EXHIBIT 13 - FIRST FINANCIAL BANCORP 1995 ANNUAL REPORT
Management's Discussion and Analysis
of Financial Condition and Results of Operation
Overview of Operating Results - 1995 compared to 1994
Earnings per share increased by 146.2% in 1995 compared to 1994. Net income
and earnings per share were $843 thousand and $.64, respectively, for 1995
compared to net income and earnings per share of $338 thousand and $.26,
respectively, for 1994. The return on average assets and average equity
were .83% and 7.4%, respectively, for 1995 compared to .33% and 3.1%,
respectively, for 1994. Rising interest rates contributed significantly to
an increase in the net interest margin of 30 basis points to 5.52%.
Although net interest income increased by $256 thousand, or 5.5%,
noninterest income declined by $110 thousand, or 10.5%. Noninterest
expense decreased by $603 thousand, or 11.7%, due to general cost reduction
efforts, declining regulatory assessments, and the absence of the
reorganization costs that significantly impacted noninterest expense during
1994.
Consolidated assets were $103.9 million at December 31, 1995, a decrease of
$1.3 million, or 1.2%, over the comparable total of $105.2 million at
December 31, 1994. Average consolidated assets decreased by $636 thousand,
or .6%, to $101.3 million for 1995 compared to $101.9 million for 1994.
The decline in year-end and average consolidated assets was the result of
decreases in year-end and average deposits of $763 thousand and $1.2
million, respectively. Average earning assets decreased by $267 thousand,
or .3%, and represented 88.5% of consolidated average assets for 1995
compared to 88.2% for 1994. Loans declined to 63% of average earning
assets in 1995 compared to 67% in 1994 due both to efforts to improve
overall credit quality and a continuation of subdued demand for credit.
The declining loan portfolio funded an increase in the average investment
portfolio of $3.7 million, or 14%.
Consolidated equity increased by $954 thousand to $11.6 million. The
increases of $843 thousand and $4 thousand from earnings and option
exercises, respectively, were combined with the change in the securities
portfolio valuation adjustment account of $303 thousand to provide total
additions to consolidated equity of $1.2 million. Consolidated equity was
reduced by the $196 thousand in dividends declared during 1995. The
securities valuation adjustment was recorded as a component of equity in
accordance with Statement of Financial Accounting Standard No. 115,
Accounting for Certain Investments in Debt and Equity Securities which was
adopted by the Company in the first quarter of 1994. Consolidated equity
as a percentage of consolidated assets increased to 11.1% from 10.1% as the
capital growth rate was disproportionate to the slightly negative growth
rate in deposits and other non-equity funding. The Bank's total risk-based
and leverage capital ratios at December 31, 1995, were 15.1% and 9.0%,
respectively, compared to 12.7% and 7.9%, respectively, at December 31,
1994.
Net Interest Income, Margin, and Spread - 1995 compared to 1994
Net interest income, interest income less interest expense, increased by
$256 thousand, or 5.5%. Although average earning assets and deposits
decreased by .3% and 1.4%, respectively, the change in net interest income
is primarily the net result of changes in the mix and yield of average
earning assets and average deposits. Net interest margin, net interest
income as a percentage of earning assets, increased by 30 basis points to
5.52% from 5.22% and increased net interest income by $454 before taking
into account the impact of lower average loans outstanding and increased
average certificate of deposit balances for 1995 compared to 1994. These
mix changes offset $203 thousand of the benefit derived from the increase
in net interest margin.
Interest income increased by $627 thousand, or 8.4%. Earning asset yields
increased to a weighted average of 9.02% from 8.30%, and increased interest
income by $839 thousand before the impact of lower average earning asset
volume and lower average loans relative to total average earning assets.
Average loans fell to 63% of earning assets for 1995 compared to 67% for
1994, while average investments increased to 33% of average earning assets
for 1995 compared to 29% for 1994. The change in earning asset mix dampened
the overall increase in average earning asset yields, as loan yields
increased 106 basis points while the investment portfolio yields increased
by 54 basis points. Had the average earning asset mix for 1995 been equal
to the mix for 1994, interest income would have been $174 thousand higher
in 1995.
Interest expense increased by $371 thousand, or 13.4%, from 1994 to 1995.
The decrease in average deposits and other funding of $1.27 million, or
1.4%, resulted in a decrease in interest expense of $43 thousand. The
average cost of deposits and other funding increased by 46 basis points and
contributed $385 thousand to the increase in interest expense. Average
certificates of deposit increased to 37% of average deposits and other
funding from 34% in 1994 and contributed $29 thousand to the increase in
interest
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expense. The average cost of certificates of deposit increased by
123 basis points as a result of the increases in the general level of
interest rates that began in 1994.
Net interest spread, the difference between the yield on earning assets and
the average interest rate paid for deposits and other debt, increased by 26
basis points, to 5.48%. Net interest spread was four basis points less than
the net interest margin for 1995 compared to one basis point greater for
1994. The primary factor behind the change is the increase in earning asset
efficiency (the ratio of earning assets to total assets). Increased
efficiency provides a broader base of earning assets over which to spread
deposit costs relative to the deposit base. Earning asset efficiency was
88.5% in 1995 compared to 88.2% in 1994.
Exposure to Interest Rate Fluctuations
The structure of earning assets and liabilities both during and at the end
of 1995 were such that net interest income and earnings were at risk to
increases in interest rates. During 1995, there was approximately $.85 in
earning assets subject to repricing for every $1.00 in deposits subject to
repricing on a rolling, cumulative, twelve-month basis, representing a
cumulative twelve-month repricing gap of 85%. The practical reality of this
sensitivity position is predicated upon the assumption that earning assets
and liabilities that are subject to repricing will reprice in concert with
the general rate movement in the money and credit markets. While this
assumption was generally borne out with respect to repricable assets,
repriceable deposits lagged the overall movement in interest rates and net
interest margin widened as a result. A similar but inverse pattern occurs
during periods of declining interest rates such as has been the case since
late 1995.
Fluctuations in interest rates can affect net spread, net interest margin,
and net interest income beyond the impact of direct contractual repricing
of assets and liabilities. Fluctuations in interest rates can, and often
do, alter the contractual maturities of assets and liabilities by
increasing or decreasing both contractual and anticipated prepayment rates.
Changes in contractual and anticipated prepayment rates affect net spread,
net interest margin and income by altering expected repricing gaps as well
as changing the amortization of premiums and discounts related to the
affected earning assets.
Fluctuations in interest rates can also impact the market value of assets
and liabilities either favorably or adversely depending upon the nature of
the rate fluctuations as well as the maturity and repricing structure of
the underlying financial instruments. To the extent that financial
instruments are held to contractual maturity, market value fluctuations
related to interest rate changes are realized only to the extent that
future net interest margin is either higher or lower than comparable market
rates for the period. To the extent that liquidity management dictates the
need to liquidate certain assets prior to contractual maturity, changes in
market value from fluctuating interest rates will be realized in income to
the extent of any gain or loss incurred upon the liquidation of the related
assets.
Provision for Loan Losses - 1995 compared to 1994
The provision for loan losses was approximately 64%, or $208 thousand less
than in 1994. In relation to average loans outstanding, the provision for
loan losses in 1995 was .20% compared to .53% in 1994. Net loans charged
off during 1995 were $283 thousand compared to $120 thousand in 1994. Gross
charge-offs for 1995 were $482 thousand compared to $175 thousand in 1994.
The increase in gross charge-offs reflects the resolution of certain loan
relationships that had been reserved for during 1994; and to a lesser
extent, an isolated number of new loan resolution efforts that developed
during 1995. $199 thousand in previously charged off loans were recovered
during 1995 compared to $55 thousand during 1994. The provision for loan
losses is derived through the maintenance of an adequate reserve for loan
losses. To the extent that the reserve for loan losses needs to be
increased or decreased after adjustment for net chargeoffs, a provision for
loan losses is charged against or credited to earnings with a corresponding
adjustment to the reserve for loan losses. The loan loss reserve is
discussed in the asset quality and allowance for loan losses section of
management's discussion and analysis.
Noninterest Income - 1995 compared to 1994
Noninterest income declined by $110 thousand, or 10.5%, compared to 1994.
Service charge income declined by $64 thousand while SBA and mortgage
income declined by $51 thousand, or 11.5%. The principal reason for the
decline in service charge income was a reduction in the volume of returned
checks and the related service charges. SBA and mortgage income consists of
transaction income in the form of premiums realized upon the sale of loans,
and servicing income related to portfolio administration on behalf of the
investors to whom loans were sold. Transaction income declined by 23% in
1995 while servicing income increased by 2.5%.
Income from the sale of SBA loans declined by $45 thousand, or 24%, in 1995
compared to 1994. SBA servicing income remained constant in 1995 compared
to 1994. The decline in transaction revenue was the result of a decline in
the volume of loans sold. The
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volume decline is attributable to both soft demand and increased
competition in the SBA lending area.
Income from the sale of mortgage loans declined by $16 thousand, or 30%,
while servicing income increased by $4 thousand, or 15%. Mortgage activity
slowed considerably during 1995 due to increased competition as well as
rising interest rates in the early part of the year that significantly
impacted demand in the home refinance and purchase markets.
Noninterest Expense - 1995 compared to 1994
Total noninterest expenses decreased by $603 thousand, or 11.7%, in 1995
compared to 1994. The most significant components of the change were a
decrease of $557 thousand, or 29%, in other noninterest expense and a
decrease of $118 thousand, or 45%, in regulatory assessments.
The principal element of the decline in other noninterest expense is the
absence of the significant management transition costs that were incurred
during 1994. Transition costs and accruals during 1994 totaled $433
thousand and consisted principally of estimated payments and the related
legal and professional costs incurred to settle the claims made by the
former President and Chief Executive Officer. The remaining decrease in
other noninterest expense reflects lower loss experience in the areas of
operations and the disposition of other real estate owned.
Operations and other real estate loss levels declined by approximately $117
thousand during 1995. Although management has begun efforts to
strategically reduce operating costs in a number of areas, the benefits
realized from these efforts during 1995 were overshadowed by increased
legal costs related to the resolution of loans. Legal costs related to loan
resolution efforts increased by $38 thousand, or 40.7%, during 1995.
Effective June 1, 1995, the Federal Deposit Insurance Corporation (FDIC)
made significant changes to its deposit insurance premium schedule. The
deposit insurance expense of the Bank of Lodi was significantly reduced as
a result of the FDIC changes. The Bank of Lodi's principal regulator, the
Office of the Comptroller of the Currency (OCC), has also reduced its
annual assessment rates. Regulatory assessments for 1995 were below the
1994 level by $118 thousand, or 45%. The benefit from reductions in
regulatory assessments is subject to change in the future based upon the
level of reserves in the FDIC's Bank Insurance Fund as well as the outcome
of current proposals to merge the underfunded Savings Association Insurance
Fund with the Bank Insurance Fund. The final outcome of such a merger of
the deposit insurance funds could result in significant increases in the
deposit insurance premiums paid by banks.
Although salaries and employee benefits increased by $63 thousand, or 2.9%,
direct salary expense was unchanged. The principal elements of the increase
were a $15 thousand reduction in the amount of lending salary expense
deferrable in connection with loan originations and an increase of $31
thousand in the contribution to the Employee Stock Ownership Plan. The
Employee Stock Ownership Plan contribution increased based upon the
improved financial performance of the company.
Occupancy expense increased by 5.5%, or $23 thousand, during 1995. The
principal cause of the increase was a decline in the occupancy levels of
the Company's principal location. The lease of a primary tenant expired at
the end of the third quarter of 1995 and was not renewed. Although some of
the vacated space is now being used by the Bank of Lodi, management is
making efforts to lease the remaining vacant space.
Income Taxes - 1995 compared to 1994
The current year tax provision is a tax expense of $399 thousand compared
to tax benefit of $53 thousand for 1994. Although the Company had pre-tax
income of $285 thousand for 1994, a taxable loss was generated after
deducting tax free municipal bond income net of disallowed interest expense
associated with carrying the bonds. The company had taxable book income
during 1995. The company had an effective tax rate that was below statutory
rates due to the continued benefit of tax-free interest income from
municipal securities holdings.
Earning Assets
Although average deposits declined by $1.2 million, decreases in nonearning
assets and increases in capital left the level of average earning assets
during 1995 virtually constant with 1994. Average earning assets for 1995
were $89.6 million compared to $89.9 million in 1994. As a result of the
reduced averages for nonearning assets, the earning asset efficiency ratio
(earning assets relative
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to total assets) increased to 88.5% in 1995 from 88.2% in 1994.
The mix of earning assets changed during 1995 as a result of continued
softness in the lending market and management efforts to reduce the level
of loans for which underwriting criteria were not satisfied. The mix of
average loans, investments, and federal funds was 63%, 33%, and 4% for
1995, respectively, compared to 67%, 29%, and 4% for 1994, respectively.
Changes in the relative yields of significant earning asset components are
discussed in the net interest margin portion of management's discussion and
analysis.
Loan Portfolio
The average loan portfolio was $56.5 million for 1995 compared to $60.5
million for 1994. The decline of $4 million, or 6.6%, was a function of
both soft credit demand and the liquidation of certain loan relationships
that had credit characteristics that did not meet the Bank's continuing
underwriting criteria. The portfolio segments that experienced the greatest
declines were commercial and real estate lending. The average commercial
portfolio declined by $2.5 million, or 8.2%, while the average real estate
portfolio declined by $1.4 million, or 7.2%.
The most significant component of the loan portfolio is commercial loans.
At December 31, 1995, commercial loans represented 80% of the loan
portfolio. The commercial loan portfolio includes agricultural loans,
working capital loans to businesses in a number of industries, and loans to
finance commercial real estate. Agricultural loans represent approximately
25% of the commercial loan portfolio. Agricultural loans are diversified
amongst a number of agricultural areas including dairies, orchards, row
crops, vineyards, cattle, and contract harvesting. Agricultural lending
risks are generally related to the potential for volatility of agricultural
commodity prices. Commodity prices are affected by government programs to
subsidize certain commodities, weather, and the potential for changes in
overall demand and supply. The remaining commercial loans are to business
entities in a number of industries throughout the greater Lodi, California
area. Lending risk in this sector of the commercial loan portfolio is
related to the health of the local economy and real estate market.
Investment Securities
The average investment securities portfolio increased by $3.7 million, or
14.1%, during 1995. The increase in the portfolio was generally funded by
the reductions in the average loan portfolio of $4 million. New purchases
were concentrated primarily in US Agency securities with maturities of less
than five years. In addition to these purchases, investments were also made
in shares of an institutional money market fund that was designed to be
competitive with investments in federal funds. The focus upon short-term
investments and money market equivalents can be directly related to the
prevailing interest rate environment during 1995. The prospect of rising
interest rates kept new purchases necessarily short so as to allow the
Company and the Bank to take advantage of rising rates, although the trend
in rising rates was reversed late in 1995 when the Federal Reserve began to
lower its targeted Federal Funds Rate.
As discussed in note 1 (a) to the consolidated financial statements, the
company adopted the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, effective January 1, 1994. The decline in interest rates that
occurred in the latter part of 1995 increased the market value of the
investment portfolio. At December 31, 1995, the market value of the
investment portfolio was in excess of cost by $461 thousand compared to
cost being in excess of market at December 31, 1994, by $112 thousand.
A significant portion of the market value appreciation in the investment
portfolio has taken place within the municipal bond portfolio as this
portfolio segment includes many of the longest maturities in the investment
portfolio. In addition, the portfolio of collateralized mortgage
obligations as well as certain structured agency obligations also
experienced a disproportionate share of the overall increase in the market
value of the investment portfolio. In some cases, these instruments are
tied to floating rate indices that lag the overall decreases in interest
rates. Both the collateralized mortgage obligations and the structured
agency bonds are considered to be derivative securities under the broadest
definitions of derivatives, however; derivative investments in the bank's
portfolio are structured such that they fall on the conservative end of the
derivative risk spectrum.
A portion of the investment portfolio contains structured notes. Structured
notes generally carry terms that reference some index or predefined
schedule as a means of determining the coupon rate of interest to be paid
on the security, and there may also be interest rate caps or floors that
limit the extent to which the coupon rate can adjust in any given period
and/or for the life of the security.
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Depending upon the referenced index or predefined schedule as well as the
interest rate cap or floor, the coupon rate of a structured note can lead,
lag, move in tandem with, or move in the opposite direction of market
interest rates. As a result, the market value of the note can be favorably
or adversely impacted depending upon the direction and magnitude of change
in market interest rates. Structured notes may also contain provisions that
give the issuer the right to call the security away from the owner at a
predetermined price; therefore, the contractual, expected, and actual final
maturity of the notes may differ.
The amortized cost of the Bank's structured note portfolio at December 31,
1995 and 1994 was $3.6 million and $3.6 million, respectively, and
represented approximately 9.7% and 10.9%, respectively, of the investment
portfolio. The market value of the structured note portfolio at December
31, 1995 and 1994 was $3.6 million and $3.4 million, respectively. All of
the structured notes were issued by Federal Agencies and therefore carry
the implied AAA credit rating of the Federal Government. Approximately $2.6
million of the structured note portfolio carries floating rate coupons that
generally lag overall movements in market interest rates, while the
remaining $1 million are now fixed after having previously adjusted upward
based upon a predefined schedule. The average final maturity of the
structured note portfolio at December 31, 1995 and 1994 was approximately
one year and two years, respectively.
Asset Quality and Allowance for Loan Losses
The allowance for loan losses at December 31, 1995, was $959 thousand or
1.86% of loans outstanding compared to $1.1 million, or 1.98% of loans
outstanding at December 31, 1994. The absolute level of the allowance
declined during 1995 as certain loans for which reserves had been
previously established were either favorably resolved or charged off.
Nonaccrual loans at December 31, 1995, were $987 thousand, or 29% higher
than the balance of $765 thousand at December 31, 1994. The nonaccrual
coverage ratio decreased to .97 times at December 31, 1995, compared to
1.47 times at December 31, 1994. Although the portfolio of nonaccrual loans
has increased during 1995, the overall credit risk exposure of the
nonaccrual portfolio has decreased, and management believes that the
current reserve and coverage levels are adequate. The relative health of
the overall portfolio as measured by the portfolio delinquency rate
continued to improve during 1995. Loan portfolio delinquency at December
31, 1995, was 2.57% compared to 2.71% at December 31, 1994.
Other real estate owned represents property acquired through foreclosure or
by taking a deed in lieu of foreclosure. The portfolio of other real estate
owned increased by $182 thousand during 1995 to $357 thousand at December
31, 1995, compared to $175 thousand at December 31, 1994. Provisions made
during 1995 to recognize the impairment of other real estate owned values
totaled $60 thousand compared to $115 thousand in 1994. As discussed in
Note 1 (c) of the consolidated financial statements, the company adopted
the provisions of Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan, during the first quarter
of 1994. Among other provisions, Statement No. 114 eliminates the
application of in-substance foreclosure accounting. For 1995 and 1994 the
adoption of Statement No. 114 does not affect the comparability of other
real estate owned portfolio balances.
Deposits
Average deposits decreased by $1.2 million, or 1.4%, in 1995 compared to
1994. Despite the decline in average deposits, noninterest bearing deposits
increased by $1 million, or 16.9%, in addition to the 16.3% growth in this
deposit category last year. Average negotiable order of withdrawal (NOW),
money market and savings deposits declined by $4 million, or 7.9%, in the
aggregate. Some of the decline resulted from depositors' reallocation of
deposits into certificates of deposit. Average certificates of deposit
increased by $1.7 million, or 5.5%. The increase in noninterest bearing
demand deposits was due in part to an emphasis on developing business
demand deposits in connection with developing overall business banking
relationships. The changes in the average deposit balances increased the
mix of certificates of deposit for 1995 to 37% from 34%, while noninterest
bearing demand balances increased to 8% in 1995 from 7% 1994.
Capital
Consolidated capital increased by $954 thousand, or 9%, during 1995. The
increase was due primarily to net income of $843 thousand plus the after-
tax valuation adjustment of $303 thousand related to marking the available
for sale securities portfolio to market at December 31, 1995, compared to
December 31, 1994. The securities valuation adjustment is required by
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities as discussed in Note 1
28
(b) to the financial statements. The consolidated capital to equity ratio
increased to 11.1% at December 31, 1995, from 10.1% at December 31, 1994.
The Bank's total risk-based and leverage capital ratios at December 31,
1995, were 15.1% and 9.0%, respectively, compared to 12.7% and 7.9%,
respectively, at December 31, 1994. The leverage and total risk-based
capital ratios at December 31, 1995, are in excess of the required
regulatory minimums of 3% and 8%, respectively. Regulatory minimums may
increase during 1996 after the implementation of new guidelines that
require banks to hold additional capital if interest rate risk exceeds
certain defined thresholds. Application of these rules to the Bank is not
expected to have a material impact on the required minimum capital ratios.
Liquidity
Liquidity is managed on a daily basis by maintaining cash, federal funds
sold, and short-term investments at levels commensurate with the estimated
requirements for loan demand and fluctuations in deposits. Loan demand and
deposit fluctuations are affected by a number of factors, including
economic conditions, seasonality of the borrowing and deposit bases, and
the general level of interest rates. The bank maintains two lines of credit
with correspondent banks as a supplemental source of short-term liquidity
in the event that salable investment securities and loans or available new
deposit funding are not adequate to meet liquidity needs. The Bank may also
borrow on a short-term basis from the Federal Reserve in the event that
other liquidity sources are not adequate. At December 31, 1995, liquidity
was considered adequate, and funds available in the local deposit market
and scheduled maturities of investments are considered sufficient to meet
long-term liquidity needs. Compared to 1994, liquidity increased during
1995 as a result of the reduction in average loans outstanding and the
corresponding additions to the investment portfolio that carry a greater
degree of liquidity than loans.
Investment in Bank Premises and Equipment
In 1995, investments in bank premises and equipment totaled $231 thousand
in comparison to $88 thousand invested in 1994. Over one-half of the
capital expenditures for 1995 are attributable to new investment in
information systems technology, the foundation of which is expected to be
completed and operational in the second quarter of 1996. The total
investment in the information systems foundation is expected to be
approximately $500 thousand. Subsequent investment to expand the system's
functionality in specialized areas, maintain hardware capabilities to
support emerging software standards, and upgrade telecommunications is
expected to total approximately $200 thousand during 1996 and 1997. The
remaining capital expenditures for 1995 were for various operating
equipment requirements.
Summary of Operating Results - 1994 compared to 1993
1994 was marked by difficult operational changes that had a significant
impact on earnings yet were essential to positioning the Company and the
Bank for the future. The president and chief executive officer of the
company and the bank was terminated on July 29, 1994, in an effort to
reorganize the management of the Company and the Bank. The former president
and chief executive officer filed a lawsuit against the Company and the
Bank for wrongful termination and various other causes of action. Although
his claims were settled for a fraction of the alleged damages, the
settlement together with the associated costs had a material impact on 1994
operating results. Excluding those costs and other fourth quarter
adjustments, core operating results for the last two quarters improved in
relation to both the prior year and the first and second quarters of 1994,
and consolidated assets reached a record high of over $105 million before
the end of the fourth quarter. In addition, the board and new management
made significant strides toward being released from the Formal Agreement
between the Bank and the Office of the Comptroller of the Currency (OCC).
Consolidated assets were $105 million at December 31, 1994, an increase of
$5.4 million, or 5.4%, over the comparable total of $99.8 million at
December 31, 1993. Average consolidated assets increased by $4.5 million,
or 4.6%, to $101.9 million for 1994 compared to $97.4 million for 1993. The
increases were the result of growth in both total and average deposits of
4.3% and 4.0%, respectively. Average earning assets increased by $4.4
million, or 5.2%, and represented 88.2% of consolidated average assets for
1994 compared to 87.7% for 1993. Loans declined to 67% of average earning
assets in 1994 compared to 75% in 1993 as rising interest rates subdued an
already soft local credit environment. The increasing deposit portfolio and
declining loan portfolio funded an increase in the average investment
portfolio of $10.5 million, or 68%.
Consolidated equity increased by $230 thousand to $10.6 million. The
increases of $338 thousand and $4 thousand from earnings and option
exercises, respectively, were partially offset by a securities valuation
adjustment of $112 thousand. The securities valuation adjustment was
recorded as a component of equity in accordance with the new Statement of
Financial Accounting Standard No. 115, Accounting for Certain Investments
in Debt and Equity Securities which was adopted by the Company in the first
quarter of 1994. Consolidated equity as a percentage of consolidated assets
decreased to 10.1% from 10.4% as the rate of deposit
29
growth exceeded the equity growth rate. The Bank's total risk-based and
leverage capital ratios at December 31, 1994 were 12.7% and 7.9%,
respectively, compared to 11.9% and 8.0%, respectively, at December 31,
1993.
Earnings per share before the cumulative effect of accounting changes
declined by 47% in 1994 compared to 1993. Net income and earnings per share
were $338 thousand and $.26, respectively, for 1994 compared to net income
and earnings per share before the cumulative effect of accounting changes
of $640 thousand and $.49, respectively, for 1993. The return on average
assets and average equity were .33% and 3.09%, respectively, for 1994
compared to .77% and 7.45%, respectively, for 1993. Rising interest rates
and the increase in average earning assets increased the net interest
margin by 37 basis points to 5.22%. Although net interest income increased
by $553 thousand, or 13%, noninterest income declined by $101 thousand, or
9%, while noninterest expense increased by $1.02 million, or 25%. The
increase in noninterest expenses included costs of $433 thousand related to
the management transition and fourth quarter charges of nearly $221
thousand to adjust asset valuation reserves.
The Bank was released in December 1994 from the Formal Agreement between
the Bank and the OCC. The agreement was entered into in October of 1992,
and achieving full compliance with the portions of the agreement that had
not as of yet been adequately addressed was a top priority of both the
board and the new management team.
Net Interest Income and Margin - 1994 compared to 1993
Net interest income, interest income less interest expense, increased by
$553 thousand, or 13%. The increase is largely the net result of changes
in the volume, mix and yield of earning assets and deposits. Average
earning assets and deposits increased by 5.2% and 4.0%, respectively, and
contributed $121 thousand to the overall increase. Net interest margin,
net interest income as a percentage of earning assets, increased by 37
basis points to 5.22% from 4.85% and contributed the remaining $432
thousand of the increase in net interest income. While the mix of
noninterest bearing and other interest bearing demand deposits increased
relative to higher cost certificates of deposit and helped to lower the
overall cost of funds, this benefit was more than offset by reduced average
loans outstanding and the corresponding increase in investment securities
with yields that are lower than the foregone loan yields. Without these
mix changes, net interest income would have been $154 thousand higher.
Noninterest Income - 1994 compared to 1993
Noninterest income declined by $101 thousand, or 9%, compared to 1993.
Service charge income was nearly equal to 1993 while SBA and mortgage
income declined by $126 thousand, or 22%. Service charge income was stable
despite an increase of nearly 9% in transaction deposit accounts. SBA and
mortgage income consists of transaction income in the form of premiums
realized upon the sale of loans, and servicing income related to portfolio
administration on behalf of the investors to whom loans were sold.
Transaction income declined by 39% in 1994 while servicing income increased
by 12.5%.
Noninterest Expense - 1994 compared to 1993
Total noninterest expenses increased by $1.02 million, or 25%, in 1994
compared to 1993. The most significant components of the change were an
increase of $714 thousand, or 60%, in other noninterest expense and an
increase of $246 thousand, or 13%, in salaries and employee benefits.
The largest component of the increase in other noninterest expense was the
cost associated with the management changes that took place during 1994.
Transition costs and accruals totaled $433 thousand and consisted
principally of estimated payments and the related legal and professional
costs incurred to settle the claims made by the former president and chief
executive officer. Other significant elements of the increase in other
noninterest expenses included provisions for losses on the sale of other
real estate owned which were $77 thousand in excess of the comparable
amount in 1993, increased sundry losses related to fraud and robbery in the
amount of $69 thousand, and $45 thousand related to the writedown of
equipment to be taken out of service and liquidated. Finally, marketing
costs increased by 32% due to increased promotional efforts, while legal
costs associated with the resolution of a small number of loan
relationships increased general legal costs by 58%. Excluding transitional
costs and the other aforementioned costs, the remaining other noninterest
expenses increased by approximately 2.25% relative to 1993.
A significant portion of the increase in salaries and employee benefits is
related to several positions that were added in the latter part of 1993 and
for which 1994 is the first full year of salary and benefit impact. One
branch manager position was also added in 1994. The average increase in
compensation for continuing staff positions was approximately 4.5% and made
up the remainder of the net increase in salaries and benefits.
30
Income Taxes - 1994 compared to 1993
The 1994 tax provision is a tax benefit of $53 thousand compared to tax
expense of $211 thousand for 1993. Although the Company has pre-tax income
of $285 thousand for 1994, a taxable book loss is generated after deducting
tax free municipal bond income net of disallowed interest expense
associated with carrying the bonds. In addition, taxable income for 1994
is significantly in excess of book taxable income as a result of the
deferred deductibility of certain outstanding accruals at year end, and
this level of taxable income was sufficient to allow the recognition in
1994 of a portion of previously deferred and unrecognized Federal
Alternative Minimum Tax credits.
Investment Securities
The average investment securities portfolio increased by $10.5 million, or
68%, during 1994. New purchases were concentrated primarily in US Agency
discount notes with maturities of less than one year and, to a lesser
extent, US Agency bonds with maturities of less than three years. In
addition to these purchases, investments were also made in shares of an
institutional money market fund that was designed to be competitive with
investments in federal funds. The prospect of rising interest rates kept
new purchases necessarily short so as to allow the Company and the Bank to
take advantage of rising rates.
Asset Quality and Allowance for Loan Losses
The allowance for loan losses at December 31, 1994, was $1.13 million or
1.98% of loans outstanding compared to $924 thousand, or 1.5% of loans
outstanding at December 31, 1993. The 22% increase in the allowance is
related to specific deterioration for certain loans that could be dependent
upon real estate collateral that is particularly sensitive to rising
interest rates. Nonaccrual loans at December 31, 1994, were $765 thousand,
or 7% higher than the balance of $714 thousand at December 31, 1993. The
nonaccrual coverage ratio increased to 1.47 times at December 31, 1994,
compared to 1.29 times at December 31, 1993. The relative health of the
overall portfolio as measured by the portfolio delinquency rate improved
during 1994. Portfolio delinquency at December 31, 1994, was 2.71%
compared to 5.12% at December 31, 1993.
The portfolio of other real estate owned declined by $232 thousand during
1994 to $175 thousand at December 31, 1994, compared to $407 thousand at
December 31, 1993. The decline for the year included $115 thousand in
either losses recognized on the sale of other real estate or provisions
necessary to reduce the book value of other real estate owned to fair
value.
Market Price of Company's Stock
The Company's common stock is traded in the over-the-counter market and is
not presently listed on a national exchange or reported by the NASDAQ Stock
Market. Trading of the stock has been limited and has been principally
been contained within the Corporation's general service area. As of March
1, 1996, there were 1,170 shareholders of record of the Corporation's
common stock.
1995 1994
Bid Price of Common Shares High Low High Low
- --------------------------------------------------------
First Quarter $7.00 6.75 $7.50 6.50
Second Quarter 7.00 6.75 7.00 6.75
Third Quarter 7.75 7.00 6.80 6.25
Fourth Quarter 9.00 7.00 6.75 6.75
The foregoing prices are based on trades of which the Corporation is aware
and reflect inter-dealer prices, without retail mark-up, mark-down or
commissions, and may not represent specific transactions.
31
Selected Financial Data
(in thousands except per share amounts) 1995 1994 1993 1992 1991
Consolidated Statement of Income
- ------------------------------------------------------------------------------------------
Interest Income 8,089 7,462 6,907 7,499 8,105
Interest Expense 3,138 2,767 2,765 3,646 4,717
Net Interest Income 4,951 4,695 4,142 3,853 3,388
Provision for Loan Losses 115 323 327 836 360
Noninterest Income 940 1,050 1,151 1,099 917
Noninterest Expense 4,534 5,137 4,115 3,752 3,411
Net Income 843 338 746 294 405
- ------------------------------------------------------------------------------------------
Per Share Data
Net Income .64 .26 .57 .23 .31
Cash Dividends Declared .15 -- .10 -- --
- ------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data
Federal Funds Sold 3,300 2,000 2,600 4,900 3,800
Investment Securities 36,945 33,100 23,956 13,967 11,467
Loans, net of loss reserve and deferred fees 50,524 55,812 59,943 64,482 68,391
Note Payable 2,585 2,618 2,648 2,674 2,698
Total Assets 103,972 105,167 99,806 98,902 100,256
Total Deposits 89,216 89,979 86,174 85,090 87,485
Total Stockholders' Equity 11,564 10,610 10,380 9,653 9,263
32
Independent Auditors' Report
The Board of Directors
First Financial Bancorp:
We have audited the accompanying consolidated balance sheets of First
Financial Bancorp and subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Financial Bancorp and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for marketable securities to adopt the provisions of
the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities in 1994. Additionally, as discussed in Note 1 to the
financial statements, the Company adopted the provisions of Financial
Accounting Standards Board's Statement No. 109, Accounting for Income Taxes
in 1993.
/s/ KPMG Peat Marwick LLP
Sacramento, California
March 8, 1996
33
FIRST FINANCIAL BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands)
December 31, 1995 and 1994
Assets 1995 1994
- ----------------------------------------------------------------------------------------
Cash and due from banks (note 2) $ 4,488 5,199
Federal funds sold 3,300 2,000
Investment Securities: (note 3)
Held-to-maturity securities (at amortized cost, market
value of $2,170 and $2,118 in 1995 and 1994) 2,036 2,038
Available-for-sale securities at fair value 34,909 31,062
- ----------------------------------------------------------------------------------------
Total investments 36,945 33,100
Loans, net of deferred loan fees and allowance for loan losses of
$1,320 and $1,500 in 1995 and 1994, respectively (notes 4 & 14) 50,524 55,812
Premises and equipment, net (notes 5 & 8) 6,449 6,640
Accrued interest receivable 1,139 1,103
Other assets (notes 6 & 12) 1,127 1,313
- ----------------------------------------------------------------------------------------
$103,972 105,167
========================================================================================
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------------------------------
Liabilities:
Deposits (notes 7 & 14):
Noninterest bearing $ 7,863 8,415
Interest bearing 81,353 81,564
- ----------------------------------------------------------------------------------------
Total deposits 89,216 89,979
Accrued interest payable 408 300
Other liabilities (note 12) 199 1,660
Note payable (note 8) 2,585 2,618
- ----------------------------------------------------------------------------------------
Total liabilities 92,408 94,557
Stockholders' equity (notes 13 & 17):
Common stock - no par value; authorized 9,000,000 shares, issued and
outstanding in 1995, 1,306,996 shares; in 1994, 1,306,296 shares 7,314 7,310
Retained earnings 4,059 3,412
Net unrealized holding gain (loss) on available-for-sale securities 191 (112)
- ----------------------------------------------------------------------------------------
Total stockholders' equity 11,564 10,610
- ----------------------------------------------------------------------------------------
Commitments and contingencies (notes 9, 10 & 19) $103,972 105,167
========================================================================================
See accompanying notes to consolidated financial statements.
34
FIRST FINANCIAL BANCORP AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(in thousands except share amounts)
Years Ended December 31, 1995, 1994 and 1993
Unrealized
Common Stock Retained Securities
Shares Amount Earnings Gain(Loss)Net Total
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 1,273,500 $7,194 2,459 -- 9,653
Options exercised (Note 13) 40,988 112 -- -- 112
Cash dividend declared (Note 13) -- -- (131) -- (131)
Net income -- -- 746 -- 746
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 1,314,488 7,306 3,074 -- 10,380
Shares returned (8,717) -- -- -- --
Options exercised (Note 13) 525 4 -- -- 4
Net unrealized loss on available-for-sale securities,
net of tax effect of $80 -- -- -- (112) (112)
Net income -- -- 338 -- 338
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 1,306,296 7,310 3,412 (112) 10,610
Options exercised (Note 13) 700 4 -- -- 4
Cash dividends declared (Note 13) -- -- (196) -- (196)
Net change in unrealized gain (loss) on available-for-sale
securities,net of tax effect of $216 -- -- -- 303 303
Net Income -- -- 843 -- 843
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,306,996 $7,314 4,059 191 11,564
==============================================================================================================================
See accompanying notes to consolidated financial statements.
35
FIRST FINANCIAL BANCORP AND SUBSIDIARY
Consolidated Statements of Income
(in thousands except per share amounts)
Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
- ------------------------------------------------------------------------
Interest income:
Loans, including fees $6,112 5,910 5,833
Investment securities:
Taxable 1,424 1,047 459
Exempt from Federal taxes 353 368 440
Federal funds sold 200 134 170
Deposits in banks and other interest income -- 3 5
- ------------------------------------------------------------------------
Total interest income 8,089 7,462 6,907
Interest expense:
Deposit accounts 2,859 2,485 2,480
Other 279 282 285
- ------------------------------------------------------------------------
Total interest expense 3,138 2,767 2,765
- ------------------------------------------------------------------------
Net interest income 4,951 4,695 4,142
Provision for loan losses (note 4) 115 323 327
- ------------------------------------------------------------------------
Net interest income after provision
for loan losses 4,836 4,372 3,815
Noninterest income:
Service charges 492 556 563
Premiums and fees from SBA and
mortgage operations 393 444 570
Other 55 50 18
- ------------------------------------------------------------------------
Total noninterest income 940 1,050 1,151
Noninterest expense:
Salaries and employee benefits 2,231 2,168 1,922
Occupancy 443 420 399
Equipment 374 388 354
Regulatory assessments 142 260 253
Other (Note 11) 1,344 1,901 1,187
- ------------------------------------------------------------------------
Total noninterest expense 4,534 5,137 4,115
- ------------------------------------------------------------------------
Income before provision for income taxes 1,242 285 851
Provision for income taxes (note 12) 399 (53) 211
- ------------------------------------------------------------------------
Income before cumulative effect of 843 338 640
accounting change
Cumulative effect of change in accounting
for income taxes (notes 1 & 12) -- -- 106
- ------------------------------------------------------------------------
Net Income $ 843 338 746
========================================================================
Earnings per share:
Income before cumulative effect of
accounting change $.64 .26 .49
Cumulative effect of change in accounting
for income taxes -- -- .08
- ------------------------------------------------------------------------
Net Income $.64 .26 .57
========================================================================
See accompanying notes to consolidated financial statements
36
FIRST FINANCIAL BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Years Ended December 31, 1995, 1994, and 1993
1995 1994 1993
- -------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 843 338 746
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Decrease in loans held for resale 201 32 1,455
(Decrease) increase in deferred loan income (12) 44 13
Provision for other real estate owned losses 60 115 38
Depreciation and amortization 422 430 413
Provision for loan losses 115 323 327
Provision for deferred taxes 188 (299) 123
Increase in accrued interest receivable (36) (249) (138)
Increase (decrease) in accrued interest payable 108 27 (56)
(Decrease) increase in other liabilities (461) 460 44
- -------------------------------------------------------------------------------------------
(Increase) decrease in other assets 393 1,312 2,712
Cash flows from investing activities:
Decrease in certificates of deposit in banks -- 100 --
Proceeds from maturity of held-to-maturity securities -- 46 --
Proceeds from maturity of held-for-investment securities -- -- 3,060
Proceeds from maturity of available-for-sale securities 20,218 27,104 --
Proceeds from sale of available-for-sale securities -- 1,000 --
Purchases of held-for-investment securities -- -- (14,049)
Purchases of available-for-sale securities (24,544) (36,487) --
Decrease in loans made to customers 4,730 3,824 2,631
Proceeds from the sale of other real estate 11 316 666
Purchases of bank premises and equipment (231) (88) (149)
- -------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 184 (4,185) (7,841)
Cash flows from financing activities:
Net (decrease) increase in deposits (763) 3,805 1,084
Payments on notes payable (33) (30) (26)
Proceeds received upon exercise of stock options 4 4 112
Dividends paid (196) (131) --
- -------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (988) 3,648 1,170
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 589 775 (3,959)
Cash and cash equivalents at beginning of year 7,199 6,424 10,383
- -------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 7,788 7,199 6,424
===========================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash (paid) received during the year for:
Interest $ (3,029) (2,740) (2,821)
Income taxes (391) 144 (125)
See accompanying notes to consolidated financial statements
37
FIRST FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of First Financial Bancorp (the
Company) and its subsidiary, Bank of Lodi, N.A., (the Bank) conform
with generally accepted accounting principles and prevailing practices
within the banking industry. In preparing the consolidated financial
statements, Management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenue and expense for the period.
Actual results could differ from those estimates applied in the
preparation of the consolidated financial statements. The following are
descriptions of the more significant accounting and reporting policies:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiary for all periods presented. All material
intercompany accounts and transactions have been eliminated in
consolidation.
(b) Investment Securities
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS 115), as of January 1, 1994. Under the
provisions of SFAS 115, the Company designates a security as held-to-
maturity or available-for-sale when the security is purchased. The
selected designation is based upon investment objectives, operational
needs, and intent. The Company does not engage in trading activity.
Held-to-maturity securities are carried at cost, adjusted for accretion
of discounts and amortization of premiums, which are recognized as
adjustments to interest income using the interest method. Available-
for-sale securities are recorded at fair value with unrealized holding
gains and losses, net of the related tax effect reported as a separate
component of stockholders' equity until realized. As of December 31,
1995 and 1994, there were no transfers between classifications.
To the extent that the fair value of a security is below cost and the
impairment of value is permanent, a new cost basis is established using
the current market value, and the resulting loss is charged to
earnings.
Gains and losses realized upon disposition of securities are recorded
as a component of noninterest income on the trade date, based upon the
net proceeds and the adjusted carrying value of the securities using
the specific identification method.
(c) Loans
Loans are stated at principal balances outstanding, net of deferred
origination fees, costs and loan sale premiums. During 1994, the
Company adopted the provisions of Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by Statement No. 118, Accounting by Creditors for Impairment of
a Loan-Income Recognition and Disclosures (SFAS 114). A loan within the
scope of SFAS 114 is considered impaired when based on current
information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the
loan agreement, including scheduled interest payments. For a loan that
has been restructured, the contractual terms of the loan agreement
refer to the contractual terms specified by the original loan
agreement, not the contractual terms specified by the restructuring
agreement. Under SFAS 114, an impaired loan is measured based upon the
present value of future cash flows discounted at the loan's effective
rate, the loan's observable market price, or the fair value of
collateral if the loan is collateral dependent. Interest on impaired
loans is recognized on a cash basis. SFAS 114 does not apply to large
groups of small balance, homogenous loans that are collectively
evaluated for impairment. If the measurement of the impaired loan is
less than the recorded investment in the loan, an impairment is
recognized by adjusting the allowance for loan loss. SFAS 114 does not
change the timing of chargeoffs of loans to reflect the amount
ultimately expected to be collected. Loans held for sale are carried at
the lower of aggregate cost or market.
Interest on loans is accrued daily. Nonaccrual loans are loans on which
the accrual of interest ceases when the collection of principal or
interest is determined to be doubtful by management. It is the general
policy of the Company to discontinue the
38
accrual of interest when principal or interest payments are delinquent 90
days or more unless the loan is well secured and in the process of
collection. When a loan is placed on non-accrual status, accrued and unpaid
interest is reversed against current period interest income. Interest
accruals are resumed when such loans are brought fully current with respect
to interest and principal and when, in the judgment of management, the loans
are estimated to be fully collectable as to both principal and interest.
(d) Loan Origination Fees and Costs
Loan origination fees, net of certain direct origination costs, are deferred
and amortized as a yield adjustment over the life of the related loans using
the interest method, which results in a constant rate of return. Loan
commitment fees are also deferred. Commitment fees are recognized over the
life of the resulting loans if the commitments are funded or at the
expiration of the commitments if the commitments expire un-exercised.
Origination fees and costs related to loans held for sale are deferred and
recognized as a component of gain or loss when the related loans are sold.
(e) Revenue Recognition on Loan Sales
The Bank originates loans under programs administered by the United States
Small Business Administration (SBA). The programs generally provide for SBA
guarantees of 75% to 90% of each loan. The Bank's general practice is to
sell the guaranteed portion of each loan to third parties and retain the
balance in its loan portfolio. A portion of the premium received from the
sale of the guaranteed portion is recognized as a gain on the sale, and the
remainder of the premium is deferred. The gain is the difference between the
market value and allocated book value of the portion sold. The deferred
premium is amortized into interest income over the estimated life of the
retained portion of the loan using the interest method.
(f) Loan Servicing Income
The Bank services both the sold and retained portions of SBA loans as well
as a portfolio of mortgage loans. Servicing income is realized through the
retention of an ongoing rate differential between the rate paid by the
borrower to the Bank and the rate paid by the Bank to the investor in the
loan.
(g) Allowance for Loan Losses
The allowance for loan losses is established through a provision charged to
expense. Loans are charged off against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely.
Recoveries of amounts previously charged off are added back to the
allowance. The allowance is an amount that management believes will be
adequate to absorb losses inherent in existing loans, standby letters of
credit, overdrafts and commitments to extend credit based on evaluations of
collectibility and prior loss experience. The evaluations take into
consideration such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, loan concentrations, specific problem
loans, commitments, and current and anticipated economic conditions that may
affect the borrowers' ability to pay. While management uses these
evaluations to recognize the provision for loan losses, future provisions
may be necessary based on changes in the factors used in the evaluations.
The allowance for loan losses is also subject to review by the Comptroller
of the Currency, the Bank's principal regulator.
(h) Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the
straight-line method over the estimated useful lives of the related assets.
Estimated useful lives are as follows:
Building 35 years
Improvements, furniture, and equipment 3 to 10 years
Expenditures for repairs and maintenance are charged to operations as
incurred; significant betterments are capitalized. Interest expense
attributable to construction-in-progress is capitalized.
(i) Other Real Estate Owned
Other real estate owned (OREO) consists of property acquired through
foreclosure and is recorded at the time of foreclosure at its fair market
value. Thereafter, it is carried at the lower of cost or fair market value
less estimated completion and selling costs. If at foreclosure, the loan
balance is greater than the fair market value of the property acquired, the
excess is
39
charged against the allowance for loan losses. Subsequent operating
expenses or income, changes in carrying value, and gains or losses on
disposition of OREO are reflected in current operating results. Fair
market value is generally determined based upon independent appraisals.
(j) Earnings Per Share
Earnings per common and common share equivalent are calculated by
dividing net income by the weighted-average number of common and common
share equivalents outstanding during the period. Stock owned by the
Employee Stock Ownership Plan is included in the weighted average
number of common and common share equivalents outstanding for earnings
per share calculations. Stock options are considered common share
equivalents for this calculation.
(k) Income Taxes
Effective January 1, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, and has reported the cumulative effect of that change in
the method of accounting for income taxes in the 1993 consolidated
statement of income. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. 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.
Income tax expense is allocated to each entity of the Company based
upon analyses of the tax consequences of each company on a stand alone
basis.
(l) Statements of Cash Flows
For purposes of the statements of cash flows, cash, non-interest
bearing deposits in other banks and federal funds sold, which generally
have maturities of one day, are considered to be cash equivalents.
(m) Reclassifications
Certain reclassifications not affecting net income or stockholders'
equity have been made to prior years' balances to conform with the
current year's presentation.
(2) Restricted Cash Balances
The Bank is required to maintain certain daily reserve balances in
accordance with Federal Reserve Board requirements. Aggregate reserves
of approximately $788,000 and $789,000 were maintained to satisfy these
requirements at December 31, 1995 and 1994, respectively.
40
(3) Investment Securities
Investment securities at December 31, 1995 and 1994 consisted of the
following:
December 31, 1995
Gross Gross Estimated
Unrealized Unrealized Market Amortized
Gains Losses Value Cost
- ------------------------------------------------------------------------------------
Held to Maturity
- ----------------
Municipal Securities $ 2,036,000 134,000 -- 2,170,000
Available for Sale
- ------------------
U.S. Treasury securities $ 1,599,000 17,000 -- 1,616,000
U.S. Agency securities 16,368,000 62,000 40,000 16,390,000
Municipal securities 3,560,000 243,000 -- 3,803,000
Collateralized mortgage
obligations 2,303,000 32,000 35,000 2,300,000
Debt securities 2,029,000 49,000 1,000 2,077,000
Money market mutual fund 8,640,000 -- -- 8,640,000
Investment in Federal Agency
Stock 83,000 -- -- 83,000
- ------------------------------------------------------------------------------------
34,582,000 403,000 76,000 34,909,000
- ------------------------------------------------------------------------------------
Total $36,618,000 537,000 76,000 37,079,000
====================================================================================
====================================================================================
December 31, 1994
Gross Gross Estimated
Unrealized Unrealized Market Amortized
Gains Losses Value Cost
- ------------------------------------------------------------------------------------
Held to Maturity
- ----------------
Municipal Securities $ 2,038,000 80,000 -- 2,118,000
Available for Sale
- ------------------
U.S. Treasury securities $ 4,392,000 6,000 60,000 4,338,000
U.S. Agency securities 15,129,000 53,000 177,000 15,005,000
Municipal securities 3,958,000 142,000 17,000 4,083,000
Collateralized mortgage
obligations 3,828,000 27,000 164,000 3,691,000
Debt securities 249,000 -- 2,000 247,000
Liquid cash mutual fund 3,615,000 -- -- 3,615,000
Investment in FederalAgency
Stock 83,000 83,000
- ------------------------------------------------------------------------------------
31,254,000 228,000 420,000 31,062,000
- ------------------------------------------------------------------------------------
Total $33,292,000 308,000 420,000 33,180,000
====================================================================================
At December 31, 1994, other liabilities included an accrual of $1,000,000
for an investment security purchased prior to December 31, 1994, and settled
in January 1995. This transaction had no affect on cash during 1994 and has
been excluded from the Consolidated Statement of Cash Flows for 1994.
Investment securities totaling $355,000 and $100,000 were pledged as
collateral to secure treasury, tax and loan accounts with the Federal
Reserve at December 31, 1995 and 1994, respectively.
Gross realized losses and gains on the sale of available-for-sale investment
securities were $1,000 and $0 in 1994, respectively. There were no realized
loses or gains on the sale of available-for-sale investment securities in
1995 or 1993.
41
Federal Agency stock dividends paid to the Company were $16,000, $7,000, and
$5,000 in 1995, 1994 and 1993, respectively.
The amortized cost and estimated fair value of debt securities at December
31, 1995, by contractual maturity, or expected maturity where applicable,
are shown below. Expected maturities will differ from contractual maturities
because certain securities provide the issuer with the right to call or
prepay obligations with or without call or prepayment penalties.
December 31, 1995
Amortized Market
Cost Value
- ----------------------------------------------------------------------
Held to Maturity
----------------
Due in one year or less $ 250,000 253,000
Due after one year through five years 1,786,000 1,917,000
Due after five years through 10 years -- --
Due after 10 years -- --
- ----------------------------------------------------------------------
$ 2,036,000 2,170,000
======================================================================
Available for Sale
------------------
Due in one year or less................ $19,563,000 19,554,000
Due after one year through five years.. 8,437,000 8,467,000
Due after five years through 10 years.. 4,889,000 5,167,000
Due after 10 years..................... 1,610,000 1,638,000
- ----------------------------------------------------------------------
34,499,000 34,826,000
- ----------------------------------------------------------------------
$36,535,000 36,996,000
======================================================================
(4) Loans
The Bank grants commercial, installment, real estate construction and other
real estate loans to customers primarily in the greater Lodi area.
Generally, the loans are secured by real estate or other assets. Although
the Bank has a diversified loan portfolio, a significant portion of its
debtors' ability to honor their contract is dependent upon the condition of
the local real estate market.
Outstanding loans consisted of the following at December 31:
1995 1994
- ---------------------------------------------------------------------
Commercial $41,538,000 44,847,000
Real estate construction 3,529,000 5,220,000
Other real estate 4,020,000 4,589,000
Installment and other 2,757,000 2,656,000
- ---------------------------------------------------------------------
51,844,000 57,312,000
Deferred loan fees and loan sale premiums (361,000) (373,000)
Allowance for loan losses (959,000) (1,127,000)
- ---------------------------------------------------------------------
$50,524,000 55,812,000
=====================================================================
Included in total loans are loans held for sale of approximately
$323,000 and $524,000 for 1995 and 1994, respectively.
SBA and mortgage loans serviced by the Bank totaled $35,505,000 and
$31,598,000, and $29,909,000 in 1995, 1994, and 1993, respectively.
Changes in the allowance for loan losses were as follows:
1995 1994 1993
- ---------------------------------------------------------------------------
Balance, beginning of year $1,127,000 924,000 1,334,000
Loans charged off (482,000) (175,000) (763,000)
Recoveries 199,000 55,000 26,000
Provision charged to operations 115,000 323,000 327,000
- ---------------------------------------------------------------------------
Balance, end of year $ 959,000 1,127,000 924,000
===========================================================================
42
Nonaccrual loans totaled approximately $987,000 and $765,000 at December 31,
1995, and 1994, respectively Interest income which would have been recorded
on such loans was approximately $161,000, $74,000 and $57,000, in 1995,
1994, and 1993, respectively
Impaired loans are loans for which it is probable that the Bank will not be
able to collect all amounts due The Bank adopted SFAS 114 pertaining to
impaired loans on January 1, 1994 December 31, 1995 and 1994, the Bank had
outstanding balances of $770,000 and $595,000 in impaired loans which had
valuation allowances of $140,000 in 1995 and $158,000 in 1994 The average
outstanding balances of impaired loans for the years ended December 31, 1995
and 1994 were $682,000 and $298,000 respectively, on which $22,000 and
$40,000, respectively, was recognized as interest income
(5) Premises and Equipment
Premises and equipment consisted of the following at December 31:
1995 1994
- ---------------------------------------------------------------------------
Land $ 694,000 694,000
Building 5,438,000 5,438,000
Leasehold improvements 1,234,000 1,233,000
Furniture and equipment 1,582,000 1,444,000
- ---------------------------------------------------------------------------
8,948,000 8,809,000
Less accumulated depreciation and amortization (2,499,000) (2,169,000)
- ---------------------------------------------------------------------------
$6,449,000 6,640,000
===========================================================================
The Company leases a portion of its building to unrelated parties under
operating leases which expire in various years.
The minimum future rentals to be received on noncancelable leases as of
December 31, 1995, for each of the next five years and in the aggregate are:
Year Ending December 31,
- ---------------------------------------------------
1996 $ 42,000
1997 32,000
1998 23,000
1999 23,000
2000 23,000
- ---------------------------------------------------
Total minimum future rentals $143,000
===================================================
(6) Other Real Estate Owned
Other real estate owned is included in other assets and was $357,000 and
$175,000 at December 31, 1995 and 1994, respectively. During 1995, 1994, and
1993, real estate of $254,000, $176,000 and $232,000, respectively, was
acquired through foreclosure as settlement for loans These amounts represent
noncash transactions, and accordingly, have been excluded from the
Consolidated Statements of Cash Flows. The noncash portion of the proceeds
from the sale of other real estate totaled $0, $268,000 and $119,000 in
1995, 1994 and 1993, respectively, and has been excluded from the
Consolidated Statements of Cash Flows.
43
(7) Deposits
The following is a summary of deposits at December 31:
1995 1994
- -----------------------------------------------------------
Demand $ 7,863,000 8,415,000
NOW and Super NOW Accounts 18,910,000 18,842,000
Money Market 13,047,000 14,069,000
Savings 15,880,000 16,680,000
Time, $100,000 and over 12,126,000 10,124,000
Other Time 21,390,000 21,849,000
- -----------------------------------------------------------
$89,216,000 89,979,000
===========================================================
Interest paid on time deposits in denominations of $100,000 or more was
approximately $561,000, $395,000 and $394,000 in 1995, 1994 and 1993,
respectively.
(8) Note Payable
During 1991, the Company secured financing of $2,700,000. The remaining
balance of the note of $2,585,000 is due November of 1996, is secured
by the Company's building and premises, and bears a fixed interest rate
of 10.45%.
(9) Operating Leases
The Bank has noncancelable operating leases with unrelated parties for
office space and equipment. The lease payments for future years are as
follows:
Year Ending December 31, Lease Payments
- --------------------------------------------
1996 $23,000
1997 1,000
- --------------------------------------------
$24,000
============================================
Total rental expense for operating leases was approximately $67,000 in 1995
and $66,000 in 1994 and 1993.
(10) Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Company is a party to financial
instruments with off-balance sheet risk. These financial instruments
include commitments to extend credit and standby letters of credit.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount
of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
44
At December 31, 1995 and 1994, financial instruments whose contract amounts
represent credit risk are as follows:
1995 1994
- -------------------------------------------------------------
Commitments to extend credit $9,789,000 11,538,000
=============================================================
=============================================================
Standby letters of credit $ 153,000 80,000
=============================================================
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, other termination clauses
and may require payment of a fee. Many of the commitments are expected to
expire without being drawn upon and accordingly, the total commitment
amounts do not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case-by-case basis. Upon
extension of credit, the amount of collateral obtained, if any, is based on
management's credit evaluation of the counter-party. Collateral varies but
may include accounts receivable, inventory, property, plant and equipment,
and income-producing or other real estate.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support private borrowing arrangements.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. Collateral
obtained, if any, is varied.
(11) Other Noninterest Expense
Other noninterest expense for the years 1995, 1994 and 1993 included
the following significant items:
1995 1994 1993
- -----------------------------------------------------------------------
Management transition expenses $ 18,000 433,000 --
Directors' fees 109,000 84,000 82,000
Provision for other real estate
owned losses 60,000 115,000 38,000
Legal fees 142,000 90,000 57,000
(12) Income Taxes
The provision for income taxes for the years 1995, 1994 and 1993 consisted
of the following:
1995 Federal State Total
- -----------------------------------------------------------------------------------
Current $ 143,000 68,000 211,000
Deferred, net 118,000 70,000 188,000
- -----------------------------------------------------------------------------------
Income tax expense $ 261,000 138,000 399,000
===================================================================================
1994
- -----------------------------------------------------------------------------------
Current $ 160,000 86,000 246,000
Deferred, net (220,000) (79,000) (299,000)
- -----------------------------------------------------------------------------------
Income tax expense $ (60,000) 7,000 (53,000)
===================================================================================
1993
- -----------------------------------------------------------------------------------
Current $ 49,000 39,000 88,000
Deferred, net 77,000 46,000 123,000
- -----------------------------------------------------------------------------------
Income tax expense $ 126,000 85,000 211,000
===================================================================================
45
Income taxes payable of approximately $25,000 and $173,000 are included
in other liabilities at December 31, 1995 and 1994, respectively.
Deferred tax assets of approximately $324,000 and $728,000 are included in
other assets at December 31, 1995 and 1994.
The provision for income taxes differs from amounts computed by applying the
statutory Federal income tax rate to operating income before income taxes.
The reasons for these differences are as follows:
1995 1994 1993
Amount Rate Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------
Federal income tax expense, at statutory
income tax rates $ 422,000 34% 97,000 34% 289,000 34%
State franchise tax expense, net of federal
income tax benefits 87,000 7 20,000 7 57,000 7
Tax-free municipal interest income (110,000) (9) (118,000) (41) (139,000) (16)
Tax-free loan interest income -- -- (11,000) (4) -- --
Change in the beginning of the year deferred
tax asset valuation allowance -- -- (17,000) (6) 27,000 3
Tax loss carryback benefit -- -- -- -- (14,000) (2)
Other -- -- (24,000) (9) (9,000) (1)
- -----------------------------------------------------------------------------------------------------------
$ 399,000 32% (53,000) (19%) 211,000 25%
===========================================================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1995 and in 1994 are presented below.
Deferred tax assets: 1995 1994
- ----------------------------------------------------------------------------------
Allowance for loan losses $ 271,000 359,000
- ----------------------------------------------------------- --------- ---------
Reserve for losses on other real estate owned 77,000 56,000
Deferred loan income 114,000 114,000
Deferred compensation 76,000 75,000
Alternative minimum tax credit carryforwards 160,000 162,000
Settlement accruals 20,000 191,000
Net unrealized loss on available-for-sale securities, net -- 80,000
Other 44,000 46,000
- ----------------------------------------------------------------------------------
Total gross deferred tax assets 762,000 1,083,000
Less valuation allowance (133,000) (133,000)
- ----------------------------------------------------------------------------------
Deferred tax assets, net of allowance 629,000 950,000
- ----------------------------------------------------------------------------------
Deferred tax liabilities:
Accumulated depreciation (44,000) (63,000)
Deferred loan origination costs (78,000) (86,000)
Unrealized gain on available-for-sale securities, net (136,000) --
Other (47,000) (73,000)
- ----------------------------------------------------------------------------------
Total gross deferred tax liabilities (305,000) (222,000)
- ----------------------------------------------------------------------------------
Net deferred tax asset $ 324,000 728,000
==================================================================================
There was no change in the valuation allowance for deferred tax assets
for the year ended December 31, 1995. The valuation allowance for
deferred tax assets as of January 1, 1994, was $150,000. The net change
in the total valuation allowance for the year ended December 31, 1994,
was a decrease of $17,000. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the
deferred tax assets are
46
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowances at December 31, 1995 and 1994.
At December 31, 1995, the Company has alternative minimum tax credit
carryforwards of approximately $160,000 which are available to reduce future
federal regular income taxes, if any, over an indefinite period.
As discussed in note 1 (k), the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, as of January 1,
1993. The cumulative effect of adopting Statement 109 of $106,000 was
determined as of January 1, 1993, and is reported separately in the
consolidated statement of income for the year ended December 31, 1993.
(13) Stockholders' Equity
(a) Stock Options
In December 1982, the Board of Directors adopted the First Financial
Bancorp 1982 Stock Incentive Plan. A total of 250,000 shares of the
Company's common stock were reserved for issuance under the Plan. Options
were granted at an exercise price not less than the fair market value of
the stock at the date of grant and became exercisable over varying periods
of time and expired 10 years from such date.
In February 1991, the Board of Directors adopted the First Financial
Bancorp 1991 Employee Stock Option Plan and Director Stock Option Plan. The
maximum number of shares issuable under the Employee Stock Option Plan is
178,500. The maximum number of shares issuable under the Director Stock
Option Plan was 55,000. Options are granted at an exercise price of at
least 100% and 85% of the fair market value of the stock on the date of
grant for the Employee Stock Option Plan and the Director Stock Option Plan
respectively. The 1991 Plans replaced the 1982 Plan; however, this does not
adversely affect any stock options outstanding under the 1982 Plan. In May,
1995, the 1991 Director Stock Option Plan was amended to grant in 1995
options that were otherwise grantable in subsequent years.
Transactions during 1995, 1994 and 1993 related to the stock option plan
were as follows:
Shares Options Outstanding
Available Exercise Price
For Grant Shares Per Share
- --------------------------------------------------------------------------------
Balance, December 31, 1992 211,800 94,469 $ 4.54 - 10.43
================================================================================
Options granted (39,725) 39,725 $ 6.80 - 7.50
================================================================================
Options exercised -- (66,556) $ 4.54 - 8.57
================================================================================
Balance, December 31, 1993 172,075 67,638 $ 6.80 - 10.43
================================================================================
Options granted (139,725) 139,725 $ 5.74 - 6.75
================================================================================
Options exercised -- (525) $ 6.80
================================================================================
Options surrendered 50,000 (50,000) $ 7.50
================================================================================
Balance, December 31, 1994 82,350 156,838 $ 5.74 - 10.43
================================================================================
Options granted (55,350) 55,350 $ 5.78 - 6.80
================================================================================
Options exercised -- (700) $ 5.74 - 6.50
================================================================================
Options expired -- (1,764) $10.43
================================================================================
Balance, December 31, 1995 27,000 209,724 $ 5.74 - 10.43
================================================================================
At December 31, 1995, options for 46,414 shares were exercisable at
prices varying from $5.74 to $10.43 per share. Options exercised during
1993 included options exercised in a cashless manner whereby no cash is
paid by the optionee, and the actual shares issued are determined by
dividing the difference between the options gross market value and
option price by
47
the market value per share of the stock on the date of exercise. The
effect of cashless exercises was to reduce the shares otherwise
issuable under those options by 25,568 shares.
(b) Employee Stock Ownership Plan
Effective January 1, 1992, the Bank established the Bank of Lodi
Employee Stock Ownership Plan. The plan covers all employees, age 21 or
older, beginning with the first plan year in which the employee
completes at least 1,000 hours of service. The Bank's annual
contributions to the plan are made in cash and are at the discretion of
the Board of Directors based upon a review of the Bank's profitability.
A contribution of approximately $56,000 was approved for 1995 and is
included as part of salaries and benefits expense. Contributions for
1994 and 1993 totaled approximately $25,000 and $78,000, respectively.
As of December 31, 1995, the plan owned 17,429 shares of Company Common
Stock.
Contributions to the plan are invested primarily in the Common Stock of
First Financial Bancorp and are allocated to participants on the basis
of salary in the year of allocation. Benefits become 20% vested after
the third year of credited service, with an additional 20% vesting each
year thereafter until 100% vested after seven years.
(c) Dividends and Dividend Restrictions
On November 10, 1993, the Company's Board of Directors declared a cash
dividend of ten cents per share payable on March 1, 1994, to
shareholders of record on December 31, 1993. On April 20, 1995, the
Company's Board of Directors declared a cash dividend of five cents per
share payable on May 30, 1995, to shareholders of record on May 15,
1995. On July 27, 1995, the Board of Directors declared a cash dividend
of five cents per share payable on August 30, 1995, to shareholders of
record on August 15, 1995. On November 22, 1995, the Board of Directors
declared a cash dividend of five cents per share payable on November
30, 1995, to shareholders of record on November 15, 1995. On January
25, 1996, the Board of Directors declared a cash dividend of five cents
per share payable February 28, 1996 to shareholders of record on
February 15, 1996.
The Company's principal source of funds for dividend payments is
dividends received from its subsidiary Bank. Under applicable Federal
laws, permission to pay a dividend must be granted to a Bank by the
Comptroller of the Currency if the total dividend payment of any
national banking association in any calendar year exceeds the net
profits of that year, as defined, combined with net profits for the two
preceding years. At December 31, 1995, there were Bank retained
earnings of $2,121,000 free of this condition.
(d) Weighted Average Shares Outstanding
Weighted-average shares used in the computation of earnings per share
were 1,321,764, 1,306,514 and 1,308,458 for 1995, 1994 and 1993,
respectively.
(14) Related Party Transactions
During the normal course of business, the Bank enters into transactions
with related parties, including directors, officers, and affiliates.
These transactions include borrowings from the Bank with substantially
the same terms, including rates and collateral, as loans to unrelated
parties. At December 31, 1995 and 1994, respectively, such borrowings
totaled $1,803,000 and $2,536,000. Deposits of related parties held by
the Bank totaled $1,800,000 and $2,117,000 at December 31, 1995 and
1994, respectively.
48
The following is an analysis of activity with respect to the aggregate dollar
amount of loans made by the Bank to directors, officers and affiliates for the
years ended December 31:
1995 1994
- ----------------------------------------------------------
Balance, beginning of year $ 2,536,000 2,331,000
Loans funded 1,290,000 694,000
Principal repayments (2,023,000) (489,000)
- ----------------------------------------------------------
Balance, end of year $ 1,803,000 2,536,000
==========================================================
(15) Parent Company Financial Information
This information should be read in conjunction with the other notes to the
consolidated financial statements. The following presents summary balance sheets
as of December 31, 1995 and 1994, and statements of income, and cash flows
information for the years ended December 31, 1995, 1994, and 1993.
49
Balance Sheets:
Assets 1995 1994
- --------------------------------------------------------------------------------------------------
Cash in bank $ 45,000 123,000
Investment securities available-for-sale, at fair value 382,000 509,000
Premises and equipment, net 4,418,000 4,560,000
Investment in wholly-owned subsidiary 9,238,000 8,000,000
Other assets 66,000 77,000
- --------------------------------------------------------------------------------------------------
$14,149,000 13,269,000
==================================================================================================
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------------------------
Note payable $ 2,585,000 2,618,000
Accounts payable and other liabilities -- 41,000
- --------------------------------------------------------------------------------------------------
Total liabilities 2,585,000 2,659,000
- --------------------------------------------------------------------------------------------------
Common stock 7,314,000 7,310,000
Retained earnings 4,059,000 3,412,000
Unrealized holding gain (loss) on available-
for-sale securities, net 191,000 (112,000)
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 11,564,000 10,610,000
- --------------------------------------------------------------------------------------------------
$14,149,000 13,269,000
==================================================================================================
Income Statements: 1995 1994 1993
- --------------------------------------------------------------------------------------------------
Interest from subsidiary $ -- 6,000 8,000
Rent from subsidiary 456,000 445,000 424,000
Interest from unrelated parties 23,000 18,000 23,000
Other expenses (610,000) (586,000) (568,000)
Equity in undistributed income of subsidiary 935,000 385,000 800,000
Income tax benefit 39,000 70,000 88,000
- --------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 843,000 338,000 775,000
Cumulative effect of change in accounting
for income taxes -- -- 29,000
- --------------------------------------------------------------------------------------------------
Net income $ 843,000 338,000 746,000
==================================================================================================
Cash Flow Statements: 1995 1994 1993
- --------------------------------------------------------------------------------------------------
Net Income $ 843,000 338,000 746,000
Adjustments to reconcile net income to net cash
flows provided by operating activities:
Depreciation and amortization 142,000 142,000 170,000
Provision for deferred taxes 4,000 (7,000) 26,000
(Decrease) increase in other liabilities (41,000) (90,000) 131,000
Decrease in other assets 7,000 34,000 60,000
Increase in equity of subsidiary (935,000) (385,000) (800,000)
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 20,000 32,000 333,000
Proceeds from sale of available-for-sale securities 127,000 -- --
Purchase of available-for-sale securities -- (509,000) --
Decrease (increase) in loans -- 220,000 (4,000)
- --------------------------------------------------------------------------------------------------
Net cash provided by (used by) investing activities 127,000 (289,000) (4,000)
Payments on notes payable (33,000) (30,000) (26,000)
Proceeds received upon exercise of stock options 4,000 4,000 112,000
Dividends paid (196,000) -- (131,000)
- --------------------------------------------------------------------------------------------------
Net cash used by financing activities (225,000) (26,000) (45,000)
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (78,000) (283,000) 284,000
50
- --------------------------------------------------------------------------------------------------
Cash at beginning of year 123,000 406,000 122,000
- --------------------------------------------------------------------------------------------------
Cash at end of year $ 45,000 123,000 406,000
==================================================================================================
(16) Lines of Credit
The Company has two lines of credit with correspondent banks totaling
$3,500,000. As of December 31, 1995 and 1994, no amounts were outstanding
under these lines of credit.
(17) Regulatory Matters
The Federal Deposit Insurance Corporation (FDIC) has specified guidelines
for purposes of evaluating a Bank's capital adequacy. Banks are required to
satisfy two separate capital requirements.
First, a bank must meet a minimum leverage capital ratio ranging from 3% to
5% based upon the bank's CAMEL (capital adequacy, asset quality,
management, earnings, and liquidity) rating. At December 31, 1995, the
Bank's leverage capital ratio was 8.96%.
Second, a bank must meet a minimum risk-based capital ratio of 8.00%. Risk-
based capital guidelines vary from leverage capital guidelines by
redefining the components of capital, categorizing assets into different
risk classes, and including certain off-balance sheet items in the
calculation of the capital ratio. The effect of the risk-based capital
guidelines is that banks with high risk exposure will be required to raise
additional capital while institutions with low risk exposure could, with
the concurrence of regulatory authorities, be permitted to operate with
lower capital ratios. At December 31, 1995, the Bank's risk-based capital
ratio was 15.08%.
(18) Fair Values of Financial Instruments
Effective December 31, 1995, the company adopted the provisions of SFAS 107
"Disclosures About Fair Value of Financial Investments," which requires
disclosure of fair value information about financial instruments, whether
or not recognized in the balance sheet, for which it is practicable to
estimate that value.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and federal funds sold are a reasonable estimate of fair
value.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. (See note 3).
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. The fair values for other loans (e.g., commercial real estate,
mortgage loans, commercial and construction loans, and installment loans)
are estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality.
Commitments to extend credit and standby letters of credit: The majority of
commitments to extend credit and standby letters of credit contain variable
rates of interest and credit deterioration clauses, and therefore, the
carrying value of these credit commitments approximates fair value.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, savings, and money market accounts)
are, by definition, equal to the amount payable on demand at the reporting
date (i.e., their carrying amounts). The fair values for fixed-rate time
deposits are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on time deposits to a
schedule of aggregated expected monthly maturities on time deposits.
Limitations: Fair value estimates are made at a specific point in time,
based on relevant market information and information
51
about the financial instrument. These estimates do not reflect any premium
or discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. Because no
market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics
of various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments. Other significant assets and
liabilities that are not considered financial assets or liabilities include
deferred tax assets, premises, and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in many of the estimates.
The estimated fair values of the Bank's financial instruments are
approximately as follows:
1995
------------------------
Carrying Fair
Amount Value
- -----------------------------------------------------------------------
Financial assets:
Cash and federal funds sold $ 7,788,000 7,788,000
Investment securities $36,945,000 37,079,000
Loans:
Gross Loans $51,844,000 51,542,000
Less:
Allowance for loan losses (959,000) (959,000)
Deferred loan fees and loan sale premiums (361,000) (361,000)
Net loans $50,524,000 50,222,000
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Financial liabilities:
Deposits:
Demand $ 7,863,000 7,863,000
Now and Super Now accounts 18,910,000 18,910,000
Money Market 13,047,000 13,047,000
Savings 15,880,000 15,880,000
Time 33,516,000 33,620,000
- -----------------------------------------------------------------------
Total deposits $89,216,000 89,320,000
Note payable 2,585,000 2,585,000
Contract Carrying Fair
Amount Amount Value
- ------------------------------------------------------------------------------------
Unrecognized financial instruments:
- ------------------------------------------------------------------------------------
Commitments to extend credit $ 9,789,000 -- 98,000
Standby letters of credit 153,000 -- 2,000
(19) Legal Proceedings
The bank is involved in various legal actions arising in the ordinary
course of business. In the opinion of management, after consulting with
legal counsel, the ultimate disposition of these matters will not have a
material effect on the Bank's financial condition, results of operations,
or liquidity.
52
(20) Derivative Financial Instruments
In October, 1994, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 119, Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments (SFAS 119),
effective for financial statements issued for fiscal years ending after
December 15, 1994. This statement requires certain disclosures for off-
balance sheet derivative financial instruments. As of December 31, 1995,
the Company has no off-balance sheet derivatives requiring additional
disclosure under the provisions of SFAS 119. The Company holds $2,300,000
in collateralized mortgage obligations and $3,568,000 in structured notes
as of December 31, 1995, which are considered derivative financial
instruments under the provisions of SFAS 119. These investments are held in
the available-for-sale portfolio.
(21) Prospective Accounting Pronouncements
(a) Stock Based Compensation
In October, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (SFAS 123). This statement is effective for fiscal years
beginning after December 15, 1995. SFAS 123 defines a fair value method of
accounting for employee stock options issued and encourages all entities to
adopt that method of accounting. However, it also allows an entity to
continue to measure compensation cost for stock option plans using the
intrinsic value based method of accounting as prescribed by Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees and to instead make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting as
defined by SFAS 123 had been applied. It is management's intention to
account for stock options under APB Opinion No. 25.
(b) Long-Lived Assets
In March, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121).
The provisions of SFAS 121 are effective for financial statements issued
for years beginning after December 15, 1995. This statement requires that
long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Additionally, this statement requires that long-lived assets
and certain identifiable intangibles to be disposed of be reported at the
lower of the carrying amount or fair value less cost to sell. It is
management's opinion that applying the provisions of this statement will
not have a significant effect on the Company's financial position.
53