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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 September 30, 2001
OR
[ ] 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 November 1, 2001 there were 1,614,300 shares of Common Stock, no
par value, outstanding.
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FIRST FINANCIAL BANCORP
FORM 10-Q
FOR THE QUARTER AND NINE MONTH PERIOD ENDED SEPTEMBER 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 ..................................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk ................ 17
PART II
Item 1. Legal Proceedings ......................................................... 17
Item 2. Changes in Securities ..................................................... 17
Item 3. Defaults Upon Senior Securities ........................................... 17
Item 4. Submission of Matters to a Vote of Security Holders ....................... 17
Item 5. Other Information ......................................................... 17
Item 6. Exhibits and Reports on Form 8-K .......................................... 17
i
ITEM 1. FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(in thousands except share amounts)
September 30, December 31,
Assets 2001 2000
- ------ -------- --------
Cash and due from banks $ 14,654 $ 10,909
Federal funds sold and securities purchased under resale agreements 2,344 10,115
Investment securities available for sale, at fair value 39,701 29,560
Loans held for sale 3,864 1,292
Loans, net of deferred loan fees 127,783 113,292
Less allowance for loan losses 2,572 2,499
-------- --------
Net loans 125,211 110,793
Premises and equipment, net 7,073 7,002
Accrued interest receivable 1,342 1,447
Other assets 16,945 13,946
-------- --------
Total Assets $211,134 $185,064
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Deposits
Noninterest bearing $ 26,317 $ 24,223
Interest bearing 164,929 138,038
-------- --------
Total deposits 191,246 162,261
Accrued interest payable 330 316
Short term borrowings -- 4,588
Other liabilities 1,996 1,445
-------- --------
Total liabilities 193,572 168,610
Stockholders' equity:
Common stock - no par value; authorized
9,000,000 shares, issued and outstanding
in 2001 and 2000, 1,614,300 and 1,526,063,
respectively 10,143 9,338
Retained earnings 6,840 6,831
Accumulated other comprehensive income 579 285
-------- --------
Total stockholders' equity 17,562 16,454
-------- --------
$211,134 $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 Nine Months Ended
September 30, September 30,
------------------------ -------------------------
2001 2000 2001 2000
------- ------- ------- -------
Interest income:
Loans, including fees $ 2,892 $ 2,737 $ 8,222 $ 7,958
Investment securities:
Taxable 549 417 1,397 1,287
Exempt from federal taxes 58 133 196 410
Federal funds sold 64 83 441 189
------- ------- ------- -------
Total interest income 3,563 3,370 10,256 9,844
Interest expense:
Deposit accounts 1,185 1,083 3,517 3,099
Short term borrowings 1 142 5 316
------- ------- ------- -------
Total interest expense 1,186 1,225 3,522 3,415
------- ------- ------- -------
Net interest income 2,377 2,145 6,734 6,429
Provision for loan losses 55 35 245 135
------- ------- ------- -------
Net interest income after provision for
loan losses 2,322 2,110 6,489 6,294
------- ------- ------- -------
Non-interest income:
Gain on sale of investment securities
available for sale 267 -- 267 --
Gain on sale of other real estate -- -- 222 --
Service charges 346 313 1,052 957
Premiums and fees from SBA and mortgage
operations 201 155 621 482
Miscellaneous 216 170 579 490
------- ------- ------- -------
Total non-interest income 1,030 638 2,741 1,929
Non-interest expense:
Salaries and employee benefits 1,508 1,119 4,309 3,356
Occupancy 140 155 696 618
Equipment 345 262 721 572
Other 940 935 2,654 2,783
------- ------- ------- -------
Total non-interest expense 2,933 2,471 8,380 7,329
------- ------- ------- -------
Income before provision for income taxes 419 277 850 894
Provision for income taxes 97 30 120 105
------- ------- ------- -------
Net income $ 322 $ 247 $ 730 $ 789
======= ======= ======= =======
Earnings per share:
Basic $ 0.20 $ 0.16 $ 0.45 $ 0.50
======= ======= ======= =======
Diluted $ 0.19 $ 0.15 $ 0.44 $ 0.48
======= ======= ======= =======
<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)
Nine Months Ended September 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 $ 730 730 730
-------------
Other comprehensive income:
Unrealized holding gains
arising during the current
period, net of tax
effect of $213 294
-------------
Total other comprehensive
income 294 294 294
-------------
Comprehensive income $ 1,024
=============
Options exercised 12,392 88 88
Stock dividend 75,845 717 (717)
Cash in lieu of stock dividend (4) (4)
----------- --------- ------- ------------- ----------
Balance at September 30, 2001 1,614,300 $ 10,143 6,840 579 17,562
=========== ========= ======= ============= ==========
Nine Months Ended September 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 $ 789 789 789
-------------
Other comprehensive income:
Unrealized holding gains
arising during the current
period, net of tax effect of $208 288
-------------
Total other comprehensive
income 288 288 288
-------------
Comprehensive income $ 1,077
=============
Options exercised 12,184 90 90
Stock dividend 71,764 732 (732)
Cash dividend (74) (74)
----------- --------- ------- ------------- ----------
Balance at September 30, 2000 1,517,682 $ 9,255 6,337 22 15,614
=========== ========= ======= ============= ==========
<FN>
See accompanying notes.
</FN>
-3-
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended September 30,
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 730 $ 789
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
(Increase) decrease in loans held for sale (2,188) 476
Gain on sale of loans (384) (207)
Increase in deferred loan income 129 63
Depreciation and amortization 970 605
Provision for loan losses 245 135
Gain on sale of investment securities
available for sale (267) --
Gain on sale of other real estate owned (222) --
Decrease (increase) in accrued interest receivable 105 (37)
Increase (decrease) in accrued interest payable 14 (6)
Increase (decrease) in other liabilities 551 (421)
Increase in cash surrender value of life insurance (429) (342)
Increase in other assets (701) (191)
-------- --------
Net cash (used in) provided by
operating activities (1,447) 864
Cash flows from investing activities:
Proceeds from maturity of available for sale securities 15,034 3,835
Proceeds from sale of available for sale securities 3,578 --
Purchases of available for sale securities (28,040) (901)
Net increase in loans made to customers (15,408) (3,818)
Proceeds from sale of other real estate 627 10
Purchase of cash surrender value life insurance (2,000) (900)
Purchases of bank premises and equipment (851) (578)
-------- --------
Net cash used in investing activities (27,060) (2,352)
Cash flows from financing activities:
Net increase (decrease) in deposits 28,985 (1,706)
(Decrease) increase in other borrowings (4,588) 5,467
Dividends paid -- (74)
Payment for fractional stock dividends (4) --
Proceeds from issuance of common stock 88 90
-------- --------
Net cash provided by financing activities 24,481 3,777
Net (decrease) increase in cash and cash
equivalents (4,026) 2,289
Cash and cash equivalents at beginning of period 21,024 9,409
-------- --------
Cash and cash equivalents at end of period $ 16,998 $ 11,698
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest payments $ 3,508 3,421
Cash paid for taxes $ 417 560
Loans transferred to other real estate owned $ 616 405
Stock dividend $ 717 732
<FN>
See accompanying notes.
</FN>
-4-
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 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.
Certain amounts in prior year's presentations have been reclassified to
conform with the current presentation. These reclassification have no
effect on previously reported income.
(2) Weighted Average Shares Outstanding
Per share information is based on weighted average number of shares of
common stock outstanding during each three- and nine-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
September 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 nine-month periods ending September 30, 2001 and 2000:
Income Shares Per-Share
Three months ended September 30, 2001 (numerator) (denominator) Amount
---------------------------------------------- --------------- --------------- --------------
Basic earnings per share $ 322,000 1,614,300 $ 0.20
Effect of dilutive securities - 38,537 -
--------------- ---------------
Diluted earnings per share $ 322,000 1,652,837 $ 0.19
=============== ===============
Income Shares Per-Share
Three months ended September 30, 2000 (numerator) (denominator) Amount
---------------------------------------------- --------------- --------------- --------------
Basic earnings per share $ 247,000 1,592,638 $ 0.16
Effect of dilutive securities - 38,764 -
--------------- ---------------
Diluted earnings per share $ 247,000 1,631,402 $ 0.15
=============== ===============
Income Shares Per-Share
Nine months ended September 30, 2001 (numerator) (denominator) Amount
---------------------------------------------- --------------- --------------- --------------
Basic earnings per share $ 730,000 1,607,178 $ 0.45
Effect of dilutive securities - 37,562 -
--------------- ---------------
Diluted earnings per share $ 730,000 1,644,740 $ 0.44
=============== ===============
Income Shares Per-Share
Nine months ended September 30, 2000 (numerator) (denominator) Amount
---------------------------------------------- --------------- --------------- -------------
Basic earnings per share $ 789,000 1,589,932 $ 0.50
Effect of dilutive securities - 41,302 -
--------------- ---------------
Diluted earnings per share $ 789,000 1,631,234 $ 0.48
=============== ===============
(3) Allowance for Loan Losses
The following summarizes changes in the allowance for loan losses for
the nine month periods ended September 30, 2001 and 2000 and the twelve
month period ended December 31, 2000:
(in thousands) 9/30/01 9/30/00 12/31/00
------- ------- -------
Balance at beginning of period $ 2,499 2,580 2,580
Loans charged off (194) (171) (246)
Recoveries 22 21 30
Provisions charged to operations 245 135 135
------- ------- -------
Balance at end of period $ 2,572 2,565 2,499
======= ======= =======
-6-
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 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 nine
months ended September 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. FASB Technical Bulletin No. 01-1 delays the effective
date for the isolation standards and related guidance under Statement
No. 140 to transfers of financial assets by affected entities occurring
after December 31, 2001, instead of March 31, 2001. 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 adopted the provisions of Statement 141 on July 1, 2001 and
is required to adopt 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-
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001 and December 31, 2000
The Financial Accounting Standards Board (FASB) recently issued
Statement No. 143, Accounting for Asset Retirement Obligations in
August 2001. This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs.
As a result, FASB Statement No. 143 applies to all entities that have
legal obligations associated with the retirement of long-lived tangible
assets that result from the acquisition, construction, development or
normal use of the asset. As used in this Statement, a legal obligation
results from existing law, statute, ordinance, written or oral
contract, or by legal construction of a contract under the doctrine of
promissory estoppels.
Statement No. 143 requires an enterprise to record the fair value of an
asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of a tangible
long-lived asset. Since the requirement is to recognize the obligation
when incurred, approaches that have been used in the past to accrue the
asset retirement obligation over the life of the asset are no longer
acceptable. Statement No. 143 also requires the enterprise to record
the contra to the initial obligation as an increase to the carrying
amount of the related long-lived asset (i.e., the associated asset
retirement costs) and to depreciate that cost over the remaining useful
life of the asset. The liability is changed at the end of each period
to reflect the passage of time (i.e., accretion expense) and changes in
the estimated future cash flows underlying the initial fair value
measurement. Enterprises are required to adopt Statement No. 143 for
fiscal years beginning after June 15, 2002. Early adoption is
encouraged. The Company is in process of determining what effect, if
any, adoption of Statement No. 143 will have on the financial condition
or operating results of the Company.
On October 3, 2001, the Financial Accounting Standards Board issued
FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. While Statement
No. 144 supersedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, it retains many of the fundamental provisions of that
Statement.
Statement No. 144 also supersedes the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions, for the disposal of a segment of a business. However,
it retains the requirement in Opinion 30 to report separately
discontinued operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. By
broadening the presentation of discontinued operations to include more
disposal transactions, the FASB has enhanced management's ability to
provide information that helps financial statement users to assess the
effects of a disposal transaction on the ongoing operations of an
entity. The statement is required to be adopted for fiscal years
beginning after December 15, 2001 and interim periods within those
fiscal years. Early adoption is encouraged. The Company does not expect
adoption of Statement No. 144 to have a material impact on the
financial condition or operating results of the Company.
-8-
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 8, as well as other information presented throughout
this report.
Changes in Financial Condition
Consolidated total assets at September 30, 2001 were approximately $211 million,
which represents an increase of $26,070 thousand, or 14.1%, above the comparable
level at December 31, 2000. The increase in total assets was directly
attributable to a $28,985 thousand, or 17.9%, 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 the result of a $2,094
thousand, or 8.6%, increase in demand deposit accounts, $4,101 thousand, or 9.3%
increase in NOW accounts, $273 thousand, or 1.8% decrease in money market
accounts, $3,007 thousand, or 11.3% increase in savings accounts and a $20,056
thousand, or 38.8% increase in Certificates of Deposit from December 31, 2000 to
September 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 $17,192 thousand, or 14.9%, from December 31, 2000
to September 30, 2001. The net increase in gross loans is the result of a $5,445
thousand, or 12.4% increase in real estate loans, $5,278 thousand, or 39.4%
increase in commercial loans, $4,094 thousand, or 17.2% increase in SBA loans,
$2,572 thousand, or 199.1% increase in loans held for sale, $210 thousand, or
1.8% increase in construction loans, $223 thousand, or 1.3% decrease in
agricultural loans and a $184 thousand, or 5.1% decrease in consumer loans.
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.
-9-
The allowance for loan losses (the "allowance") is established through a
provision for loan losses charged to expense. The allowance at September 30,
2001 represented 1.94% of gross loans and was in excess of the December 31, 2000
allowance by $73 thousand, or 2.9%, as a result of a provision for $245 thousand
and net charge offs totaling $172 thousand. This compares to a provision of $135
thousand and net charge offs totaling $150 thousand for the first nine months of
2000. The increased provision resulted primarily from three events; increases in
loan growth and the potential for declines in the economy combined with the
resolution of several nonperforming loans. The loan portfolio during the first
nine months of 2001 increased $17,192 thousand, or 14.9%, exceeding the rate
that occurred during the first nine months of 2000 ($3,336 thousand, or 3.0%).
In addition, during 2001, management became increasingly concerned over the
potential for possible declines in the credit quality of its borrowers resulting
from declines in the national economy. Furthermore, the Company eliminated
several nonperforming loans during the year without sustaining substantial
charge off activity.
At September 30, 2001, nonperforming loans were $4,412 thousand, or 3.3% of
gross loans outstanding. This compares to $5,655 thousand or 4.9% of gross loans
outstanding at December 31, 2000. At September 30, 2000 the Company reported
nonperforming loans totaling $7,731 thousand, or 6.7% of gross loans. Subsequent
to September 30, 2000, the Company reduced nonperforming loans by $3,319
thousand or 42.9%. Additionally, during the first nine months of 2001, the
resolution of the nonperforming loans resulted in the Company realizing $251
thousand in previously forgone interest income.
At September 30, 2001, the Company has a total of 30 nonperforming loans. Some
of the nonperforming loans are guaranteed by government agencies, including the
SBA. The Company is in the process of liquidating some of the nonperforming
loans and expects to receive payments totaling $454 thousand from the government
agencies. The Company has two loans to one borrower which total approximately
26% of total nonperforming loans and are secured by real estate. In addition,
nonperforming loans with outstanding balances ranging from $250 thousand to $600
thousand total approximately 43% of total nonperforming loans, loans with
balances ranging from $100 thousand to $250 thousand total 20% of total
nonperforming loans and loans with balances below $100 thousand total 11% of
total nonperforming loans. Management continues to actively work to resolve the
nonperforming loans, the majority of which are secured by real estate and, in
the opinion of management, are well collateralized. In several instances, the
Company is continuing to receive payments from the borrowers and has elected to
apply all payments received to the reduction of principal.
The allowance to nonperforming loan coverage ratio increased to 0.58 times at
September 30, 2001 from 0.44 times at December 31, 2000. Total portfolio
delinquency at September 30, 2001 was 5.3%, compared to 5.1% at December 31,
2000. Excluding the nonperforming loans, total portfolio delinquency at
September 30, 2001 was $2,545 thousand, or 1.9% of gross loans, compared to $259
thousand, or 0.2% of gross loans at December 31, 2000. At September 30, 2001
loans past due 30 to 59 days totaled $1,288, or 0.97% of gross loans and was
comprised of 13 loans and loans past due 60 to 89 days totaled $1,257 thousand,
or 0.95% of gross loans and was comprised of 5 loans.
Interest forgone or reversed on non-accrual loans during the first nine months
of 2001 totals approximately $463 thousand. For the third quarter of 2001,
interest forgone on nonaccrual loans totaled $131 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 September 30, 2001
does 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 September 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.
-10-
The following tables depict activity in the allowance for loan losses and
allocation of reserves as of and for the nine months and year ended September
30, 2001 and December 31, 2000, respectively:
September 30, December 31,
2001 2000
------- -------
Balance at beginning of period $ 2,499 $ 2,580
Charge-offs:
Commercial (168) (201)
Real estate -- --
Consumer (26) (45)
------- -------
Total charge-offs (194) (246)
Recoveries:
Commercial 8 15
Real estate -- --
Consumer 14 15
------- -------
Total recoveries 22 30
------- -------
Net charge-offs (172) (216)
Provision charged to operations 245 135
------- -------
Balance at end of period $ 2,572 $ 2,499
======= =======
Allocation of the Allowance for Loan Losses
----------------------- ----------------------
September 30, 2001 December 31, 2000
----------------------- ---------------------
Amount % of Amount % of
Loan Category (000's) Loans (000's) Loans
------ ------ ------ -------
Commercial $ 911 87.84% $ 879 86.46%
Real Estate 506 9.49% 594 10.41%
Consumer 2 2.67% 1 3.13%
Unallocated 1,153 N/A 1,025 N/A
------ ------ ------ -------
$2,572 100.00% $2,499 100.00%
====== ====== ====== =======
Investments
Investments consist of federal funds sold, investment securities and money
market mutual funds. Investment securities increased $10,141 thousand, or 34.3%,
from December 31, 2000 to September 30, 2001. In addition federal funds sold
decreased $7,771 thousand, or 76.8% from December 31, 2000 to September 30,
2001. The increase in investment securities resulted primarily from the
conversion of federal funds sold to investment securities. The purchases of
investment securities during 2001 consisted primarily of mortgage backed
securities with short average lives that are intended to provide the Company
with investment income in excess of federal funds rates while providing a
continuing cash flow stream for use in funding new loan growth.
Other Assets
Other Assets increased $2,999 thousand, or 21.5%, from December 31, 2000 to
September 30, 2001. The increase is attributable primarily to an increase of
$2,429 in the cash surrender value of life insurance. The cash surrender value
of life insurance consists primarily of the Bank's contractual rights under
single-premium life insurance policies written on the lives of certain officers
and the directors of the Company and the Bank. The policies were purchased in
order to indirectly offset anticipated costs of certain benefits payable upon
the retirement, and the death or disability of the directors and officers
pursuant to deferred compensation agreements. The cash surrender value
accumulates tax-free based upon each policy's crediting rate which is adjusted
by the insurance company on an annual basis.
-11-
Equity
Consolidated equity increased $1,108 thousand from December 31, 2000 to
September 30, 2001. Consolidated equity represented 8.32% and 8.89% of
consolidated assets at September 30, 2001 and December 31, 2000, respectively.
In addition to the year to date earnings of $730 thousand, equity capital
increased by $88 thousand from the exercise of stock options over the nine
months ended September 30, 2001 and $294 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 September 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 10.56% at September 30,
2001 compared to 11.27% at December 31, 2000. The Bank's leverage capital ratio
was 7.61% at September 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 Nine Months ended September 30, 2001
Summary of Earnings Performance
-------------------------------- ------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------
2001 2000 2001 2000
------------- ------------ ------------ ------------
Earnings (in thousands) $ 322 $ 247 $ 730 $ 789
Basic earnings per share $ 0.20 $ 0.16 $0.45 $0.50
Diluted earnings per share $ 0.19 $ 0.15 $0.44 $0.48
Return on average assets 0.62% 0.54% 0.49% 0.59%
Return on average equity 7.70% 6.65% 5.78% 7.30%
Dividend payout ratio -- -- -- 9.62%
Average equity to average assets 8.07% 8.09% 8.54% 8.02%
The Company reported net income of $322 thousand ($.19 per share, diluted) for
the three months ended September 30, 2001, compared to $247 thousand ($.15 per
share, diluted) for the same period in 2000. Net income for the nine months
ended September 30, 2001 was $730 thousand ($.44 per share, diluted) compared to
$789 thousand ($.48 per share, diluted). The increase in net income for the
third quarter in 2001 when compared to the same period one year ago is due to an
increase of $232 thousand in net interest income, an increase of $20 thousand in
the provision for loan losses, an increase of $392 thousand in noninterest
income, an increase of $462 thousand in noninterest expense and an increase of
$67 thousand in the provision for income taxes. The decrease in net income
during the first nine months of 2001 when compared to the same period in 2000 is
due to an increase of $305 thousand in net interest income, an increase of $110
thousand in the provision for loan losses, an increase of $812 thousand in
noninterest income, an increase of $1,051 thousand in noninterest expense and an
increase of $15 thousand in the provision for income taxes.
-12-
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 September 30,
---------------------------------------------------------------------------------
2001 2000
--------------------------------------- ---------------------------------------
Average Income/ Yield (1) Average Income/ Yield
Dollars In Thousands Balance Expense (1) Balance Expense (1)
-------- -------- ------- -------- -------- -------
Earning Assets:
Investment securities(1)(2) $ 43,536 $ 607 5.53% $ 34,414 $ 550 6.34%
Federal funds sold 7,178 64 3.54% 5,383 83 6.12%
Loans (2)(3) 123,737 2,892 9.27% 116,590 2,737 9.31%
-------- -------- ------- -------- -------- -------
$174,451 $ 3,563 8.10% $156,387 $ 3,370 8.55%
======== ======== ======= ======== ======== =======
Liabilities:
Non-interest bearing $ 26,362 $ -- -- $ 21,810 $ -- --
Savings, money market,
& NOW deposits 90,853 300 1.31% 83,480 341 1.62%
Time deposits 71,069 885 4.94% 54,020 742 5.45%
Other borrowings 96 1 4.13% 8,318 142 6.77%
-------- -------- ------- -------- -------- -------
Total Liabilities $ 380 $ 1,186 2.50% $167,628 $ 1,225 2.90%
======== ======== ======= ======== ======== =======
Net Interest Spread 5.61% 5.65%
======= =======
Earning Income Earning Income
Assets (Expense) Yield Assets (Expense) Yield
-------- -------- ------- -------- -------- -------
Yield on average earning assets $174,451 $ 3,563 8.10% $156,387 $ 3,370 8.55%
Cost of funding average
earning assets $174,451 (1,186) (2.70)% $156,387 (1,225) (3.11)%
-------- -------- ------- -------- -------- -------
Net Interest Margin $174,451 $ 2,377 5.40% $156,387 $ 2,145 5.44%
======== ======= ======== =======
<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>
-13-
---------------------------------------------------------------------------------
For the Three Months Ended September 30,
---------------------------------------------------------------------------------
2001 2000
--------------------------------------- ---------------------------------------
Average Income/ Yield (1) Average Income/ Yield
Dollars In Thousands Balance Expense (1) Balance Expense (1)
-------- -------- --------- -------- -------- -------
Earning Assets:
Investment securities(1) $ 34,143 $ 1,593 6.24% $ 38,321 $ 1,697 5.90%
Federal funds sold 12,734 441 4.63% 3,950 189 6.37%
Loans(2)(3) 118,841 8,222 9.25% 114,300 7,958 9.27%
-------- -------- ---------- -------- -------- -------
$165,718 $ 10,256 8.27% $156,571 $ 9,844 8.38%
======== ======== ========== ======== ======== =======
Liabilities:
Non-interest bearing
deposits $ 24,439 $ -- -- $ 20,330 $ -- --
Savings, money market, &
NOW deposits 89,320 967 1.45% 83,570 1,008 1.61%
Time deposits 64,800 2,550 5.26% 53,820 2,091 5.18%
Other borrowings 126 5 5.31% 6,500 316 6.48%
-------- -------- ---------- -------- -------- -------
Total Liabilities $178,685 $ 3,522 2.64% $164,220 $ 3,415 2.77%
======== ======== ========== ======== ======== =======
Net Interest Spread 5.64% 5.61%
========= =======
Earning Income Earning Income
Assets (Expense) Yield Assets (Expense) Yield
-------- -------- ---------- -------- -------- -------
Yield on average earning
assets $165,718 $ 10,256 8.27% $156,571 $ 9,844 8.38%
Cost of funding average
earning assets $165,718 $ (3,522) (2.84)% $156,571 $ (3,415) (2.91)%
-------- -------- ---------- -------- -------- -------
Net Interest Margin $165,718 $ 6,734 5.43% $156,571 $ 6,429 5.47%
======== ========== ======== =======
<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 third quarter of 2001 increased by $193 thousand, or
5.7%, over the same quarter of 2000. The net interest margin of 5.40% for the
third quarter of 2001 decreased from 5.44% for the third quarter of 2000. For
the first nine months of 2001, interest income increased by $412 thousand, or
4.2%, over the same period one year ago. The net interest margin of 5.43% for
the first nine months of 2001 decreased from 5.47% over the same period one year
ago. Interest income increased as a result of increases in average loans and
earning assets combined with the recovery of interest income from nonperforming
loans and was negatively impacted by declines in interest rates which resulted
from the Federal Reserve reducing interest rates eight times during 2001
resulting in a 350 basis point reduction in the prime lending rate. The decline
in the net interest margin resulted primarily from the impact of increases in
deposits being invested in earning assets during a lower interest rate
environment that existed during the third quarter and first nine months of 2001
as compared to that which existed during the third quarter and first nine months
of 2000.
-14-
Average gross loans for the three months ended September 30, 2001 increased by
$7,147 thousand, or 6.1% compared to the prior year quarter. For the first nine
months of 2001, average gross loans increased $4,541 thousand, or 4.0%, compared
to the first nine months of 2000. This increase has been the result of the
Bank's efforts to increase total loans.
Average deposits for the three months ended September 30, 2001 increased $28,974
thousand, or 18.2%, compared to the prior year quarter. The average rate paid on
savings, money market and NOW accounts decreased from 1.62% in the third quarter
of 2000 to 1.31% for the third quarter of 2001. The average rate paid on
certificates of deposits decreased, from 5.45% for the third quarter of 2000 to
4.94% for the same quarter of 2001. The decline in the average rates paid are
reflective of the lower interest rate environment during the third quarter of
2001 as compared to the same period in 2000. For the first nine months of 2001,
average deposits increased $20,839 thousand, or 13.2%, compared to the first
nine months of 2000. The average rate paid on savings, money market and NOW
accounts was 1.45% for 2001 compared to 1.61% for 2000. The average rate paid on
certificates of deposit was 5.26% for 2001 compared to 5.18% for 2000.
Average non-interest bearing deposits have increased as a percent of total
interest bearing deposits from a year ago and make up 14% of average total
deposits for both the third quarter and first nine months of 2001 as compared to
13% and 12% for the third quarter and first nine months of 2000, respectively.
This has helped to keep down the cost of funding earning assets. Average
certificates of deposit for the third quarter and the first nine months of 2001
were 38% and 36% of average deposits, respectively, compared to 32% and 33% for
the same periods of 2000.
Provision for Loan Losses
The provision for loan losses for the three and nine months periods ended
September 30, 2001 was $55 and $245 thousand compared with $35 thousand and $135
thousand for the three and nine months periods ended September 30, 2000. Also
see "Allowance for Loan Losses" contained herein.
Non-interest Income
Non-interest income for the third quarter of 2001 increased $392 thousand, or
61.4%, over the same period last year. For the first nine months of 2001,
non-interest income increased $812 thousand, or 42.1%, compared to the first
nine months of 2000.
Gains on the sale of investment securities totaling $267 thousand were realized
during the third quarter of 2001. In addition, during the first quarter of 2001,
the Company realized gains of $222 thousand resulting from the sale of other
real estate owned. There we no sales of investment securities or other real
estate owned during the first nine months of 2000.
Service charge income for the third quarter of 2001 increased $33 thousand, or
10.5%, compared to the same quarter of 2000. For the first nine months of 2001,
service charge income increased $95 thousand, or 9.9%, compared to the first
nine months of 2000. The increases are consistent with the growth in average
interest bearing demand deposits and savings accounts in 2001 as compared to
2000.
Income from the premiums and fees from SBA and mortgage operations for the
current year third quarter increased $46 thousand, or 29.7%, compared to the
prior year third quarter. For the first nine months of 2001, premiums and fees
from SBA and mortgage operations increased $139 thousand, or 28.8%, compared to
the first nine months of 2000. The increase in income is a result of increases
in the total volume 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 for the third quarter of 2001 increased by $462 thousand,
or 18.7%, compared to the prior year quarter. For the first nine months of 2001,
non-interest expense increased $1,051 thousand, or 14.3%, compared to the first
nine 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.
-15-
For the third quarter, salary and employee benefits expense increased $389
thousand, or 34.8%, occupancy expense decreased $15 thousand, or 9.7%, and
equipment expense increased $83 thousand, or 31.7%.
Year to date, salary and employee benefits expense increased $953 thousand, or
28.4%, occupancy expense increased 78 thousand, or 12.6%, equipment expense
increased $149 thousand, or 26.0%, and director fees and benefits increased $59
thousand, or 41.5%, while consulting expenses decreased $128 thousand, or 56.9%,
and problem loan resolution expenses decreased $158 thousand, or 73.1%, 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 increase in director fees and benefits resulted
from the addition of new directors to the Board combined with increased benefit
costs. 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 September 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 nine months
ended September 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.
-16-
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 nine months ended
September 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
None
(b) Reports on Form 8-K
None
-17-
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: November 13, 2001 /s/ Allen R. Christenson
----------------- ------------------------
Allen R. Christenson
Senior Vice President
Chief Financial Officer