FIRST FINANCIAL BANCORP 29 8 $332,617,000, as required by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." See Note 8 of the Notes to Consolidated Financial Statements for additional information. Bancorp's federal funds sold and securities purchased under agreements to resell increased $6,572,000, from $12,201,000 at December 31, 1996, to $18,773,000 at December 31, 1997. Bancorp monitors this position as part of its asset/liability management. Bancorp does not use off-balance-sheet derivative financial instruments (such as interest rate swaps) as defined in SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." DEPOSITS AND BORROWINGS Bancorp's subsidiaries solicit deposits by offering a wide variety of savings and transaction accounts, including checking accounts, regular savings accounts, money market deposit accounts, and time deposits of various maturities and rates. In accordance with Bancorp's decentralized management structure and in an effort to respond to local conditions, each Bancorp subsidiary designs and prices the savings and transaction accounts offered in its local market area. Total deposits increased $350,212,000 or 18.6% in 1997. The two banks that joined Bancorp during 1997 had total deposits of $89,540,000 at December 31, 1997, and deposits assumed from KeyBank as part of the branch acquisition totaled $245,632,000; the other affiliates therefore experienced a smaller increase in deposits during 1997. The growth in deposits was used to finance loan growth and allowed for paydowns of borrowings. Comparing Bancorp totals at December 31, 1997 and 1996, time deposits increased $171,143,000, savings deposits increased $139,469,000, interest-bearing demand deposits decreased $36,036,000, and noninterest-bearing demand deposits increased $75,636,000. The average rate paid on time deposits increased only 2 basis points, from 5.40% for 1996 to 5.42% for 1997. The average rate paid on interest-bearing demand deposits increased 4 basis points, from 2.30% in 1996 to 2.34% in 1997, and the average rate paid for savings deposits decreased 6 basis points, from 2.50% during 1996 to 2.44% during 1997. The weighted average rate for all interest-bearing deposits remained constant at 4.14% for both 1997 and 1996. Table 6 shows the contractual maturity of time deposits of $100,000 and over that were outstanding at December 31, 1997. These deposits represented only 7.64% of total deposits. During 1997, management decided to lengthen the maturities of Bancorp's borrowings. In addition, the increase in deposits, especially the deposits assumed from KeyBank, allowed for paydowns in short-term borrowings. As a result, short-term borrowings decreased from $93,779,000 at December 31, 1996 to $52,288,000 at December 31, 1997. During the same period, long-term borrowings increased from $6,506,000 to $41,054,000. TABLE 6 - MATURITIES OF TIME DEPOSITS GREATER THAN OR EQUAL TO $100,000*
DECEMBER 31, 1997 (Dollars in thousands) Maturing in 3 months or less $ 68,835 3 months to 6 months 32,671 6 months to 12 months 30,030 over 12 months 38,743 -------- TOTAL $170,279 ======== * All time deposits greater than or equal to $100,000 were in certificates of deposit.
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 $3,438,000 for 1997 and $4,381,000 for 1996. Remodeling is a planned and ongoing process given the 105 offices of Bancorp and its subsidiaries. Material commitments for capital expenditures as of December 31, 1997, were $2,050,000. Bancorp subsidiaries' source of funding is predominately deposits within each of their respective market areas. The deposit base is diversified among individuals, partnerships, corporations, and public entities. This diversification helps Bancorp avoid dependence on large concentrations of funds. Bancorp does not solicit time deposits from brokers. Liquidity is derived primarily from core deposit growth, principal payments received on loans, the sale and maturation of investment securities, net cash provided by operating activities, and access to other funding sources. The most stable source of liability-funded liquidity for both the long-term and short-term is deposit growth and retention in the core deposit base. In addition, Bancorp utilizes advances from the Federal Home Loan Bank as a funding source. The principal source of asset-funded liquidity is investment securities classified as available-for-sale, the market values of which totaled $332,617,000 at December 31, 1997. 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 $17,619,000 at December 31, 1997. 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 Table 7 details the maturities and yields of interest-bearing financial instruments at December 31, 1997, for the next five years and thereafter. Also included with each category is the fair value of those instruments. The values represent the contractual maturity of each instrument. For loan instruments without contractual maturities, such as credit card loans, management has allocated principal payments based upon historical trends of payment activity. Where there is no set maturity, as in the case of some interest-bearing liabilities, management has allocated the amounts based upon its expectation of cash flows, incorporating internal core deposit studies and current expectations of customer behavior. For loans, securities, and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities. The data in Table 7 was aggregated by type of financial instrument -- fixed and variable rate loans, fixed and variable rate investments, other earning assets, fixed and variable rate deposits, and other fixed and variable rate interest-bearing liabilities. First Financial Bancorp has no interest rate swaps, interest rate caps, or interest rate floors. Therefore, data concerning these instruments is not included in the table. The primary source of market risk for the finanical instruments presented is interest rate risk. That is, the risk that an adverse change in market rates will adversely affect the market value of the instruments. Generally, the longer the maturity, the higher the interest rate risk exposure. While maturity information does not necessarily present all aspects of exposure, it may provide an indication of where risks are prevalent. All financial institutions assume interest rate risk as an integral part of normal operations. Managing and measuring interest rate risk is a dynamic, multi-faceted process that ranges from reducing the exposure of Bancorp's net interest margin to swings in interest rates, to assuring sufficient capital and liquidity to support future balance sheet growth. Bancorp manages interest rate risk 30 FIRST FINANCIAL BANCORP 9 through the asset/liability committees of Bancorp's subsidiaries. The asset/liability committees are comprised of bank officers from various disciplines. Each subsidiary committee establishes policies and rates which lead to the prudent investment of resources, the effective management of risks associated with changing interest rates, the existence of adequate liquidity, and the earning of an adequate return on shareholders' equity. Bancorp has a holding company asset/liability committee, made up of representatives of various subsidiaries and disciplines, whose function is to develop policies and guidelines for effective asset/liability management throughout Bancorp's subsidiaries. TABLE 7 - MARKET RISK DISCLOSURE
Principal Amount Maturing In: FAIR VALUE 1998 1999 2000 2001 2002 THEREAFTER TOTAL DECEMBER 31,1997 (Dollars in thousands) RATE SENSITIVE ASSETS Fixed interest rate loans $ 71,314 $ 44,614 $75,510 $86,688 $87,847 $278,718 $ 644,691 $ 632,588 Average interest rate 9.78% 9.57% 9.94% 9.44% 9.23% 8.64% 9.17% Variable interest rate loans 408,781 72,230 41,999 36,151 60,818 712,361 1,332,340 1,361,060 Average interest rate 9.49% 9.10% 9.31% 9.30% 8.59% 8.14% 8.70% Fixed interest rate securities 57,812 61,393 33,628 15,298 29,622 126,337 324,090 324,758 Average interest rate 6.64% 6.21% 6.10% 6.92% 6.43% 7.03% 6.65% Variable interest rate securities 760 481 -- 88 104 65,441 66,874 68,820 Average interest rate 6.22% 8.39% -- 7.82% 7.00% 6.42% 6.43% Other earning assets 21,448 712 100 -- -- -- 22,260 22,260 Average interest rate 6.22% 6.30% 6.10% -- -- -- 6.22% RATE SENSITIVE LIABILITIES Noninterest - bearing checking 218,353 -- 95,698 -- -- -- 314,051 314,051 Savings & interest- bearing checking 120,585 681,938 -- -- -- -- 802,523 802,523 Average interest rate 2.09% 1.99% -- -- -- -- 2.00% Time deposits 747,542 249,729 85,600 15,491 13,959 1,283 1,113,604 1,113,061 Average interest rate 5.36% 5.58% 5.78% 5.61% 5.73% 6.35% 5.45% Fixed interest rate borrowings 3,536 3,000 10,581 695 15,950 2,829 36,591 33,288 Average interest rate 5.55% 5.56% 5.60% 5.47% 5.75% 6.80% 5.75% Variable interest rate borrowings 53,751 -- -- -- 3,000 -- 56,751 56,751 Average interest rate 5.33% -- -- -- 5.32% -- 5.33%
FIRST FINANCIAL BANCORP 31 10 STATISTICAL INFORMATION
(Unaudited) 1997 1996 1995 BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE INTEREST YIELD Daily average balances and interest rates; (Tax equivalent basis; dollars in thousands) EARNING ASSETS Loans(1) Commercial(2) $ 432,579 $ 43,732 10.11% $ 368,838 $ 36,817 9.98% $ 316,414 $ 32,581 10.30% Real estate(2) 944,080 78,613 8.33% 857,947 70,119 8.17% 793,379 63,400 7.99% Installment and other consumer 412,564 42,793 10.37% 362,164 37,094 10.24% 321,978 32,131 9.98% Lease financing(2) 18,817 1,449 7.70% 15,653 1,154 7.37% 15,580 1,217 7.81% ---------- ---------- ---------- -------- --------- -------- Total loans 1,808,040 166,587 9.21% 1,604,602 145,184 9.05% 1,447,351 129,329 8.94% Investment securities(3) Taxable 301,022 20,011 6.65% 294,898 19,330 6.55% 250,492 16,593 6.62% Tax-exempt(2) 72,258 7,681 10.63% 83,251 9,314 11.19% 95,182 11,446 12.03% ---------- ---------- ---------- -------- --------- -------- Total investment securities(3) 373,280 27,692 7.42% 378,149 28,644 7.57% 345,674 28,039 8.11% Interest-bearing deposits with other banks 4,083 253 6.20% 7,736 450 5.82% 5,932 351 5.92% Federal funds sold and securities purchased under agreements to resell 11,379 599 5.26% 9,432 507 5.38% 7,319 418 5.71% ---------- ---------- ---------- -------- --------- -------- TOTAL EARNING ASSETS 2,196,782 195,131 8.88% 1,999,919 174,785 8.74% 1,806,276 158,137 8.75% NONEARNING ASSETS Allowance for loan losses (24,470) (21,547) (19,341) Cash and due from banks 94,253 85,993 75,904 Accrued interest and other assets 96,508 83,159 71,076 ---------- ---------- ---------- TOTAL ASSETS $2,363,073 $2,147,524 $1,933,915 ========== ========== ========== INTEREST-BEARING LIABILITIES Deposits Interest-bearing demand $ 250,005 5,844 2.34% $ 298,975 6,866 2.30%$ 260,419 5,799 2.23% Savings 472,180 11,539 2.44% 372,169 9,317 2.50% 358,517 9,212 2.57% Time 976,643 52,928 5.42% 920,474 49,724 5.40% 822,289 44,402 5.40% ---------- ---------- ---------- -------- --------- -------- Total interest-bearing deposits 1,698,828 70,311 4.14% 1,591,618 65,907 4.14% 1,441,225 59,413 4.12% Borrowed funds Short-term borrowings 111,944 5,518 4.93% 73,095 3,521 4.82% 74,744 4,051 5.42% Long-term borrowings 16,782 1,004 5.98% 4,301 279 6.49% 783 52 6.64% ---------- ---------- ---------- -------- --------- -------- Total borrowed funds 128,726 6,522 5.07% 77,396 3,800 4.91% 75,527 4,103 5.43% ---------- ---------- ---------- -------- --------- -------- TOTAL INTEREST-BEARING LIABILITIES 1,827,554 76,833 4.20% 1,669,014 69,707 4.18% 1,516,752 63,516 4.19% NONINTEREST-BEARING LIABILITIES Noninterest-bearing demand deposits 236,998 208,017 184,797 Other liabilities 24,298 23,043 19,970 SHAREHOLDERS' EQUITY 274,223 247,450 212,396 ---------- ---------- ---------- -------- --------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,363,073 $2,147,524 $1,933,915 ========== ========== ========== NET INTEREST INCOME AND INTEREST RATE SPREAD $ 118,298 4.68% $105,078 4.56% $ 94,621 4.56% ========== ==== ======== ==== ======== ==== NET INTEREST MARGIN 5.39% 5.25% 5.24% ==== ==== ==== (1) Nonaccrual loans are included in average loan balance and loan fees are included in interest income. (2) Interest income on tax-exempt investments and on certain tax-exempt loans and leases has been adjusted to a taxable equivalent basis using a marginal federal income tax rate of 35.0%. (3) Includes both investment securities held-to-maturity and investment securities available-for-sale.
32 FIRST FINANCIAL BANCORP 11 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 1996 (Dollars in thousands) ASSETS Cash and due from banks $ 142,334 $ 110,767 Interest-bearing deposits with other banks 3,487 5,079 Federal funds sold and securities purchased under agreements to resell 18,773 12,201 Investment securities held-to-maturity (market value of $60,961 at December 31, 1997; $83,441 at December 31, 1996) 58,347 78,945 Investment securities available-for-sale, at market value (cost of $329,261 at December 31, 1997; $288,829 at December 31, 1996) 332,617 290,701 Loans Commercial 502,919 398,034 Real estate-construction 63,308 43,262 Real estate-mortgage 927,985 863,414 Installment 439,744 366,051 Credit card 17,369 16,107 Lease financing 27,260 14,821 ----------- ----------- Total loans 1,978,585 1,701,689 Less Unearned income 1,554 1,425 Allowance for loan losses 27,510 22,672 ----------- ----------- Net loans 1,949,521 1,677,592 Premises and equipment 47,013 42,633 Deferred income taxes 3,070 2,802 Accrued interest and other assets 80,949 40,991 ----------- ----------- TOTAL ASSETS $ 2,636,111 $ 2,261,711 =========== =========== LIABILITIES Deposits Noninterest-bearing $ 314,051 $ 238,415 Interest-bearing 1,916,127 1,641,551 ----------- ----------- Total deposits 2,230,178 1,879,966 Short-term borrowings Federal funds purchased and securities sold under agreements to repurchase 46,638 35,304 Federal Home Loan Bank borrowings 2,000 56,500 Other 3,650 1,975 ----------- ----------- Total short-term borrowings 52,288 93,779 Federal Home Loan Bank long-term borrowings 41,054 6,506 Accrued interest and other liabilities 26,332 22,978 ----------- ----------- TOTAL LIABILITIES 2,349,852 2,003,229 SHAREHOLDERS' EQUITY Common stock -- par value $8 per share Authorized -- 60,000,000 shares Issued -- 16,558,108 shares in 1997 and 14,727,772 shares in 1996 132,464 117,822 Surplus 100,129 47,125 Retained earnings 51,973 93,369 Unrealized net gains on securities available-for-sale, net of tax 2,094 1,162 Restricted stock awards (338) (220) Treasury stock, at cost, 1,319 and 25,907 shares (63) (776) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 286,259 258,482 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,636,111 $ 2,261,711 =========== ===========
See Notes to Consolidated Financial Statements. FIRST FINANCIAL BANCORP 33 12 CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31, 1997 1996 1995 (Dollars in thousands, except per share data) INTEREST INCOME Loans, including fees $ 166,336 $ 144,941 $ 129,058 Investment securities Taxable 20,011 19,330 16,593 Tax-exempt 4,986 6,047 7,431 ----------- ----------- ----------- Total investment securities interest 24,997 25,377 24,024 Interest-bearing deposits with other banks 253 450 351 Federal funds sold and securities purchased under agreements to resell 599 507 418 ----------- ----------- ----------- Total interest income 192,185 171,275 153,851 INTEREST EXPENSE Deposits 70,311 65,907 59,413 Short-term borrowings 5,518 3,521 4,051 Long-term borrowings 1,004 279 52 ----------- ----------- ----------- TOTAL INTEREST EXPENSE 76,833 69,707 63,516 ----------- ----------- ----------- NET INTEREST INCOME 115,352 101,568 90,335 Provision for loan losses 4,736 3,433 2,108 ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 110,616 98,135 88,227 NONINTEREST INCOME Service charges on deposit accounts 10,398 9,182 8,596 Trust revenues 9,905 8,278 7,623 Investment securities gains (losses) 54 (8) 340 Other 6,620 4,645 3,999 ----------- ----------- ----------- TOTAL NONINTEREST INCOME 26,977 22,097 20,558 NONINTEREST EXPENSES Salaries and employee benefits 42,385 37,586 33,262 Net occupancy 5,025 4,790 4,340 Furniture and equipment 4,374 3,911 3,352 Data processing 4,960 4,773 5,165 Deposit insurance 375 2,889 2,204 State taxes 1,718 1,706 1,637 Other 18,840 15,606 13,385 ----------- ----------- ----------- TOTAL NONINTEREST EXPENSES 77,677 71,261 63,345 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 59,916 48,971 45,440 Income tax expense 19,608 15,031 13,651 ----------- ----------- ----------- NET EARNINGS $ 40,308 $ 33,940 $ 31,789 =========== =========== =========== NET EARNINGS PER SHARE - BASIC $ 2.44 $ 2.11 $ 2.10 =========== =========== =========== NET EARNINGS PER SHARE - DILUTED $ 2.43 $ 2.11 $ 2.10 =========== =========== =========== AVERAGE SHARES OUTSTANDING 16,546,552 16,072,510 15,110,682 =========== =========== ===========
See Notes to Consolidated Financial Statements. 34 FIRST FINANCIAL BANCORP 13 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 1996 1995 (Dollars in thousands) OPERATING ACTIVITIES Net earnings $ 40,308 $ 33,940 $ 31,789 Adjustments to reconcile net earnings to net cash provided by operating activities Provision for loan losses 4,736 3,433 2,108 Provision for depreciation and amortization 5,204 4,027 3,981 Net amortization of premiums and accretion of discounts on investment securities 376 715 1,114 Deferred income taxes (158) 680 171 Realized (gains) losses on investment securities (54) 8 (340) Originations of mortgage loans held for sale (65,748) (43,943) (33,009) Gains from sales of mortgage loans held for sale (839) (667) (501) Proceeds from sales of mortgage loans held for sale 66,587 44,610 33,510 Increase in cash surrender value of life insurance (3,264) (8,159) (37) (Increase) decrease in interest receivable (229) 815 220 (Increase) decrease in prepaid expenses (563) (199) 143 Increase (decrease) in accrued expenses 920 (338) 1,041 Increase (decrease) in interest payable 69 (384) 1,638 Other (97) 1,113 (58) --------- --------- --------- Net cash provided by operating activities 47,248 35,651 41,770 INVESTING ACTIVITIES Proceeds from sales of investment securities available-for-sale 972 4,984 39,514 Proceeds from calls, paydowns, and maturities of investment securities available-for-sale 127,409 150,957 58,798 Purchases of investment securities available-for-sale (149,707) (133,449) (112,372) Proceeds from calls, paydowns, and maturities of investment securities held-to-maturity 22,361 17,594 56,118 Purchases of investment securities held-to-maturity (1,293) (3,053) (525) Net decrease in interest-bearing deposits with other banks 1,592 1,803 2,470 Net decrease (increase) in federal funds sold and securities purchased under agreements to resell 5,129 23,426 (6,042) Net increase in loans and leases (164,896) (96,361) (56,235) Proceeds from disposal of other real estate owned 560 1,765 1,028 Recoveries from loans and leases previously charged off 999 1,173 1,202 Net cash acquired (used) in purchase of financial institutions and branches 147,963 (6,427) Cash acquired in merger with other financial institutions 8,288 1,845 5,999 Purchases of premises and equipment (3,438) (4,381) (3,615) --------- --------- --------- Net cash used in investing activities (4,061) (40,124) (13,660) FINANCING ACTIVITIES Net increase (decrease) in total deposits 13,906 (15,416) 54,765 Net (decrease) increase in short-term borrowings (41,491) 35,389 (63,747) Proceeds from long-term borrowings 34,951 5,000 49 Principal payments of long-term borrowings (403) (1,314) (850) Cash dividends (18,958) (16,341) (13,521) Purchase of common stock (282) (994) Proceeds from exercise of stock options 657 231 127 --------- --------- --------- Net cash (used in) provided by financing activities (11,620) 6,555 (23,177) --------- --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 31,567 2,082 4,933 Cash and cash equivalents at beginning of year 110,767 108,685 103,752 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 142,334 $ 110,767 $ 108,685 ========= ========= ========= SUPPLEMENTAL DISCLOSURES Interest paid $ 76,764 $ 70,091 $ 61,878 ========= ========= ========= Income taxes paid $ 21,030 $ 14,919 $ 12,140 ========= ========= ========= Recognition of deferred tax (liabilities) assets attributable to SFAS No. 115 $ (551) $ 139 $ (2,364) ========= ========= ========= Acquisition of other real estate owned through foreclosure $ 1,265 $ 375 $ 635 ========= ========= ========= Issuance of restricted stock awards $ 220 $ 226 $ 33 ========= ========= =========
See Notes to Consolidated Financial Statements. FIRST FINANCIAL BANCORP 35 14 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON COMMON UNREALIZED RESTRICTED TREASURY TREASURY STOCK STOCK RETAINED GAINS AND STOCK STOCK STOCK SHARES AMOUNT SURPLUS EARNINGS (LOSSES) AWARDS SHARES AMOUNT TOTAL (Dollars in thousands) Balances at December 31, 1994 12,204,575 $ 97,637 $ 15,027 $ 84,748 $(2,712) $ (27) $194,673 Net earnings 31,789 31,789 Cash dividends declared (Bancorp - $0.89 per share) (13,521) (13,521) Shares issued in Peoples Bank and Trust Company merger 354,645 2,837 (867) 6,351 8,321 Shares issued in Bright Financial Services, Inc. merger 442,876 3,543 (653) 5,735 8,625 Change in unrealized gains and (losses), net of income tax expense of $2,364 4,149 4,149 Exercise of stock options, net of shares purchased 10,326 82 45 127 Restricted stock awards 1,000 8 25 (33) Amortization of restricted stock awards 12 12 ---------- -------- -------- -------- ------ ----- -------- Balances at December 31, 1995 13,013,422 104,107 13,577 115,102 1,437 (48) 234,175 Net earnings 33,940 33,940 Cash dividends declared (Bancorp - $1.01 per share) (16,341) (16,341) Shares issued in F&M Bancorp merger 363,373 2,907 (1,238) 6,023 7,692 Change in unrealized gains and (losses), net of income tax benefit of $139 (275) (275) Purchase of common stock (30,174) $ (994) (994) Exercise of stock options, net of shares purchased 5,589 45 (32) 6,934 218 231 Restricted stock awards 6,500 52 174 (226) 10% stock dividend 1,338,888 10,711 34,644 (45,355) (2,667) Amortization of restricted stock awards 54 54 ---------- -------- -------- -------- ------ ----- ------ ------ -------- Balances at December 31, 1996 14,727,772 117,822 47,125 93,369 1,162 (220) (25,907) (776) 258,482 NET EARNINGS 40,308 40,308 CASH DIVIDENDS DECLARED (BANCORP - $1.14 PER SHARE) (18,958) (18,958) SHARES ISSUED IN HASTINGS FINANCIAL CORPORATION MERGER 322,386 2,579 (1,733) 4,238 1 5,085 CHANGE IN UNREALIZED GAINS AND (LOSSES), NET OF INCOME TAX EXPENSE OF $551 931 931 EXERCISE OF STOCK OPTIONS, NET OF SHARES PURCHASED 2,471 38 (168) 23,817 787 657 10% STOCK DIVIDEND 1,505,479 12,025 54,896 (66,984) (212) (63) PURCHASE OF COMMON STOCK (5,965) (282) (282) RESTRICTED STOCK AWARDS 9 (220) 6,948 208 (3) AMORTIZATION OF RESTRICTED STOCK AWARDS 102 102 ---------- -------- -------- -------- ------ ----- ------ ------ -------- BALANCES AT DECEMBER 31, 1997 16,558,108 $132,464 $100,129 $ 51,973 $2,094 $(338) (1,319) $ (63) $286,259 ========== ======== ======== ======== ====== ===== ====== ====== ========
See Notes to Consolidated Financial Statements. 36 FIRST FINANCIAL BANCORP 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation - The consolidated financial statements of First Financial Bancorp. (Bancorp), a bank and savings and loan holding company, principally serving western Ohio, eastern and west-central Indiana and southern Michigan, include the accounts and operations of Bancorp and its 15 wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of management's estimates. Interest on loans, securities, and other earning assets is recognized primarily on the accrual basis. Intangible assets arising from the acquisition of subsidiaries are being amortized over varying periods, none of which exceeds 25 years. Core deposit intangibles are being amortized over varying periods, none of which exceeds 10 years. Investment securities - Statement of Financial Accounting Standards (SFAS)No. 115 classifies debt and equity securities in three categories: trading, held-to-maturity, and available-for-sale. Bancorp does not hold any investment securities for trading purposes. Management determines the appropriate classification of debt securities at the time of purchase. Debt securities are classified as held-to-maturity when Bancorp has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are stated at aggregate fair value, with the unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments. Interest and dividends are included in interest income from investments. Realized gains and losses, and declines in value judged to be other than temporary, are included in investment securities gains (losses). The cost of securities sold is based on the specific identification method. Loans - Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount amortized as an adjustment to the related loan's yield. The accrual of interest income is discontinued when the collection of a loan or interest, in whole or in part, is doubtful. This applies generally to all loans, including impaired loans. When interest accruals are suspended, interest income accrued in the current period is reversed and interest accrued in the prior year is charged to the allowance for loan losses. Bancorp's subsidiaries sell certain mortgage loans immediately after origination on a flow basis. Due to Bancorp's policy of selling loans on a flow basis, loans held for sale are not material and therefore not disclosed separately on the Consolidated Balance Sheets. Loans held for sale are carried at the lower of cost or market value. SFAS No. 122, "Accounting for Mortgage Servicing Rights," requires companies engaging in mortgage banking operations, that is, the selling of mortgage loans, to recognize as separate assets the estimated value of rights to service mortgage loans for others. A company that acquires mortgage servicing rights either through origination or purchase of mortgage loans and sells or securitizes those loans with servicing rights retained should allocate the total cost of the mortgage loans to mortgage servicing rights and to loans without mortgage servicing rights based on their relative fair values. This allocation increases the gain or decreases the loss from the sale of the mortgage loans and decreases income in the future as the mortgage servicing rights are amortized against servicing income. The adoption of this statement by Bancorp in 1996 did not have a material impact on its consolidated financial position or earnings. Allowance for loan losses - The level of the allowance for loan losses (allowance) is based upon management's evaluation of the loan and lease portfolios' past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, and other pertinent factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The level of the allowance maintained is believed by management to be adequate to cover future potential losses. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged off. Lease financing - Bancorp principally uses the finance method of accounting for direct lease contracts. Under this method of accounting, a receivable is recorded for the total amount of lease payments due and estimated residual values. Lease income, represented by the excess of the total contract receivable plus estimated equipment residual value over the cost of the related equipment, is recorded over the terms of the leases at a level rate of return on the unrecovered net investment. Premises and equipment - Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed principally on the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred. Other real estate owned - Other real estate owned represents properties acquired by Bancorp's subsidiaries through loan defaults by customers. The property is recorded at the lower of cost or fair value minus estimated costs to sell at the date acquired. Subsequently, the property is valued at the lower of the amount recorded when the property was placed into other real estate owned or fair value minus estimated costs to sell based on periodic valuations performed by management. An allowance for losses on other real estate owned may be maintained for subsequent valuation adjustments on a specific property basis. Any gains or losses realized at the time of disposal are reflected in income. Income taxes - Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Bancorp and its subsidiaries file a consolidated federal income tax return. Each subsidiary provides for income taxes on a separate return basis, and remits to Bancorp amounts determined to be currently payable. Earnings per share - SFAS No. 128, "Earnings per Share," issued in 1997 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to SFAS No. 128 requirements. Cash flow information - For purposes of the statement of cash flows, Bancorp considers cash and due from banks as cash and cash equivalents. Transfers and servicing of financial assets and extinguishment of liabilities - SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," was released in June, 1996, and is effective for transactions occurring after December 31, 1996. Under the provisions of SFAS No. 125, each party to a transaction recognizes only assets it controls and liabilities it has incurred, derecognizes assets only when control has been surrendered and derecognizes liabilities only when they have been extinguished. Transactions are to be separated into components and separate assets and liabilities may need FIRST FINANCIAL BANCORP 37 16 to be recorded for the different components. Adoption of this statement did not have a material effect on Bancorp's consolidated financial position or earnings. Reporting comprehensive income - SFAS No. 130, "Reporting Comprehensive Income," was issued in June, 1997, and is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a set of financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. Bancorp believes that adoption of this statement will not have a material impact on its financial statements. Disclosure about segments and related information - SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was released in June, 1997, and is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for reporting information about operating segments. Operating segments are components of a business about which separate financial information is available, that are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Bancorp believes that adoption of this statement will not have a material impact on its financial statements. Reclassifications - Certain reclassifications of prior years' amounts have been made to conform to current year presentation. Such reclassifications had no effect on net earnings. NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS Bancorp's subsidiaries are required to maintain average reserve balances either in the form of vault cash or reserves held on deposit with the Federal Reserve Bank, Federal Home Loan Bank, or in pass-through reserve accounts with correspondent banks. The average amounts of these required reserve balances for 1997 and 1996 were approximately $21,707,000 and $24,178,000, respectively. NOTE 3 - BUSINESS COMBINATIONS Bancorp consummated the following business combinations in 1997, 1996, and 1995:
ACQUISITION SHARES PURCHASE DATE ASSETS DEPOSITS ISSUED PRICE (Dollars in thousands) Purchase transactions KEYBANK BRANCHES DECEMBER 8, 1997 $ 93,486 $246,120 $28,837 SOUTHEASTERN INDIANA BANCORP JUNE 1, 1997 55,071 46,774 7,800 Farmers State Bancorp December 1, 1996 64,860 56,283 7,575 Pooling-of-interests HASTINGS FINANCIAL CORPORATION JANUARY 1, 1997 49,989 44,156 322,386 F&M Bancorp April 1, 1996 61,721 53,638 363,373 Bright Financial Services, Inc. October 1, 1995 112,813 98,251 442,876 Peoples Bank and Trust Company July 16, 1995 54,005 45,220 354,645
On November 1, 1997, two of Bancorp's subsidiaries, The Citizens Commercial Bank & Trust Company and Van Wert National Bank, combined to form Community First Bank & Trust (Community First). In addition to this merger, on December 8, 1997, Community First purchased the assets and assumed the liabilities of eleven branches from KeyBank National Association (Key), Cleveland, Ohio. This group of offices includes branches in Mercer, Auglaize, Allen, Paulding, and Williams counties in Ohio. This acquisition was accounted for using the purchase method of accounting and, accordingly, the consolidated financial statements include the results of operations of the eleven branches from the date of purchase. On June 1, 1997, Bancorp paid $7.8 million in cash for all outstanding common shares of Southeastern Indiana Bancorp (SIB). Upon consummation of the merger, SIB was merged out of existence and its only subsidiary, the $55 million Vevay Deposit Bank, became a wholly owned subsidiary of Bancorp. Vevay Deposit Bank has its main office and two other offices in Vevay, Indiana and one office in East Enterprise, Indiana. This merger was accounted for using the purchase method of accounting and, accordingly, the consolidated financial statements include Vevay Deposit Bank's results of operations from the date of purchase. On January 1, 1997, Bancorp issued 322,386 shares of its common stock in exchange for all the outstanding common stock of Hastings Financial Corporation (Hastings) of Hastings, Michigan. Upon consummation of the merger, Hastings was merged out of existence and the $50 million National Bank of Hastings, Hastings' only subsidiary, became a wholly owned subsidiary of Bancorp. This merger was accounted for as an immaterial pooling-of-interests and accordingly, the consolidated financial statements, including earnings per share, were not restated for periods prior to January 1, 1997. On December 23, 1997, Bancorp signed a Plan and Agreement of Merger with The Union State Bank, a $60 million bank in Payne, Ohio. Upon completion of the merger process, which is subject to regulatory and shareholder approval, The Union State Bank will be dissolved and become the 22nd branch of Community First Bank & Trust. The purchase price of this cash acquisition will be $13.6 million and will be accounted for using the purchase method of accounting. 38 FIRST FINANCIAL BANCORP 17 NOTE 4 - LEASE FINANCING Leases included in the loan portfolio at December 31 were composed as follows:
1997 1996 (Dollars in thousands) Direct financing $ 22,097 $ 12,725 Leveraged 1,302 1,302 Non-recourse debt, principal and interest (936) (936) -------- -------- Net rentals receivable 22,463 13,091 Estimated residual value of leased assets 10,580 4,202 Less unearned income 5,783 2,472 -------- -------- INVESTMENT IN LEASES, NET $ 27,260 $ 14,821 ======== ========
Direct financing lease payments receivable as of December 31, 1997, for the next five years and thereafter are as follows:
(Dollars in thousands) 1998 $ 6,656 1999 6,025 2000 4,637 2001 3,162 2002 1,592 Thereafter 25
NOTE 5 -PREMISES AND EQUIPMENT Premises and equipment at December 31 were summarized as follows:
1997 1996 (Dollars in thousands) Land and land improvements $ 8,896 $ 8,426 Buildings 48,109 43,148 Furniture and fixtures 34,588 31,619 Leasehold improvements 1,088 792 Construction in progress 676 530 ------- ------- 93,357 84,515 Less accumulated depreciation and amortization 46,344 41,882 ------- ------- TOTAL $47,013 $42,633 ======= =======
NOTE 6 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS, OR ADVANCES Dividends paid by Bancorp are mainly provided by dividends from its subsidiaries. However, certain restrictions exist regarding the ability of these subsidiaries to transfer funds to Bancorp in the form of cash dividends, loans, or advances. The approval of the subsidiaries' respective primary federal regulators is required for Bancorp's subsidiaries to pay dividends in excess of regulatory limitations. As of December 31, 1997, Bancorp's subsidiaries had retained earnings of $115,993,000 of which $17,035,000 was available for distribution to Bancorp as dividends without prior regulatory approval. NOTE 7 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK In the normal course of business, Bancorp offers a variety of financial instruments with off-balance-sheet risk to its customers to aid them in meeting their requirements for liquidity and credit enhancement. These financial instruments include standby letters of credit and commitments outstanding to extend credit. Generally accepted accounting principles do not require these financial instruments to be recorded in the consolidated financial statements and, accordingly, they are not. Bancorp does not use off- balance- sheet derivative financial instruments (such as interest rate swaps) as defined in SFAS No. 119 "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments". Bancorp's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit and commitments outstanding to extend credit is represented by the contractual amounts of those instruments. Bancorp uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Following is a discussion of these transactions. Standby letters of credit-These transactions are conditional commitments issued by Bancorp to guarantee the performance of a customer to a third party. Bancorp's portfolio of standby letters of credit consists primarily of performance assurances made on behalf of customers who have a contractual commitment to produce or deliver goods or services. The risk to Bancorp arises from its obligation to make payment in the event of the customers' contractual default. Bancorp had issued standby letters of credit aggregating $19,210,000 and $9,706,000 at December 31, 1997 and 1996, respectively. Management conducts regular reviews of these instruments on an individual customer basis, and the results are considered in assessing the adequacy of Bancorp's allowance for loan losses. Management does not anticipate any material losses as a result of these letters of credit. Loan commitments-Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termi- FIRST FINANCIAL BANCORP 39 18 nation clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bancorp evaluates each customer's creditworthiness on an individual basis. The amount of collateral obtained, if deemed necessary by Bancorp upon extension of credit, is based on management's credit evaluation of the counterparty. The collateral held varies, but may include securities, real estate, inventory, plant, or equipment. Bancorp had commitments outstanding to extend credit totaling $335,092,000 and $270,232,000 at December 31, 1997 and 1996, respectively. Management does not anticipate any material losses as a result of these commitments. NOTE 8 - INVESTMENT SECURITIES The following is a summary of investment securities as of December 31, 1997:
HELD-TO-MATURITY AVAILABLE-FOR-SALE AMORTIZED UNREALIZED MARKET AMORTIZED UNREALIZED MARKET COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE (Dollars in thousands) U.S. Treasury securities $ 44,732 $ 151 $ (4) $ 44,879 Securities of U.S. government agencies and corporations 100,041 504 (32) 100,513 Mortgage-backed securities $11,398 $ 375 $ (57) $11,716 139,874 1,872 (190) 141,556 State, county, and municipal securities 45,881 2,344 (53) 48,172 26,131 770 (1) 26,900 Other securities 1,068 5 1,073 18,483 286 18,769 ------- ------ ----- ------- -------- ------ ----- -------- Total $58,347 $2,724 $(110) $60,961 $329,261 $3,583 $(227) $332,617 ======= ====== ===== ======= ======== ====== ===== ========
The following is a summary of investment securities as of December 31, 1996:
HELD-TO-MATURITY AVAILABLE-FOR-SALE AMORTIZED UNREALIZED MARKET AMORTIZED UNREALIZED MARKET COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE (Dollars in thousands) U.S. Treasury securities $ 43,361 $ 192 $ (16) $ 43,537 Securities of U.S. government agencies and corporations 77,767 579 (18) 78,328 Mortgage-backed securities $14,506 $ 396 $(125) $14,777 132,683 995 (520) 133,158 State, county, and municipal securities 62,474 4,240 (19) 66,695 19,780 500 (19) 20,261 Other securities 1,965 7 (3) 1,969 15,238 185 (6) 15,417 ------- ------- ----- ------- -------- ------ ----- -------- Total $78,945 $ 4,643 $(147) $83,441 $288,829 $2,451 $(579) $290,701 ======= ======= ===== ======= ======== ====== ===== ========
The carrying value of investment securities as of December 31, 1995, by category was as follows: U.S. Treasury $68,382,000, U.S. government agencies and corporations $104,904,000, mortgage-backed $112,129,000, state, county, and municipal $84,309,000, and other $17,850,000. During the year ended December 31, 1997, available-for-sale securities with a fair value at the date of sale of $971,000 were sold. The gross realized gains on such sales totaled $1,000. During the year ended December 31, 1996, available-for-sale securities with a fair value at the date of sale of $5,000,000 were sold. The gross realized losses on such sales totaled $16,000. During the year ended December 31, 1995, available-for-sale securities with a fair value at the date of sale of $39,220,000 were sold. The gross realized gains on such sales totaled $297,000 and the gross realized losses totaled $3,000. There were net investment gains after taxes of $49,000, $69,000, and $323,000 for the years ended December 31, 1997, 1996, and 1995, respectively. The applicable income tax effects were an expense of $5,000 in 1997, a benefit of $77,000 in 1996, and an expense of $17,000 in 1995. The carrying value of investment securities pledged to secure public deposits and for other purposes as required by law amounted to $186,574,000 at December 31, 1997. The amortized cost and market value of investment securities, including mortgage-backed securities at December 31, 1997, by contractual maturity, are shown in the table below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
HELD-TO-MATURITY AVAILABLE-FOR-SALE AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE (Dollars in thousands) Due in one year or less $17,619 $17,920 $ 40,892 $ 40,953 Due after one year through five years 17,986 19,145 122,025 122,628 Due after five years through ten years 10,563 11,424 40,543 41,171 Due after ten years 12,179 12,472 125,801 127,865 ------- ------- -------- -------- TOTAL $58,347 $60,961 $329,261 $332,617 ======= ======= ======== ========
40 FIRST FINANCIAL BANCORP 19 NOTE 9 - LOANS Information as to nonaccrual and restructured loans at December 31 was as follows:
1997 1996 1995 (Dollars in thousands) Principal balance Nonaccrual loans $5,257 $4,850 $2,764 Restructured loans 1,581 890 517 ------ ------ ------ TOTAL $6,838 $5,740 $3,281 ====== ====== ====== Interest income effect Gross amount of interest that would have been recorded at original rate $ 474 $ 717 $ 276 Interest included in income 165 371 135 ------ ------ ------ NET IMPACT ON INTEREST INCOME $ 309 $ 346 $ 141 ====== ====== ======
At December 31, 1997, there were no commitments outstanding to lend additional funds to borrowers with nonaccrual or restructured loans. The balances of other real estate acquired through loan foreclosures, repossessions or other workout situations, net of the related allowance, totaled $950,000, $264,000, and $1,677,000 at December 31, 1997, 1996, and 1995, respectively. Changes in the allowance for loan losses for the three years ended December 31 were as follows:
1997 1996 1995 (Dollars in thousands) Balance at beginning of year $22,672 $20,437 $18,609 Allowance acquired through mergers 3,013 1,592 1,162 Provision for loan losses 4,736 3,433 2,108 Loans charged off (3,910) (3,963) (2,644) Recoveries 999 1,173 1,202 ------- -------- ------- BALANCE AT END OF YEAR $27,510 $ 22,672 $20,437 ======= ======== =======
The 1997, 1996, and 1995 allowances for loan losses related to loans that are identified for evaluation in accordance with SFAS No. 114 are based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Prior to 1995, the allowance for loan losses related to these loans was based on undiscounted cash flows or the fair value of the collateral for collateral dependent loans. At December 31, 1997, 1996, and 1995, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $3,313,000, $1,935,000, and $889,000, respectively. The related allowance for loan losses on these impaired loans was $995,000 at December 31, 1997, $694,000 at December 31, 1996, and $514,000 at December 31, 1995. There were no impaired loans that as a result of write-downs did not have an allowance for loan losses. The average recorded investment in impaired loans during the year ended December 31, 1997, was approximately $3,016,000 versus $1,962,000 for the year ended December 31, 1996, and $1,325,000 for the year ended December 31, 1995. For the years ended December 31, 1997, 1996, and 1995, Bancorp recognized interest income on those impaired loans of $22,000, $54,000, and $57,000, respectively. Bancorp recognizes income on impaired loans using the cash basis method. Mortgage loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The unpaid principal balances of these loans totaled $222,615,000, $223,012,000, and $221,519,000 at December 31, 1997, 1996, and 1995, respectively. Custodial escrow balances maintained in connection with these mortgage loans serviced were approximately $1,670,000, $1,580,000, and $1,485,000 at December 31, 1997, 1996, and 1995, respectively. NOTE 10 - FEDERAL HOME LOAN BANK LONG-TERM BORROWINGS Long-term borrowings at December 31, 1997, consisted exclusively of Federal Home Loan Bank (FHLB) advances with rates ranging from 5.19% to 6.90%, with interest payable monthly. The advances were secured by certain residential mortgage loans with a book value of $534,284,000 at December 31, 1997. The advances mature as follows: $1,000,000 in 1998, $3,000,000 in 1999, $14,581,000 in 2000, $695,000 in 2001, $18,950,000 in 2002, and $2,828,000 in 2006. FIRST FINANCIAL BANCORP 41 20 NOTE 11 - INCOME TAXES Income tax expense consisted of the following components:
1997 1996 1995 (Dollars in thousands) Current Federal $18,928 $13,098 $12,486 State 1,500 1,228 994 ------- ------- ------- Total 20,428 14,326 13,480 Deferred (benefit) expense (820) 705 171 ------- ------- ------- INCOME TAX EXPENSE $19,608 $15,031 $13,651 ======= ======= =======
The difference between the federal income tax rates, applied to income before income taxes, and the effective rates were due to the following:
1997 1996 1995 (Dollars in thousands) Income taxes computed at federal statutory 35% $20,970 $17,139 $15,904 State income taxes, net of federal tax bene 975 798 646 Effect of tax-exempt interest (2,017) (2,224) (2,687) Other (320) (682) (212) ------- ------- ------- INCOME TAX EXPENSE $19,608 $15,031 $13,651 ======= ======= =======
On August 21, 1996, The Small Business Job Protection Act, which repeals the favorable bad debt deduction method available to savings banks, was signed into law. Bancorp's savings banks were required to change their bad debt method to the specific charge-off method effective for the year ending December 31, 1996. As of December 31, 1996, Bancorp's two savings bank subsidiaries had a bad debt reserve for federal tax purposes of approximately $5,600,000, all of which represents the base year amount. A deferred tax liability has not been recognized for the base year amount. If the savings bank subsidiaries use the base year reserve for any reason other than to absorb loan losses, a tax liability could be incurred. It is not anticipated that the reserve will be used for any other purpose. SFAS No. 109, "Accounting for Income Taxes," requires that deferred tax assets and liabilities be carried at the enacted tax rate. The enacted tax rate was 35% for years ended December 31, 1997, 1996, and 1995. The major components of the temporary differences that give rise to deferred tax assets and liabilities at December 31, 1997 and 1996 were as follows:
1997 1996 (Dollars in thousands) Deferred tax assets Allowance for loan losses $ 8,288 $ 7,399 Other real estate owned 44 118 Postretirement benefits other than pensions liability 980 971 Pension liability 338 Other 482 413 -------- ------- Total deferred tax assets 10,132 8,901 Deferred tax liabilities Tax greater than book depreciation 1,105 1,129 Leasing activities 2,019 1,875 Federal Home Loan Bank stock basis difference 631 568 Prepaid pension asset 626 Deferred loan fees 343 284 Purchase accounting basis differences 614 320 Other 1,088 586 -------- ------- Total deferred tax liabilities 5,800 5,388 -------- ------- Net deferred tax asset recognized through the statement of earnings 4,332 3,513 Net deferred tax liability associated with investment securities available-for-sale, recognized in equity section of balance sheet (1,262) (711) -------- ------- TOTAL NET DEFERRED TAX ASSET $ 3,070 $ 2,802 ======== =======
SFAS No. 109 requires that a valuation allowance be established if management has evidence that part or all of the deferred tax assets may not be realized. Management has determined that it is more likely than not that all of the deferred tax assets will be realized. Therefore, no valuation allowance is required at this time. 42 FIRST FINANCIAL BANCORP 21 NOTE 12 - RISK-BASED CAPITAL The Federal Reserve established risk-based capital requirements for U.S. banking organizations which have been adopted by the Office of Thrift Supervision for savings and loan associations. Risk weights are assigned to on-and off-balance sheet items in arriving at risk-adjusted total assets. Regulatory capital is divided by risk- adjusted total assets, with the resulting ratios compared to minimum standards to determine whether a bank has adequate capital. Regulatory guidelines require a 4.00% Tier 1 capital ratio, an 8.00% Total risk-based capital ratio, and a 4.00% Leverage ratio. Tier 1 capital consists primarily of common shareholders' equity, net of certain intangibles, and Total risk-based capital is Tier 1 capital plus Tier 2 supplementary capital, which is primarily the allowance for loan losses subject to certain limits. The Leverage ratio is a result of Tier 1 capital divided by average total assets less certain intangibles. Bancorp's Tier 1 ratio at December 31, 1997, was 13.0%, its Total risk-based capital ratio was 14.3%, and its Leverage ratio was 10.5%. While Bancorp's subsidiaries' ratios are well above regulatory requirements, management will continue to monitor the asset mix which affects these ratios due to the risk weights assigned various assets, and the allowance for loan losses, which influences the Total risk-based capital ratio. The table below illustrates the risk-based capital calculations and ratios for the last two years.
DECEMBER 31, 1997 1996 (Dollars in thousands) Tier I capital Shareholders' equity $ 286,259 $ 258,482 Less intangibles 39,169 4,154 Less unrealized net securities gains, net of tax 2,094 1,162 ---------- ---------- TOTAL TIER I CAPITAL $ 244,996 $ 253,166 ========== ========== Total risk-based capital Tier I capital $ 244,996 $ 253,166 Qualifying allowance for loan losses 23,591 19,856 ---------- ---------- TOTAL RISK-BASED CAPITAL $ 268,587 $ 273,022 ========== ========== RISK WEIGHTED ASSETS $1,883,335 $1,588,464 ========== ========== RISK-BASED RATIOS TIER I CAPITAL 13.0% 15.9% ========== ========== TOTAL RISK-BASED CAPITAL 14.3% 17.2% ========== ========== LEVERAGE 10.5% 11.8% ========== ==========
NOTE 13 - EMPLOYEE BENEFIT PLANS Bancorp sponsors a non-contributory defined benefit pension plan covering substantially all employees. Benefits are based on age, years of service, and the employee's compensation during a five year period of employment. The funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. The following tables set forth the plan's funded status and amounts recognized in Bancorp's Consolidated Balance Sheets:
JANUARY 1, 1997 1996 (Dollars in thousands) Actuarial present value of accumulated plan benefits: Vested $16,531 $16,498 Nonvested 1,670 1,324 ------- ------- Total $18,201 $17,822 ======= =======
DECEMBER 31, 1997 1996 (Dollars in thousands) Reconciliation of funded status: Projected benefit obligation for service rendered to date $(24,393) $(21,639) Plan assets at fair value, primarily listed stocks, bonds and U.S. bonds 23,738 21,963 -------- -------- Plan assets (less than) in excess of projected benefit obligation (655) 324 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (751) (159) Prior service cost not yet recognized in net periodic pension cost 1,831 1,839 Unrecognized net asset at January 1, 1986, net of amortization (1,647) (1,810) -------- -------- NET PENSION (LIABILITY) ASSET RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS $ (1,222) $ 194 ======== ========
FIRST FINANCIAL BANCORP 43 22
Year Ended December 31, 1997 1996 1995 The net periodic pension expense included the following components: (Dollars in thousands) Service cost benefits earned during the period $ 1,502 $ 1,324 $ 1,129 Interest cost on projected benefit obligation 1,734 1,628 1,505 Actual return on plan assets (4,572) (2,212) (4,300) Net amortization and deferral 2,827 425 2,744 ------- -------- ------- NET PERIODIC PENSION EXPENSE $ 1,491 $ 1,165 $ 1,078 ======= ======== ======= 1997 1996 Assumptions used in the actuarial present value determinations of the projected benefit obligation were: Weighted-average discount rate used in determining projected benefit obligations 7.25% 7.50% Rate of increase in future compensation 3.50% 3.50% Long-term rate of return on plan assets 8.00% 8.00%
Bancorp also sponsors a defined contribution 401(k) thrift plan which covers substantially all employees. Employees may contribute up to 12.0% of their base salaries into the plan. Bancorp contributions are at the discretion of the Board of Directors. During 1997, 1996, and 1995, Bancorp contributed $.50 for each $1.00 an employee contributed, up to a maximum Bancorp contribution of 3.00% of the employee's base salary. All Bancorp matching contributions vest immediately. Total Bancorp contributions to the 401(k) plan were $566,000 during 1997, $537,000 during 1996, and $489,000 during 1995. NOTE 14 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Some Bancorp subsidiaries maintain health care and, in limited instances, life insurance plans for employees who retired prior to 1994. Under the current policy, the health care plans are unfunded and pay medically necessary expenses incurred by retirees, after subtracting payments by Medicare or other providers and after stated deductibles have been met. Bancorp has reserved the right to change or eliminate these benefit plans. The following table sets forth the funded status and amounts recognized in Bancorp's Consolidated Balance Sheets:
1997 1996 (Dollars in thousands) Actuarial present value of accumulated benefits other than pension $ 1,669 $ 1,715 Plan assets ------- ------- Accumulated obligation in excess of plan assets 1,669 1,715 Unrecognized prior service cost 36 380 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions 1,044 618 ------- ------- NET POSTRETIREMENT LIABILITY RECOGNIZED IN THE BALANCE SHEETS $ 2,749 $ 2,713 ======= ======= Net periodic postretirement benefit cost includes the following components: Interest cost on accumulated postretirement benefit obligation $ 127 $ 166 Net amortization and deferral (74) (14) ------- ------- NET PERIODIC COST $ 53 $ 152 ======= =======
The discount rate used to determine the accumulated postretirement benefit obligation was 7.25% at December 31, 1997, and 7.50% at December 31, 1996. For 1997, the assumed health care cost trend rates used in determining the accumulated postretirement benefit obligation were 9.00% for 1998, 8.10% for 1999, 7.30% for 2000, 6.60% for 2001, 6.00% for 2002, 5.50% for 2003, and 5.00% thereafter. For 1996, the assumed trend rates were 10.5% for the first seven years, 8.50% for the next five years, and 6.50% thereafter. If the health care cost trend rate assumptions were increased by 1.00%, the accumulated postretirement benefit obligation as of December 31, 1997, would be increased by approximately $130,000. 44 FIRST FINANCIAL BANCORP 23 NOTE 15 - EARNINGS PER SHARE
1997 1996 1995 The following table sets forth the computation of basic and diluted earnings per share: (Dollars in thousands, except per share data) Net income--numerator for basic and diluted earnings per share - income available to common stockholders $ 40,308 $ 33,940 $ 31,789 =========== =========== =========== Denominator for basic earnings per share - weighted average shares 16,546,552 16,072,510 15,110,682 Effect of dilutive securities - employee stock options 59,237 20,280 28,052 ----------- ----------- ----------- Denominator for diluted earnings per share - adjusted weighted average shares 16,605,789 16,092,790 15,138,734 =========== =========== =========== Basic earnings per share $ 2.44 $ 2.11 $ 2.10 =========== =========== =========== Diluted earnings per share $ 2.43 $ 2.11 $ 2.10 =========== =========== ===========
NOTE 16 - STOCK OPTIONS On April 28, 1992, the shareholders of Bancorp approved the 1991 Stock Incentive Plan. This plan provides incentive stock options and stock awards to certain key employees and non-qualified stock options to directors of Bancorp who are not employees for up to 665,500 common shares of Bancorp. The options are not exercisable for at least one year from the date of grant and are thereafter exercisable for such periods (which may not exceed 10 years) as the Board of Directors, or a committee thereof, specify, provided that the optionee has remained in the employment of Bancorp or its subsidiaries. The Board or the committee may accelerate the exercise period for an option upon the optionee's disability, retirement, or death. All options expire at the end of the exercise period. Cancelled and expired options become available for issuance and are reflected in the available for future grant figure. Bancorp has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation" requires use of option valuation models that were not developed for use in valuing stock options. Under APB 25, because the exercise price of Bancorp's employee stock options equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if Bancorp had accounted for its stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997, 1996, and 1995, respectively: risk-free interest rates of 6.72%, 5.65%, and 7.13%; dividend yields of 3.67%, 3.57%, and 3.73%; volatility factors of the expected market price of Bancorp's common stock of 0.195, 0.206, and 0.222; and a weighted average expected life of the options of 7.57, 5.45, and 5.45 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because Bancorp's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the option is amoritized to expense over the options' vesting period. Bancorp's pro forma information follows:
1997 1996 1995 (Dollars in thousands, except per share data) Pro forma net earnings $ 39,946 $ 33,686 $ 31,715 ========= ========= ======== Pro forma earnings per share $ 2.42 $ 2.10 2.10 ========= ========= ========
Activity in the above plan for 1997, 1996, and 1995 is summarized as follows:
1997 1996 1995 NUMBER OF OPTION NUMBER OF OPTION NUMBER OF OPTION SHARES PRICE SHARES PRICE SHARES PRICE Outstanding at beginning of year 168,866 151,339 169,313 Granted 53,649 $28.30-33.41 58,332 $27.68-28.72 16,413 $27.48-28.10 Exercised (34,994) $18.71-28.72 (36,131) $18.71-26.77 (29,507) $18.15-27.48 Cancelled (550) $ 28.30 (1,210) $ 28.72 (2,440) $ 28.10 Expired $ (3,464) $ 26.77 (2,440) $ 18.15 --------- --------- ------ OUTSTANDING AT END OF YEAR 186,971 $18.15-33.41 168,866 $18.15-28.72 151,339 $18.15-28.10 ========= ========= ====== EXERCISABLE AT END OF YEAR 133,843 $18.15-28.72 119,610 $18.15-27.48 134,926 $18.15-26.77 ========= ========= ====== AVAILABLE FOR FUTURE GRANT UNDER THE 1991 STOCK INCENTIVE PLAN 372,409 433,463 487,096 ========= ========= ====== WEIGHTED-AVERAGE FAIR VALUE OF OPTIONS GRANTED DURING THE YEAR $ 6.20 $ 5.50 $ 6.25 ========= ========= ======
FIRST FINANCIAL BANCORP 45 24 NOTE 17 -LOANS TO RELATED PARTIES Loans to directors, executive officers, principal holders of Bancorp's common stock, and certain related persons totaled $30,692,000 and $16,058,000 at December 31, 1997 and 1996, respectively.
Activity of these loans was as follows: 1997 1996 (Dollars in thousands) Beginning balance $ 16,058 $ 18,929 Additions 20,502 4,656 Collected 5,868 7,527 Charged off 0 0 -------- -------- ENDING BALANCE $ 30,692 $ 16,058 ======== ======== LOANS 90 DAYS PAST DUE $ 0 $ 0 ======== ========
Related parties of Bancorp, as defined above, were customers of and had transactions with subsidiaries of Bancorp in the ordinary course of business during the periods noted above. Additional transactions may be expected in the ordinary course of business in the future. All outstanding loans, commitments, financing leases, transactions in money market instruments, and deposit relationships included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others, and did not involve more than a normal risk of collectibility or present other unfavorable features. NOTE 18 - SHAREHOLDER RIGHTS PLAN On November 26, 1993, Bancorp adopted a "shareholder rights plan" and declared a dividend of one "right" on each outstanding share of Bancorp common stock. Under the plan, each "right" would be distributed only on the 20th business day after any one of the following events occur: 1) A public announcement that a person or group has acquired 20 percent or more (an "acquiring person") of Bancorp's outstanding common shares, 2) The beginning of a tender offer or exchange offer that would result in a person or group owning 30 percent or more of the corporation's outstanding common shares, or 3) A declaration by the Board of Directors of a shareholder as an "adverse person." (An adverse person is a person who owns at least 10 percent of the common shares and attempts "greenmail," or is likely to cause a material adverse impact on the Bancorp - such as impairing customer relationships, harming the company's competitive position or hindering the Board's ability to effect a transaction it deems to be in the shareholders' best interest.) In the event of such a distribution, each "right" would entitle the holder to purchase, at an exercise price of $99, one share of common stock of the corporation. If a person or group acquires 30 percent or more of Bancorp's outstanding common shares or is declared an "adverse person" by the Board of Directors of the corporation, each "right" would entitle the holder to purchase, at an exercise price of $99, a number (to be determined under the plan) of shares of common stock of the corporation at a price equal to 50 percent of its then current market price. However, any "rights" held by an "acquiring person" or an "adverse person" could not be exercised. Additionally, each "right" holder would be entitled to receive common stock of any acquiring company worth two times the exercise price of the "right," should either of the following happen after a person becomes an "acquiring person": 1) Bancorp is acquired in a merger or other transaction - other than a merger which the independent directors determine to be in the best interest of Bancorp and its shareholders, or 2) 50 percent or more of Bancorp's assets or earning power is sold or transferred. Bancorp may redeem "rights" for $0.01 per "right" at any time prior to the 20th business day following the date when a person acquires 20 percent of the outstanding shares. Bancorp may not redeem the "rights" when a holder has become an "adverse person." The Board's adoption of this "rights" plan has no financial effect on Bancorp, is not dilutive to Bancorp shareholders, is not taxable to the corporation or its shareholders, and will not change the way in which Bancorp common shares are traded. "Rights" are not exercisable until distributed; and all "rights" will expire at the close of business on December 6, 2003, unless earlier redeemed by Bancorp. 46 FIRST FINANCIAL BANCORP 25 NOTE 19 - DISCLOSURES ABOUT FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by Bancorp in estimating its fair value disclosures for financial instruments: Cash and short-term investments-The carrying amounts reported in the balance sheet for cash and short-term investments, such as interest-bearing deposits with other banks and federal funds sold, approximated the fair value of those instruments. Investment securities (including mortgage-backed securities)-Fair values for investment securities were based on quoted market prices, where available. If quoted market prices were not available, fair values were based on quoted market prices of comparable instruments. Refer to Note 8 for further disclosure. Loans-For variable-rate loans that reprice frequently with no significant change in credit risk, fair values were based on carrying values. The fair values of other loans and leases, such as commercial real estate and consumer loans were estimated by discounting the future cash flows using the current rates at which similar loans and leases would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying amount of accrued interest approximated its fair value. Deposit liabilities-The fair value of demand deposits, savings accounts, and certain money market deposits was the amount payable on demand at the reporting date. The carrying amounts for variable-rate certificates of deposit approximated their fair values at the reporting date. The fair value of fixed-rate certificates of deposit was estimated using a discounted cash flow calculation which applies the interest rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest approximated its fair value. Borrowings-The carrying amounts of federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings approximated their fair values. The fair value of long-term borrowings was estimated using a discounted cash flow calculation which utilizes the interest rates currently offered for borrowings of similar remaining maturities. Commitments to extend credit and standby letters of credit-Pricing of these financial instruments is based on the credit quality and relationship, fees, interest rates, probability of funding and compensating balance and other covenants or requirements. Loan commitments generally have fixed expiration dates, are variable rate and contain termination and other clauses which provide for relief from funding in the event that there is a significant deterioration in the credit quality of the customer. Many loan commitments are expected to expire without being drawn upon. The rates and terms of the commitments to extend credit and the standby letters of credit are competitive with those in Bancorp's market area. The carrying amounts are reasonable estimates of the fair value of these financial instruments. Carrying amounts which are comprised of the unamortized fee income and, where necessary, reserves for any expected credit losses from these financial instruments, are immaterial. Refer to Note 7 for additional information. Bancorp does not carry financial instruments which are held or issued for trading purposes. The estimated fair values of Bancorp's financial instruments at December 31 were as follows:
1997 1996 CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE (Dollars in thousands) Financial assets Cash and short-term investments $ 164,594 $ 164,594 $ 128,047 $ 128,047 Investment securities held-to-maturity 58,347 60,961 78,945 83,441 Investment securities available-for-sale 332,617 332,617 290,701 290,701 Loans Commercial 502,919 498,755 398,034 394,197 Real estate-construction 63,308 63,304 43,262 43,152 Real estate-mortgage 927,985 951,183 863,414 878,052 Installment, net of unearned income 438,190 434,341 364,626 362,449 Credit card 17,369 17,437 16,107 16,029 Leasing 27,260 28,628 14,821 15,693 Less allowance for loan losses 27,510 22,672 ---------- ----------- ----------- ----------- Net loans 1,949,521 1,993,648 1,677,592 1,709,572 Accrued interest receivable 20,293 20,293 21,613 21,613 Financial liabilities Deposits Noninterest-bearing 314,051 314,051 238,415 238,415 Interest-bearing demand 281,151 281,151 317,187 317,187 Savings 521,372 521,372 381,903 381,903 Time 1,113,604 1,113,061 942,461 940,563 ---------- ----------- ----------- ----------- Total deposits 2,230,178 2,229,635 1,879,966 1,878,068 Short-term borrowings 52,288 52,288 93,779 93,779 Federal Home Loan Bank long-term borrowings 41,054 37,751 6,506 6,016 Accrued interest payable 7,415 7,415 6,422 6,422
FIRST FINANCIAL BANCORP 47 26 NOTE 20 - FIRST FINANCIAL BANCORP. (PARENT COMPANY ONLY) FINANCIAL INFORMATION BALANCE SHEETS
DECEMBER 31, 1997 1996 (Dollars in thousands) ASSETS Cash $ 37,429 $ 57,103 Receivables from subsidiaries 2,865 Investment in subsidiaries Commercial banks 216,371 173,636 Stock savings banks 28,464 30,312 -------- ------- Total investment in subsidiaries 244,835 203,948 Other assets 9,332 94 -------- ------- Total assets $291,596 $264,010 ======== ======= LIABILITIES Dividends payable $ 4,967 $ 4,409 Other liabilities 370 1,119 -------- ------- Total liabilities 5,337 5,528 SHAREHOLDERS' EQUITY 286,259 258,482 -------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $291,596 $264,010 ======== =======
STATEMENTS OF EARNINGS YEAR ENDED DECEMBER 31, 1997 1996 1995 (Dollars in thousands) INCOME Interest income $ 24 $ 29 $ 40 Dividends from subsidiaries 45,811 31,211 33,572 -------- ------- ------- TOTAL INCOME 45,835 31,240 33,612 EXPENSES Salaries and employee benefits 1,198 1,091 966 Other 1,945 955 608 -------- ------- ------- TOTAL EXPENSES 3,143 2,046 1,574 -------- ------- ------- INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET EARNINGS OF SUBSIDIARIES 42,692 29,194 32,038 Income tax benefit (768) (282) (95) -------- ------- ------- INCOME BEFORE EQUITY IN UNDISTRIBUTED NET EARNINGS OF SUBSIDIARIES 43,460 29,476 32,133 Equity in undistributed net earnings of subsidiaries (3,152) 4,464 (344) -------- ------- ------- NET EARNINGS $ 40,308 $33,940 $31,789 ======== ======= =======
48 FIRST FINANCIAL BANCORP 27 STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 1996 1995 (Dollars in thousands) OPERATING ACTIVITIES Net earnings $ 40,308 $ 33,940 $ 31,789 Adjustments to reconcile net earnings to net cash provided by operating activities Equity in undistributed net earnings of subsidiaries 3,152 (4,464) 344 Provision for amortization 13 14 17 Deferred income taxes (71) 91 104 Increase (decrease) in dividends payable 558 505 (1) (Decrease) increase in accrued expenses (749) (185) 109 Decrease (increase) in receivables 2,865 (2,865) 2,061 -------- -------- -------- Net cash provided by operating activities 46,076 27,036 34,423 INVESTING ACTIVITIES Securities purchased under agreements to resell to affiliates 15,000 15,279 Capital contributions to subsidiaries (39,400) (1,300) Purchase of subsidiary (7,800) (7,575) Other 33 75 (43) -------- -------- -------- Net cash (used in) provided by investing activities (47,167) 6,200 15,236 FINANCING ACTIVITIES Cash dividends (18,958) (16,341) (13,521) Purchase of common stock (282) (994) Proceeds from exercise of stock options, net of shares purchased 657 231 127 Principal payment of long-term borrowings (850) -------- -------- -------- Net cash used in financing activities (18,583) (17,104) (14,244) -------- -------- -------- (DECREASE) INCREASE IN CASH (19,674) 16,132 35,415 Cash at beginning of year 57,103 40,971 5,556 -------- -------- -------- CASH AT END OF YEAR $ 37,429 $ 57,103 $ 40,971 ======== ======== ========
REPORT OF ERNST & YOUNG LLP. INDEPENDENT AUDITORS The Board of Directors and Shareholders First Financial Bancorp. We have audited the accompanying consolidated balance sheets of First Financial Bancorp. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Financial Bancorp. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Cincinnati, Ohio January 15, 1998 FIRST FINANCIAL BANCORP 49 28 QUARTERLY FINANCIAL AND COMMON STOCK DATA(1)
(Unaudited) THREE MONTHS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 (Dollars in thousands, except per share data) 1997 Interest income $ 45,369 $ 47,267 $48,918 $50,631 Interest expense 18,131 18,814 19,658 20,230 -------- -------- ------- ------- Net interest income 27,238 28,453 29,260 30,401 Provision for loan losses 860 1,123 1,076 1,677 Noninterest income Investment securities gains (losses) 9 (2) 22 25 All other 6,178 6,232 7,068 7,445 Noninterest expenses 18,520 18,711 20,146 20,300 -------- -------- ------- ------- Income before income taxes 14,045 14,849 15,128 15,894 Income tax expense 4,631 4,835 4,898 5,244 -------- -------- ------- ------- NET EARNINGS $ 9,414 $ 10,014 $10,230 $10,650 ======== ======== ======= ======= Per share NET EARNINGS - BASIC $ 0.57 $ 0.61 $ 0.62 $ 0.64 ======== ======== ======= ======= NET EARNINGS - DILUTED $ 0.57 $ 0.60 $ 0.62 $ 0.64 ======== ======== ======= ======= CASH DIVIDENDS PAID $ 0.27 $ 0.27 $ 0.27 $ 0.30 ======== ======== ======= ======= Market price HIGH BID $ 33.41 $ 37.73 $ 50.75 $ 50.50 ======== ======== ======= ======= LOW BID $ 27.73 $ 30.68 $ 35.45 $ 46.50 ======== ======== ======= ======= 1996 Interest income $ 40,937 $ 42,259 $43,582 $44,497 Interest expense 16,807 17,049 17,793 18,058 -------- -------- ------- ------- Net interest income 24,130 25,210 25,789 26,439 Provision for loan losses 606 764 1,097 966 Noninterest income Investment securities (losses) gains (3) (14) 9 All other 5,257 5,408 5,694 5,746 Noninterest expenses 17,128 16,789 19,667 17,677 -------- ------- ------------ ----------- Income before income taxes 11,653 13,062 10,705 13,551 Income tax expense 3,827 4,017 3,125 4,062 -------- -------- ------- ------- NET EARNINGS $ 7,826 $ 9,045 $ 7,580 $ 9,489 ======== ======== ======= ======= Per share NET EARNINGS - BASIC $ 0.50 $ 0.55 $ 0.47 $ 0.59 ======== ======== ======= ======= NET EARNINGS - DILUTED $ 0.50 $ 0.55 $ 0.47 $ 0.59 ======== ======== ======= ======= CASH DIVIDENDS PAID $ 0.25 $ 0.25 $ 0.25 $ 0.25 ======== ======== ======= ======= Market price HIGH BID $ 29.34 $ 28.93 $ 28.93 $ 29.55 ======== ======== ======= ======= LOW BID $ 27.68 $ 26.04 $ 26.45 $ 27.47 ======== ======== ======= ======= The stock of First Financial Bancorp. is listed with the National Association of Securities Dealers, Inc. (NASDAQ), under the symbol FFBC. (1) First Financial Bancorp's per share data and market price information is stated as if the 10.0% stock dividends declared in 1996 and 1997 occurred January 1, 1996.
50 FIRST FINANCIAL BANCORP EX-21 10 EXHIBIT 21 1 EXHIBIT 21 FIRST FINANCIAL BANCORP. SUBSIDIARIES First National Bank of Southwestern Ohio, organized as a national banking association under the laws of the United States Community First Bank & Trust, incorporated in the state of Ohio Union Trust Bank, incorporated in the state of Indiana Indiana Lawrence Bank, incorporated in the state of Indiana Fidelity Federal Savings Bank, organized as a federal stock savings bank under the laws of the United States Citizens First State Bank, incorporated in the state of Indiana Home Federal Bank, a Federal Savings Bank, organized as a federal stock savings bank under the laws of the United States Union Bank & Trust Company, incorporated in the state of Indiana The Clyde Savings Bank Company, incorporated in the state of Ohio Peoples Bank and Trust Company, incorporated in the state of Indiana Bright National Bank, organized as a national banking association under the laws of the United States First Finance Mortgage Company of Southwestern Ohio, Inc. (dba Community First Finance), incorporated in the state of Ohio Farmers State Bank, incorporated in the state of Indiana National Bank of Hastings, organized as a national banking association under the laws o the United States Vevay Deposit Bank, incorporated in the state of Indiana MXG, Inc., incorporated in the state of Ohio EX-23 11 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of First Financial Bancorp. of our report dated January 15, 1998, included in the 1997 Annual Report to Shareholders of First Financial Bancorp. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-46819) pertaining to the First Financial Bancorp. 1991 Stock Incentive Plan and in the related Prospectus of our report dated January 15, 1998, with respect to the consolidated financial statements of First Financial Bancorp. incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1997. Ernst & Young LLP March 16, 1998 Cincinnati, Ohio 2 Exhibit 3a ARTICLES OF INCORPORATION OF FIRST FINANCIAL BANCORP. The undersigned, a majority of whom are citizens of the United States, desiring to form a corporation, for profit, under Sections 1701.01 et seq. of the Revised Code of Ohio, do hereby certify: FIRST. The name of said corporation shall be First Financial Bancorp. SECOND. The place in Ohio where its principal office is to be located is Hamilton, Butler County. THIRD. The purposes for which it is formed are: to organize, purchase, acquire, own, invest in, or control banks and other companies, and the shares and securities of the same, in accordance with, and to the full extent permitted by, the Bank Holding Company Act of 1956 and other applicable laws of the United States, or of this State, as now or hereafter amended, and to carry on the business of a bank holding company in accordance with such laws; and to engage in any lawful act or activity for which corporations may be formed under Sections 1701.01 to 1701.98, inclusive, of the Ohio Revised Code. FOURTH. The total number of shares of stock which the corporation shall have authority to issue is Sixty Million (60,000,000) shares of common stock of the par value of Eight ($8.00) Dollars per share. (a) Dividends. The holders of shares of common stock shall be entitled to receive dividends, if and when declared payable from time to time by the Board of Directors, from any funds legally available therefor. (b) Voting. Each outstanding share of the common stock of the corporation shall entitle the holder thereof to one vote and the exclusive voting power for all purposes shall be vested in the holders of common stock. 3 -2- (c) Preemptive Rights. No holder of shares of the common stock of the corporation shall have preemptive rights to subscribe for or to purchase any shares of the common stock of the corporation or any other securities of the corporation, whether such share or shares are now or hereafter authorized. (d) Purchase of Own Securities. The corporation shall be authorized to purchase or otherwise acquire, and to hold, own, pledge, transfer or otherwise dispose of, shares of its own common stock and other securities, subject, however, to the laws of the State of Ohio and to federal statutes, and without limitation to the Bank Holding Company Act of 1956 as amended and as hereinafter may be amended or supplemented. (e) The shareholders shall not have the right to vote cumulatively in the election of directors effective for the Annual Meeting occurring in 1988 and thereafter. FIFTH. The number and qualification of directors of the corporation shall be fixed from time to time by its Code of Regulations. The number of directors may be increased or decreased as therein provided but the number thereof shall in no event be less than nine. The Board of Directors shall be divided into three classes as nearly equal in number as the then total number of directors constituting the whole board permits, with the term of office of one class expiring each year. At the first annual meeting of stockholders, directors of Class I shall be elected to hold office for a term expiring at the next succeeding annual meeting, directors of Class II shall be elected to hold office for a term expiring at the second succeeding annual meeting, and directors of Class III shall be elected to hold office for a term expiring at the third succeeding annual meeting. In no event shall there be less than three directors per class. Subject to the foregoing, at each annual meeting of stockholders the successors to the class of directors whose terms shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting. In the event of any increase in the number of directors of the corporation, the additional directors shall be so classified that all classes of directors shall be increased equally as nearly as may be possible. In the event of any decrease in the number of directors of the corporation, all classes of directors shall be decreased as equal as possible. No reduction in number of directors shall of itself have the effect of shortening the term of an incumbent director. SIXTH. Each person who is or was a director, officer, employee or agent of the corporation shall be indemnified by the corporation to the full extent permitted by the Revised Code of Ohio against any liability, cost or expense incurred by him in his capacity as a director, officer, employee or agent, or arising out of his status as a director, officer, employee or agent. The corporation may, but shall not be obligated to, maintain insurance, at its expense, to protect itself and any such person against any such liability, cost or expense. SEVENTH. The corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation in the manner now or hereafter prescribed by the laws of Ohio, and all rights and powers conferred herein upon stockholders and directors are granted subject to this reservation. 4 -3- EIGHTH. The amount of capital with which the corporation shall begin business is Five Hundred ($500.00) Dollars. IN WITNESS WHEREOF, we have hereunto subscribed our names, this 20th day of July, 1982. FIRST FINANCIAL BANCORP /s/Robert Q. Millan ---------------------------------- Robert Q. Millan /s/Richard J. Fitton ---------------------------------- Richard J. Fitton /s/Elliott D. Levey ---------------------------------- Elliott D. Levey 5 Exhibit 3b AMENDED AND RESTATED REGULATIONS OF FIRST FINANCIAL BANCORP. ARTICLE I MEETINGS OF SHAREHOLDERS SECTION 1.1. ANNUAL MEETING. The regular annual meeting of the shareholders for the election of directors and the transaction of whatever other business may properly come before the meeting, shall be held at the principal office of the Corporation, 300 High Street, Hamilton, Ohio, or such other place as the Board of Directors may designate, at 2:00 P.M., on the fourth Tuesday of April each year. Notice of such meeting shall be mailed, postage prepaid, at least ten days prior to the date thereof, addressed to each shareholder at his address appearing on the books of the Corporation. SECTION 1.2. SPECIAL MEETINGS. Special meetings of shareholders for any purpose or purposes may be called by the Chairman of the Board, by the President, by the Vice President authorized to exercise the authority of the President in the case of the President's absence, death or disability, by resolution of the directors or by the holders of not less than one-half of the outstanding voting power of the Corporation. SECTION 1.3. QUORUM. At all meetings of shareholders, the holders of record of a majority of shares entitled to vote at each meeting, present in person or by proxy, shall constitute a quorum, but no action required by law the (Amended) Articles or these Amended and Restated Regulations to be authorized or taken by the holders of a designated proportion of the shares of any particular class or of each class, may be authorized or taken by a lesser proportion. The holders of a majority of the voting shares represented at a meeting, whether or not a quorum is present, may adjourn such meeting from time to time. SECTION 1.4. PROXIES. Any shareholder entitled to vote at a meeting of shareholders may be represented and vote thereat by proxy appointed by an instrument in writing subscribed by the shareholder or his duly authorized agent, and submitted to the secretary of the Corporation or the inspectors of election at or before said meeting. ARTICLE II DIRECTORS SECTION 2.1. NOMINATION. Nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or a committee appointed by the Board of Directors or by any shareholder entitled to vote in the election of directors generally. Shareholders intending to nominate director candidates for election must deliver written notice thereof to the Secretary of the Corporation not later than (i) with respect to an election to be held at any annual meeting of shareholders, 90 days prior to the date one year from the date of the immediately preceding annual meeting of shareholders, and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to shareholders. Such a notice timely given by a shareholder shall set forth certain information concerning such shareholder and his or her nominee(s), including: the name and address of the shareholder and each nominee; the age and principal occupation or employment of each nominee; the number of shares of equity securities beneficially owned by each nominee; a representation that the shareholder is a holder of record of 6 -2- shares entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; a description of all arrangements or understandings between the shareholder and each nominee; such other information regarding each nominee as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated by the Board of Directors; and the consent of each nominee to serve as a director of the corporation if elected. The corporation may also require any proposed nominee to furnish other information reasonably required by the corporation to determine the proposed nominee's eligibility to serve as a director. The presiding officer at the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedures and any person not nominated in accordance with the foregoing procedures shall not be eligible for election as a director. SECTION 2.2. NUMBER. The number of directors of the Corporation, which shall not be less than nine nor more than twenty-five, shall be fifteen until increased or decreased at any time by the affirmative vote of two-thirds of the whole authorized number of directors or, at a meeting of the shareholders called for the purpose of electing directors at which a quorum is present, by the affirmative vote of the holders of at least two-thirds of the outstanding voting power of the Corporation voting as a single class. Directors shall hold office in their respective classes for three-year terms. The election of directors shall be held at the annual meeting of shareholders for the class year of directors whose terms expire at the annual meeting, except that a majority of the directors in office at any time, though less than a majority of the whole authorized number of directors, may, by the vote of a majority of their number, fill any director's office that is created by an increase in the number of directors or by a vacancy; provided, however, that in any period between annual meetings of shareholders, the directors will not increase the number of directors by more than three. A vacancy is created by the death, resignation, removal or incapacity of a director prior to the end of his term or by the failure of the shareholders at any time to elect the whole authorized number of directors. A director may be removed for cause. Cause if defined to exist if a court of law finds a director guilty of a felony or has breached his fiduciary duty under the laws of Ohio. SECTION 2.3. CLASSES OF DIRECTORS. The directors' terms are divided into three classes of terms consecutively expiring. The classes are known as Classes I, II and III. The directors of each class are shown on the Proxy Statement issued to shareholders of record. SECTION 2.4. MEETINGS. Meetings of the Board of Directors shall be held at the principal office of the Corporation or at such other place, within or without the State of Ohio, as may be determined by the Board. Two day's notice of such meeting shall be given to each director, unless the Board of Directors has fixed a regular time and place for such meetings, in which case no notice shall be required for meetings held at such time and place. Meetings may be called by the Chairman of the Board, the President, or by any seven directors, upon giving the notice as herein required. SECTION 2.5. MANDATORY RETIREMENT. No person shall be elected or re-elected a director after reaching his seventieth (70th) birthday. 7 -3- SECTION 2.6. DIRECTOR EMERITUS. The Board shall have the right from time to time to choose as Directors Emeritus persons who have had prior service as members of the Board and who may receive such compensation as shall be fixed from time to time by the Board of Directors. SECTION 2.7. COMMITTEES. The Board of Directors is authorized to create an Executive Committee of not less than three (3) members of the Board and such other committees as it sees fit, which, to the extent authorized by the Board of Directors, may exercise all powers of the Board of Directors between meetings of said Board, other than that of filling vacancies among the directors or any committee of the directors.The Board of Directors may designate any one of the directors of the Corporation as an alternate member of any committee to replace any absent or disqualified member at any meeting of such committee. ARTICLE III OFFICERS SECTION 3.1. CHAIRMAN OF THE BOARD. The Board of Directors may appoint one of its members to be Chairman of the Board to serve at the pleasure of the Board. He shall preside at all meetings of the Board of Directors. He shall exercise such powers and duties, as from time to time may be conferred upon, or assigned to, him by the Board of Directors. SECTION 3.2. PRESIDENT. The Board of Directors shall appoint one of its members to be President of the Corporation. In the absence of the Chairman, he shall preside at any meeting of the Board. The President shall have general executive powers, and shall have and may exercise any and all other powers and duties pertaining by law, regulation, or practice, to the office of President, or imposed by these Amended and Restated Regulations. He shall also have and may exercise such further powers and duties as from time to time may be conferred upon, or assigned to, him by the Board of Directors. SECTION 3.3. VICE PRESIDENTS. The Board of Directors may appoint one or more Vice Presidents. Each Vice President shall have such powers and duties as may be assigned to him by the Chief Executive Officer. SECTION 3.4. SECRETARY. The Board of Directors shall appoint a Secretary who shall keep accurate minutes of all meetings. He shall attend to the giving of all notices required by these Amended and Restated Regulations to be given. He shall be custodian of the corporate seal, records, documents and papers of the Corporation. He shall provide for the keeping of proper records of all transactions of the Corporation. He shall have and may exercise any and all other powers and duties pertaining by law, regulation or practice, to the office of the Secretary or imposed by these Amended and Restated Regulations. He shall also perform such other duties as may be assigned to him, from time to time by the Chief Executive Officer. SECTION 3.5. OTHER OFFICERS. All other officers appointed by the Board of Directors shall have such duties as defined by law and as may from time to time be assigned to them by the Chief Executive Officer or the Board of Directors. 8 -4- SECTION 3.6. TERM OF OFFICE. All officers of the Corporation shall be chosen by the Board of Directors by a majority vote and shall hold office until the first meeting of the Board of Directors following the next annual meeting of shareholders or until their successors are elected and duly qualified. The Board of Directors may remove any officer at any time with or without cause by a majority vote. SECTION 3.7. RETIREMENT DATE. Normal retirement date for all employees is the employee's 65th birthday. ARTICLE III-A IV INDEMNIFICATION The Corporation shall, to the full extent permitted by the General Corporation Law of Ohio, indemnify all persons whom it may indemnify pursuant hereto. ARTICLE V CERTIFICATES SECTION 5.1. Certificates evidencing the ownership of shares of the Corporation shall be issued to those entitled to them by transfer or otherwise. Each certificate for shares shall bear a distinguishing number, the signature of the President or Chairman of the Board, and of the Secretary of the Corporation, the corporate seal, and such recitals as may be required by law. Such signatures and seal on the certificate may be facsimile signatures. SECTION 5.2. Subject to any applicable provision of law or the Articles, transfers of shares of the Corporation shall be made only upon its books, upon surrender and cancellation of a certificate or certificates for the shares so transferred. Any certificate so presented for transfer shall be endorsed or shall be accompanied by separate written assignment or a power of attorney, signed by the person appearing by the certificate to be the owner of the shares represented thereby. SECTION 5.3. Lost, Stolen, Destroyed, or Mutilated Certificates. The Corporation may, in its discretion, upon evidence satisfactory to it of the loss, theft, or destruction of any certificate for shares of the Corporation, authorize the issuance of a new certificate in lieu thereof, and may, in its discretion, require as a condition precedent to such issuance, the giving, by the owner of such alleged lost, stolen, or destroyed certificate, of a bond of indemnity, in form and amount, with surety, satisfactory to the Corporation, against any loss or damage which may result to, or claim which may be made against, the Corporation, or any transfer agent or registrar of its shares, in connection with such alleged lost, stolen, or destroyed, or such new, certificate. If any certificate for shares of the Corporation becomes worn, defaced, or mutilated, the Corporation may, upon production and surrender thereof, order that the same be canceled and that a new certificate be issued in lieu thereof. ARTICLE VI CORPORATE SEAL SECTION 6.1. CORPORATE SEAL. The Chairman of the Board, the President, Vice President, or Secretary or other officers designated by the Board of Directors, shall have authority to affix the corporate seal to any document requiring such seal, and to attest the same. The seal of the Corporation shall be such as the Board of Directors may from time to time determine. ARTICLE VII MISCELLANEOUS PROVISIONS 9 -5- SECTION 7.1. FISCAL YEAR. The fiscal year of the Corporation shall be the calendar year. SECTION 7.2. EXECUTION OF INSTRUMENTS. All agreements, deeds, conveyances, transfers, certificates, and any other documents may be signed on behalf of the Corporation by the Chairman of the Board, or the President, or such other designated officers that the Board may designate from time to time. SECTION 7.3. RECORDS. The Articles of the Corporation, the Amended and Restated Regulations and the proceedings of all meetings of the shareholders, the Board of Directors, standing committees of the Board, shall be recorded in appropriate minute books provided for the purpose. The minutes of each meeting shall be signed by the Secretary or other officer appointed to act as Secretary of the meeting. ARTICLE VIII AMENDMENT, ALTERATION OR REPEAL SECTION 8.1. INSPECTION. A copy of the Amended and Restated Regulations, with all amendments thereto, shall at all times be kept in a convenient place at the office of the Corporation, and shall be open for inspection during all business hours. SECTION 8.2. AMENDMENTS. The Amended and Restated Regulations may be amended, altered, repealed, or replaced only by the affirmative vote of the holders of at least two-thirds of the outstanding voting power of the Corporation voting as a single class at a meeting of shareholders called for such purpose, unless such amendment, alteration, repeal or replacement is recommended by the affirmative vote of two-thirds of the whole authorized number of directors, in which case these Amended and Restated Regulations may be amended, altered, repealed or replaced by the affirmative vote of the holders of a majority of the outstanding voting power of the Corporation voting as a single class at a meeting of shareholders called for such purpose. EX-27 12 EXHIBIT 27
9 0000708955 FIRST FINANCIAL BANCORP YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 142,334 3,487 18,773 0 332,617 58,347 60,961 1,977,031 27,510 2,636,111 2,230,178 52,288 26,332 41,054 0 0 132,464 153,795 2,636,111 166,336 24,997 852 192,185 70,311 76,833 115,352 4,736 54 77,677 59,916 0 0 0 40,308 2.44 2.43 8.88 5,257 1,203 1,581 1,612 22,672 3,910 999 27,510 27,510 0 0
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