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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 30, 2001
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission File Number : 0-12499
First Financial Bancorp
(Exact name of registrant as specified in its charter)
California 94-28222858
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701 South Ham Lane , Lodi, California 95242
(Address of principal executive offices) (Zip Code)
(209)-367-2000
(Registrant's telephone number, including area code)
NA
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
As of August 3, 2001 there were 1,608,350 shares of Common Stock, no par
value, outstanding.
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FIRST FINANCIAL BANCORP
FORM 10-Q
FOR THE QUARTER AND SIX MONTH PERIOD ENDED JUNE 30, 2001
TABLE OF CONTENTS
Page
----
PART I
Item 1. Consolidated Financial Statements and Notes to Consolidated
Financial Statements................................................... 1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk............. 15
PART II
Item 1. Legal Proceedings ..................................................... 15
Item 2. Changes in Securities ................................................. 15
Item 3. Defaults Upon Senior Securities ....................................... 15
Item 4. Submission of Matters to a Vote of Security Holders ................... 15
Item 5. Other Information ..................................................... 15
Item 6. Exhibits and Reports on Form 8-K ...................................... 15
i
ITEM 1. FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(in thousands except share amounts)
June 30, Dec. 31,
Assets 2001 2000
- ------ --------------- ---------------
Cash and due from banks $ 13,741 $ 10,909
Federal funds sold and securities purchased under resale agreements 11,841 10,115
Investment securities available for sale, at fair value 41,886 29,560
Loans held for sale 3,606 1,292
Loans, net of deferred loan fees 116,555 113,292
Less allowance for loan losses 2,541 2,499
--------------- ---------------
Net loans 114,014 110,793
Premises and equipment, net 6,993 7,002
Accrued interest receivable 1,418 1,447
Other assets 15,497 13,946
--------------- ---------------
Total Assets $ 208,996 $ 185,064
=============== ===============
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits
Noninterest bearing $ 26,061 $ 24,223
Interest bearing 164,235 138,038
--------------- ---------------
Total deposits 190,296 162,261
Accrued interest payable 336 316
Short term borrowings - 4,588
Other liabilities 1,348 1,445
--------------- ---------------
Total liabilities 191,980 168,610
Stockholders' equity:
Common stock - no par value; authorized 9,000,000
shares, issued and outstanding in 2001 and 2000,
1,608,350 and 1,526,063, respectively 10,073 9,338
Retained earnings 6,518 6,831
Accumulated other comprehensive income 425 285
--------------- ---------------
Total stockholders' equity 17,016 16,454
--------------- ---------------
$ 208,996 $ 185,064
=============== ===============
<FN>
See accompanying notes.
</FN>
-1-
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Interest income:
Loans, including fees $ 2,645 $ 2,657 $ 5,330 $ 5,221
Investment securities:
Taxable 475 417 848 870
Exempt from federal taxes 67 140 138 277
Federal funds sold 196 64 377 106
------------- ------------- ------------- -------------
Total interest income 3,383 3,278 6,693 6,474
Interest expense:
Deposit accounts 1,229 1,061 2,332 2,016
Short term borrowings 1 94 4 174
------------- ------------- ------------- -------------
Total interest expense 1,230 1,155 2,336 2,190
------------- ------------- ------------- -------------
Net interest income 2,153 2,123 4,357 4,284
Provision for loan losses -- 65 190 100
------------- ------------- ------------- -------------
Net interest income after provision for
loan losses 2,153 2,058 4,167 4,184
Non-interest income:
Gain on sale of other real estate -- -- 222 --
Service charges 373 329 706 644
Premiums and fees from SBA and mortgage
operations 203 137 420 327
Miscellaneous 182 163 363 320
------------- ------------- ------------- -------------
Total non-interest income 758 629
1,711 1,291
Non-interest expense:
Salaries and employee benefits 1,396 1,119 2,801 2,237
Occupancy 335 262 556 463
Equipment 145 131 376 310
Other 906 1,007 1,714 1,848
------------- ------------- ------------- -------------
Total non-interest expense 2,782 2,519
5,447 4,858
------------- ------------- ------------- -------------
Income before provision for income taxes 129 168 431 617
Provision for income tax (benefit) expense (24) (28) 23 75
------------- ------------- ------------- -------------
Net income $ 153 $ 196 $ 408 $ 542
============= ============= ============= =============
Earnings per share:
Basic $ 0.10 $ 0.12 $ 0.25 $ 0.34
============= ============= ============= =============
Diluted $ 0.09 $ 0.12 $ 0.25 $ 0.33
============= ============= ============= =============
Dividends declared per share $ - $ - $ - $ -
============= ============= ============= =============
<FN>
See accompanying notes.
</FN>
-2-
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Unaudited)
(in thousands except share amounts)
Six Months Ended June 30, 2001
Accumulated
Common Common Other
Stock Stock Comprehensive Retained Comprehensive
Description Shares Amounts Income Earnings Income Total
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 1,526,063 $ 9,338 6,831 285 16,454
Comprehensive income:
Net income $ 408 408 408
---------------
Other comprehensive income:
Unrealized holding gains arising
during the current period, net of tax 140
effect of $102 ---------------
Total other comprehensive income 140 140 140
---------------
Comprehensive income $ 548
===============
Options exercised 6,442 18 18
Stock dividend 75,845 717 (717)
Cash in lieu of stock dividend (4) (4)
------------------------- --------------------------------------
Balance at June 30, 2001 1,608,350 $ 10,073 6,518 425 17,016
========================= ======================================
Six Months Ended June 30, 2000
Accumulated
Common Common Other
Stock Stock Comprehensive Retained Comprehensive
Description Shares Amounts Income Earnings Loss Total
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 1,433,734 $ 8,433 6,354 (266) 14,521
Comprehensive income:
Net income $ 542 542 542
---------------
Other comprehensive income:
Unrealized holding gains arising
during the current period, net of tax 151
effect of $109 ---------------
Total other comprehensive income 151 151 151
---------------
Comprehensive income $ 693
===============
Options exercised 11,300 85 85
Stock dividend 71,764 732 (732)
Cash dividend (74) (74)
------------------------- --------------------------------------
Balance at June 30, 2000 1,516,798 $ 9,250 6,090 (115) 15,225
========================= ======================================
<FN>
See accompanying notes.
</FN>
-3-
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six Months Ended March 31,
2001 2000
----------- ------------
Cash flows from operating activities:
Net income $ 408 $ 542
Adjustments to reconcile net income to net cash
used in operating activities:
Increase in loans held for sale (2,098) (1,142)
Gain on sale of loans (216) (128)
(Decrease) increase in deferred loan income (4) 20
Depreciation and amortization 584 629
Provision for loan losses 190 100
Gain on sale of other real estate owned (222) --
Decrease (increase) in accrued interest
receivable 29 (222)
Increase (decrease) in accrued interest payable 20 3
Increase (decrease) in other liabilities (97) (485)
Increase in cash surrender value of life insurance (285) (225)
(Increase) decrease in other assets (269) 443
------------- -------------
Net cash used in operating activities (1,960) (465)
Cash flows from investing activities:
Proceeds from maturity of available-for-sale
securities 10,300 1,954
Purchases of available-for-sale securities (22,366) (899)
Net increase in loans made to customers (3,497) (3,465)
Proceeds from sale of other real estate 627 10
Purchase of cash surrender value life insurance (1,500) (900)
Purchases of bank premises and equipment (507) (417)
------------- -------------
Net cash used in investing activities (16,943) (3,717)
Cash flows from financing activities:
Net increase in deposits 28,035 5,606
(Decrease) increase in other borrowings (4,588) 4,047
Dividends paid -- (73)
Payment for fractional stock dividends (4) (1)
Proceeds from issuance of common stock 18 85
------------- -------------
Net cash provided by financing activities 23,461 9,664
Net increase in cash and cash equivalents 4,558 5,482
Cash and cash equivalents at beginning of period 21,024 9,409
------------- -------------
Cash and cash equivalents at end of period $ 25,582 $ 14,891
============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest payments $ 2,316 2,187
Cash paid for taxes $ 285 491
Loans transferred to other real estate owned $ 90 --
<FN>
See accompanying notes.
</FN>
-4-
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of First Financial Bancorp (the
Company) and its subsidiaries, Bank of Lodi, N.A., (the Bank) and Western
Auxiliary Corporation (WAC) conform with accounting principles generally
accepted in the United States of America 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. There were no new accountings standards adopted
during the current period.
(2) Weighted Average Shares Outstanding
Per share information is based on weighted average number of shares of
common stock outstanding during each three- and six-month periods after
giving retroactive effect for the five percent stock dividend declared for
shareholders of record May 8, 2001, payable May 22, 2001. Basic earnings
per share (EPS) is computed by dividing net income available to
shareholders by the weighted average common shares outstanding during the
period. Diluted earnings per share is computed by dividing net income
available to shareholders by the weighted average common shares outstanding
during the period plus potential common shares outstanding. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the Company.
-5-
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
(2) Weighted Average Shares Outstanding (continued)
The following table provides a reconciliation of the numerator and denominator of the basic and
diluted earnings per share computation of the three- and six-month period ending June 30, 2001 and
2000:
Income Shares Per-Share
Three months ended June 30, 2001 (numerator) (denominator) Amount
------------------------------------------------------------------------------------------------
Basic earnings per share $ 153,000 1,604,056 $ .10
Effect of dilutive securities - 34,825 -
-------------- ---------------
Diluted earnings per share $ 153,000 1,638,881 $ .09
============== ===============
Income Shares Per-Share
Three months ended June 30, 2000 (numerator) (denominator) Amount
------------------------------------------------------------------------------------------------
Basic earnings per share $ 196,000 1,592,638 $ .12
Effect of dilutive securities - 39,923 -
-------------- ---------------
Diluted earnings per share $ 196,000 1,632,561 $ .12
============== ===============
Income Shares Per-Share
Six months ended June 30, 2001 (numerator) (denominator) Amount
------------------------------------------------------------------------------------------------
Basic earnings per share $ 408,000 1,603,130 $ .25
Effect of dilutive securities - 36,003 -
-------------- ---------------
Diluted earnings per share $ 408,000 1,639,133 $ .25
============== ===============
Income Shares Per-Share
Six months ended June 30, 2000 (numerator) (denominator) Amount
------------------------------------------------------------------------------------------------
Basic earnings per share $ 542,000 1,588,564 $ .34
Effect of dilutive securities - 41,029 -
-------------- ----------------
Diluted earnings per share $ 542,000 1,629,593 $ .33
============== ================
(3) Allowance for Loan Losses
The following summarizes changes in the allowance for loan losses for the six month periods ended
June 30, 2001 and 2000 and the twelve month period ended December 31, 2000:
(in thousands) 6/30/01 6/30/00 12/31/00
-------------- ------------- --------------
Balance at beginning of period $ 2,499 2,580 2,580
Loans charged off (163) (23) (246)
Recoveries 15 11 30
Provisions charged to operations 190 100 135
-------------- ------------- --------------
Balance at end of period $ 2,541 2,668 2,499
============== ============= ==============
-6-
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
(4) Basis of Presentation
First Financial Bancorp is the holding company for Bank of Lodi, N.A.
and Western Auxiliary Corporation. In the opinion of management, the
accompanying unaudited consolidated financial statements reflect all
adjustments (consisting of normal recurring accruals and other accruals
as explained above) necessary for a fair presentation of financial
position as of the dates indicated and results of operations for the
periods shown. All material intercompany accounts and transactions have
been eliminated in consolidation. In preparing the financial
statements, management is required to make estimates and assumptions
that affect the reported amounts. The results for the three and six
months ended June 30, 2001 are not necessarily indicative of the
results which may be expected for the year ended December 31, 2001. The
unaudited consolidated financial statements presented herein should be
read in conjunction with the consolidated financial statements and
notes included in the 2000 Annual Report to Shareholders.
(5) Gain Or Loss On Sale Of Loans And Servicing Rights
Effective April 1, 2001, the Company adopted FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a replacement of FASB Statement No.
125, which supersedes and replaces the guidance in FASB Statement No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. Statement No. 140 revises the standards
for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it carries
over most of the provisions of Statement No. 125 without
reconsideration. Statement No. 140 is effective for transfers of
financial assets occurring after March 31, 2001; it is applied
prospectively. The Company does not expect adoption of Statement No.
140 to have a material impact on the financial condition or operating
results of the Company
(6) Impact Of Recently Issued Accounting Standards
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement
141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all
purchase method business combinations completed after June 30, 2001.
Statement 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and
reported apart from goodwill, noting that any purchase price allocable
to an assembled workforce may not be accounted for separately.
Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of
Statement 142. Statement 142 will also require that intangible assets
with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of.
The Company is required to adopt the provisions of Statement 141
immediately and Statement 142 effective January 1, 2002. Furthermore,
any goodwill and any intangible asset determined to have an indefinite
useful life that are acquired in a purchase business combination
completed after June 30, 2001 will not be amortized, but will continue
to be evaluated for impairment in accordance with the appropriate
pre-Statement 142 accounting literature. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142. The
Company does not have any goodwill and intangible assets acquired in
business combinations completed before July 1, 2001. The Company does
not expect adoption of Statements No. 141 and 142 to have a material
impact on the financial condition or operating results of the Company.
-7-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement for the Purposes of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995.
The Company is including the following cautionary statement to take advantage of
the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of
1995 for any forward-looking statement made by, or on behalf of, the Company.
The factors identified in this cautionary statement are important factors (but
not necessarily all important factors) that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, the Company.
Where any such forward-looking statement includes a statement of the assumptions
of bases underlying such forward-looking statement, the Company cautions that,
while it believes such assumptions or bases to be reasonable and makes them in
good faith, assumed facts or bases almost always vary from actual results, and
the differences between assumed facts or bases and actual results can be
material, depending on the circumstances. Where, in any forward-looking
statement, the Company expresses an expectation or belief as to future results,
such expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result, or be achieved or accomplished.
Taking into account the foregoing, such risks and uncertainties include, but are
not limited to, the following factors: competitive pressure in the banking
industry; changes in the interest rate environment; general economic conditions,
either nationally or regionally becoming less favorable than expected and
resulting in, among other things, a deterioration in credit quality and an
increase in the provision for possible loan losses; changes in the regulatory
environment; changes in business conditions; volatility of rate sensitive
deposits; operational risks, including data processing system failures or fraud;
asset/liability matching risks and liquidity risks; and changes in the
securities markets.
The following discussion addresses information pertaining to the financial
condition and results of operations of the Company that may not be otherwise
apparent from a review of the consolidated financial statements and related
footnotes. It should be read in conjunction with those statements and notes
found on pages 1 through 7, as well as other information presented throughout
this report.
Changes in Financial Condition
Consolidated total assets at June 30, 2001 were approximately $209 million,
which represents an increase of $23,932 thousand, or 12.9%, above the comparable
level at December 31, 2000. The increase in total assets was directly
attributable to a $28,035 thousand, or 17.3%, increase in total deposits
combined with a $4,588 thousand, or 100.0%, decrease in short term borrowings as
compared to December 31, 2000. The growth in deposits is primarily the result of
a $6,644 thousand, or 7.9%, increase in demand deposit accounts, $2,416
thousand, or 9.1% increase in savings accounts and a $18,975 thousand, or 36.7%
increase in Certificates of Deposit from December 31, 2000 to June 30, 2001,
respectively. The increase in certificates of deposit resulted from the Company
offering deposit rates at or slightly above the rates offered in its immediate
market area, the intent of which was to attract new customers while providing
funding for projected loan growth. In addition, the new certificates of deposit
are from depositors in the local markets in which the Company operates and does
not consist of brokered deposits.
Total gross loans increased $5,573 thousand, or 4.8%, from December 31, 2000 to
June 30, 2001. The net increase in gross loans is primarily the result of
increases of $4,495 thousand, or 33.6%, $2,314 thousand, or 179.1%, and $880
thousand, or 7.3%, in commercial loans, loans held for sale and construction
loans, respectively, combined with a decrease of $1,142 thousand, or 2.6%, $880
thousand, or 5.2% in real estate loans and agricultural loans, respectively.
During the first quarter of 2001, the Company opened a Small Business
Administration ("SBA") loan production office in Folsom California, moving its
operations for SBA loans from its Lodi office to the Folsom area.
-8-
The allowance for loan losses (the "allowance") is established through a
provision for loan losses charged to expense. The allowance at June 30, 2001 was
in excess of the December 31, 2000 allowance by $42 thousand, or 1.7%, as a
result of a provision for $190 thousand and net charge offs totaling $148
thousand. This compares to a provision of $100 thousand for the first six months
of 2000. The increased provision is a result of the general growth of the loan
portfolio during the first six months of 2001 ($5.6 million, or 4.8%) exceeding
the rate that occurred during the first six months of 2000 ($4.7million, or
4.2%). In addition, during the first six months of 2001, as a result of
shortages of electrical power in California, the Company established a general
reserve for possible loan losses that might occur as a result of the shortage of
electrical power in California.
At June 30, 2001, nonperforming loans were $5,410 thousand, or 4.5% of gross
loans outstanding. This compares to $5,655 thousand or 4.9% of gross loans
outstanding at December 31, 2000. The allowance to nonperforming loan coverage
ratio increased to 0.47 times at June 30, 2001 from 0.44 times at December 31,
2000. Total portfolio delinquency at June 30, 2001 was 5.2%, compared to 5.1% at
December 31, 2000. Excluding the nonperforming loans, total portfolio
delinquency at June 30, 2001 was $847 thousand, or 0.7% of gross loans, compared
to $259 thousand, or 0.2% of gross loans at December 31, 2000.
Management continues to actively work to resolve the nonperforming loans, the
majority of which are secured by real estate that, in the opinion of management,
are well collateralized. Management believes that the allowance at June 30, 2001
is adequate to absorb known and reasonably estimated loan losses. However, there
can be no assurances that future economic events may negatively impact the
Bank's borrowers, thereby causing loan losses to exceed the current allowance.
Interest forgone or reversed on non-accrual loans during the first six months of
2001 totals approximately $332 thousand. For the second quarter of 2001,
interest forgone on non-accrual loans totaled $179 thousand. The majority of the
loans placed on nonaccrual were internally identified as classified assets as of
December 31, 1999 and specific reserves for possible losses were established
within the allowance as of December 31, 1999. Management continues to actively
monitor the status of these nonperforming loans and as of June 30, 2001 did not
believe any material increases to the specific reserves for these nonperforming
loans as compared to December 31, 2000 was necessary. Management believes the
allowance at June 30, 2001 is adequate to absorb loan losses inherent in the
portfolio. However, there can be no assurances that future economic events may
negatively impact the Bank's borrowers, thereby causing loan losses to exceed
the current allowance.
The following tables depict activity in the allowance for loan losses and
allocation of reserves as of and for the six months and year ended June 30, 2001
and December 31, 2000, respectively:
June 30, December 31,
2001 2000
----------- -----------
Balance at beginning of period $ 2,499 $ 2,580
Charge-offs:
Commercial (140) (201)
Real estate - --
Consumer (23) (45)
----------- -----------
Total charge-offs (163) (246)
Recoveries:
Commercial 4 15
Real estate - --
Consumer 11 15
----------- -----------
Total recoveries 15 30
----------- -----------
Net charge-offs (148) (216)
Provision charged to operations 190 135
----------- -----------
Balance at end of period $ 2,541 $ 2,499
=========== ===========
-9-
Allocation of the Allowance for Loan Losses
----------------------------- -----------------------------
June 30, 2001 December 31, 2000
----------------------------- -----------------------------
Amount Amount
Loan Category (000's) % of Loans (000's) % of Loans
- ------------------ ------------- ------------- ------------- -------------
Commercial $ 821 86.07% $ 879 86.46%
Real Estate 572 10.99% 594 10.41%
Consumer 0 2.94% 1 3.13%
Unallocated 1,148 N/A 1,025 N/A
------ ------- ------ -------
$2,541 100.00% $2,499 100.00%
====== ======= ====== =======
Investments
Investments consist of federal funds sold, investment securities and money
market mutual funds. Investment securities increased $12,326 thousand, or 41.7%,
from December 31, 2000 to June 30, 2001. In addition federal funds sold
increased $1,726 thousand, or 17.1% from December 31, 2000 to June 30, 2001. The
increase in investment securities and federal funds sold occurred as a result of
increases in deposits outpacing the increase in loans during the first six
months of 2001.
Equity
Consolidated equity increased $562 thousand from December 31, 2000 to June 30,
2001. Consolidated equity represented 8.14% and 8.89% of consolidated assets at
June 30, 2001 and December 31, 2000, respectively. In addition to the earnings
of $408 thousand, equity capital increased by $18 thousand from the exercise of
stock options over the six months ended June 30, 2001 and $140 thousand to
reflect the increase in the after-tax market value of the available-for-sale
investment securities portfolio. The increase in the investment security
portfolio's market value reflects the decrease in the level of market interest
rates at June 30, 2001 compared to December 31, 2000. Year-to-date capital
reductions totaled $4 thousand resulting from the cash payout for fractional
shares as a result of the 5% stock dividend declared in May 2001. The total
risk-based capital ratio for the Company's wholly owned subsidiary, Bank of Lodi
was 11.30% at June 30, 2001 compared to 11.27% at December 31, 2000. The Bank's
leverage capital ratio was 7.77% at June 30, 2001 versus 7.99% at December 31,
2000. The capital ratios are in excess of the regulatory minimums for a
well-capitalized bank.
Changes in Results of Operations - Three and Six Months ended June 30, 2001
Summary of Earnings Performance
---------------------- ---------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
2001 2000 2001 2000
---------- ---------- ---------- ---------
Earnings (in thousands) $ 153 $ 196 $ 408 $ 542
Basic earnings per share $ 0.10 $ 0.12 $ 0.25 $ 0.34
Diluted earnings per share $ 0.09 $ 0.12 $ 0.25 $ 0.33
Return on average assets 0.30% 0.44% 0.42% 0.61%
Return on average equity 3.74% 5.48% 4.87% 7.69%
Dividend payout ratio -- -- -- --
Average equity to average assets 8.13% 7.96% 8.68% 7.92%
The Company reported net income of $153 thousand ($.09 per share, diluted) for
the three months ended June 30, 2001, compared to $196 thousand ($.12 per share,
diluted) for the same period in 2000. Net income for the six months ended June
30, 2001 was $408 thousand ($.25 per share, diluted) compared to $542 thousand
($.33 per
-10-
share, diluted). The decrease in net income for the second quarter in 2001 when
compared to the same period one year ago is due to an increase of $30 thousand
in net interest income, a decrease of $65 thousand in the provision for loan
losses, an increase of $129 thousand in non-interest income, an increase of $263
thousand in non-interest expense and a decrease of $4 thousand in the provision
for income tax benefit. The increase in net income during the first six months
of 2001 when compared to the same period in 2000 is due to an increase of $73
thousand in net interest income, an increase of $90 thousand in the provision
for loan losses, an increase of $420 thousand in non-interest income, an
increase of $589 thousand in non-interest expense and a decrease of $52 thousand
in the provision for income tax.
Net Interest Income
The following tables provides a detailed analysis of the net interest spread and
net interest margin for the periods indicated:
-------------------------------------------------------------------------------------------
For the Three Months Ended June 30,
-------------------------------------------------------------------------------------------
2001 2000
-------------------------------------------- -------------------------------------------
Average Income/ Yield Average Income/ Yield
Dollars In Thousands Balance Expense (1) Balance Expense (1)
------------ ------------- ---------- ----------- ------------ -----------
Earning Assets:
Investment securities
(1)(2) $ 45,077 $ 542 4.82% $ 34,988 $ 557 6.39%
Federal funds sold 18,089 196 4.35% 3,587 64 7.16%
Loans (2)(3) 117,868 2,645 9.00% 115,062 2,657 9.26%
------------ ------------- ---------- ----------- ------------ -----------
$ 181,034 $ 3,383 7.50% $ 153,637 $ 3,278 8.56%
============ ============= ========== =========== ============ ===========
Liabilities:
Non-interest bearing
deposits $ 24,572 $ -- -- $ 19,869 $ -- --
Savings, money market, &
NOW deposits 90,391 325 1.44% 83,404 332 1.60%
Time deposits 67,643 904 5.36% 55,538 729 5.26%
Other borrowings 78 1 5.14% 5,583 94 6.78%
------------ ------------- ---------- ----------- ------------ -----------
Total Liabilities $ 182,684 $ 1,230 2.70% $ 164,394 $ 1,155 2.82%
============ ============= ========== =========== ============ ===========
Net Interest Spread 4.79% 5.74%
========== ===========
-------------------------------------------------------------------------------------------
Earning Income Earning Income
Assets (Expense) Yield Assets (Expense) Yield
------------ ------------- ---------- ----------- ------------ -----------
Yield on average $ 181,034 $ 3,383 7.50% $ 153,637 $ 3,278 8.56%
earning assets
Cost of funding average
earning assets $ 181,034 (1,230) (2.73)% $ 153,637 ( 1,155) (3.02)%
------------- ---------- ------------ -----------
Net Interest Margin $ 181,034 $ 2,153 4.77% $ 153,637 $ 2,123 5.54%
============= ========== ============ ===========
<FN>
(1) Held for period annualized on actual number of days in period and based on a 365-day year.
(2) Income on tax-exempt securities has not been adjusted to a tax equivalent basis.
(3) Nonaccrual loans are included in the loan totals for each period; however, only collected interest
on such loans is included in interest income.
</FN>
-11-
-------------------------------------------------------------------------------------------
For the Six Months Ended June 30,
-------------------------------------------------------------------------------------------
2001 2000
-------------------------------------------- -------------------------------------------
Average Income/ Yield Average Income/ Yield
Dollars In Thousands Balance Expense (1) Balance Expense (1)
------------ ------------- ---------- ----------- ------------ -----------
Earning Assets:
Investment securities
(1)(2) $ 29,355 $ 986 6.77% $ 35,547 $ 1,147 6.47%
Federal funds sold 15,569 377 4.88% 3,232 106 6.58%
Loans (2)(3) 116,371 5,330 9.24% 113,153 5,221 9.25%
------------ ------------- ---------- ----------- ------------ -----------
$ 161,295 $ 6,693 8.37% $ 151,932 $ 6,474 8.55%
============ ============= ========== =========== ============ ===========
Liabilities:
Non-interest bearing
deposits $ 23,464 $ -- -- $ 19,597 $ -- --
Savings, money market, &
NOW deposits 88,552 667 1.52% 83,612 667 1.60%
Time deposits 61,617 1,665 5.45% 53,713 1,349 5.03%
Other borrowings 140 4 5.76% 5,583 174 6.25%
------------ ------------- ---------- ----------- ------------ -----------
Total Liabilities $ 173,773 $ 2,336 2.71% $ 162,505 $ 2,190 2.70%
============ ============= ========== =========== ============ ===========
Net Interest Spread 5.66% 5.84%
========== ===========
-------------------------------------------------------------------------------------------
Earning Income Earning Income
Assets (Expense) Yield Assets (Expense) Yield
------------ ------------- ---------- ----------- ------------ -----------
Yield on average earning $ 161,295 $ 6,693 8.37% $ 151,932 $ 6,474 8.55%
assets
Cost of funding average
earning assets $ 161,295 $ (2,336) (2.92)% $ 151,932 $ (2,190) (2.89)%
------------- ---------- ------------ -----------
Net Interest Margin $ 161,295 $ 4,357 5.45% $ 151,932 $ 4,284 5.66%
============= ========== ============ ===========
<FN>
(1) Yield for period annualized on actual number of days in period and based on a 365-day year.
(2) Income on tax-exempt securities has not been adjusted to a tax equivalent basis.
(3) Nonaccrual loans are included in the loan totals for each period; however, only collected interest
on such loans is included in interest income.
</FN>
Interest income for the second quarter of 2001 increased by $105 thousand, or
3.2%, over the same quarter of 2000. The net interest margin of 4.77% for the
second quarter of 2001 decreased from 5.54% for the second quarter of 2000. For
the first six months of 2001, interest income increased by $219 thousand, or
3.4%, over the same period one year ago. The net interest margin of 5.45% for
the first six months of 2001 decreased from 5.66% over the same period one year
ago. Improvement in interest income was the result of the higher volume of loans
combined with an increase in total earning assets. Conversely, the decline in
the net interest margin resulted primarily from the impact of increases in
deposits being invested in securities and federal funds sold during a lower
interest rate environment
-12-
that existed during the second quarter and first half of 2001 as compared to
that which existed during the second quarter and first half of 2000.
Average loans for the three months ended June 30, 2001 increased by $2,806
thousand, or 2.4% compared to the prior year quarter. For the first six months
of 2001, average loans increased $3,218 thousand, or 2.8%, compared to the first
six months of 2001. This increase has been the result of the Bank's efforts to
increase total loans. Average deposits for the three months ended June 30, 2001
increased by $23,795 thousand, or 15.0%, compared to the prior year quarter. The
average rate paid on savings, money market and NOW accounts decreased from 1.60%
in the second quarter of 2000 to 1.44% for the second quarter of 2001. The
average rate paid on certificates of deposits increased, from 5.26% for the
second quarter of 2000 to 5.36% for the same quarter of 2001. For the first six
months of 2001, average deposits increased $16,711 thousand, or 10.6%, compared
to the first six months of 2001. The average rate paid on savings, money market
and NOW accounts was 1.52% compared to 1.60% for 2000. The average rate paid on
certificates of deposit was 5.76% compared to 6.25% for 2000.
Average non-interest bearing deposits have kept pace with the growth in interest
bearing deposits from a year ago and make up 14% of average total deposits both
for the second quarter and for the first six months of 2001. This has helped to
keep down the cost of funding earning assets. Average certificates of deposit
for the second quarter and the first six months of 2001 were 37% and 36% of
average deposits, respectively, compared to 35% and 34% for the same periods of
2000.
Provision for Loan Losses
The provision for loan losses for the three and six months ended June 30, 2001
was $0 and $190 thousand compared with $65 thousand and $100 thousand for the
three and six months ended June 30, 2000. The year-to-date increase is
consistent with the increase in the growth rate of gross loans during the first
six months of 2001 as compared to the first six months of 2000. Also see
"Allowance for Loan Losses" contained herein.
Non-interest Income
Non-interest income for the second quarter of 2001 increased by $129 thousand,
or 20.5%, over the same period last year. For the first six months of 2001,
non-interest income increased $420 thousand, or 32.5%, compared to the first six
months of 2000.
Service charge income for the second quarter increased by $44 thousand, or
13.4%, compared to the same quarter of 2000. For the first six months of 2001,
service charge income increased $62 thousand, or 9.6%, compared to the first six
months of 2000. The increases are consistent with the growth in average interest
bearing demand deposits and savings accounts combined with strategic initiatives
regarding pricing and improved services which were implemented during the second
half of 2000.
Income from the premiums and fees from SBA and mortgage operations increased $66
thousand, or 48.2%, compared to the prior year second quarter. For the first six
months of 2001, premiums and fees from SBA and mortgage operations increased $93
thousand, or 28.4%, compared to the first six months of 2000. The increase in
income is a result of increases in total volumes of loans generated and sold,
particularly in the area of mortgage loans. The increase in mortgage loan
activity is attributable to the decline in mortgage lending interest rates that
has resulted in an increase in the origination of new loans in addition to
increased refinancing activity of existing loans.
Non-interest Expenses
Non-interest expenses increased by $263 thousand, or 10.4%, compared to the
prior year quarter. For the first six months of 2001, non-interest expense
increased $589 thousand, or 12.1%, compared to the first six months of 2000. The
increase in non-interest expense results primarily from increases in salary and
benefits, occupancy and equipment combined with decreases in consulting,
marketing and problem loan resolution.
For the second quarter, salary and employee benefits expense increased $277
thousand, or 24.8%, occupancy expense increased $73 thousand, or 27.9%,
equipment expense increased $14 thousand, or 10.7% while consulting expenses
decreased $63 thousand, or 74.1%, marketing expenses decreased $14 thousand, or
12.2%, and problem loan resolution expenses decreased $78 thousand, or 88.6%,
compared to the prior year.
-13-
Year to date, salary and employee benefits expense increased $564 thousand, or
25.2%, occupancy expense increased 93 thousand, or 20.1%, equipment expense
increased $66 thousand, or 21.3% while consulting expenses decreased $83
thousand, or 50.3%, marketing expenses decreased $72 thousand, or 29.1%, and
problem loan resolution expenses decreased $61 thousand, or 66.3%, compared to
the prior year.
Salary and employee benefits expense increased as a result of the addition of
certain staffing positions combined with general merit increases in salaries and
increased employee benefit costs. The increase in occupancy and equipment
expenses occurred primarily as a result of the addition of the Folsom SBA
lending office and the relocation of the branch in Folsom, combined with other
general upgrades in equipment and technology. The consulting expenses have
related primarily to matters engaged and completed during 2000 regarding the
enhancement of noninterest income, personnel and employee benefits and
improvements in technology. The marketing expenses relate to increased efforts
during 2000 to expand the Bank's market share through the use of television and
radio. While the Bank continues an active marketing campaign, the frequency of
television and radio advertising was decreased during 2001. Problem loan
resolution costs declined during 2001 as compared to 2000 as a result of
specific collection and collateral maintenance requirements incurred during 2000
which were not incurred during 2001.
Liquidity
The Company's primary source of liquidity is dividends from the Bank. The
Company's primary uses of liquidity are associated with dividend payments made
to the shareholders, and operating expenses.
The Bank's 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 three lines of credit with
correspondent banks as a supplemental source of short-term liquidity in the
event that saleable investment securities and loans or available new deposits
are not adequate to meet liquidity needs. The Bank has also established reverse
repurchase agreements with two brokerage firms which allow for short term
borrowings that are secured by the Bank's investment securities. Furthermore,
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 June 30, 2001 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 2000 liquidity
increased in 2001 as a result of the growth in deposit portfolio combined the
sales and maturities of available-for-sale investment securities.
Basis of Presentation
First Financial Bancorp is the holding company for Bank of Lodi, N.A. and
Western Auxiliary Corporation. In the opinion of management, the accompanying
unaudited consolidated financial statements reflect all adjustments (consisting
of normal recurring accruals and other accruals as explained above) necessary
for a fair presentation of financial position as of the dates indicated and
results of operations for the periods shown. All material intercompany accounts
and transactions have been eliminated in consolidation. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts. The results for the three and six months ended
June 30, 2001 are not necessarily indicative of the results which may be
expected for the year ended December 31, 2001. The unaudited consolidated
financial statements presented herein should be read in conjunction with the
consolidated financial statements and notes included in the 2000 Annual Report
to Shareholders.
-14-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
While there are several varieties of market risk, the market risk material to
the Company and the Bank is interest rate risk. Within the context of interest
rate risk, market risk is the risk of loss due to changes in market interest
rates that have an adverse effect on net interest income, earnings, capital or
the fair value of financial instruments. Exposure to this type of risk is a
regular part of a financial institution's operations. The fundamental activities
of making loans, purchasing investment securities, and accepting deposits
inherently involve exposure to interest rate risk. The Company monitors the
repricing differences between assets and liabilities on a regular basis and
estimates exposure to net interest income, net income, and capital based upon
assumed changes in the market yield curve. As of and for the six months ended
June 30, 2001, there were no material changes in the market risk profile of the
Company or the Bank as described in the Company's 2000 Form 10-K.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
Form 8-K dated June 27, 2001 announcing Shareholder's Rights Plan
-15-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FINANCIAL BANCORP
Date: August 13, 2001 /s/ Allen R. Christenson
------------------------
Allen R. Christenson
Senior Vice President
Chief Financial Officer
-16-