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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Preferred Share Purchase Rights
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant was approximately $18,998,387 (based on the $11.75 average of bid and
ask prices per share on June 28, 2002).
As of March 3, 2003, there were 1,623,257 shares of Common Stock, no
par value, outstanding.
Documents Incorporated by Reference Part of Form 10-K into which Incorporated
- ----------------------------------- -----------------------------------------
Proxy Statement for the Annual
Meeting of Shareholders to be
held on April 22, 2003. Part III, Items 10, 11, 12, 13
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FIRST FINANCIAL BANCORP
2002 FORM 10-K
TABLE OF CONTENTS
PART 1
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ITEM 1. BUSINESS .................................................................. 4
General ................................................................ 4
The Bank ............................................................... 4
Bank Services .......................................................... 4
Sources of Business .................................................... 5
Competition ............................................................ 5
Officers ............................................................... 6
Employees .............................................................. 6
Supervision and Regulation ............................................. 7
The Company ................................................... 7
The Bank....................................................... 7
Recent Legislation and Regulations Affecting Banking .......... 8
ITEM 2. PROPERTIES ................................................................ 14
ITEM 3. LEGAL PROCEEDINGS ......................................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....................... 14
Part II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS .................................................... 15
ITEM 6. SELECTED FINANCIAL DATA ................................................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .............................................. 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................. 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................... 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .................................... 38
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ........................ 38
ITEM 11. EXECUTIVE COMPENSATION .................................................... 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ............ 38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............................ 38
ITEM 14. CONTROLS AND PROCEDURES ................................................... 38
PART IV
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ........... 39
Signatures ............................................................................ 67
Certifications under Section 906 of the Sarbanes-Oxley Act of 2002..................... 68
Index to Exhibits...................................................................... 70
2
PART I
Certain statements in this Annual Report on Form 10-K include forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the "safe harbor" created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies, and expectations, are generally
identifiable by the use of words such as "believe", "expect", "intend",
"anticipate", "estimate", "project", "assume," "plan," "predict," "forecast" or
similar expressions. These forward-looking statements relate to, among other
things, expectations of the business environment in which the Company operates,
projections of future performance, potential future performance, potential
future credit experience, perceived opportunities in the market, and statements
regarding the Company's mission and vision.
The Company's actual results, performance, and achievements may differ
materially from the results, performance, and achievements expressed or implied
in such forward-looking statements due to a wide range of risks and
uncertainties. 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; monetary and fiscal
policies of the U.S. Government; changes in real estate valuations; 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; civil disturbances or terrorist threats or acts; or
apprehension about the possible future occurrences of acts of this type; the
outbreak or escalation of hostilities involving the United States; and changes
in the securities markets. Also, all of the Company's operations and most of its
customers are located in California. During recent times, the availability of a
sufficient supply of electrical power in California has been unreliable at
times. In addition, other events, including those of September 11, 2001, have
increased the uncertainty related to the national and California economic
outlook and could have an effect on the future operations of the Company or its
customers, including borrowers.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
3
ITEM 1. BUSINESS
General:
First Financial Bancorp (the "Company") was incorporated under the laws of the
State of California on May 13, 1982, and operates principally as a bank holding
company for its wholly owned subsidiary, Bank of Lodi, N.A. (the "Bank"). The
Company is registered under the Bank Holding Company Act of 1956, as amended.
The Bank is the principal source of income for the Company. The Company also
holds all of the capital stock of its other subsidiaries, Western Auxiliary
Corporation and First Financial (CA) Statutory Trust I. Western Auxiliary
Corporation (WAC), a California Corporation, functions as trustee on deeds of
trust securing mortgage loans originated by the Bank. First Financial (CA)
Statutory Trust I is a Delaware business trust formed in 2001 for the exclusive
purpose of issuing Company obligated manditorily redeemable cumulative trust
preferred securities of Subsidiary Grantor Trust holding solely junior
subordinated debentures. All references herein to the "Company" include the Bank
and all other subsidiaries, unless the context otherwise requires.
Information on the Company's financial results and its products and services is
available on the Internet at http://www.bankoflodi.com. Copies of the Company's
Annual Report on Form 10-K, Quarterly Reports on 10-Q and Current Reports on
Form 8-K filed with the Securities and Exchange Commission will be furnished to
any shareholder, free of charge, upon request. These reports also are available
over the Internet at http://www.sec.gov.
The Bank:
The Bank was organized on May 13, 1982 as a national banking association. The
application to organize the Bank was accepted for filing by the Comptroller of
the Currency (the "OCC") on September 8, 1981, and preliminary approval to
organize was granted on March 27, 1982. On July 18, 1983 the Bank received from
the OCC a Certificate of Authority to Commence the Business of Banking.
Subsequently, the Bank opened branch offices in Woodbridge and Lockeford,
California. Effective February 22, 1997, the Bank acquired the Galt, Plymouth
and San Andreas offices of Wells Fargo Bank. A loan production office in Folsom,
California was opened in January 1998, and was approved to operate as a
full-service branch in July 1999. In July 2001 the Bank relocated the Folsom
branch. A full-service branch was opened in Elk Grove, California in August
1998. In March 2001, the Bank established a Small Business Administration loan
production office in Folsom, California.
The Bank's headquarters is located at 701 South Ham Lane, Lodi, California. The
Bank's primary service area, from which the Bank attracts 50% of its business,
is the city of Lodi and the surrounding area. This area is estimated to have a
population approaching 60,000 persons, with a median annual family income of
approximately $42,000. The area includes residential developments, neighborhood
shopping centers, business and professional offices and manufacturing and
agricultural concerns.
Bank Services:
The Bank offers a wide range of commercial banking services to individuals and
business concerns located in and around its primary service area. These services
include personal and business checking and savings accounts (including
interest-bearing negotiable order of withdrawal ("NOW") accounts and/or accounts
combining checking and savings accounts with automatic transfers), and time
certificates of deposit. The Bank also offers extended banking hours at its
drive-through window, night depository and bank-by-mail services, and travelers'
checks (issued by an independent entity). Each branch location has a 24-hour ATM
machine, and the Bank has 24 hour telephone banking and bill paying services.
The Bank issues debit cards, MasterCard credit cards and acts as a merchant
depository for cardholder drafts under both VISA and MasterCard. In addition, it
provides direct deposit of social security and other government checks. The Bank
also offers Internet banking and bill payment services, which are located at
http://www.bankoflodi.com.
During 1998, the Bank entered into an agreement with Investment Centers of
America to offer stocks, bonds, mutual funds, annuities and insurance products
through offices located on-site at Bank branches. The first Investment Centers
of America office was established at the Lodi branch location, and additional
offices are planned for Elk Grove and Folsom.
The Bank engages in a full complement of lending activities, including
commercial, Small Business Administration (SBA), residential mortgage,
consumer/installment, and short-term real estate loans, with particular emphasis
on short and medium-term obligations. Commercial lending activities are directed
principally toward businesses whose demand for funds falls within the Bank's
lending limit, such as small to medium-sized professional firms, retail and
wholesale outlets and manufacturing and agricultural concerns. Consumer lending
is oriented primarily to the needs of the Bank's customers, with an emphasis on
automobile financing and leasing. Consumer loans also include loans for boats,
home improvements, debt consolidation, and other personal needs. Real estate
loans include short-term "swing" loans and construction loans. Residential
mortgages are generally sold into the secondary market for these loans. SBA
loans are made available to small to medium-sized businesses. The Bank generates
noninterest income through premiums received on the sale of the guaranteed
portions of SBA loans and the resulting on-going servicing income on its SBA
portfolio.
4
Sources of Business:
Management seeks to obtain sufficient market penetration through the full range
of services described above and through the personal solicitation of the Bank's
officers, directors and shareholders. All officers are responsible for making
regular calls on potential customers to solicit business and on existing
customers to obtain referrals. Promotional efforts are directed toward
individuals and small to medium-sized businesses. The Bank's customers are able
in their dealings with the Bank to be served by bankers who have commercial loan
experience, lending authority, and the time to serve their banking needs quickly
and competently. Bankers are assigned to customers and not transferred from
office to office as in many major chain or regional banks. In order to expedite
decisions on lending transactions, the Bank's loan committee meets on a regular
basis and is available where immediate authorization is important to the
customer.
The risk of non-payment (or deferred payment) of loans is inherent in commercial
banking. Furthermore, the Bank's marketing focus on small to medium-sized
businesses may involve certain lending risks not inherent in loans to larger
companies. Smaller companies generally have shorter operating histories, less
sophisticated internal record keeping and financial planning capabilities, and
greater debt-to-equity ratios. Management of the Bank carefully evaluates all
loan applicants and attempts to minimize its credit risk through the use of
thorough loan application and approval procedures.
Consistent with the need to maintain liquidity, management of the Bank seeks to
invest the largest portion of the Bank's assets in loans of the types described
above. Loans are generally limited to less than 80% of deposits and capital
funds. The Bank's surplus funds are invested in the investment portfolio, made
up of both taxable and non-taxable debt securities of the U.S. government, U.S.
government agencies, states, and municipalities. On a day-to-day basis, surplus
funds are invested in federal funds sold, securities purchased under resale
agreements and other short-term money market instruments.
Competition:
The banking business in California generally, and in the northern portion of
central California where the Bank is located, is highly competitive with respect
to both loans and deposits and is dominated by a relatively small number of
major banks with branch office networks and other operating affiliations
throughout the State. The Bank competes for deposits and loans with these banks,
as well as with savings and loan associations, thrift and loan associations,
credit unions, mortgage companies, insurance companies and other lending
institutions. Among the advantages certain of these institutions have over the
Bank are their ability (i) to finance extensive advertising campaigns, (ii) to
allocate a substantial portion of their investment assets in securities with
higher yields (not available to the Bank if its investments are to be
diversified) and (iii) to make funds available for loans in geographic regions
with the greatest demand. In competing for deposits, the Bank is subject to the
same regulations with respect to interest rate limitations on time deposits as
other depository institutions. See "Supervision and Regulation" below.
Many of the major commercial banks operating in the Bank's service area offer
certain services, such as international banking and trust services, which are
not offered directly by the Bank, and such banks, by virtue of their greater
capitalization, have substantially higher lending limits than the Bank. In
addition, other entities, both public and private, seeking to raise capital
through the issuance and sale of debt and equity securities compete with the
Bank for the acquisition of funds for deposit.
In order to compete with other financial institutions in its primary service
area, the Bank relies principally on local promotional activities, personal
contacts by its officers, directors, employees and shareholders, extended hours
and specialized services. The Bank's promotional activities emphasize the
advantages of dealing with a locally-owned and headquartered institution
sensitive to the particular needs of the community. The Bank also assists
customers in obtaining loans in excess of the Bank's lending limit or services
not offered by the Bank by arranging such loans or services in participation
with or through its correspondent banks.
The State Bank Parity Act, effective January 1, 1996, eliminated certain
existing disparities between California state chartered banks and national
banking associations, such as the Bank, by authorizing the California
Commissioner of Financial Institutions (the "Commissioner") to address such
disparities through a streamlined rule-making process.
5
Officers:
Leon Zimmerman, age 59, is President and Chief Executive Officer of the Bank and
of the Company; Robert H. Daneke, age 49 is Executive Vice President and Chief
Credit Officer of the Bank and of the Company, and; Allen R. Christenson, age 45
is Senior Vice-President, Chief Financial Officer and Secretary of the Bank and
of the Company.
Mr. Zimmerman joined the Company in April 1990. He was promoted from Executive
Vice President and Chief Credit Officer of Bank of Lodi to President and CEO in
August of 1994. Mr. Zimmerman became President and CEO of the Company effective
August 1995. He lives in Lodi with his wife and has resided and worked in the
San Joaquin-Sacramento Valley since 1960, serving in various banking capacities
since 1962. Mr. Zimmerman serves on many community boards and committees,
including the Lodi Police Chaplaincy Association, San Joaquin County Education
Foundation, Chamber of Commerce - Agribusiness Committee, and LEED - Sacramento
Steering Committee. He is a member of Lodi Rotary Club, Sutter Club -
Sacramento, World Trade Club - San Francisco, Independent Order of Odd Fellows,
Lodi Grape Festival and Harvest Fair and several other community groups.
Mr. Daneke joined the Company in December 1999 bringing on board 23 years of
banking experience. Prior to joining the Company, Mr. Daneke was employed at
Clovis Community Bank for eight years and was promoted to Senior Vice
President/Senior Credit Officer in 1997. In addition, his career has included:
seven years with the Correspondent Bank Division of Community Bank in Redwood
City and seven years with Bank of America Corporate Banking Group. Mr. Daneke
holds a B.B.A. Degree in Finance from the University of Iowa. He is also a
graduate of Pacific Coast Banking School at the University of Washington, the
California Intermediate Banking School at the University of San Diego and the
Lodi Chamber of Commerce Leadership Lodi Program. He currently is a member of
the Lodi Chapter of Independent Order of Odd Fellows and serves on Lodi Unified
School District's Budget Advisory Committee. Mr. Daneke resides in Lodi with his
wife and two children.
Mr. Christenson joined the Company in August 1999. Prior to joining the Company,
Mr. Christenson was Senior Vice President and Chief Financial Officer of River
City Bank, located in Sacramento, California (1994-1999). Prior to joining River
City Bank, Mr. Christenson was Senior Vice President and Chief Financial Officer
of CapitolBank Sacramento, which was acquired by another bank (1993-1994). Prior
to joining CapitolBank Sacramento, Mr. Christenson was in public accounting for
over eight years, specializing in financial audits and consulting within the
financial services industry. Mr. Christenson is a Certified Public Accountant
and has a Bachelors degree from California State University, Sacramento. He
resides in South Sacramento with his wife and five children. He is a life-long
resident of the greater Sacramento area and continues to serve in various
community and civic organizations.
Employees:
As of December 31, 2002, the Company employed 129 full-time equivalent
employees, including three executive officers. Management believes that the
Company's relationship with its employees is good.
6
Supervision and Regulation
The Company:
The common stock of the Company is subject to the registration requirements of
the Securities Act of 1933, as amended, and the qualification requirements of
the California Corporate Securities Law of 1968, as amended. The Company is also
subject to the periodic reporting requirements of Section 13(d) of the
Securities Exchange Act of 1934, as amended, which include, but are not limited
to, annual, quarterly and other current reports with the Securities and Exchange
Commission.
The Company is a bank holding company registered under the Bank Holding Company
Act of 1956 (the "Act") and is subject to supervision by the Board of Governors
of the Federal Reserve System (the "Board"). As a bank holding company, the
Company must file with the Board quarterly reports, annual reports, and such
other additional information as the Board may require pursuant to the Act. The
Board also examines the Company and its subsidiaries on a regular basis.
The Act requires prior approval of the Board for, among other things, the
acquisition by a bank holding company of direct or indirect ownership or control
of more than 5% of the voting shares, or substantially all the assets, of any
bank, or for a merger or consolidation by a bank holding company with any other
bank holding company. The Act also prohibits the acquisition by a bank holding
company or any of its subsidiaries of voting shares, or substantially all the
assets, of any bank located in a state other than the state in which the
operations of the bank holding company's banking subsidiaries are principally
conducted, unless the statutes of the state in which the bank to be acquired is
located expressly authorize the acquisition.
With certain limited exceptions, a bank holding company is prohibited from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company that is not a bank or bank holding company and from
engaging directly or indirectly in any activity other than banking or managing
or controlling banks or furnishing services to, or performing services for, its
authorized subsidiaries. A bank holding company may, however, engage in or
acquire an interest in a company that engages in activities that the Board has
determined to be so closely related to banking or to managing or controlling
banks as to be properly incident thereto. In making this determination, the
Board is required to consider whether the performance of an activity reasonably
can be expected to produce benefits to the public, such as greater convenience,
increased competition, or gains in efficiency, which outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. The Board is
also empowered to differentiate between activities commenced de novo and
activities commenced by the acquisition, in whole or in part, of a going
concern.
Additional statutory provisions prohibit a bank holding company and any
subsidiary banks from engaging in certain tie-in arrangements in connection with
the extension of credit, sale or lease of property or furnishing of services.
Thus, a subsidiary bank may not extend credit, lease or sell property, or
furnish any services, or fix or vary the consideration for any of the foregoing
on the condition that: (i) a customer obtain or provide some additional credit,
property or service from or to the bank other than a loan, discount, deposit or
trust service; or (ii) the customer obtain or provide some additional credit,
property or service from or to the company or any other subsidiary of the
company; or (iii) the customer not obtain some other credit, property or service
from competitors, except reasonable requirements to assure soundness of the
credit extended. These anti-tying restrictions also apply to bank holding
companies and their non-bank subsidiaries as if they were banks.
The Company's ability to pay cash dividends is subject to restrictions set forth
in the California General Corporation Law. The Bank is a legal entity separate
and distinct from the Company, and is subject to various statutory and
regulatory restrictions on its ability to pay dividends to the Company. See Note
13(c) to the consolidated financial statements for further information regarding
the payment of cash dividends by the Company and the Bank.
The Company is a bank holding company within the meaning of Section 3700 of the
California Financial Code. As such, the Company and its subsidiaries are subject
to examination by, and may be required to file reports with, the Commissioner.
Regulations have not yet been proposed or adopted to implement the
Commissioner's powers under this statute.
The Bank:
The Bank, is a national banking association whose deposit accounts are insured
by the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum
legal limits. The Bank is subject to regulation, supervision, and regular
examination by the OCC. The Bank is a member of the Federal Reserve System, and,
as such, is subject to certain provisions of the Federal Reserve Act and
regulations issued by the Board. The Bank is also subject to applicable
provisions of California law, insofar as they are not in conflict with, or
preempted by, federal law. The regulations of these various agencies govern most
aspects of the Bank's business, including reserves against deposits, interest
rates payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends and location of branch offices.
7
Recent Legislation and Regulations Affecting Banking:
From time to time, new laws are enacted which increase the cost of doing
business, limit permissible activities, or affect the competitive balance
between banks and other financial institutions. Proposals to change the laws and
regulations governing the operations and taxation of bank holding companies,
banks and other financial institutions are frequently made in Congress, in the
California legislature and before various bank holding company and bank
regulatory agencies. The likelihood of any major changes and the impact such
changes might have are impossible to predict. Certain significant recently
proposed or enacted laws and regulations are discussed below.
Interstate Banking. Beginning in 1986, California permitted California banks and
bank holding companies to be acquired by banking organizations based in other
states on a "reciprocal" basis (i.e., provided the other state's laws permit
California banking organizations to acquire banking organizations in that state
on substantially the same terms and conditions applicable to local banking
organizations). Since October 2, 1995, California law implementing certain
provisions of prior federal law have (1) permitted interstate merger
transactions; (2) prohibited interstate branching through the acquisition of a
branch business unit located in California without acquisition of the whole unit
of the California bank; and (3) prohibited interstate branching through de novo
establishment of California branch offices. Initial entry into California by an
out-of-state institution must be accomplished by acquisition of or merger with
an existing whole bank which has been in existence for at least five years.
Capital Requirements. Federal regulation imposes upon all FDIC-insured financial
institutions a variable system of risk-based capital guidelines designed to make
financial institution capital requirements sensitive to differences in risk
profiles among banking organizations, to take into account off-balance sheet
exposures and to aid in making the definition of bank capital uniform
internationally. Under the risk-based capital guidelines, the Bank is required
to maintain capital equal to at least 8 percent of its assets, weighted by risk.
Assets and off-balance sheet items are categorized by the guidelines according
to risk, and certain assets considered to present less risk than others permit
maintenance of capital below the 8 percent level. The guidelines established two
categories of qualifying capital: Tier 1 capital comprising core capital
elements, and Tier 2 comprising supplementary capital requirements. At least
one-half of the required capital must be maintained in the form of Tier 1
capital. For the Bank, Tier 1 capital includes only common stockholders' equity
and retained earnings, but qualifying perpetual preferred stock would also be
included without limit if the Bank were to issue such stock. Tier 2 capital
includes, among other items, limited life and cumulative preferred stock,
mandatory convertible securities, subordinated debt, and a limited amount of the
institution's allowance for loan and lease losses.
The risk-based capital guidelines also require insured institutions to maintain
a minimum leverage ratio of 3 percent Tier 1 capital to total assets (the
"leverage ratio"). The OCC emphasizes that the leverage ratio constitutes a
minimum requirement for the most well run banking organizations. All other
banking organizations are required to maintain a minimum leverage ratio ranging
generally from 4 to 5 percent. The Bank's required minimum leverage ratio is 4
percent.
In 1996, the federal banking agencies issued a joint agency policy statement
regarding the management of interest-rate risk exposure . Interest rate risk is
the risk that changes in market interest rates might adversely affect a bank's
financial condition. The goal of the policy is to ensure that institutions with
high levels of interest-rate risk have sufficient capital to cover their
exposures to risk. The policy statement reflected the agencies' decision at that
time not to promulgate a standardized measure and explicit capital charge for
interest rate risk, in the expectation that industry techniques for measurement
of such risk will evolve.
Also in 1996, the Federal Financial Institutions Examination Council ("FFIEC")
approved an updated Uniform Financial Rating System ("UFIRS"). The UFIRS
utilizes the "CAMELS" rating system, which classifies and evaluates the
soundness of financial institutions based upon an evaluation of capital
adequacy, asset quality, management, earnings, liquidity and sensitivity to
market risk, which is intended to reflect the degree to which changes in
interest rates, foreign exchange rates, commodity prices or equity prices may
adversely affect an institution's earnings and capital.
As of December 31, 2002, the Bank's total risk-based capital ratio was
approximately 11.16 percent and its leverage ratio was approximately 8.22
percent. The Bank does not presently expect that compliance with the risk-based
capital guidelines, minimum leverage sensitivity to market risk requirements
will have a materially adverse effect on its business in the reasonably
foreseeable future.
During 2002 the Holding Company contributed $2 million into the bank as
contributed capital which is included in Tier 1 capital for regulatory capital
adequacy determination purposes. The funds were made available as a result of a
$5 million trust preferred securities offering. The securities offering is
discussed in Note 17 to the consolidated financial statements.
8
Deposit Insurance Assessments. In 1995 the FDIC reduced bank deposit insurance
assessment rates to a range from $0 to $.27 per $100 of deposits, with the
assessment amount charged to a particular financial institution based upon the
risk the institution is perceived to present to the deposit insurance fund. The
FDIC has continued these reduced assessment rates through 2002. Based upon the
above risk-based assessment rate schedule, the Bank's current capital ratios,
the Bank's current level of deposits, and assuming no further change in the
assessment rate applicable to the Bank during 2003, the Bank estimates that its
annual noninterest expense attributed to the regular assessment schedule will
not increase during 2003.
Prompt Corrective Action. The Prompt Corrective Action Regulations (the "PCA
Regulations") of the federal bank regulatory agencies establish the following
five capital categories in descending order: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. Assignment to a capital category depends upon an institution's
total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage
ratio. Institutions classified in one of the three undercapitalized categories
are subject to certain mandatory and discretionary supervisory actions, which
include increased monitoring and review, implementation of capital restoration
plans, asset growth restrictions, limitations upon expansion and new business
activities, requirements to augment capital, restrictions upon deposit gathering
and interest rates, replacement of senior executive officers and directors, and
requiring divestiture or sale of the institution. The Bank has been classified
as a well-capitalized bank since adoption of the PCA Regulations.
Community Reinvestment Act. Community Reinvestment Act ("CRA") regulations
evaluate banks' lending to low and moderate income individuals and businesses
across a four-point scale from "outstanding" to "substantial noncompliance," and
are a factor in regulatory review of applications to merge, establish new
branches or form bank holding companies. In addition, any bank rated in
"substantial noncompliance" with the CRA regulations may be subject to
enforcement proceedings. The Bank has a current rating of "satisfactory" CRA
compliance.
Safety and Soundness Standards. Federal bank regulatory agency safety and
soundness standards for insured financial institutions establish standards for
(1) internal controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; and (6) compensation, fees and benefits. In addition, the standards
prohibit the payment of compensation which is excessive or which could lead to
material financial loss. If an agency determines that an institution fails to
meet any standard established by the guidelines, the agency may require the
financial institution to submit to the agency an acceptable plan to achieve
compliance with the standard. Agencies may elect to initiate enforcement action
in certain cases where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution. The Bank has not been
and does not expect to be required to submit a safety and soundness compliance
plan because of a failure to meet any of the safety and soundness standards.
Permitted Activities. In recent years, the Federal banking agencies, especially
the OCC and the Board, have taken steps to increase the types of activities in
which national banks and bank holding companies can engage, and to make it
easier to engage in such activities. In particular, the OCC has issued
regulations permitting national banks to engage in a wide range of activities
through subsidiaries. "Eligible institutions" (national banks that are well
capitalized, have a high overall rating and a satisfactory CRA rating, and are
not subject to an enforcement order) may engage in activities related to banking
through operating subsidiaries after going through an expedited application
process. In addition, the regulations include a provision whereby a national
bank may apply to the OCC to engage in an activity through a subsidiary in which
the bank itself may not engage.
Monetary Policies. Banking is a business in which profitability depends on rate
differentials. In general, the differences between the interest rate received by
a bank on loans extended to its customers and securities held in that bank's
investment portfolio and the interest rate paid on its deposits and its other
borrowings constitute the major portion of the bank's earnings. To the extent
that a bank is not able to compensate for increases in the cost of deposits and
other borrowings with greater income from loans, securities and fees, the net
earnings of that bank will be reduced. The interest rates paid and received by
any bank are highly sensitive to many factors that are beyond the control of
that bank, including the influence of domestic and foreign economic conditions.
See Item 7 herein, Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The earnings and growth of a bank are also affected by the monetary and fiscal
policy of the United States Government and its agencies, particularly the Board.
These agencies can and do implement national monetary policy, which is used in
part to curb inflation and combat recession. Among the instruments of monetary
policy used by these agencies are open market transactions in United States
Government securities, changes in the discount rates of member bank borrowings,
and changes in reserve requirements. The actions of the Board have had a
significant effect on banks' lending, investments and deposits, and such actions
are expected to continue to have a substantial effect in the future. However,
the nature and timing of any further changes in such policies and their impact
on banks cannot be predicted.
9
Financial Services Modernization Legislation. The Gramm-Leach-Bliley Act of 1999
(the "Modernization Act") repealed two affiliation provisions of the
Glass-Steagall Act: Section 20, which restricted the affiliation of Federal
Reserve member banks with firms "engaged principally" in specified securities
activities; and Section 32, which restricted officer, director, or employee
interlocks between a member bank and any company or person "primarily engaged"
in specified securities activities. In addition, the Modernization Act also
expressly preempts any state law restricting the establishment of financial
affiliations, primarily related to insurance. The law establishes a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms, and other financial service providers by revising
and expanding the BHC Act framework to permit a holding company system to engage
in a full range of financial activities through a new entity known as a
Financial Holding Company. "Financial activities" is broadly defined to include
not only banking, insurance, and securities activities, but also merchant
banking and additional financial activities or complementary activities that do
not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.
In order for the Company to take advantage of the ability provided by the
Modernization Act to affiliate with other financial service providers, it must
become a "Financial Holding Company." To do so, the Company would file a
declaration with the Federal Reserve electing to engage in activities
permissible for Financial Holding companies and certifying that it is eligible
to do so because its insured depository institution subsidiary (the Bank) is
well-capitalized and well-managed. In addition, the Federal Reserve must also
determine that an insured depository institution subsidiary has at least a
"satisfactory" rating under the Community Reinvestment Act. The Company
currently meets the requirements for Financial Holding Company status. The
Company will continue to monitor its strategic business plan to determine
whether, based on market conditions and other factors, the Company wishes to
utilize any of its expanded powers provided in the Modernization Act.
Under the Modernization Act, securities firms and insurance companies that elect
to become Financial Holding Companies may acquire banks and other financial
institutions. The Company does not believe that the Modernization Act will have
a material adverse effect on its operations in the near-term. However, to the
extent that it permits banks, securities firms, and insurance companies to
affiliate, the financial services industry may experience further consolidation.
The Modernization Act is intended to grant to community banks certain powers as
a matter of right that larger institutions have accumulated on an ad hoc basis.
Nevertheless, the Act may have the result of increasing the amount of
competition that the Company and the Bank face from larger institutions and
other types of companies offering financial products, many of which may have
substantially more financial resources than the Company and the Bank.
Privacy Provisions of the Modernization Act. The Modernization Act required
federal banking regulators to adopt rules limiting the ability of banks and
other financial institutions to disclose nonpublic information about consumers
to nonaffiliated third parties. The rules require disclosure of privacy policies
to consumers and, in some circumstances, allow consumers to prevent disclosure
of certain personal information to nonaffiliated third parties. The privacy
provisions of the Modernization Act also affect how consumer information may be
transmitted through diversified financial services companies and conveyed to
outside vendors.
Regulation W. On December 12, 2002, the Federal Reserve adopted Regulation W,
the rule that comprehensively implements sections 23A and 23B of the Federal
Reserve Act. The rule is effective April 1, 2003.
Sections 23A and 23B and Regulation W limit the risks to a bank from
transactions between the bank and its affiliates and limit the ability of a bank
to transfer to its affiliates the benefits arising from the bank's access to
insured deposits, the payment system and the discount window and other benefits
of the Federal Reserve system. The statute and rule impose quantitative and
qualitative limits on the ability of a bank to extend credit to, or engage in
certain other transactions with, an affiliate (and a nonaffiliate if an
affiliate benefits from the transaction). However, certain transactions that
generally do not expose a bank to undue risk or abuse the safety net are
exempted from coverage under Regulation W.
Historically, a subsidiary of a bank was not considered an affiliate for
purposes of Sections 23A and 23B, since their activities were limited to
activities permissible for the bank itself. The GLB Act authorized "financial
subsidiaries" that may engage in activities not permissible for a bank. These
financial subsidiaries are now considered affiliates. Certain transactions
between a financial subsidiary and another affiliate of a bank are also covered
by sections 23A and 23B under Regulation W.
10
Regulation W has certain exemptions, including:
o For state-chartered banks, an exemption for subsidiaries
lawfully conducting nonbank activities before issuance of the
final rule.
o An exemption for extensions of credit by a bank under a
general purpose credit card where the borrower uses the credit
to purchase goods or services from an affiliate of the bank,
so long as less than 25 percent of the aggregate amount of
purchases with the card are purchases from an affiliate of the
bank (a bank that does not have nonfinancial affiliates is
exempt from the 25 percent test).
o An exemption for loans by a bank to a third party secured by
securities issued by a mutual fund affiliate of the bank
(subject to a number of conditions).
o An exemption that would permit a banking organization to
engage more expeditiously in internal reorganization
transactions involving a bank's purchase of assets from an
affiliate (subject to a number of conditions.
The final rule contains new valuation rules for a bank's investments in, and
acquisitions of, affiliates.
The Federal Reserve expects examiners and other supervisory staff to review
intercompany transactions closely for compliance with the statutes and
Regulation W and to resolve any violations or potential violations quickly.
Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley")
implemented legislative reforms intended to address corporate and accounting
fraud. In addition to the establishment of a new accounting oversight board that
will enforce auditing, quality control and independence standards and will be
funded by fees from all publicly traded companies, Sarbanes-Oxley places certain
restrictions on the scope of services that may be provided by accounting firms
to their public company audit clients. Any non-audit services being provided to
a public company audit client will require preapproval by the company's audit
committee. In addition, Sarbanes-Oxley makes certain changes to the requirements
for accounting firm partner rotation after a period of time. Sarbanes-Oxley
requires chief executive officers and chief financial officers, or their
equivalent, to certify to the accuracy of periodic reports filed with the SEC,
subject to civil and criminal penalties if they knowingly or willingly violate
the certification requirement. In addition, under Sarbanes-Oxley, counsel are
required to report evidence of a material violation of the securities laws or a
breach of fiduciary duty by a company to its chief executive officer or its
chief legal officer, and, if such officer does not appropriately respond, to
report such evidence to the audit committee or other similar committee of the
board of directors or to the board itself.
Under Sarbanes-Oxley, longer prison terms will apply to corporate executives who
violate federal securities laws; the period during which certain types of suits
can be brought against a company or its officers is extended; and bonuses issued
to top executives prior to restatement of a company's financial statements are
subject to disgorgement if the restatement was due to corporate misconduct.
Executives are also prohibited from insider trading during retirement plan
"blackout" periods, and loans to company executives (other than loans by
financial institutions permitted by federal rules and regulations) are
restricted. In addition, a provision directs that civil penalties levied by the
SEC as a result of any judicial or administrative action under Sarbanes-Oxley be
deposited to a fund for the benefit of harmed investors. The legislation
accelerates the time frame for disclosures by public companies, as they must
immediately disclose any material changes in their financial condition or
operations. Directors and executive officers must also provide information for
most changes in ownership in a company's securities generally within two
business days of the change.
Sarbanes-Oxley also increases responsibilities and codifies certain requirements
relating to audit committees of public companies and how they interact with the
company's "registered public accounting firm." Audit Committee members must be
independent and are absolutely barred from accepting consulting, advisory or
other compensatory fees from the issuer. In addition, companies must disclose
whether at least one member of the committee is a "financial expert" (as defined
by the SEC) and if not, why not. A company's public accounting firm is
prohibited from performing audit services for the company if the company's chief
executive officer, chief financial officer, comptroller, chief accounting
officer or any person serving in equivalent positions had been employed by the
auditor and participated in the company's audit during the year preceding the
audit initiation date. Sarbanes-Oxley also prohibits any officer or director of
a company or any other person acting under their direction from taking any
action to fraudulently influence, coerce, manipulate or mislead any independent
accountant engaged in the audit of the company's financial statements for the
purpose of rendering the financial statements materially misleading.
Sarbanes-Oxley requires the SEC to prescribe rules requiring inclusion of any
internal control report and assessment by management in the annual report to
shareholders. Sarbanes-Oxley also requires the public accounting firm that
issues a company's audit report to attest to and report on management's
assessment of the company's internal controls.
11
Although the Company anticipates that it will incur additional expense in
complying with the provisions of Sarbanes-Oxley, management does not expect that
compliance will have a material impact on the Company's financial condition or
results of operations.
Source of Strength Policy. According to FRB policy, bank holding companies are
expected to act as a source of financial strength to each subsidiary bank and to
commit resources to support each such subsidiary.
USA PATRIOT Act. The terrorist attacks in September, 2001 impacted the financial
services industry and led to the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the
"USA PATRIOT Act"). Part of the USA Patriot Act is the International Money
Laundering Abatement and Financial Anti-Terrorism Act of 2001 ("IMLAFATA").
IMLAFATA authorizes the Secretary of the Treasury, in consultation with the
heads of other government agencies, to adopt special measures applicable to
banks, bank holding companies, and/or other financial institutions. These
measures may include enhanced recordkeeping and reporting requirements for
certain financial transactions that are of primary money laundering concern, due
diligence requirements concerning the beneficial ownership of certain types of
accounts, and restrictions or prohibitions on certain types of accounts with
foreign financial institutions.
Among its other provisions, IMLAFATA requires each financial institution to: (i)
establish an anti-money laundering program; (ii) establish due diligence
policies, procedures and controls with respect to its private banking accounts
and correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a
foreign bank that does not have a physical presence in any country. In addition,
IMLAFATA contains a provision encouraging cooperation among financial
institutions, regulatory authorities and law enforcement authorities with
respect to individuals, entities and organizations engaged in, or reasonably
suspected of engaging in, terrorist acts or money laundering activities.
IMLAFATA expands the circumstances under which funds in a bank account may be
forfeited and requires covered financial institutions to respond under certain
circumstances to requests for information from federal banking agencies within
120 hours. IMLAFATA also amends the Bank Holding Company Act and the Bank Merger
Act to require the federal banking agencies to consider the effectiveness of a
financial institution's anti-money laundering activities when reviewing an
application under these acts.
Treasury regulations implementing the due diligence requirements must be issued
no later than April 24, 2002. Whether or not regulations are adopted, IMLAFATA
becomes effective July 23, 2002. Additional regulations are to be adopted during
2002 to implement minimum standards to verify customer identity, to encourage
cooperation among financial institutions, federal banking agencies, and law
enforcement authorities regarding possible money laundering or terrorist
activities, to prohibit the anonymous use of "concentration accounts," and to
require all covered financial institutions to have in place a Bank Secrecy Act
compliance program.
The Company is establishing policies and procedures to ensure compliance with
the IMLAFATA. As of the date of this filing, the Company has not determined the
impact that IMLAFATA will have on the Company's operations.
Cross-Institution Assessments. Any insured depository institution owned by the
Company can be assessed for losses incurred by the FDIC in connection with
assistance provided to, or the failure of, any other depository institution
owned by the Company.
Audit Requirements. The Bank is required to have an annual independent audit and
to prepare all financial statements in accordance with generally accepted
accounting principles. The Bank is also required to have an independent audit
committee comprised entirely of outside directors. Under National Association of
Securities Dealers (NASD) on-time certifications, the Company has certified that
the audit committee has adopted a formal written charter and meets the requisite
number of directors, independence and qualification standards.
Other Consumer Protection Laws and Regulations. The bank regulatory agencies
closely monitor an institution's compliance with consumer protection laws and
regulations. The examination and enforcement activities conducted by these
agencies are intense, and banks have been advised to focus on compliance with
consumer protection laws and their implementing regulations. The federal
Interagency Task Force on Fair Lending has issued a policy statement on
discrimination in home mortgage lending which describes three methods that
federal agencies will use to prove discrimination: overt evidence of
discrimination, evidence of disparate treatment, and evidence of disparate
impact. In addition to CRA and fair lending requirements, the Bank is subject to
numerous other federal consumer protection statutes and regulations. Due to
heightened regulatory concern related to compliance with consumer protection
laws and regulations generally, the Bank may incur additional compliance costs
or be required to expend additional funds for investments in the local
communities it serves.
Proposed Legislation and Regulation. Certain legislative and regulatory
proposals that could affect the Bank and the banking business in general are
pending or may be introduced before the United States Congress, the California
State Legislature and Federal and state government agencies. The United States
Congress regularly considers bills designed to substantially reform
12
banking laws. It is not known whether any of these legislative proposals will be
enacted and what effect such legislation would have on the structure, regulation
and competitive relationships of financial institutions. It is likely, however,
that many of these proposals would subject the Bank to increased regulation,
disclosure and reporting requirements and would increase competition to the Bank
and its cost of doing business.
In addition to pending legislative changes, the various banking regulatory
agencies frequently propose rules and regulations to implement and enforce
already existing legislation. It cannot be predicted whether or in what form any
such rules or regulations will be enacted or the effect that such rules and
regulations may have on the Bank's business.
The above description of the business of the Bank should be read in conjunction
with Item 7 herein, Management's Discussion and Analysis of Financial Condition
and Results of Operations.
13
ITEM 2. PROPERTIES
The Bank owns a 0.861 acre lot located at the corner of Ham Lane and Tokay
Street, Lodi, California. A 34,000 square foot, tri-level commercial building
for the main branch and administrative offices of the Company and the Bank was
constructed on the lot. The Company and the Bank use approximately 75% of the
leasable space in the building and the remaining area is either leased or
available for lease as office space to other tenants. The construction of this
building in 1991 has enabled the Bank to better serve its customers with more
teller windows, four drive-through lanes and expanded safe deposit box capacity.
The Company owns a 10,000 square foot lot located on Lower Sacramento Road in
the unincorporated San Joaquin County community of Woodbridge, California. The
entire parcel has been leased to the Bank on a long-term basis at market rates.
The Bank has constructed, furnished and equipped a 1,437 square foot branch
office on the parcel and commenced operations of the Woodbridge Branch at that
location on December 15, 1986.
The Bank assumed a long-term ground lease on 1.7 acres of land at 19000 North
Highway 88, Lockeford, California. The building previously occupying the Lodi
site at 701 South Ham Lane was moved to Lockeford, California, and has become
the permanent branch office of the Bank at that location. A temporary 1,000
square foot office had been used by the Bank at the Lockeford location. The
permanent office was opened on April 1, 1991. The temporary office, along with a
portion of the permanent building, is leased by the Bank to two tenants.
On February 22, 1997, the Bank acquired the Galt, Plymouth and San Andreas
branches of Wells Fargo Bank. The transaction included the assumption of the
6,000 square foot branch building lease in Galt with a remaining term of two
years, and the purchase of the branch building and land for the Plymouth and San
Andreas offices. The Plymouth and San Andreas offices are approximately 1,200
and 5,500 square feet, respectively. In November 1998, upon expiration of the
Galt lease, the Galt branch was relocated to a new 3,000 square foot leased
facility one block west of the old location. The new Galt location is leased
under a five-year lease with three successive five-year renewal options.
In January 1998, the Bank opened a 1,220 square foot loan production office in
Folsom, California. The office was leased for one year with a one-year renewal
option that has been exercised by the Bank. In July 1999, the Bank received
approval to operate the Folsom office as a full-service branch. In December
1999, the lease was extended for one year to allow the Bank time to identify a
permanent location in the Folsom community. In December 2000, the Landlord
agreed to extend the lease on a month-to-month basis while the Bank completed
the process of moving into a new full-service branch location. In January 2001,
the Bank entered into a 10-year lease for a 2,426 square foot full-service
branch location in the Folsom area. In July 2001, the new Folsom branch became
fully operational and the former branch was subsequently closed.
In August 1998, the Bank opened a 4,830 square foot full service branch in Elk
Grove, California. The office is leased under a three-year lease with two
successive three-year renewal options. In January 2001, the Bank entered into a
three-year lease for a 1,557 square foot Small Business Administration loan
production office in the Folsom area.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the common stock of the
Company. The Company's common stock is traded in the over-the-counter market on
the Over-the-Counter Bulletin Board (OTCBB) under the symbol "FLLC" and is not
presently listed on a national exchange or reported by the NASDAQ Stock Market.
Trading of the stock has been limited and has been principally contained within
the Company's general service area. As of March 3, 2003, there were 1,203
shareholders of record of the Company's common stock. Set forth below is the
range of high and low bid prices for the common stock during 2002 and 2001 and
is based on information obtained from the OTCBB.
2002 2001
Bid Price of Common Shares High Low High Low
First Quarter $ 11.35 10.40 10.13 9.00
Second Quarter 12.50 11.00 9.87 9.12
Third Quarter 11.88 11.65 10.42 9.00
Fourth Quarter 12.65 11.71 11.15 9.90
The foregoing prices are based on trades of which Company is aware and reflect
inter-dealer prices, without retail mark-up, mark-down or commissions, and may
not necessarily represent actual transactions.
The Company has not declared or paid any cash dividends on its common stock in
its two most recent fiscal years. The Company's principal source of funds for
dividend payments is dividends received from the Bank. Future dividend payments
by the Bank, if any, will be subject to regulatory limitations, earnings,
general economic conditions, financial condition, capital requirements, and
other factors as may be appropriate in determining dividend policy. The OCC has
authority to prohibit a bank from engaging in business practices that are
considered to be unsafe or unsound. Depending upon the financial condition of a
bank and upon other factors, the OCC could assert that payments of dividends or
other payments by a bank might be such an unsafe or unsound practice. Also,
under applicable Federal laws a national bank must seek permission from the OCC
to pay a dividend if the total dividend payment in any calendar year exceeds the
net profits of that year, as defined, combined with net profits for the two
preceding years. For legal and regulatory restrictions on the payment of
dividends see "Item I. Business - The Company" and "Supervision and Regulation."
For the amount available for dividends at December 31, 2002, see Note 13 to the
notes to consolidated financial statements filed with this report. No assurance
can be given that the Bank will pay dividends at any time.
15
ITEM 6. SELECTED FINANCIAL DATA
(in thousands except per share amounts)
Consolidated Statement of Income 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Income $ 13,677 13,858 13,496 12,526 11,508
Interest Expense 3,459 4,644 4,613 3,699 4,028
Net Interest Income 10,218 9,214 8,883 8,827 7,480
Provision for Loan Losses 625 391 135 1,051 250
Noninterest Income 4,703 3,828 2,690 2,461 1,878
Noninterest Expense 12,486 11,226 9,855 8,803 7,712
Net Income $ 1,355 1,207 1,283 1,159 1,052
Per Share Data
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Earnings $ .82 .75 .81 .75 .69
Diluted Earnings .79 .73 .79 .72 .65
Cash Dividends Declared $ -- -- .05 .20 .20
Consolidated Balance Sheet Data
- ------------------------------------------------------------------------------------------------------------------------------------
Federal Funds Sold and Securities
Purchased Under Resale Agreements $ 19,634 6,129 10,115 100 4,800
Investment Securities 33,125 41,015 29,560 36,096 45,647
Loans held for sale 7,578 3,876 1,292 647 2,619
Loans, net of loss reserve and
deferred fees 154,090 135,430 110,793 108,947 88,459
Total Assets 255,246 226,175 185,064 176,334 164,400
Total Deposits 210,679 201,571 162,261 156,161 149,544
Other Borrowings 19,885 4,000 4,588 4,300 --
Total Stockholders' Equity $ 19,270 17,863 16,454 14,521 13,857
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Prospective Accounting Pronouncements
The Financial Accounting Standards Board (FASB) 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 does not expect adoption of Statement No. 143 to have a
material impact to the consolidated financial statements of the Company.
In April 2002, FASB issued Statement Financial Accounting Standards (SFAS) No.
145. Statement No. 145 rescinds SFAS No. 4, which requires all gains and losses
from extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion No. 30 will now be used to classify those gains and losses. SFAS No.
64 amended SFAS No. 4, and is no longer necessary because SFAS No. 4 has been
rescinded. The accounting, disclosure and financial statements provision of SFAS
No. 145 are effective for financial statements in fiscal years beginning after
May 15, 2002. Any gain or loss on extinguishment of debt that was classified as
an extraordinary item in prior periods presented that does not meet the criteria
in Opinion No. 30 for classification as an extraordinary item shall be
reclassified. The implementation of Statement No. 145 is not expected to have a
material impact to the consolidated financial statements of the Company.
The Financial Accounting Standards Board issued FASB Statement No. 146,
Accounting for Costs Associated with Exit or Disposal Activities in June 2002.
Statement No. 146 requires the Company to recognize costs associated with exit
or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 replaces Emerging Issues Task
Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The provisions of SFAS 146 are to be
applied prospectively to exit or disposal activities initiated after December
31, 2002.
In October 2002, the FASB issued SFAS 147, which removes certain acquisitions of
financial institutions (other than transactions between two or more mutual
enterprises) from the scope of SFAS 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions and FASB Interpretation 9, Applying APB Opinions
16 and 17 When a Savings and Loan or a Similar Institution Is Acquired in a
Business Combination Accounted for by the Purchase Method. These types of
transactions are now accounted for under SFAS 141 and 142. In addition, this
Statement amends SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, to include in its scope long-term customer relationship
intangible assets of financial institutions. The provisions of this Statement
were effective October 1, 2002, with earlier adoption permitted. The
implementation of Statement No. 147 is not expected to have a material impact to
the consolidated financial statements of the Company.
In December 2002, the FASB issued SFAS 148, which provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. Finally, this Statement amends APB Opinion 28, Interim Financial
Reporting, to require disclosure about those effects in interim financial
information. This Statement is effective for fiscal and interim periods ending
after December 15, 2002. Management does not expect this Statement to have a
material impact to the consolidated financial statements. See Note 1(n) to the
consolidated financial statements for stock based compensation disclosures.
17
In November 2002, the FASB issued FIN 45, which elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of the guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of this
Interpretation are applied prospectively to guarantees issued or modified after
December 31, 2002. The adoption of these recognition provisions will result in
recording liabilities associated with certain guarantees provided by the
Company. These currently include standby letters of credit and first-loss
guarantees on securitizations. The disclosure requirements of this
Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. Management does not expect this
Interpretation to have a material impact to the consolidated financial
statements.
In January 2003, the FASB issued FIN 46, which clarifies the application of
Accounting Research Bulletin ("ARB") 51, consolidated financial statements, to
certain entities (called variable interest entities) in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The disclosure
requirements of this Interpretation are effective for all financial statements
issued after January 31, 2003. The consolidation requirements apply to all
variable interest entities created after January 31, 2003. In addition, public
companies must apply the consolidation requirements to variable interest
entities that existed prior to February 1, 2003 and remain in existence as of
the beginning of annual or interim periods beginning after June 15, 2003.
Management is currently assessing the impact of FIN 46, and does not expect this
Interpretation to have a material impact to the consolidated financial
statements.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, income and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to the allowance for loan losses, other real
estate owned, investments and income taxes. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. The Company maintains allowances for loan losses resulting
from the customer's inability to make required loan payments. If the financial
conditions of the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. The Company invests in debt and equity securities. If the Company
believes these securities have experienced a decline in value that is other than
temporary, an investment impairment charge is recorded. Future adverse changes
in market conditions or poor operating results of underlying investments could
result in losses or an inability to recover the carrying value of the
investments that may not be reflected in an investment's carrying value, thereby
requiring an impairment charge in the future. For a more complete discussion of
the Company's accounting policies, see Note 1 to the consolidated financial
statements.
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 41 through 66, as well as other information presented throughout
this report.
18
Summary of Earnings Performance
- -------------------------------------------------------------------------------
For the Year Ended December 31:
-------------------------------------------
2002 2001 2000
Earnings (in thousands) $ 1,355 1,207 1,283
- -------------------------------------------------------------------------------
Basic earnings per share $ .82 .75 .81
Diluted earnings per share $ .79 .73 .79
Return on average assets 0.57% 0.59% 0.71%
Return on average equity 7.30% 7.03% 8.74%
Dividend payout ratio -- -- 5.88%
- -------------------------------------------------------------------------------
Average equity to average assets 7.74% 8.34% 8.10%
- -------------------------------------------------------------------------------
Net income totaled $1,355 thousand for the year ended December 31, 2002,
resulting in an increase of $148 thousand, or 12.3%, over the prior year. Basic
earnings per share in 2002 were $.82, compared to $.75 and $.81 in 2001 and
2000, respectively. During 2002, the Company experienced increases in both
earning assets and deposits. As a result of interest income and interest expense
decreasing $181 thousand and $1,185 thousand, respectively, the Company realized
an increase in net interest income to $10,218 thousand as compared to $9,214
thousand in 2001. This represents an increase of $1,004 thousand or 10.9%. As a
result of increases in loans during 2002, the Company increased the provision
for loan losses by $234 thousand as compared to 2001. In addition, the Company
experienced an $875 thousand increase in noninterest income which was offset by
an increase of $1,260 thousand in noninterest expense. Furthermore, the
Company's provision for income taxes increased $237 thousand in 2002 as compared
to 2001.
During 2002, the Company's total gross loans (total portfolio loans plus loans
held for sale) increased 16.0%. While the Company experienced significant growth
in loans during the year, the lower interest rate environment during 2002, when
compared to 2001 reduced the overall earnings potential generated by the
increase in the Company's primary earning asset. As a further benefit to
interest income, the Company was successful in collecting interest totaling $242
thousand and $423 thousand on loans that had previously been on nonaccrual
during 2002 and 2001, respectively. Interest forgone on nonaccrual loans
amounted to $364 thousand during 2002 compared to $310 thousand during 2001.
The lower interest rate environment during 2002, as compared to 2001, also
resulted in a decrease in the Company's total interest expense. The reduction in
interest expense occurred primarily as a result of a decrease in the overall
interest rate paid for deposits combined with a $14.3 million reduction in
Certificates of Deposit. The reduction in Certificates of Deposit resulted from
the Bank focusing its deposit development efforts on core deposit relationships.
Accordingly, excluding certificates of deposit, total deposits increased $23.5
million, or 17.8% during 2002 when compared to 2001.
The Provision for Loan Losses for the year ending December 31, 2002 was $625
thousand, an increase of $234 thousand over 2001's provision of $391 thousand.
The increase in the provision was primarily related to the growth in the
Company's loans.
Noninterest income totaled $4,703 thousand for the year ending December 31, 2002
representing an increase of $875 thousand, or 22.9% over the prior year. The
increase resulted primarily from gains on the sale of investment securities and
loans, increased service charge revenue, which resulted from the increase in
total deposits, increased mortgage lending activity and an increase in the cash
surrender value of life insurance. Total noninterest expense increased $1,260
thousand, or 11.2% during the year primarily as a result of additions to
personnel and the upgrading of existing positions in addition to general overall
increases in the cost of operations incurred with strategic expansion projects.
19
Branch Expansion and Acquisitions
In January 2001, the Bank entered into a three-year lease for a 1,557 square
foot Small Business Administration loan production office in the Folsom area.
During 2001, the Bank was approved as a Certified Lender by the Small Business
Administration (SBA) thereby allowing the department to provide quicker
responses to customer's requests for SBA loans.
In August 1998, the Bank opened a full-service branch in the Elk Grove,
California market. The Elk Grove office is approximately 30 miles north of the
Bank's corporate headquarters in Lodi, California and it effectively expands the
Bank's trade area into South Sacramento County. In January 1998, the Bank opened
a loan production office in the growing market of Folsom, California. The
location was converted to a full-service branch in July 1999 and in July 2001
was relocated to a new site in Folsom. The Folsom office is approximately 45
miles northeast of the Bank's corporate headquarters in Lodi, California and
effectively expanded the Bank's trade area into the greater Sacramento area.
On February 22, 1997, the Bank completed the acquisition of the Galt, Plymouth,
and San Andreas, California, branches of Wells Fargo Bank. The Bank purchased
the premises and equipment of the Plymouth and San Andreas branches and assumed
the building lease for the Galt branch. The Bank also purchased the furniture
and equipment of all three branches and paid a premium for the deposits of each
branch. The total cost of acquiring the branches, including payments to Wells
Fargo Bank as well as other direct costs associated with the purchase, was $2.86
million. The transaction was accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated first to identifiable
tangible assets based upon those assets' fair value and then to identifiable
intangible assets based upon the assets' fair value. The excess of the purchase
price over identifiable tangible and intangible assets was allocated to
goodwill. Allocations to identifiable tangible assets, identifiable intangible
assets, and goodwill were $856 thousand, $1.98 million, and $24 thousand,
respectively. Deposits totaling $34 million were acquired in the transaction.
20
Net Interest Income
The following table provides a detailed analysis of average earning assets and
liabilities, net interest spread and net interest margin for the years ended
December 31, 2002, 2001, and 2000, respectively:
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended For the Year Ended For the Year Ended
December 31, 2002 December 31, 2001 December 31, 2000
(Dollar amounts in thousands) (Dollar amounts in thousands) (Dollar amounts in thousands)
-------------------------------------------------------------------------------------------------
Average Income/ Average Income/ Average Income/
Balance Expenses Yield Balance Expenses Yield Balance Expense Yield
------- -------- ----- ------- -------- ----- ------- ------- -----
Earning Assets:
Investment securities (1) $ 34,076 1,602 4.70% 35,260 2,073 5.88% 34,690 2,214 6.38%
Federal funds sold and
securities purchased under
resale agreements $ 9,464 158 1.67% 11,360 481 4.23% 5,090 329 6.46%
Loans (2) $ 155,986 11,917 7.64% 123,600 11,304 9.15% 114,690 10,953 9.55%
------- ------ ----- ------- ------ ----- ------- ------ -----
Total Earning Assets $ 199,526 13,677 6.85% 170,220 13,858 8.14% 154,470 13,496 8.74%
======= ====== ===== ======= ====== ===== ======= ====== =====
Liabilities:
Noninterest bearing deposits $ 33,529 -- -- 25,350 -- -- 21,240 -- --
Savings, money market, & NOW
deposits 112,727 1,296 1.15% 91,600 1,297 1.42% 83,970 1,350 1.61%
Time deposits 62,026 1,880 3.03% 66,630 3,342 5.02% 53,020 2,801 5.28%
Other borrowings 8,288 283 3.41% 120 5 4.17% 7,000 462 6.60%
------- ------ ----- ------- ------ ----- ------- ------ -----
Total Liabilities $ 216,570 3,459 1.60% 183,700 4,644 2.53% 165,230 4,613 2.79%
======= ====== ===== ======= ====== ===== ======= ====== =====
Net Spread 5.25% 5.61% 5.95%
===== ===== =====
- ----------------------------------------------------------------------------------------------------------------------------------
Earning Income Earning Income Earning Income
Assets (Expense) Yield Assets (Expense) Yield Assets (Expense) Yield
------ --------- ----- ------ --------- ----- ------ --------- -----
Yield on average earning assets $ 199,526 13,677 6.85% 170,220 13,858 8.14% 154,470 13,496 8.74%
Cost of funds for average
earning assets 199,526 (3,459) (1.73%) 170,220 (4,644) (2.73%) 154,470 (4,613) (2.99%
------ ----- ----- ----- ----- -----
Net Interest Margin 199,526 10,218 5.12% 170,220 9,214 5.41% 154,470 8,883 5.75%
====== ===== ===== ===== ===== =====
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Income on tax-exempt securities has not been adjusted to a tax equivalent
basis.
(2) Loans held for sale and nonaccrual loans are included in the loan totals for
each year.
Net interest income increased $1,004 thousand, or 11% in 2002 after increasing
4% in 2001. While the yield on average earning assets declined to 6.85% in 2002
as compared to 8.14% in 2001, the cost of funds for average earning assets also
decreased to 1.73% in 2002 from 2.73% in 2001. The increase in net interest
income in 2002 is attributable to an increase of 17% in average earning assets
combined with a 14% increase in average deposits, which offset the decline in
net interest margin from 5.41% to 5.12% from 2001 to 2002.
During 2002, average loans, increased $32,386 thousand, or 26%, while investment
securities and federal funds sold and securities purchased under resale
agreements decreased $1,184 thousand and $1,896 thousand, or 3% and 17%,
respectively, compared to 2001. Average deposits increased $24,702 thousand, or
13% during 2002 and other borrowings increased $8,168 thousand, primarily as a
result of a $5 million floating rate pooled trust preferred securities offering
which closed March 26, 2002.
Net interest margin decreased 29 basis points in 2002 after decreasing by 34
basis points in 2001. This decrease in 2002 was the result of several key items:
- - Interest forgone on nonaccrual loans during 2002 totaled $364 thousand.
This reduced the yield on loans by 23 basis points and the net interest
margin by 18 basis points.
o Interest collected on loans that had previously been on
nonaccrual status totaled $242 thousand. This increased the yield
on loans by 16 basis points and the net interest margin by 12
basis points.
21
- - Changes in the mix of the investment portfolio during 2002 resulted in a
decrease of 118 basis points in the average yield earned on investments
securities.
- - The general decrease in interest rates during 2002 resulted in a decrease
of 256 basis points in the average yield earned on federal funds sold and
securities purchased under resale agreements.
- - The general decrease in interest rates during 2002 resulted in a decrease
of 199 basis points in the cost of average certificates of deposit.
Net interest income increased $331 thousand, or 4% in 2001 after increasing 1%
in 2000. The increase in 2001 is attributable to an increase of 10% in average
earning assets combined with a 16% increase in average deposits. In addition,
during 2001, the Company's base lending rate decreased 475 basis points. The
decrease in the base lending rate was consistent with the national decrease in
the prime lending rate during 2001 from 9.50% at December 31, 2000 to 4.75% at
December 31, 2001. The decline in the prime lending rate resulted from the
eleven interest rate reductions by the Federal Reserve during 2001. Furthermore,
while the Company recorded $423 thousand in interest income on nonaccrual loans
during the year, interest forgone on nonaccrual loans totaled $310 thousand.
The mix of earning assets at December 31, 2001 changed as compared to December
31, 2000 as a result of year-over-year loan growth of 24% in 2001 as compared to
2% in 2000. During 2001, average loans, investment securities and federal funds
sold and securities purchased under resale agreements increased $8,910 thousand,
$570 thousand and $6,270 thousand, or 8%, 2% and 123%, respectively, compared to
2000. Average earnings assets increased as a result of a $25,350 thousand, or
16%, increase in average deposits during 2001. As average deposit growth
outpaced average loan growth during the year, the average loan to deposit ratio
decreased to 67% for 2001 as compared to 73% in 2000.
Net interest margin decreased 34 basis points in 2001 after decreasing by 28
basis points in 2000. This decrease in 2001 was the result of several key items:
- - Interest forgone on nonaccrual loans during 2001 totaled $310 thousand.
This reduced the yield on loans by 25 basis points and the net interest
margin by 19 basis points.
o Interest collected on loans that had previously been on
nonaccrual status totaled $423 thousand. This increased the yield
on loans by 35 basis points and the net interest margin by 25
basis points.
Changes in the mix of the investment portfolio during 2001 resulted in a
decrease of 50 basis points in the average yield earned on investments
securities.
- - The general decrease in interest rates during 2001 resulted in a decrease
of 223 basis points in the average yield earned on federal funds sold and
securities purchased under resale agreements.
- - The general decrease in interest rates during 2001 resulted in a decrease
of 26 basis points in the cost of average certificates of deposit.
22
The following table presents the monetary impact of the aforementioned changes
in earning asset and deposit volumes and yields for the two years ended December
31, 2002 and 2001.
- ------------------------------------------------------------------------------------------------------
2002 compared to 2001 2001 compared to 2000
(in thousands) (in thousands)
Change due to: Change due to:
Interest Income: Volume Rate Total Volume Rate Total
-----------------------------------------------------------------------------
Investment securities $ (70) (401) (471) 36 (177) (141)
Federal funds sold and
securities purchased
under resale agreements (80) (243) (323) 405 (253) 152
Loans 2,962 (2,349) 613 851 (500) 351
-------- ------- --- ----- --- ---
Total interest income $ 2,812 (2,993) (181) 1,292 (930) 362
======== ======= ======= ===== === ===
Interest Expense:
Savings, money market, &
NOW accounts $ 384 (385) (1) 111 (164) (53)
Time deposits (231) (1,231) (1,462) 719 (178) 541
Other borrowings 340 (62) 278 (454) (3) (457)
--- -- --- ===== --- ---
Total interest expense $ 493 (1,678) (1,185) 376 (345) 31
======== ======= ======= ===== === ===
Net interest income $ 2,319 (1,315) 1,004 916 (585) 331
======== ======= ======= ===== === ===
- ------------------------------------------------------------------------------------------------------
The volume variances for total interest income in 2002 compared to 2001 indicate
that the increase in average loans of 26% together with decreases in average
investment securities and federal funds sold and securities purchased under
resale agreements of 3% and 17%, respectively, combined for a net increase to
interest income of $2,812 thousand. However, the continued decline of the
interest rate environment during 2002 reduced interest income $2,993 thousand,
as compared to the prior year, with $2,349 thousand of the decrease resulting
from a 151 basis point decline in the yield earned on loans, $401 thousand
decrease resulting from a 118 basis points decline in the yield earned on
investment securities and a $243 thousand decrease resulting from a 256 basis
points decline in the yield earned on federal funds sold and securities
purchased under resale agreements. While average interest bearing liabilities
increased 14% during 2002, the average rate paid on interest bearing liabilities
declined 100 basis points resulting in a net decrease in total interest expense
of $1,462 thousand. In addition, during 2002, other borrowings (which includes
the proceeds from the trust preferred securities) increased $8.2 million
resulting in an increase in total interest expense of $278 thousand.
The total interest income volume variances for 2001 compared to 2000 indicate
that increases in average loans, investment securities and federal funds sold
and securities purchased under resale agreements of 8%, 2% and 123%,
respectively combined to increase interest income by $1,292 thousand. However,
the declining interest rate environment during 2001 reduced interest income $930
thousand, as compared to the prior year, with $500 thousand of the decrease
resulting from a 40 basis point decline in the yield earned on loans, $177
thousand decrease resulting from a 50 basis point decline in the yield earned on
investment securities and a $113 thousand decrease resulting from a 223 basis
points decrease in the yield earned on federal funds sold and securities
purchased under resale agreements. Additionally, while average interest bearing
liabilities increased 11% during 2001, the average rate paid on interest bearing
liabilities decreased 9% resulting in a net increase in total interest expense.
23
Allowance for Loan Losses
The following table reconciles the beginning and ending allowance for loan
losses for the previous five years. Reconciling activity is broken down into the
three principal items that impact the reserve: (1) reductions from charge-offs;
(2) increases from recoveries; and (3) increases or decreases from positive or
negative provisions for loan losses.
- -------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000 1999 1998
Balance at beginning of period $ 2,668 $ 2,499 $ 2,580 $ 1,564 $ 1,313
Charge-offs:
Commercial 178 226 201 90 67
Real estate 62 -- -- -- 25
Consumer 30 57 45 20 40
------- ------- ------- ------- -------
Total Charge-offs 270 283 246 110 132
Recoveries:
Commercial 26 21 15 68 112
Real estate -- -- -- -- --
Consumer 8 40 15 7 21
------- ------- ------- ------- -------
Total Recoveries 34 61 30 75 133
------- ------- ------- ------- -------
Net charge-offs (236) (222) (216) (35) (1)
Additions charged to operations 625 391 135 1,051 250
------- ------- ------- ------- -------
Balance at end of period 3,057 2,668 2,499 2,580 1,564
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans outstanding
(0.14%) (0.16%) (0.19%) (0.03%) (0.001%)
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------
Note 1(f) to the consolidated financial statement discusses the factors used in
determining the provision for loan losses and the adequacy of the allowance for
loan losses.
Net charge-offs during 2002 totaled $236 thousand and represents an increase of
$14 thousand, or 6%, over 2001. This activity was comprised of $270 thousand in
gross charge-offs combined with $34 thousand in recoveries representing a
decrease of 5% in gross charge-offs and a decrease of 44% in recoveries compared
to 2001. The decrease in both charge-offs and recoveries during 2002 is related
to the reduction of nonaccrual loans. The Bank has not modified or significantly
compromised its underwriting standards despite growing competition within the
industry.
The loan loss provision for 2002 totaled $625 thousand and represents an
increase of $234 thousand, or 60%, over 2001. The provision increased primarily
in response to the increases in loan growth and the potential for declines in
the economy. During 2002, average loans and gross loans (including loans held
for sale) increased 26% and 16%, respectively compared to 2001. Management
remained concerned throughout 2002 about declines in the national economy and
the potential for declines in the credit quality of its borrowers as a result.
During 2002, the Company continued to eliminate nonperforming loans without
incurring substantial charge-offs.
Net charge-offs during 2001 totaled $222 thousand and represents an increase of
$6 thousand, or 3%, over 2000. This activity was comprised of $283 thousand in
gross charge-offs combined with $61 thousand in recoveries representing an
increase of 15% in gross charge-offs and an increase of 103% in recoveries
compared to 2000. The increase in charge-offs during 2001 is related to measures
taken by the Company to reduce the level of nonaccrual loans.
At December 31, 2001, the loan provision totaled $391 thousand and represents an
increase of $256 thousand, or 190%, when compared to December 31, 2000. The
increase in the 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. While average loans increased 8%
during 2001 as compared to 2000, gross loans (including loans held for sale) at
December 31, 2001 increased 24% as compared to December 31, 2000. In addition,
during 2000, 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-offs.
24
Noninterest Income
Noninterest income increased 23% and 42% in 2002 and 2001, respectively. The
primary components of noninterest income consist of: service charges, SBA and
mortgage income, and other noninterest income. The following table summarizes
the significant elements of service charge, SBA, mortgage and Farmer Mac revenue
for the three years ending 2002, 2001, and 2000:
- ------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------
Periodic deposit account charges $ 483 492 477
Returned item charges 849 624 561
Ancillary services charges 97 95 99
Other service charges 169 203 124
-------------------------------------------------
Total service charge revenue 1,598 1,414 1,261
=================================================
Gain on sale of SBA loans 331 95 114
SBA loan servicing revenue 206 223 224
-------------------------------------------------
Total SBA revenue 537 318 338
Gain on sale of mortgage loans 640 458 132
Mortgage loan servicing revenue 221 127 123
-------------------------------------------------
Total mortgage revenue 861 585 255
Farmer Mac origination, sale and servicing 34 29 31
-------------------------------------------------
Total loan origination, sale and
servicing revenue 1,432 932 624
- ------------------------------------------------------------------------------------------------------
Service charge revenue increased 13% in 2002 compared to 2001 and 12% in 2001
compared to 2000. These increases are primarily the result of continued growth
in demand deposits. While average total deposits increased 14% in 2002 and 16%
in 2001, average noninterest-bearing demand deposits increased 32% and 19% and
money market accounts increased 78% and 6%, during 2002 and 2001 as compared to
2001 and 2000, respectively.
During 2002, SBA revenue increased 69% after declining 6% and 12% during 2001
and 2000. The increase in 2002 was the result of the sale of $6,904 thousand SBA
7a loans. The declines in 2001 and 2000 SBA revenue resulted primarily from a
decrease in the production of SBA 7a and an increase in the level of SBA 504
loans. The Company typically sells the SBA 7a loans to the secondary market
whereas the SBA 504 loans are typically held in the Company's loan portfolio.
The Company experienced increased mortgage lending activity for both new loans
and refinancing of existing loans due to the continued decline in mortgage
lending rates during 2002. The increased lending activity resulted in an
increase in the Company's mortgage revenue totaling $276 thousand, or 47% from
2002 to 2001 and $330 thousand, or 129% in 2001 as compared to 2000. Farmer Mac
revenue increased 17% in 2002 as compared to 2001 after declining 7% during 2001
as compared to 2000.
The Company realized gains on the sale of investment securities totaling $603
thousand, $267 thousand and $149 thousand in 2002, 2001 and 2000, respectively.
The Company purchased single-premium life insurance policies written on the
lives of certain officers and directors of the Company and the Bank. The
increase in the cash surrender value of these policies is included in other
noninterest income and totaled $649 thousand, $658 thousand and $458 thousand
during 2002, 2001 and 2000, respectively.
25
Noninterest Expenses
Noninterest expenses increased 11% in 2002 compared to 2001 and 14% in 2001
compared to 2000. The increase in noninterest expense during 2002 was primarily
a result of increases in the number of full-time equivalent employees, the cost
of employee benefits, marketing and occupancy expenditures. During 2001, the
Company experienced increases in salaries and employee benefits as a result of
increases in the number of full time equivalent employees combined with
increases in the salaries of a few officer positions within the Company
resulting from upgrades to certain officers titles, duties and responsibilities.
During 2000, the company incurred expenses associated with the resolution of
non-performing loans.
Noninterest expense is broken down into four primary categories each of which is
discussed in this section.
Salaries and Employee Benefits
The following table provides the detail for each major segment of salaries and
employee benefits together with relevant statistical data:
- --------------------------------------------------------------------------------------------------
(in thousands except full time equivalents) 2002 2001 2000
- --------------------------------------------------------------------------------------------------
Regular payroll, contract labor, and overtime $ 4,423 4,054 3,338
Incentive compensation and profit sharing 743 449 233
Payroll taxes and employment benefits 1,146 1,177 935
------------------------------------
Total Salaries and Employee Benefits $ 6,312 5,680 4,506
====================================
Average number of full-time equivalent employees 121 117 109
------------------------------------
Regular payroll per full-time equivalent employee 36.55 34.58 31.02
------------------------------------
Incentive compensation to regular payroll 16.8% 11.1% 5.6%
------------------------------------
Payroll taxes and benefits per full-time equivalent employee 9.47 10.04 8.58
- --------------------------------------------------------------------------------------------------
The number of full-time equivalent employees increased 3% in 2002 compared to
2001 and 7% in 2001 compared to 2000. Regular payroll, contract labor and
overtime increased 9% in 2002 compared to 2001 and 21% in 2001 compared to 2000.
Total salaries and benefits expense increased 11% in 2002 compared to 2001 and
26% in 2001 compared to 2000. The average regular payroll per full-time
equivalent employee increased 6% in 2002 compared to 2001 and increased 11.5% in
2001 compared to 2000.
Incentive compensation includes compensation to bonus awards to employees under
the Incentive Compensation Plan, contributions to the Employee Stock Ownership
Plan and matching contributions to the 401(k) Stock Ownership Plan. The
Incentive Compensation Plan pays incentive compensation to officers based upon
the achievement of specific performance goals within their area of
responsibility combined with the achievement of company-wide performance goals.
Contributions to the Employee Stock Ownership Plan are made at the discretion of
the board of directors based upon profitability. Matching contributions to the
401(k) Stock Ownership Plan are made at the rate of 50% of the first 4% of
compensation contributed by employees.
Payroll taxes and employee benefits per full-time equivalent decreased 6% in
2002 as compared to 2001 and increased 17% in 2001 as compared to 2000. The
decrease in 2002 as compared to 2001 is primarily the result of a $162 thousand
reduction in the supplemental compensation accrual (see Note 9 to the
consolidated financial statements for further information relating to the
Company's supplemental compensation program). Of that amount, $121,000 is
attributable to the forfeiture of an unvested post employment/retirement benefit
by a former executive officer of the Company. The increase from 2001 as compared
to 2000 is related primarily to a $132 thousand and $293 thousand increase
during 2001 and 2000, respectively, in the supplemental compensation accrual,
combined with increases in the Company's contribution to the Employee Stock
Ownership Plan, general increases in the cost of medical and other related
insurance benefits and education and training expenses.
26
Occupancy Expense
The following table provides the detail for each major segment of occupancy
expense:
- -------------------------------------------------------------------------------------------------
(in thousands except square footage and cost per sq. ft.) 2002 2001 2000
- -------------------------------------------------------------------------------------------------
Depreciation 405 347 335
Property taxes, insurance, and utilities 267 245 213
Property maintenance 189 181 184
Net rental expense (income) 167 177 93
------------------------------------
Total Occupancy 1,028 950 825
====================================
Square footage of occupied and unoccupied space 45,708 45,708 42,945
------------------------------------
Occupancy cost per square foot 22.49 20.78 19.21
------------------------------------
Locations 9 9 8
- -------------------------------------------------------------------------------------------------
Occupancy expenses increased 8% in 2002 compared to 2001 and 15% in 2001
compared to 2000. The primary reasons for the increases in 2002 and 2001 are the
expansion improvements within existing and new locations combined with general
increases in the maintenance of the existing locations. In January 2001 the
Company entered into a long term lease to relocate its existing Folsom branch to
a permanent site. In July 2001 the new branch opened for service and in August
2001, the former Folsom site was closed. In addition, in January 2001 the
Company established a Small Business Administration loan production office in
Folsom, California.
Equipment Expense
The following table provides the detail for each major segment of equipment
expense:
-----------------------------------------------------------
in thousands) 2002 2001 2000
-----------------------------------------------------------
epreciation $ 750 684 506
aintenance 302 237 259
ental expense 7 8 16
------------------------------
Total Equipment $ 1,059 929 781
----------------------------------------------------------
Equipment expense increased 14% in 2002 compared to 2001 and increased 19% in
2001 compared to 2000. The increases in 2002 are related to the purchase of
operating equipment and in 2001 and 2000 are primarily attributable to
investments made in the Company's computer hardware and software systems. In
addition, as noted above, during 2001 the Company opened an SBA loan production
office in Folsom, California and relocated its Folsom branch to a larger full
service facility.
27
Other Noninterest Expense
Other noninterest expense increased 11% in 2002 as compared to 2001 and
decreased 2% in 2001 compared to 2000. The following table provides the detail
for each major segment of other noninterest expense:
- --------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Third party data processing $ 848 877 869
Marketing 514 413 422
Professional fees 465 403 771
Director fees and retirement 315 385 193
Telephone and postage 313 296 232
Office supplies 266 247 189
Intangible amortization 171 171 215
Other real estate owned losses and holding costs 103 83 94
Nonperforming loan costs 92 77 246
Other 1,000 715 512
---------------------------
Total Other Noninterest Expense $ 4,087 3,667 3,743
- --------------------------------------------------------------------------------
Third party data processing decreased 3% during 2002. As a result of the
statement preparation and item processing functions no longer being outsourced
as of May 2002, third party data processing expenses decreased $232 thousand, or
48%, when compared to 2001. At the same time, third party expenses related to
the processing of the Company's debit card product increased $106 thousand, or
56% over 2001. As part of the Company's long term focus on growth and expansion,
marketing expenses increased 25%. Professional fees increased 15% during 2002 as
a result of the Company utilizing a third party firm to expand the internal
audit function.
During 2001 the Company expensed $385 thousand for director fees and retirement
expense which represented an increase of $192 thousand, or 99%, as compared to
2000. The increase is primarily attributable to three events; a one time
increase in the accrual for retirement benefits of certain emeritus directors,
payment of insurance premiums for long term care insurance paid on behalf of
certain directors and an increase in director fees associated with an increase
in the total number of outside directors.
During 2000 the Company expensed $246 thousand in costs associated with the
resolution of non-performing loans. Included in these costs are amounts paid for
legal representation, past due rent of borrowers, security and other property
maintenance expenses. The past due rent, security and other property maintenance
expenses were incurred by the Company in order to protect and preserve the
quality of assets pledged as collateral for the non-performing loans.
Income Taxes
The provision for income taxes as a percentage of pretax income for 2002, 2001,
and 2000 was 25%, 15%, and 19%, respectively. The effective rate is lower than
the combined marginal rate for state and federal taxes due primarily to the
level of tax exempt income relative to total pre-tax income. The two primary
components of tax exempt income are income from tax exempt investment securities
and increases in the cash surrender value of life insurance.
Interest income on tax exempt investment securities totaled $168 thousand, $241
thousand and $528 thousand and the increase in the cash surrender value of life
insurance increased $649 thousand, $658 thousand and $458 thousand, the
combination of which represented 45%, 63% and 62% of pretax income during the
year ended December 31, 2002, 2001 and 2000, respectively. Note 12 to the
consolidated financial statements contains a detailed presentation of the income
tax provision and the related current and deferred tax assets and liabilities.
28
Balance Sheet Review
The following table presents average balance sheets for the years ended December
31, 2002, 2001 and 2000.
- ---------------------------------------------------------------------------------------------------------------------------------
For the Year Ended For the Year Ended For the Year Ended
December 31, 2002 December 31, 2001 December 31, 2000
(in thousands) (in thousands) (in thousands)
---------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------------------
Assets:
Cash & Due from banks $ 14,127 5.97% 11,310 5.59% 8,150 4.50%
Federal funds sold and securities purchased under resale
agreements 9,464 4.00% 11,360 5.61% 5,090 2.81%
Investment securities 34,076 14.39% 35,260 17.42% 34,690 19.16%
Loans held for sale 4,686 1.98% 3,130 1.55% 1,144 0.63%
Loans (net of allowance for loan losses and deferred income) 149,469 63.12% 117,320 57.95% 110,346 60.93%
Premises and equipment, net 6,859 2.90% 6,800 3.35% 6,860 3.79%
Other assets 18,104 7.64% 17,260 8.53% 14,810 8.18%
----------- ------ ------- ------ ------- ------
Total Assets $ 236,785 100.00% 202,440 100.00% 181,090 100.00%
=========== ====== ======= ====== ======= ======
Liabilities & Stockholders' Equity:
Deposits $ 208,283 87.96% 183,580 90.68% 158,230 87.37%
Short term borrowings 3,288 1.39% 120 .06% 7,000 3.87%
Other liabilities 4,510 1.91% 1,730 .85% 1,190 0.66%
Stockholders' equity 20,704 8.74% 17,010 8.40% 14,670 8.10%
----------- ------ ------- ------ ------- ------
Total Liabilities & Stockholders' Equity $ 236,785 100.00% 202,440 100.00% 181,090 100.00%
=========== ====== ======= ====== ======= ======
- ---------------------------------------------------------------------------------------------------------------------------------
Average total assets increased 17% in 2002 compared to 2001 and 12% in 2001
compared to 2000. Year-end asset totals at December 31, 2002 reached $255,246
thousand and represented an increase of 13% over December 31, 2001. The increase
in 2002 and 2001 is a function of deposit growth throughout the Bank's branch
network, as average deposits increased 14% and 16%, respectively.
During 2002 average gross loans increased 26%. This increase was funded by the
growth in deposits combined with a 17% and 3% reduction in fed funds sold and
investment securities, respectively. During 2001, average gross loans increased
8%, average fed funds sold and securities purchased under resale agreements
increased 123% and average investment securities increased 2% which were funded
primarily by the 16% increase in average deposits.
Average other assets at December 31, 2002 and 2001 increased 5% and 17% as
compared to December 31, 2001 and 2000, respectively. The increases are
primarily attributable to increases in the cash surrender value of life
insurance of $649 thousand and $2,658 thousand during 2002 and 2001,
respectively. 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.
29
Investment Securities
The following table presents the investment portfolio at December 31, 2002, 2001
and 2000 by security type, maturity, and yield:
- --------------------------------------------------------------------------------------------------------------------------------
Book Value at December 31 (dollars in thousands):
2002 2001 2000
---- ---- ----
Amount Yield Amount Yield Amount Yield
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Agency Securities:
Within 1 year $ -- -- 3,501 6.46% 3,520 6.34%
After 1 year, within 5 years 3,702 5.74% 8,099 5.66% 8,018 6.26%
After 5 years, within 10 years -- -- -- -- 932 7.71%
After 10 years -- -- -- -- 1,500 6.85%
-----------------------------------------------------------------------------
Total U.S. Agency $ 3,702 5.74% 11,600 5.90% 13,970 6.46%
Collateralized Mortgage Obligations:
Within 1 year $ 4,255 3.40% 1,192 4.27% 4,121 6.09%
After 1 year, within 5 years 20,860 3.85% 21,741 4.76% 1,975 7.09%
After 5 years, within 10 years -- -- -- -- -- --
After 10 years -- -- 131 3.42% 131 8.31%
-----------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 25,115 3.67% 23,064 4.72% 6,227 6.46%
Municipal Securities:
Within 1 year $ -- -- 100 10.24% 1,048 5.28%
After 1 year, within 5 years 335 7.30% 2,133 6.86% 1,630 7.42%
After 5 years, within 10 years 501 7.57% 476 7.44% 1,564 7.40%
After 10 years 2,094 8.21% 2,309 8.20% 3,750 8.42%
-----------------------------------------------------------------------------
Total Municipal Securities $ 2,930 8.00% 5,018 7.60% 7,992 7.60%
Other Debt Securities:
Within 1 year $ 67 6.73% 202 7.41% 116 14.24%
After 1 year, within 5 years 356 4.27% 194 6.33% 338 9.41%
After 5 years, within 10 years -- -- 274 4.48% 300 --
After 10 years -- -- -- -- -- --
-----------------------------------------------------------------------------
Total Other Debt Securities $ 423 4.66% 670 5.90% 754 8.15%
Federal Agency Stock 184 6.00% 126 6.00% 126 6.00%
Unrealized Holding (Loss) / Gain 771 -- 537 -- 491 --
-----------------------------------------------------------------------------
Total $ 33,125 4.33% 41,015 5.35% 29,560 6.66%
- --------------------------------------------------------------------------------------------------------------------------------
The investment portfolio decreased $7,890 or 19%, at December 31, 2002 as
compared to December 31, 2001 and increased $11,455, or 39%, at December 31,
2001 as compared to December 31, 2000. The decrease in the investment portfolio
during 2002 occurred as a result of loan growth outpacing deposit growth.
Conversely, the increase in the investment portfolio during 2001 occurred as a
result of deposit growth outpacing loan growth. During 2002 and 2001, proceeds
received from prepayments of mortgage backed investment securities totaled
$13,595 thousand and $8,833, respectively and proceeds from the maturity of
investment securities totaled $3,600 and $9,548, respectively. During 2002,
proceeds from the sale of investment securities totaled $23,487 thousand and
resulted in gains totaling $603 thousand. During 2001, proceeds from the sale of
investment securities totaled $3,578 thousand and resulted in gains totaling
$267 thousand.
30
Loans
The following table summarizes gross loans (including loans held for sale) and
the components thereof as of December 31, for each of the last five years
(includes loans held for sale):
- -----------------------------------------------------------------------------------------------------------------
Outstanding at December 31 (in thousands):
2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Commercial and other real estate $ 141,962 125,274 99,377 95,509 77,956
Real estate construction 20,489 13,703 12,124 13,919 11,743
Installment and other 3,068 3,674 3,605 3,301 3,463
----- ----- ----- ----- -----
Total Gross Loans $ 165,519 142,651 115,106 112,729 93,162
======= ======= ======= ======= ======
- -----------------------------------------------------------------------------------------------------------------
Gross loans outstanding as of December 31, 2002 and 2001 exceeded the comparable
prior year-end totals by 16% and 24%, respectively. The reduced rate environment
combined with increased business development efforts were the foundation for the
growth in both years. With the acquisition of the Wells Fargo Branches in 1997
combined with the entry into the Folsom and Elk Grove areas in 1998, the Company
entered into new market areas that substantially enhanced its marketing
capabilities.
The most significant segment of the loan portfolio is commercial loans, which
represented 86% and 88% of the total portfolio at December 31, 2002 and 2001,
respectively. Commercial loans include agricultural loans, working capital loans
to businesses in a number of industries, and loans to finance commercial real
estate. Agricultural loans represented approximately 10 % and 13% of the
commercial loan portfolio at December 31, 2002 and 2001, respectively.
Agricultural loans are diversified throughout a number of agricultural business
segments, including dairy, orchards, row crops, vineyards, cattle and contract
harvesting. Agricultural lending risks are generally related to the potential
for volatility of agricultural commodity prices. Commodity prices are affected
by government programs to subsidize certain commodities, weather, and overall
supply and demand in wholesale and consumer markets. Excluding agricultural
loans, the remaining portfolio is principally dependent upon the health of the
local economy and the related real estate market.
The maturity and repricing characteristics of the loan portfolio at December 31,
2002 are as follows:
- --------------------------------------------------------------------------------
Due: (in thousands) (1) Fixed Rate Floating Rate Total
---------- ------------- -----
In 1 year or less $ 20,782 28,989 49,771
After 1 year through 5 years 9,783 10,306 20,089
After 5 years 8,785 86,874 95,659
-------- ------ ------
Total Loans $ 39,350 126,169 165,519
========= ======= =======
- --------------------------------------------------------------------------------
(1) Scheduled repayments are reported in the maturity category in which the
payment is due.
Approximately 24% of the loan portfolio carries a fixed rate of interest as of
December 31, 2002, while approximately 42% of the portfolio matures within five
years.
31
Deposits
The following table summarizes average deposit balances and rates for the years
ended December 31, 20021, 2001, and 2000:
- ---------------------------------------------------------------------------------------------------------------------------------
For the Year Ended For the Year Ended For the Year Ended
(in thousands) December 31, 2002 December 31, 2001 December 31, 2000
Type Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------------------------
Demand - non-interest bearing $ 33,529 N/A 25,350 N/A 21,240 N/A
NOW accounts 49,708 0.72% 47,600 1.01% 41,267 1.13%
Money market accounts 26,827 1.66% 15,050 1.98% 14,194 2.25%
Savings 36,192 1.36% 28,950 1.78% 28,509 1.97%
Time deposits 62,026 3.03% 66,630 5.02% 53,020 5.28%
------ ----- ------ ----- ------ -----
Total Deposits $ 208,282 1.52% 183,580 2.53% 158,230 2.62%
======= ===== ======= ===== ======= =====
- --------------------------------------------------------------------------------------------------------------------------
Average deposits increased approximately 13% and 16% in 2002 and 2001,
respectively. Due to a decreasing rate environment during 2002 and 2001, the
average rate decreased 101 basis points and 9 basis points when comparing 2002
to 2001 and 2001 to 2000, respectively. Account growth at all branches
throughout the Company's network resulted in the deposit growth in 2002 and
2001. The growth was the result of business development efforts in the lending
area as well as a continued influx of bank customers seeking a higher level of
customer service than that experienced at major financial institutions. The
decrease in certificates of deposit resulted from management's decision to focus
on increasing core deposits rather than pay higher interest rates for
certificates of deposit. During 2001, with the anticipated growth in the
Company's loan portfolio, management elected to increase the ratio of total
certificates of deposit to total deposits. The growth in certificates of deposit
during 2001 was consistent with the budget established by management and the
ratio of certificates of deposit to total deposits as compared to the Bank's
peer group.
Certificates of deposit contain regular and individual retirement account
balances. There are no brokered certificates of deposit in the portfolio.
Certificates of $100,000 or more represent approximately 39% and 36% of the
certificate of deposit portfolio at December 31, 2002 and 2001, respectively.
The following table summarizes the maturities of those certificates of $100,000
or more:
-------------------------------------------------------------------------
(in thousands) 2002
----
Three months or less $ 8,906
Four months to six months 5,504
Seven months to twelve months 4,410
Over twelve months 2,687
-------
Total time deposits of $100,000 or more $ 21,507
-------------------------------------------------------------------------
Short Term Borrowings
The Bank has two lines of credit with correspondent banks totaling $5 million at
December 31, 2002 and 2001. The lines of credit are unsecured and renew
annually. At December 31, 2002 and 2001 the Bank had outstanding borrowings
under these lines totaling $3 million and $4 million, respectively. The maximum
amount outstanding was $3 million and $4 million, the average balance
outstanding was $61 thousand and $50 thousand and the weighted average interest
rate was 2.46% and 3.02% for the years ending December 31, 2002 and 2001,
respectively.
At December 31, 2002 and 2001 securities sold under agreements to repurchase
totaled $11,885 thousand and $0 thousand, respectively. The maximum amount
outstanding was $11,885 thousand and $4,588 thousand, the average balance
outstanding was $3,227 thousand and $70 thousand and the weighted average
interest rate was 2.09% and 6.79% for the years ending December 31, 2002 and
2001, respectively. These agreements generally mature within 30 days.
These short term borrowings are used as temporary resources in managing the
Bank's overall liquidity. The Bank's liquidity management is discussed in the
Liquidity section below.
32
Asset Quality
The following table contains asset quality information with respect to the loan
portfolio and other real estate owned:
- ------------------------------------------------------------------------------------------------------------------------------------
Asset Quality Statistics at December 31
(in thousands except multiples and percentages) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans $2,409 3,246 5,655 2,303 248
Accruing loans past due more than 90 days -- -- -- 374 191
------ ----- ----- ----- -----
Total non-performing loans $2,409 3,246 5,655 2,677 439
===== ===== ===== =====
Allowance for loan losses $3,057 2,668 2,499 2,580 1,564
Allowance for loan losses to non-performing loans 127% 82% 44% 96% 356%
Total loan portfolio delinquency 2.38% 3.30% 5.14% 3.32% 1.40%
Allowance for loan losses to total gross loans 1.85% 1.87% 2.17% 2.29% 1.69%
Other real estate owned $ 329 809 405 129 129
- ------------------------------------------------------------------------------------------------------------------------------------
The Company's nonaccrual policy is discussed in Note 1(c) to the consolidated
financial statements. Interest income recorded on these nonaccrual loans was
approximately $242 thousand, $423 thousand, $224 thousand, $76 thousand, and $2
thousand in 2002, 2001, 2000, 1999, and 1998, respectively. Interest income
foregone or reversed on these loans was approximately $364 thousand, $310
thousand, $542 thousand, $76 thousand and $43 thousand in 2002, 2001, 2000,
1999, and 1998, respectively. At December 31, 2002, there were no individually
material or a material amount of loans in the aggregate for which management had
serious doubts as to the borrower's ability to comply with present loan
repayment terms and which may result in the subsequent reporting of such loans
as nonaccrual.
Non-performing loans decreased $837 thousand, or 26%, in 2002 and decreased
$2,409 thousand in 2001while increasing $2,978 thousand and $2,238 thousand in
2000 and 1999, respectively. Portfolio delinquency decreased to 2.38% in 2002
and to 3.30% in 2001 after increasing to 5.14% and 3.32% in 2000 and 1999,
respectively. The dollar amount of the allowance for loan losses increased $389
thousand during 2002 and $169 thousand during 2001. During 2000, the allowance
for loan losses decreased $81 thousand after having increased in the prior two
years. The reasons for the increase in the allowance for loan losses in 2002 as
compared to 2001 is explained in the "Allowance for Loan Losses" section above.
The following table summarizes the allocation of the allowance for loan losses
at December 31, for each of the last five years:
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) December 31, 2002 December 31, 2001 December 31, 2000 December 31, 1999 December 31, 1998
------------------ ----------------- ----------------- ----------------- -----------------
% % % % %
Loan Category Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------
Commercial and other real
estate $2,182 85.77% 2,122 87.82% 1,752 86.46% 1,943 84.72% 1,174 83.68%
Real estate construction 807 12.38% 466 9.61% 666 10.41% 560 12.35% 342 12.60%
Installment and other 68 1.85% 80 2.57% 81 3.13% 77 2.93% 48 3.72%
-- ----- -- ----- -- ----- -- ----- -- -----
$3,057 100.00% 2,668 100.00% 2,499 100.00% 2,580 100.00% 1,564 100.00%
===== ======= ===== ====== ===== ======= ===== ======= ===== =======
- ---------------------------------------------------------------------------------------------------------------------------------
Please also see "Allowance for Loan Losses."
33
Market Risk
Market risk is the risk to a company's financial position resulting from adverse
changes in market rates or prices, such as interest rates, foreign exchange
rates or equity prices. The Company has no exposure to foreign currency exchange
risk or any specific exposure to commodity price risk. The Company's major area
of market risk exposure is interest rate risk ("IRR"). The Company's exposure to
IRR can be explained as the potential for change in its reported earnings and/or
the market value of the Company's net worth. Variations in interest rates affect
earnings by changing net interest income and the level of other
interest-sensitive income and operating expenses. Interest rate changes also
affect the underlying economic value of the Company's assets, liabilities and
off-balance sheet items. These changes arise because the present value of future
cash flows, and often the cash flows themselves, change with the interest rates.
The effects of the changes in these present values reflect the change in the
Company's underlying economic value and provide a basis for the expected change
in future earnings related to the interest rate. IRR is inherent in the role of
banks as financial intermediaries, however a bank with a high IRR level may
experience lower earnings, impaired liquidity and capital positions, and most
likely, a greater risk of insolvency. Therefore, the Company and bank must
carefully evaluate IRR to promote safety and soundness in their activities.
The responsibility for the Company's market risk sensitivity management has been
delegated to the Asset/Liability Committee ("ALCO"). Specifically, ALCO utilizes
computerized modeling techniques to monitor and attempt to control the influence
that market changes have on rate sensitive assets ("RSA") and rate sensitive
liabilities ("RSL").
Market risk continues to be a major focal point of regulatory emphasis. In
accordance with regulation, each Company is required to develop its own IRR
management program depending on its structure, including certain fundamental
components which are mandatory to ensure sound IRR management. These elements
include appropriate board and management oversight as well as a comprehensive
risk management process that effectively identifies, measures, monitors and
controls risk. Should a company have material weaknesses in its risk management
process or high exposure relative to its capital, the regulatory agencies will
take action to remedy these shortcomings. Moreover, the level of a company's IRR
exposure and the quality of its risk management process is a determining factor
when evaluating a company's capital adequacy.
The Company utilizes the tabular presentation alternative in complying with
quantitative and qualitative disclosure rules. The following tables summarize
the expected maturities, principal repayment and fair values of other financial
instruments that are sensitive to changes in interest rates at December 31, 2002
and 2001.
As of December 31, 2002:
- ---------------------------------------------------------------------------------------------------------------
Expected Maturity / Principal Repayment Total Fair
(in thousands) 2003 2004 2005 2006 2007 Thereafter Balance Value
- ---------------------------------------------------------------------------------------------------------------
Interest-Sensitive Assets:
Federal funds sold and securities
purchased under resale agreements $19,634 -- -- -- -- -- 19,634 19,634
Fixed rate investments (1) 9,679 10,903 3,583 2,607 946 4,948 32,666 32,666
Floating rate investments (1) 92 59 46 46 51 165 459 459
Fixed rate loans (2) 20,782 2,300 3,247 2,165 2,071 8,785 39,350 39,198
Floating rate loans (2) 28,989 3,316 2,383 3,449 1,158 86,874 126,169 125,164
Interest-Sensitive Liabilities:
NOW account deposits (3) 20,233 3,369 3,369 3,369 3,369 16,873 50,582 50,993
Money market deposits (3) 12,099 2,015 2,015 2,015 2,015 10,089 30,248 30,319
Savings deposits (3) 15,839 2,637 2,637 2,637 2,637 13,210 39,597 40,177
Certificates of deposit 49,200 4,842 881 357 299 -- 55,579 55,881
Short term borrowings 14,885 -- -- -- -- 5,000 19,885 19,885
Interest-Sensitive Off-Balan Sheet
Items:
Commitments to lend 40,717 407
Standby letters of credit 1,038 1
- ---------------------------------------------------------------------------------------------------------------
34
As of December 31, 2001:
- ---------------------------------------------------------------------------------------------------------------------------------
Expected Maturity / Principal Repayment Total Fair
(in thousands) 2002 2003 2004 2005 2006 Thereafter Balance Value
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-Sensitive Assets:
Federal funds sold and securities
purchased under resale agreements $ 6,129 -- -- -- -- -- 6,129 6,129
Fixed rate investments (1) 10,908 8,342 6,476 4,339 4,214 6,128 40,407 40,407
Floating rate investments (1) 90 76 63 51 40 288 608 608
Fixed rate loans (2) 16,765 4,715 2,940 4,842 3,376 8,106 40,744 41,375
Floating rate loans (2) 23,862 3,028 2,495 903 3,325 68,294 101,907 99,663
Interest-Sensitive Liabilities:
NOW account deposits (3) 19,571 3,259 3,259 3,259 3,259 16,321 48,928 48,928
Money market deposits (3) 8,448 1,407 1,407 1,407 1,407 7,043 21,119 21,119
Savings deposits (3) 12,717 2,117 2,117 2,117 2,117 10,608 31,793 31,793
Certificates of deposit 63,788 4,538 626 559 462 -- 69,973 70,906
Short term borrowings 4,000 -- -- -- -- -- 4,000 4,000
Interest-Sensitive Off-Balance Sheet Items:
Commitments to lend -- -- -- -- -- -- 41,822 418
Standby letters of credit -- -- -- -- -- -- 920 1
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Expected maturities for investment securities are based upon anticipated
prepayments as evidenced by historical prepayment patterns.
(2) Expected maturities for loans are based upon contractual maturity dates.
Amounts reported include loans held for sale.
(3) NOW, money market and savings deposits do not carry contractual maturity
dates; therefore the expected maturities reflect estimates applied in
evaluating the Company's interest rate risk. The actual maturities of NOW,
money market, and savings deposits could vary substantially if future
prepayments differ from the Company's historical experience.
At December 31, 2002, federal funds sold and securities purchased under resale
agreements of $19,634 thousand with a yield of 1.19% and investment securities
totaling $9,771 thousand with a weighted-average, tax-equivalent yield of 3.43%
were scheduled to mature within one year. In addition, gross loans totaling
$49,771 thousand with a weighted-average yield of 6.57% were scheduled to mature
within the same time frame. Overall, interest-earning assets scheduled to mature
within one year totaled $79,176 thousand with a weighted-average, tax-equivalent
yield of 4.85% at December 31, 2002.
With respect to interest-bearing liabilities, based on historical withdrawal
patterns, NOW accounts, money market and savings deposits of $48,171 thousand
with a weighted-average cost of 0.90% were scheduled to mature within one year.
Certificates of deposit totaling $49,200 thousand with a weighted-average cost
of 2.31% were scheduled to mature in the same time frame. In addition, short
term borrowings totaling $14,885 with a weighted-average cost of 1.60% were
scheduled to mature within one year. Total interest-bearing liabilities
scheduled to mature within one year totaled $112,256 thousand with a
weighted-average rate of 1.57%.
Historical withdrawal patterns with respect to interest-bearing and
noninterest-bearing transaction accounts are not necessarily indicative of
future performance as the volume of cash flows may increase or decrease. Loan
information is presented based on payment due dates, which may materially differ
from actual results due to prepayments caused by changes in interest rates,
sociological conditions, demographics, and the economic climate.
Models that consider repricing frequencies of RSA and RSL in addition to
maturity distributions are also used to monitor IRR. One such technique utilizes
a static gap report, which attempts to measure the Company's interest rate
exposure by calculating the net amount of RSA and RSL that reprice within
specific time intervals.
35
The Company's interest rate sensitivity gap position, illustrating RSA and RSL
at their related carrying values, is summarized in the table below. The
distributions in the table are based on a combination of maturities, call
provisions, repricing frequencies and prepayment patterns. Adjustable-rate
assets are distributed based on the repricing frequency of the instrument.
As of December 31, 2002:
By Repricing Interval
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands) After three After six After one
months, six months, year, After Noninterest
Within three within within within five bearing
months Six months one year five years years funds Total
- -------------------------------- -------------------------------------------------- ----------------------------------------------
Assets
Federal funds sold and
securities purchased under
resale agreements $ 19,634 -- -- -- -- -- 19,634
Investment securities 2,178 2,054 5,539 18,241 5,113 -- 33,125
Loans (including loans held for
sale) 51,416 23,914 10,946 67,832 11,411 -- 165,519
Noninterest earning assets and
allowance for loan losses -- -- -- -- -- 36,968 36,968
--------------------------------------------------------------------------------------------------
Total Assets $ 73,228 25,968 16,485 86,073 16,524 36,968 255,246
==================================================================================================
Liabilities and Stockholders'
Equity
Savings, money market & NOW
deposits $ 155,100 -- -- -- -- -- 155,100
Time deposits 21,651 12,816 14,733 6,379 -- -- 55,579
-- -- -- 5,000 --
Borrowings 14,885 19,885
Other liabilities and
stockholders' equity -- -- -- -- -- 24,682 24,682
--------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 191,636 12,816 14,733 6,379 5,000 24,682 255,246
==================================================================================================
Interest Rate Sensitivity Gap $ (118,408) 13,152 1,752 79,694 11,524 12,286 --
==================================================================================================
Cumulative Interest Rate
Sensitivity Gap $ (118,408) (105,256) (103,504) (23,810) (12,286) -- --
- --------------------------------==================================================================================================
The interest rate gaps reported in the table arise when assets are funded with
liabilities having different repricing intervals. Since these gaps are actively
managed and change daily as adjustments are made in interest rate forecasts and
market outlook, positions at the end of any period may not be reflective of the
Company's interest rate sensitivity in subsequent periods. Active management
dictates that longer-term economic views are balanced against prospects for
short-term interest rate changes in all repricing intervals. For purposes of the
above analysis, repricing of fixed-rate instruments is based upon the
contractual maturity of the applicable instruments. In addition, repricing of
assets and liabilities is assumed in the first available repricing period.
Actual payment patterns may differ from contractual payment patterns, and it has
been management's experience that repricing does not always correlate directly
with market changes in the yield curve.
Fluctuations in interest rates can also impact the market value of assets and
liabilities either favorably or adversely depending upon the nature of the rate
fluctuations as well as the maturity and repricing structure of the underlying
financial instruments. To the extent that financial instruments are held to
contractual maturity, market value fluctuations related to interest rate changes
are realized only to the extent that future net interest margin is either higher
or lower than comparable market rates for the period. To the extent that
liquidity management dictates the need to liquidate certain assets prior to
contractual maturity, changes in market value from fluctuating interest rates
will be realized in income to the extent of any gain or loss incurred upon the
liquidation of the related assets.
36
Liquidity
The Company's primary source of liquidity is dividends from the Bank. It is the
Company's general policy to maintain liquidity levels at the parent which
management believes to be consistent with the safety and soundness of the
Company as a whole. Federal regulatory agencies have the authority to prohibit
the payment of dividends by the Bank to the Company if a finding is made that
such payment would constitute an unsafe or unsound practice or if the Bank would
be undercapitalized as a result. 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 securities purchased under resale agreements, and short-term
investments at levels commensurate with the estimated requirements for loan
demand and fluctuations in deposits. Loan demand and deposit fluctuations are
affected by a number of factors, including economic conditions, seasonality of
the borrowing and deposit bases, and the general level of interest rates. The
Bank maintains two lines of credit with correspondent banks as a supplemental
source of short-term liquidity in the event that 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 December 31, 2002, liquidity was considered adequate, and funds available in
the local deposit market combined with scheduled maturities and prepayments of
investment securities and borrowing facilities are considered sufficient to meet
both the short- and long-term liquidity needs and commitments (see Notes 7 and
16 to the consolidated financial statements for further information). Compared
to 2001 liquidity increased in 2002 as a result of the Company obtaining
short-term borrowings and selling securities under agreements to repurchase.
Capital Resources
Consolidated capital increased $1,407 thousand, or 7.9%, during 2002. The
increase was due primarily to net income of $1,355 thousand. Capital was further
increased by $100 thousand as a result of an increase in the net unrealized
holding gain on available-for-sale securities and $343 thousand as a result of
stock options exercised. Capital decreased $391 thousand as a result of stock
repurchases. The consolidated capital to assets ratio decreased 45 basis points,
or 4.4%, to 7.55% from 7.90%. This decrease is primarily due to the effect of
asset growth exceeding the growth in capital. During 2002, total assets
increased 13% while capital increased 8%.
At the February 27, 2002 regular Board of Directors Meeting, the Board approved
a $5 million participation in a floating rate pooled trust preferred securities
offering. The Company received the proceeds from the sale of the trust preferred
securities on March 26, 2002.
In April 2002, the Board of Directors authorized a stock repurchase program
approving the repurchase of up to $2 million of the Company's stock. As of
December 31, 2002, 32,649 shares had been repurchased at an average cost of
$11.96 per share for a total of $391 thousand under this program.
The Bank's total risk-based and leverage capital ratios were 11.16% and 8.22%,
respectively, at December 31, 2002 compared to 10.24% and 7.45%, respectively,
at December 31, 2001. In order to continue to facilitate the Bank's growth,
during 2002 the Holding Company contributed $2 million of the proceeds from the
trust preferred securities into the Bank as contributed capital which is
included in Tier 1 capital for regulatory capital adequacy determination
purposes. The total risk-based and leverage capital ratios at December 31, 2002,
are in excess of the required regulatory minimums of 10% and 5%, respectively,
for well-capitalized institutions.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a financial institution, the Company's primary component of market risk is
interest rate volatility. Fluctuation in interest rates will ultimately impact
both the level of income and expense recorded on a large portion of the Bank's
assets and liabilities and the market value of all interest earning assets and
interest bearing liabilities, other than those which possess a short term to
maturity. Since virtually all of the Company's interest bearing liabilities and
all of the Company's interest earning assets are located at the Bank, virtually
all of the Company's interest rate risk exposure lies at the Bank level. As a
result, all significant interest rate risk management procedures are performed
at the Bank level. Based upon the nature of its operations, the Bank is not
subject to foreign currency exchange or commodity price risk. The Bank's loan
portfolio, concentrated primarily within Northern California, is subject to
risks associated with the local economy. The Company does not own any trading
assets. See "Asset Quality" in item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15(a) herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEMS 10, 11, 12 and 13
The information required by these items is contained in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held on April 22,
2003, and is incorporated herein by reference. The definitive Proxy Statement
will be filed with the Commission within 120 days after the close of the
Company's fiscal year pursuant to Regulation 14A of the Securities Exchange Act
of 1934.
ITEM 14. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Within the 90 days prior to the filing date of this report, we carried
out an evaluation, under the supervision and with the participation of our
management, including our President and Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15(b) under the
Securities Exchange Act of 1934. Based on their review of our disclosure
controls and procedures, the President and Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to us that is
required to be included in our periodic SEC filings.
Internal Controls and Procedures
There were no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to the date of
our evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
38
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules Page Reference
Independent Auditors' Report 40
Consolidated Balance Sheets as of
December 31, 2002 and 2001 41
Consolidated Statements of Income
Years Ended 2002, 2001, and 2000 42
Consolidated Statements of
Stockholders' Equity
and Comprehensive Income
Years Ended 2002, 2001, and 2000 43
Consolidated Statements of Cash Flows
Years Ended 2002, 2001, and 2000 44
Notes to Consolidated financial statements 45
(b) Reports on Form 8-K
None
(c) Exhibits
The Exhibit List required by this Item is incorporated by
reference to the Exhibit Index which precedes the exhibits to
this report.
(d) Financial Statement Schedules
No financial statement schedules are included in this report
on the basis that they are either inapplicable or the
information required to be set forth therein is contained in
the financial statements included in this report.
* Management contract or compensatory plan or arrangement
39
Independent Auditors' Report
The Board of Directors
First Financial Bancorp:
We have audited the accompanying consolidated balance sheets of First Financial
Bancorp and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity and comprehensive income
and cash flows for each of the years in the three-year period ended December 31,
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Financial
Bancorp and subsidiaries as of December 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Sacramento, California
February 21, 2003
40
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share amounts)
December 31, 2002 and 2001
Assets 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 14,988 13,328
Federal funds sold and securities purchased
under resale agreements 19,634 6,129
Investment securities available-for-sale, at fair value
(includes securities pledged to creditors with the right
to sell or pledge of $11,885 and $0, respectively) 33,125 41,015
Loans held for sale 7,578 3,876
Loans, net of deferred loan fees and allowance for loan losses of
$3,851 and $3,345 in 2002 and 2001, respectively 154,090 135,430
Premises and equipment, net 6,745 7,185
Accrued interest receivable 772 1,265
Other assets 18,314 17,947
- ------------------------------------------------------------------------------------------------------------------
$ 255,246 226,175
==================================================================================================================
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest bearing $ 34,673 29,758
Interest bearing 176,006 171,813
- -------------------------------------------------------------------------------------------------------------------
Total deposits 210,679 201,571
Accrued interest payable 144 307
Short term borrowings 14,885 4,000
Other liabilities 5,268 2,434
Obligated mandatorily redeemable capital
securities of subsidiary trust 5,000 --
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 235,976 208,312
Stockholders' equity:
Preferred stock -- no par value; authorized 1,000,000 shares;
no shares issued and outstanding -- --
Common stock -- no par value; authorized 9,000,000 shares; issued and
outstanding in 2002, 1,621,837 shares; in 2001, 1,622,300 shares 10,143 10,191
Retained earnings 8,672 7,317
Accumulated other comprehensive income, net 455 355
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 19,270 17,863
- -------------------------------------------------------------------------------------------------------------------
Commitments and contingencies $ 255,246 226,175
===================================================================================================================
See accompanying notes to consolidated financial statements.
41
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands except per share amounts)
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
- --------------------------------------------------------------------------------------------------
Interest income:
Loans, including fees $ 11,917 11,304 10,953
Interest on investment securities
available for sale:
Taxable 1,434 1,832 1,686
Exempt from Federal taxes 168 241 528
Federal funds sold and securities
purchased under resale agreements 158 481 329
- ------------------------------------------------------------------------------------------------
Total interest income 13,677 13,858 13,496
Interest expense:
Deposit accounts 3,176 4,639 4,151
Other borrowings 283 5 462
- ------------------------------------------------------------------------------------------------
Total interest expense 3,459 4,644 4,613
Net interest income 10,218 9,214 8,883
Provision for loan losses 625 391 135
- ------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 9,593 8,823 8,748
Noninterest income:
Service charges 1,598 1,414 1,261
Gain on sale of investment securities
available-for-sale 603 267 149
Gain on sale of other real estate owned 16 255 --
Gain on sale of loans 1,005 553 246
Premiums and fees from SBA and
mortgage operations 426 379 378
Increase in cash surrender value
of life insurance 649 658 458
Other 406 302 198
- ------------------------------------------------------------------------------------------------
Total noninterest income 4,703 3,828 2,690
Noninterest expense:
Salaries and employee benefits 6,312 5,680 4,506
Occupancy 1,028 950 825
Equipment 1,059 929 781
Other 4,087 3,667 3,743
- ------------------------------------------------------------------------------------------------
Total noninterest expense 12,486 11,226 9,855
- ------------------------------------------------------------------------------------------------
Income before provision for income taxes 1,810 1,425 1,583
Provision for income taxes 455 218 300
- ------------------------------------------------------------------------------------------------
Net income $ 1,355 1,207 1,283
================================================================================================
Earnings per share:
- ------------------------------------------------------------------------------------------------
Basic $ .82 .75 .81
================================================================================================
Diluted $ .79 .73 .79
Dividends per share $ -- -- .05
================================================================================================
See accompanying notes to consolidated financial statements.
42
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(in thousands except share amounts)
Years Ended December 31, 2002, 2001 and 2000
Accumulated
Common Common Other
Stock Stock Comprehensive Retained Comprehensive
Description Shares Amounts Income Earnings Income (Loss), net Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 1,433,734 8,433 6,354 (266) 14,521
Comprehensive income:
Net income $ 1,283 1,283 1,283
-----------
Other comprehensive income:
Unrealized holding gain arising
during the current period,
net of tax effect of $459 639
Reclassification adjustment
due to gains realized,
net of tax effect of $61 (88)
Total other comprehensive
income, net of -----------
tax effect of $398 551 551 551
-----------
Comprehensive income $ 1,834
===========
Options exercised, including tax benefits 22,187 173 173
Stock dividend 70,142 732 (732)
Cash dividend (74) (74)
----------------------- ------------------------------------
Balance at December 31, 2000 1,526,063 9,338 6,831 285 16,454
Comprehensive income:
Net income $ 1,207 1,207 1,207
-----------
Other comprehensive income:
Unrealized holding gain arising
during the current period,
net of tax effect of $133 228
Reclassification adjustment
due to gains realized,
net of tax effect of $109 (158)
Total other comprehensive
income, net of -----------
tax effect of $24 70 70 70
-----------
Comprehensive income $ 1,277
===========
Options exercised, including tax benefits 20,425 136 136
Stock dividend 75,812 717 (717)
Cash dividend (4) (4)
----------------------- ------------------------------------
Balance at December 31, 2001 1,622,300 10,191 7,317 355 17,863
Comprehensive income:
Net income $ 1,355 1,355 1,355
-----------
Other comprehensive income:
Unrealized holding gain arising
during the current period,
net of tax effect of $381 456
Reclassification adjustment
due to gains realized,
net of tax effect of $247 (356)
Total other comprehensive
income, net of -----------
tax effect of $134 100 100 100
-----------
Comprehensive income $ 1,455
===========
Options exercised, including tax benefits 32,186 343 343
Stock repurchase (32,649) (391) (391)
------------------------ -------------------------------------
Balance at December 31, 2002 1,621,837 $ 10,143 8,672 455 19,270
======================= ====================================
See accompanying notes to consolidated financial statements.
43
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,355 1,207 1,283
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Increase (decrease) in deferred loan income 117 155 (34)
Depreciation and amortization 1,778 1,366 826
Provision for loan losses 625 391 135
Gain on sale of available-for-sale securities (603) (267) (149)
Gain on sale of loans (1,005) (553) (246)
Gain on sale of other real estate owned (16) (255) --
Provision for deferred taxes (338) (401) (46)
Decrease in accrued interest receivable 493 182 40
(Decrease) increase in accrued interest payable (163) (9) 12
Increase in cash surrender value of life insurance (649) (658) (458)
Decrease (increase) in other assets 125 (685) (258)
Increase in other liabilities 2,919 1,003 397
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,638 1,476 1,502
Cash flows from investing activities:
Investment securities available-for-sale:
Purchases (32,427) (33,269) (906)
Proceeds from prepayments 13,595 8,833 821
Proceeds from maturity 3,600 9,548 3,554
Proceeds from sale 23,487 3,578 4,391
Loans held for sale:
Loans originated (48,354) (33,950) (13,896)
Proceeds from sale 45,657 31,919 13,821
Increase in loans made to customers (19,492) (26,269) (2,676)
Proceeds from the sale of other real estate 296 937 160
Purchases of bank premises, equipment and intangible assets (695) (1,210) (743)
Purchase of cash surrender value life insurance -- (2,000) (900)
- --------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (14,333) (41,883) 3,626
Cash flows from financing activities:
Net increase in deposits 9,108 39,310 6,100
Proceeds from company obligated mandatorily
redeemable securities of subsidiary trust 5,000 -- --
Increase (decrease) in short term borrowings 10,885 (588) 288
Proceeds from issuance of common stock 258 122 173
Payments for repurchase of common stock (391) -- --
Dividends paid -- (4) (74)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 24,860 38,840 6,487
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 15,165 (1,567) 11,615
Cash and cash equivalents at beginning of year 19,457 21,024 9,409
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 34,622 19,457 21,024
==============================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 3,622 4,653 4,601
Income taxes 1,342 372 586
Loans transferred to other real estate owned 90 1,086 405
Stock dividend -- 717 732
See accompanying notes to consolidated financial statements.
44
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 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),
Western Auxiliary Corporation (WAC) and First Financial (CA)
Statutory Trust I (the Trust) 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. The most significant accounting estimate for the Company
is the allowance for loan losses. The following are descriptions of
the significant accounting and reporting policies:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries for all periods presented. All material
inter-company accounts and transactions have been eliminated in
consolidation.
(b) Investment Securities
The Company designates a security as held-to-maturity or
available-for-sale when a security is purchased. The selected
designation is based upon investment objectives, operational needs,
intent and ability to hold. The Company does not engage in trading
activity.
Held-to-maturity securities are carried at cost, adjusted for
accretion of discounts and amortization of premiums.
Available-for-sale securities are recorded at fair value with
unrealized holding gains and losses, net of the related tax effect
reported as a separate component of stockholders' equity until
realized.
To the extent that the fair value of a security is below cost and
the decline is other than temporary, a new cost basis is established
using the current market value, and the resulting loss is charged to
earnings. Premiums and discounts are amortized or accreted over the
life of the related held-to-maturity or available-for-sale security
as an adjustment to yield using the effective interest method.
Gains and losses realized upon disposition of securities are
recorded as a component of noninterest income on the trade date,
based upon the net proceeds and the adjusted carrying value of the
securities using the specific identification method.
(c) Loans
Loans are stated at principal balances outstanding, net of deferred
origination fees, costs and loan sale premiums. A loan is considered
impaired when based on current information and events, it is
probable that the Company will be unable to collect all amounts due
according to the "contractual terms" of the loan agreement,
including scheduled interest payments. For a loan that has been
restructured, the contractual terms of the loan agreement refer to
the contractual terms specified by the original loan agreement, not
the contractual terms specified by the restructuring agreement. An
impaired loan is measured based upon the present value of future
cash flows discounted at the loan's effective rate, the loan's
observable market price, or the fair value of collateral if the loan
is collateral dependent. Interest on impaired loans is recognized on
a cash basis. Large groups of small balance, homogenous loans are
collectively evaluated for impairment. If the measurement of the
impaired loan is less than the recorded investment in the loan, an
impairment is recognized by increasing the allowance for loan
losses. Loans held for sale are carried at the lower of aggregate
cost or market.
Interest on loans is accrued daily. Nonaccrual loans are loans on
which the accrual of interest ceases when the collection of
principal or interest is determined to be doubtful by management. It
is the general policy of the Company to discontinue the accrual of
interest when principal or interest payments are delinquent 90 days
or more unless the loan is well secured and in the process of
collection. When a loan is placed on non-accrual status, accrued and
unpaid interest is reversed against current period interest income.
Interest accruals are resumed when such loans are brought fully
current with respect to interest and principal and when, in the
judgment of management, the loans are estimated to be fully
collectible as to both principal and interest.
45
(d) Loan Origination Fees and Costs
Loan origination fees, net of certain direct origination costs, are
deferred and amortized as a yield adjustment over the life of the
related loans using the interest method, which results in a constant
rate of return. Loan commitment fees are also deferred. Commitment
fees are recognized over the life of the resulting loans if the
commitments are funded or at the expiration of the commitments if
the commitments expire unexercised. Origination fees and costs
related to loans held for sale are deferred and recognized as a
component of gain or loss when the related loans are sold.
(e) Gain or Loss on Sale of Loans and Servicing Rights
Transfers and servicing of financial assets and extinguishments of
liabilities are accounted for and reported based on consistent
application of a financial-components approach that focuses on
control. Transfers of financial assets that are sales are
distinguished from transfers that are secured borrowings. Retained
interests in loans sold are measured by allocating the previous
carrying amount of the transferred assets between the loans sold and
retained interests, if any, based on their relative fair value at
the date of transfer. Fair values are estimated using discounted
cash flows based on a current market interest rate.
The Company recognizes a gain and a related asset for the fair value
of the rights to service loans for others when loans are sold. The
Company measures the impairment of the servicing asset based on the
difference between the carrying amount of the servicing asset and
its current fair value. The servicing asset totaled $145 thousand
and $79 thousand at December 31, 2002 and 2001, respectively. As of
December 31, 2002 and 2001, there was no impairment in servicing
asset.
A sale is recognized when the transaction closes and the proceeds
are other than beneficial interests in the assets sold. A gain or
loss is recognized to the extent that the sales proceeds and the
fair value of the servicing asset exceed or are less than the book
value of the loan. Additionally, the fair value of servicing rights
is considered in the determination of the gain or loss. When
servicing rights are sold, a gain or loss is recognized at the
closing date to the extent that the sales proceeds, less costs to
complete the sale, exceed or are less than the carrying value of the
servicing rights held.
(f) Allowance for Loan Losses
The allowance for loan losses is established through a provision
charged to expense. Loans are charged off against the allowance for
loan losses when management believes that the collectibility of the
principal is unlikely. Recoveries of amounts previously charged off
are added back to the allowance. The allowance is an amount that
management believes will be adequate to absorb losses inherent in
existing loans and overdrafts based on evaluations of collectibility
and prior loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the portfolio,
overall portfolio quality, loan concentrations, specific problem
loans, commitments, and current and anticipated economic conditions
that may affect the borrowers' ability to pay. While management uses
these evaluations to recognize the provision for loan losses, future
provisions may be necessary based on changes in the factors used in
the evaluations. The allowance for loan losses is also subject to
review by the Comptroller of the Currency, the Bank's principal
regulator.
(g) Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization is
calculated using the straight-line method over the estimated useful
lives of the related assets.
Estimated useful lives are as follows:
Building 35 years
Improvements, furniture, and equipment 3 to 10 years
Expenditures for repairs and maintenance are charged to operations
as incurred; significant betterments are capitalized. Interest
expense attributable to construction-in-progress is capitalized.
46
(h) Intangible Assets
In June 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS 141, which addresses financial accounting and reporting
for business combinations and supersedes APB Opinion 16 -- Business
Combinations ("APB 16"). This Statement requires that all business
combinations be accounted for under the purchase method. Also,
intangible assets that meet certain criteria must be recognized as
assets apart from goodwill. Finally, it requires disclosures in
addition to the disclosure requirements of APB 16. The provisions of
this Statement apply to all business combinations initiated after
June 30, 2001.
In July 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets. Statement No. 142 requires 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 No. 142. Statement No.
142 also requires 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 Statement 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 No. 142 on January
1, 2002. The adoption of Statement No. 142 did not have a material
impact on the financial condition or operating results of the
Company. At December 31, 2002, the Company's goodwill totaled $13
thousand, net of accumulated amortization of $45 thousand and
intangible assets (consisting of core deposit premiums) totaled $329
thousand, net of accumulated amortization of $1,646 thousand. The
Company has ceased amortizing goodwill in accordance with this
standard. Intangible assets are amortized over 7 years.
(i) Other Real Estate Owned (OREO)
Other real estate is comprised of property acquired through
foreclosure proceedings or acceptance of deeds-in-lieu of
foreclosure. Losses recognized at the time of acquiring property in
full or partial satisfaction of debt are charged against the
allowance for loan losses. Other real estate is recorded at the
lower of the related loan balance or fair value, less estimated
disposition costs. Fair value of other real estate is generally
based on an independent appraisal of the property. Any subsequent
costs or losses are recognized as noninterest expense when incurred.
Subsequent operating expenses or income, changes in carrying value,
and gains or losses on disposition of OREO are reflected in other
noninterest expense.
Revenue recognition on the disposition of OREO is dependent upon the
transaction meeting certain criteria relating to the nature of the
property sold and the terms of the sale. Under certain
circumstances, revenue recognition may be deferred until these
criteria are met.
(j) Earnings Per Share
Basic earnings per share (EPS) includes no dilution and is computed
by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could
share in the earnings of an entity.
On May 8, 2001, the Company effected a five percent stock dividend
payable to stockholders of record as of May 22, 2001. All share, per
share, Common Stock and stock option amounts herein have been
restated to reflect the effects of the stock dividend.
(k) Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Income tax expense is allocated to each entity of the Company based
upon analyses of the tax consequences of each company on a
stand-alone basis.
47
(l) Statements of Cash Flows
For purposes of the statements of cash flows, cash, short term (90
days or less) deposits in other banks, and federal funds sold and
securities purchased under resale agreements, which generally have
maturities of one day, are considered to be cash equivalents.
(m) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
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 Company
adopted the provisions of Statement 144 on January 1, 2002. The
adoption of Statement No. 144 did not have a material impact on the
Consolidated Financial Statements of the Company.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(n) Stock Based Compensation
The Company's stock option plan is more fully explained in Note 13.
As permitted by the Financial Accounting Standards Board (FASB)
Statement No. 123 (FAS 123), Accounting for Stock-Based
Compensation, the Company has elected to continue applying the
intrinsic value method of Accounting Principles Board Opinion 25,
Accounting for Stock Issued to Employees, in accounting for its
stock option plan. As required by FASB Statement No. 148, Accounting
for Stock-Based Compensation--Transition and Disclosure, an
amendment to FASB Statement 123, pro forma net income and earnings
per common share information is provided below, as if the Company
accounted for its stock option plan under the fair value method of
FAS 123.
Year ending December 31, 2002 2001 2000
------------------------------------------------------------------------------------
Net income (in thousands)
As reported $ 1,355 1,207 1,283
Add: Stock based employee compensation
expense included in reported net income,
net of tax effects 52 -- --
Deduct: Stock based employee compensation
determined under fair value based method
for all awards, net of tax effects (40) (50) (25)
------------------------------------------------------------------------------------
Pro forma net income 1,367 1,157 1,258
====================================================================================
48
Year ending December 31, 2002 2001 2000
----------------------------------------------------------------------------------------------------
Earnings per share
Basic net income per share
As reported 0.82 0.75 0.81
Pro forma 0.83 0.72 0.79
Diluted net income per share
As reported 0.79 0.73 0.79
Pro forma 0.80 0.70 0.77
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:
2002 2001 2000
----------------------------------------------------------------------------------------------------
Dividend yield 0.0% 0.0% 0.0%
Expected life (in years) 5.0 5.0 5.0
Expected volatility 18.4% 18.4% 18.4%
Risk-free rate 2.8% 4.5% 5.2%
Weighted average grant date fair value of options granted $1.52 1.88 2.12
(o) Impact Of Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) 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 does not expect adoption
of Statement No. 143 to have a material impact to the Consolidated
Financial Statements of the Company.
In April 2002, FASB issued Statement Financial Accounting Standards
(SFAS) No. 145. Statement No. 145 rescinds SFAS No. 4, which
requires all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item,
net of related income tax effect. As a result, the criteria in
Opinion No. 30 will now be used to classify those gains and losses.
SFAS No. 64 amended SFAS No. 4, and is no longer necessary because
SFAS No. 4 has been rescinded. The accounting, disclosure and
financial statements provision of SFAS No. 145 are effective for
financial statements in fiscal years beginning after May 15, 2002.
Any gain or loss on extinguishment of debt that was classified as an
extraordinary item in prior periods presented that does not meet the
criteria in Opinion No. 30 for classification as an extraordinary
item shall be reclassified. The implementation of Statement No. 145
is not expected to have a material impact to the consolidated
financial statements of the Company.
The Financial Accounting Standards Board issued FASB Statement No.
146, Accounting for Costs Associated with Exit or Disposal
Activities in June 2002. Statement No. 146 requires the Company to
recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit
or disposal plan. SFAS 146 replaces Emerging Issues Task Force
("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." The provisions of SFAS
146 are to be applied prospectively to exit or disposal activities
initiated after December 31, 2002.
49
In October 2002, the FASB issued SFAS 147, which removes certain
acquisitions of financial institutions (other than transactions
between two or more mutual enterprises) from the scope of SFAS 72,
Accounting for Certain Acquisitions of Banking or Thrift
Institutions and FASB Interpretation 9, Applying APB Opinions 16 and
17 When a Savings and Loan or a Similar Institution Is Acquired in a
Business Combination Accounted for by the Purchase Method. These
types of transactions are now accounted for under SFAS 141 and 142.
In addition, this Statement amends SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, to include in its scope
long-term customer relationship intangible assets of financial
institutions. The provisions of this Statement were effective
October 1, 2002, with earlier adoption permitted. The implementation
of Statement No. 147 is not expected to have a material impact to
the Consolidated Financial Statements of the Company.
In December 2002, the FASB issued SFAS 148, which provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based compensation. In
addition, this Statement amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. Finally, this Statement amends APB Opinion 28, Interim
Financial Reporting, to require disclosure about those effects in
interim financial information. This Statement is effective for
fiscal and interim periods ending after December 15, 2002.
Management does not expect this Statement to have a material impact
to the Consolidated Financial Statements.
In November 2002, the FASB issued FIN 45, which elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required
to recognize, at the inception of the guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee.
The initial recognition and initial measurement provisions of this
Interpretation are applied prospectively to guarantees issued or
modified after December 31, 2002. The adoption of these recognition
provisions will result in recording liabilities associated with
certain guarantees provided by the Company. These currently include
standby letters of credit and first-loss guarantees on
securitizations. The disclosure requirements of this Interpretation
are effective for financial statements of interim or annual periods
ending after December 15, 2002. Management does not expect this
Interpretation to have a material impact to the Consolidated
Financial Statements.
In January 2003, the FASB issued FIN 46, which clarifies the
application of Accounting Research Bulletin ("ARB") 51, Consolidated
Financial Statements, to certain entities (called variable interest
entities) in which equity investors do not have the characteristics
of a controlling financial interest or do not have sufficient equity
at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The disclosure
requirements of this Interpretation are effective for all financial
statements issued after January 31, 2003. The consolidation
requirements apply to all variable interest entities created after
January 31, 2003. In addition, public companies must apply the
consolidation requirements to variable interest entities that
existed prior to February 1, 2003 and remain in existence as of the
beginning of annual or interim periods beginning after June 15,
2003. Management is currently assessing the impact of FIN 46, and
does not expect this Interpretation to have a material impact to the
Consolidated Financial Statements.
(p) Reclassifications
Certain amounts in prior years' presentations have been reclassified
to conform with the current presentation. These reclassifications
have no effect on previously reported income.
50
(2) Restricted Cash Balances
The Bank is required to maintain certain daily reserve balances in
accordance with Federal Reserve Board requirements. Aggregate
reserves of $3,163 thousand and $3,819 thousand were necessary to
satisfy these requirements at December 31, 2002 and 2001,
respectively.
(3) Investment Securities
Investment securities at December 31, 2002 and 2001 consisted of the
following:
December 31,
2002
Estimated Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Agency securities $ 3,702 146 -- 3,848
Municipal securities 2,930 264 -- 3,194
Collateralized mortgage obligations 25,115 350 2 25,463
Other debt securities 423 13 -- 436
Investment in Federal Agency stock 184 -- -- 184
--------------------------------------------------------------------------------------------------------------
Total $ 32,354 773 2 33,125
=============================================================================================================
December 31,
2001
Estimated Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Agency securities $ 11,600 144 -- 11,744
Municipal securities 5,018 256 -- 5,274
Collateralized mortgage obligations 23,064 143 4 23,203
Other debt securities 670 1 3 668
Investment in Federal Agency stock 126 -- -- 126
--------------------------------------------------------------------------------------------------------------
Total $ 40,478 544 7 41,015
=============================================================================================================
Investment securities totaling $9,755 thousand and $13,806 thousand
were pledged as collateral to secure Local Agency Deposits as well
as treasury, tax and loan accounts with the Federal Reserve at
December 31, 2002 and 2001, respectively.
Proceeds from the sale of Available for Sale securities during 2002,
2001 and 2000 were $23,487 thousand, $3,578 thousand and $4,391
thousand. The Company realized gross gains totaling $603 thousand
and $267 on the sale of Available for Sale securities during the
year ended December 31, 2002 and 2001, respectively.
Federal Agency dividends paid to the Company were $9 thousand in
2002 and $7 thousand in 2001 and 2000.
51
The amortized cost and estimated fair value of debt securities at
December 31, 2002, by contractual maturity, or expected maturity
where applicable, are shown below. Expected maturities will differ
from contractual maturities because certain securities provide the
issuer with the right to call or prepay obligations with or without
call or prepayment penalties.
December 31, 2002
Amortized Market
(in thousands) Cost Value
--------------------------------------------------------------------
Due in one year or less $ 4,322 4,356
Due after one year through five years 25,253 25,770
Due after five years through 10 years 501 556
Due after 10 years 2,094 2,259
--------------------------------------------------------------------
$ 32,170 32,941
====================================================================
(4) Loans
The Bank grants commercial, installment, real estate construction
and other real estate loans to customers primarily in the trade
areas served by its branches. Commercial loans include agricultural
loans, working capital loans to businesses in a number of
industries, and loans to finance commercial real estate. Generally,
the loans are secured by real estate or other assets. Although the
Bank has a diversified loan portfolio, a significant portion of its
debtors' ability to honor their contracts is dependent upon the
condition of the local real estate markets in which the loans are
made.
Outstanding loans consisted of the following at December 31:
(in thousands) 2002 2001
--------------------------------------------------------------------
Commercial $ 127,111 115,402
Real estate construction 20,489 13,703
Other real estate 7,273 5,996
Installment and other 3,068 3,674
--------------------------------------------------------------------
157,941 138,775
Deferred loan fees and loan sale premiums (794) (677)
Allowance for loan losses (3,057) (2,668)
--------------------------------------------------------------------
$ 154,090 135,430
====================================================================
SBA and mortgage loans serviced by the Bank totaled $102,743
thousand, $83,252 thousand and $73,607 thousand at December 31,
2002, 2001 and 2000, respectively.
Changes in the allowance for loan losses were as follows:
(in thousands) 2002 2001 2000
--------------------------------------------------------------------
Balance, beginning of year $ 2,668 2,499 2,580
Loans charged off (270) (283) (246)
Recoveries 34 61 30
Provision charged to operations 625 391 135
--------------------------------------------------------------------
Balance, end of year $ 3,057 2,668 2,499
====================================================================
Nonaccrual loans totaled $2,409 thousand, $3,246 thousand and $5,655
thousand at December 31, 2002, 2001 and 2000, respectively. Interest
income, which would have been recorded on nonaccrual loans, was $364
thousand, $310 thousand and $542 thousand, in 2002, 2001, and 2000,
respectively.
Impaired loans are loans for which it is probable that the Bank will
not be able to collect all amounts due. At December 31, 2002 and
2001, the Bank had outstanding balances of $2,409 thousand and
$3,246 thousand in impaired loans which had valuation allowances of
$446 thousand in 2002 and $464 thousand in 2001. The average
outstanding balances of impaired loans for the years ended December
31, 2002, 2001 and 2000 were $3,209 thousand, $4,871 thousand and
$5,847 thousand respectively, on which $242 thousand, $423 thousand
and $224 thousand, respectively, was recognized as interest income.
52
At December 31, 2002 and 2001, the collateral value method was used
to measure impairment for all loans classified as impaired. Impaired
loans at December 31, 2002 and 2001 consisted solely of commercial
loans.
(5) Premises and Equipment
Premises and equipment consisted of the following at December 31:
(in thousands) 2002 2001
--------------------------------------------------------------------
Land $ 874 874
Building 5,725 5,725
Leasehold improvements 2,103 1,952
Furniture and equipment 5,741 5,198
--------------------------------------------------------------------
14,443 13,749
--------------------------------------------------------------------
Accumulated depreciation and amortization (7,698) (6,564)
--------------------------------------------------------------------
$ 6,745 7,185
====================================================================
The Bank leases a portion of its building to unrelated parties under
operating leases which expire in various years. The minimum future
rentals to be received on non-cancelable leases as of December 31,
20021 are summarized as follows:
(in thousands) Year Ending December 31,
--------------------------------------------------------------------
2003 $ 74
2004 23
2005 18
2006 8
2007 7
--------------------------------------------------------------------
Total minimum future rentals $ 130
====================================================================
(6) Other Assets
Other assets includes the cash surrender value of life insurance
totaling $13,339 thousand and $12,690 thousand at December 31, 2002
and 2001 respectively. 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, for which the Bank is the beneficiary, 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.
Other real estate owned is also included in other assets and was
$329 thousand and $809 thousand at December 31, 2002 and 2001,
respectively. There was no other real estate owned acquired through
foreclosure as settlement for loans during 2002. During 2001, $1,086
thousand was acquired through foreclosure as settlement for loans.
These amounts represent non-cash transactions, and accordingly, have
been excluded from the Consolidated Statements of Cash Flows.
(7) Deposits
The following is a summary of deposits at December 31:
(in thousands) 2002 2001
--------------------------------------------------------------------
Demand $ 34,673 29,758
NOW and Super NOW Accounts 50,582 48,928
Money Market 30,248 21,119
Savings 39,597 31,793
Time, $100,000 and over 21,507 25,463
Other Time 34,072 44,510
--------------------------------------------------------------------
$ 210,679 201,571
====================================================================
53
Interest paid on time deposits in denominations of $100 thousand or
more was $660 thousand, $1,069 thousand and $943 thousand in 2002,
2001 and 2000, respectively.
At December 31, 2002, the aggregate maturities for time deposits is
as follows:
(in thousands)
--------------------------------------------------------------------
2003 $ 49,200
2004 4,842
2005 881
2006 357
2007 299
--------------------------------------------------------------------
Total $ 55,579
====================================================================
(8) Operating Leases
The Bank has non-cancelable operating leases with unrelated parties
for office space and equipment. The lease payments for future years
are as follows:
Year Ending December 31, (in thousands) Lease Payments
--------------------------------------------------------------------
2003 $ 225
2004 112
2005 84
2006 86
2007 89
--------------------------------------------------------------------
$ 596
====================================================================
Total rental expense for operating leases was $243 thousand, $254
thousand and $158 thousand in 2002, 2001 and 2000 respectively.
(9) Supplemental Compensation Agreements
Effective April 3, 1999 the Company and the Bank entered into
nonqualified supplemental compensation agreements with all of the
directors and certain executive officers for the provision of death,
disability and post-employment/retirement benefits. The agreement
with directors includes elective provisions for service as a
director emeritus following termination of service as a member of
the Bank's Board of Directors. Directors who elect to serve as a
director emeritus receive certain benefits during such period of
service in addition to benefits applicable to all directors which
commence upon expiration of the three year emeritus period. The
Company accrues for the compensation based on anticipated years of
service and the vesting schedule provided in the agreements.
The Plan is unsecured and unfunded and there are no Plan assets. The
Company has purchased insurance on the lives of the directors and
executive officers in the Plan and intends to use the cash values of
these policies as a funding source to pay the supplemental
compensation obligations. (See Note 6 for information regarding the
cash values of the life insurance). The accrued pension obligation
was $1,243 thousand and $948 thousand as of December 31, 2002 and
2001, respectively. The Company recognized expense related to the
Plan during 2002 and 2001 totaling $295 thousand and $493 thousand,
respectively. The net periodic benefits cost of $275 thousand was
all related to service cost. The net periodic cost was determined
using a discount rate of 7.25%.
54
(10) Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Company is a party to
financial instruments with off-balance sheet risk. These financial
instruments include commitments to extend credit and standby letters
of credit.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the
contractual notional amount of those instruments. The Company uses
the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
At December 31, 2002 and 2001, financial instruments whose contract
amounts represent credit risk are as follows:
(in thousands) 2002 2001
--------------------------------------------------------------------
Commitments to extend credit $ 40,717 41,822
====================================================================
Standby letters of credit $ 1,038 920
====================================================================
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates, other
termination clauses and may require payment of a fee. Many of the
commitments are expected to expire without being drawn upon and
accordingly, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. Upon extension
of credit, the amount of collateral obtained, if any, is based on
management's credit evaluation of the counter-party. Collateral
varies but may include accounts receivable, inventory, property,
plant and equipment, and income-producing or other real estate.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
These guarantees are primarily issued to support private borrowing
arrangements. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan
facilities to customers. Collateral obtained, if any, is varied.
(11) Other Noninterest Expense
Other noninterest expense for the years 2002, 2001 and 2000 included
the following significant items:
(in thousands) 2002 2001 2000
--------------------------------------------------------------------
Third party data processing expense $ 848 877 869
Marketing 514 413 422
Professional fees 465 403 771
Directors' fees and retirement 315 385 193
Telephone and postage 313 296 232
Supplies 266 247 189
Intangible amortization 171 171 215
Non-performing loan costs 92 77 246
Other 1,103 798 606
--------------------------------------------------------------------
Total $ 4,087 3,667 3,743
====================================================================
55
(12) Income Taxes
The provision for income taxes for the years 2002, 2001 and 2000
consisted of the following:
2002 (in thousands) Federal State Total
--------------------------------------------------------------------
Current $ 592 201 793
Deferred, net (287) (51) (338)
--------------------------------------------------------------------
Income tax expense $ 305 150 455
====================================================================
2001 (in thousands)
--------------------------------------------------------------------
Current $ 487 132 619
Deferred, net (358) (43) (401)
--------------------------------------------------------------------
Income tax expense $ 129 89 218
====================================================================
====================================================================
2000 (in thousands)
--------------------------------------------------------------------
Current $ 204 142 346
Deferred, net (29) (17) (46)
--------------------------------------------------------------------
Income tax expense $ 175 125 300
====================================================================
Income taxes receivable of $573 thousand and $12 thousand are
included in other assets at December 31, 2002 and 2001,
respectively.
A reconciliation of the statutory income tax rate to the effective
income tax rate attributable to continuing operations of the Company
is as follows:
2002 2001 2000
--------------------------------------------------------------------
Federal income tax expense, at statutory
income tax rates 34% 34% 34%
State franchise tax expense, net of federal
income tax benefits 7% 7% 7%
Tax-free interest income (15%) (21%) (20%)
Change in the beginning of the year deferred
tax asset valuation allowance (2%) - -
Other 1% (5%) (2%)
--------------------------------------------------------------------
25% 15% 19%
====================================================================
56
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 2002 and 2001 are presented below.
(dollars in thousands) 2002 2001
-------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 1,129 912
Deferred loan income 180 121
Accumulated depreciation 265 107
Accumulated Amortization 393 377
Deferred compensation 557 448
Other 120 210
-------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 2,644 2,175
Less valuation allowance - (35)
-------------------------------------------------------------------------------------------------------
Deferred tax assets, net of allowance 2,644 2,140
-------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred loan origination costs (387) (247)
Unrealized gain on available-for-sale securities, net (316) (182)
Other (162) (136)
-------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (865) (565)
-------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 1,779 1,575
=======================================================================================================
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for
future taxable income over the periods for which the deferred tax
assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowance at December 31,
2001. The valuation allowance was decreased by $35,000 in 2002.
57
(13) Stockholders' Equity
(a) Stock Options
In February 1997, the Board of Directors adopted the First Financial
Bancorp 1997 Stock Option Plan. The maximum number of shares
issuable under the Plan is 446,516 less any shares reserved for
issuance pursuant to the 1991 Plans. Options are granted at an
exercise price of at least 100% and 85% of the fair market value of
the stock on the date of grant for employee stock options and
director stock options, respectively. The options issued in 2001,
2000 and 1999 were not issued at less than 100% of market value.
Stock option plan activities are summarized as follows:
Weighted
Average
Options Exercise Price
------- --------------
Balance, December 31, 1999 169,125 $ 7.35
Options granted 68,775 8.96
Options exercised (22,187) 6.03
Options expired (13,774) 10.82
--------------------------------------------------------------------
Balance, December 31, 2000 201,939 7.82
Options granted 66,100 9.50
Options exercised (20,425) 5.95
Options expired (10,448) 6.84
--------------------------------------------------------------------
Balance, December 31, 2001 237,166 8.69
Options granted 63,500 11.75
Options exercised (32,186) 8.02
Options expired (5,583) 9.33
--------------------------------------------------------------------
Balance, December 31, 2002 262,897 9.26
====================================================================
At December 31, 2002, the range of exercise prices for all
outstanding options ranged from $5.06 to $12.00. The following table
provides certain information with respect to stock options
outstanding at December 31, 2002:
Weighted Weighted
Stock Average Average
Range of Options Exercise Remaining
Exercise Prices Outstanding Price Contractual Life
--------------------------------------------------------------------
Under $6.00 51,732 $ 5.80 2.21
$6.00 to $8.99 62,169 8.86 7.21
$9.00 to $9.50 66,305 9.48 8.33
Over $9.50 82,691 11.55 8.99
--------------------------------------------------------------------
262,897 $ 9.26 7.07
====================================================================
At December 31, 2002 and 2001, the weighted-average remaining
contractual life of all outstanding options was 7.07 years and 7.70
years, respectively. The number of options exercisable was 145,943,
140,992, and 122,928 and the weighted-average exercise price of
those options was $8.35, $8.12, and $7.64 at December 31, 2002, 2001
and 2000, respectively.
The following table provides certain information with respect to
stock options exercisable at December 31, 2002:
Weighted
Stock Average
Range of Options Exercise
Exercise Prices Exercisable Price
--------------------------------------------------------------------
Under $6.00 51,732 $ 5.80
$6.00 to $8.99 38,565 8.83
$9.00 to $9.50 27,593 9.47
Over $9.50 28,053 11.28
--------------------------------------------------------------------
145,943 $ 8.35
====================================================================
(b) Employee Stock Ownership Plan
58
Effective January 1, 1992, the Bank established the Bank of Lodi
Employee Stock Ownership Plan. The plan covers all employees, age 21
or older, beginning with the first plan year in which the employee
completes at least 1,000 hours of service. The Bank's annual
contributions to the plan are made in cash and are at the discretion
of the Board of Directors based upon a review of the Bank's
profitability. Contributions for 2002, 2001 and 2000 totaled
approximately $ 191 thousand, $ 171 thousand and $156 thousand,
respectively.
Contributions to the plan are invested primarily in the Common Stock
of First Financial Bancorp and are allocated to participants on the
basis of salary in the year of allocation. Benefits become 20%
vested after the third year of credited service, with an additional
20% vesting each year thereafter until 100% vested after seven
years. As of December 31, 2002, the plan owned 167,918 shares of
Company Common Stock. Of that amount, 109,807 shares were
unallocated to participants at December 31, 2002.
(c) Dividends and Dividend Restrictions
The Company's principal source of funds for dividend payments is
dividends received from the Bank. Under applicable Federal laws,
permission to pay a dividend must be granted to a bank by the
Comptroller of the Currency if the total dividend payment of any
national banking association in any calendar year exceeds the net
profits of that year, as defined, combined with net profits for the
two preceding years. At December 31, 2002, there were Bank retained
earnings of $4,272 thousand free of this condition.
(d) Weighted Average Shares Outstanding
Basic and diluted earnings per share for the years ended December
31, 2002, 2001, and 2000 were computed as follows:
Income Shares Per-Share
(numerator) (denominator) Amount
2002 (in thousands)
-------------------------------------------------------- ------------------------- --------------
Basic earnings per share $1,355 1,646,314 $0.82
Effect of dilutive stock options - 63,244 -
------------------------ -------------------------
Diluted earnings per share $1,355 1,709,558 $0.79
======================== =========================
Income Shares Per-Share
(numerator) (denominator) Amount
2001 (in thousands)
-------------------------------------------------------- ------------------------- --------------
Basic earnings per share $1,207 1,609,236 $0.75
Effect of dilutive stock options - 44,965 -
------------------------ -------------------------
Diluted earnings per share $1,207 1,654,201 $0.73
======================== =========================
Income Shares Per-Share
(numerator) (denominator) Amount
2000 (in thousands)
-------------------------------------------------------- ------------------------- --------------
Basic earnings per share $ 1,283 1,591,357 $0.81
Effect of dilutive stock options - 39,206 -
------------------------ -------------------------
Diluted earnings per share $1,283 1,630,563 $0.79
======================== =========================
59
(e) Preferred Stock Rights Plan
On May 31, 2001, the Company's Board of Directors adopted a
Shareholder Rights Plan (the "Rights Plan") pursuant to which
preferred stock purchase rights ("Rights") were granted as a
dividend to shareholders of record at the rate of one Right for each
outstanding share of common stock held of record as of the close of
business on July 6, 2001. The Rights will also be attached to
certain future issuances of common stock. Subject to certain
exceptions, each Right, when exercisable, will entitle the
registered holder to buy one one-hundredth of a share of a Series A
Junior Participating Preferred Stock of the Company (the "Series A
Junior Preferred Stock") at an exercise price of $47.50 per Right,
subject to adjustment.
The Rights will become exercisable upon the occurrence of certain
specified events, including an announcement that a person or group
of affiliated or associated persons ("Acquiring Person") has
acquired beneficial ownership of 10% or more of the outstanding
common stock. In such event, each holder of a Right (other than
Rights beneficially owned by the Acquiring Person) will thereafter
have the right to purchase, at the then-current exercise price, a
number of shares of common stock of the Company having a market
value equal to twice the exercise price of the Right. For purposes
of the Rights Plan, the Company's Board of Directors has designated
1,000,000 shares of Series A Junior Preferred Stock, which amount
may be increased or decreased by the Board of Directors. All Rights
expire on May 31, 2011, unless the Rights are earlier redeemed or
exchanged by the Company in accordance with the Rights Plan or
expire earlier upon the consummation of certain transactions as set
forth in the Rights Plan.
(14) Related Party Transactions
During the normal course of business, the Bank enters into
transactions with related parties, including directors, officers,
and affiliates. These transactions include borrowings from the Bank
with substantially the same terms, including rates and collateral,
as loans to unrelated parties. At December 31, 2002 and 2001,
respectively, such borrowings totaled $1,467 thousand and $1,403
thousand, respectively. Deposits of related parties held by the Bank
totaled $397 thousand and $ 463 thousand at December 31, 2002 and
2001, respectively.
The following is an analysis of activity with respect to the
aggregate dollar amount of loans made by the Bank to directors,
officers and affiliates for the years ended December 31:
(in thousands) 2002 2001
--------------------------------------------------------------------
Balance, beginning of year $ 1,403 1,366
Loans funded 745 475
Principal repayments (681) (438)
--------------------------------------------------------------------
Balance, end of year $ 1,467 1,403
====================================================================
60
(15) Parent Company Financial Information
This information should be read in conjunction with the other notes
to the consolidated financial statements. The following presents
summary balance sheets as of December 31, 2002 and 2001, and
statements of income, and cash flows information for the years ended
December 31, 2002, 2001, and 2000.
Balance Sheets: (in thousands)
------------------------------------------------------------------------------------------------------------------------
Assets 2002 2001
------------------------------------------------------------------------------------------------------------------------
Cash in bank $ 2,802 128
Investment securities available-for-sale, at fair value 6 6
Premises and equipment, net 60 60
Investment in wholly-owned subsidiaries 20,999 17,300
Other assets 558 369
------------------------------------------------------------------------------------------------------------------------
$ 24,425 17,863
========================================================================================================================
Liabilities and Stockholders' Equity
------------------------------------------------------------------------------------------------------------------------
Note payable to subsidiary $ 5,155 -
Stockholders' equity
Common stock 10,143 10,191
Retained earnings 8,672 7,317
Accumulated other comprehensive income, net 455 355
------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 19,270 17,863
------------------------------------------------------------------------------------------------------------------------
$ 24,425 17,863
========================================================================================================================
Statements of Income: (in thousands) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------
Rent from subsidiary $ 6 6 6
Interest expense - long term debt (214) - -
Other expenses (203) (213) (150)
Equity in income of subsidiaries 1,694 1,292 1,360
Income tax benefit 72 122 67
------------------------------------------------------------------------------------------------------------------------
Net income $ 1,355 1,207 1,283
========================================================================================================================
Statements of Cash Flows: (in thousands) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,355 1,207 1,283
Adjustments to reconcile net income to net cash
flows (used in) provided by operating activities:
Depreciation and amortization - - 3
Provision for deferred taxes (37) (21) (10)
(Increase) decrease in other assets (152) (89) 122
Increase in equity of subsidiaries (3,599) (1,307) (1,367)
------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (2,433) (210) 31
Cash flows from financing activities:
Proceeds from issuance of long term debt 5,155 - -
Proceeds from issuance of common stock 343 136 173
Payments for repurchase of common stock (391) - -
Dividends paid - (4) (74)
------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,107 132 99
------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 2,674 (78) 130
------------------------------------------------------------------------------------------------------------------------
Cash at beginning of year 128 206 76
------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 2,802 128 206
========================================================================================================================
61
(16) Short Term Borrowings
The Bank has two lines of credit with correspondent banks totaling
$5 million at December 31, 2002 and 2001. The lines of credit are
unsecured and renew annually. At December 31, 2002 and 2001 the Bank
had outstanding borrowings under these lines totaling $3 million and
$4 million, respectively. The maximum amount outstanding was $3
million and $4 million, the average balance outstanding was $61
thousand and $50 thousand and the weighted average interest rate was
2.46% and 3.02% for the years ending December 31, 2002 and 2001,
respectively.
At December 31, 2002 and 2001 securities sold under agreements to
repurchase totaled $11,885 and $0 thousand, respectively. The
maximum amount outstanding was $11,885 thousand and $4,588 thousand,
the average balance outstanding was $3,227 thousand and $70 thousand
and the weighted average interest rate was 2.09% and 6.79% for the
years ending December 31, 2002 and 2001, respectively. These
agreements generally mature within 30 days.
(17) Obligated Mandatorily Redeemable Capital Securities of Subsidiary
Trust
On March 26, 2002, First Financial (CA) Statutory Trust I (Trust), a
Connecticut statutory business trust and 100%-owned finance
subsidiary of First Financial Bancorp, issued $5 million in floating
rate Cumulative Trust Preferred Securities (Securities). The
securities have an initial interest rate of 5.59% and mature on
March 26, 2032, but prior redemption is permitted under certain
circumstances, such as changes in tax or regulatory capital rules.
The principal asset of the Trust is a $5.2 million floating rate
subordinated debenture of the Company. The subordinated debenture
bears an initial interest rate of 5.59% and matures March 26, 2032,
subject to prior redemption under certain circumstances. First
Financial Bancorp owns all of the common securities of the Trust.
The Securities, the assets of the Trust, and the common securities
issued by the Trust are redeemable in whole or in part on or after
March 26, 2007, or at any time in whole, but not in part, from the
date of issuance upon the occurrence of certain events. The
Securities are included in Tier 1 capital for regulatory capital
adequacy determination purposes, subject to certain limitations. The
obligations of the Company with respect to the issuance of the
Securities constitute a full and unconditional guarantee by the
Company of the Trust's obligation with respect to the Securities.
Subject to certain exceptions and limitations, the Company may, from
time to time, defer subordinated debenture interest payments, which
would result in a deferral of distribution payments on the related
Securities and, with certain exceptions, prevent the Company from
declaring or paying cash distributions on the Company's common stock
or debt securities that rank junior to the subordinated debenture.
(18) Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measure of the Bank's
assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios
(set forth in the table below).
First, a bank must meet a minimum Total Risk-Based Capital to
risk-weighted assets ratio of 8%. Risk-based capital and asset
guidelines vary from Tier I capital guidelines by redefining the
components of capital, categorizing assets into different classes,
and including certain off-balance sheet items in the calculation of
the capital ratio. The effect of the risk-based capital guidelines
is that banks with high exposure will be required to raise
additional capital while institutions with low risk exposure could,
with the concurrency of regulatory authorities, be permitted to
operate with lower capital ratios. In addition, a bank must meet
minimum Tier I Capital to average assets ratio.
62
Management believes, as of December 31, 2002, that the Bank meets
all capital adequacy requirements to which it is subject. As of
December 31, 2002, the most recent notification, the Federal Deposit
Insurance Corporation (FDIC) categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as adequately capitalized, the Bank must
meet the minimum ratios as set forth below. There are no conditions
or events since that notification that management believes have
changed the Bank's category.
The Bank's actual capital amounts and ratios as of December 31, 2002
are as follows:
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------------------
Total Risk-based Capital
(to Risk Weighted Assets) $ 22,506 11.16% 16,127 >8.0% 20,159 >10.0%
Tier I Capital (to Risk Weighted Assets) $ 19,979 9.91% 8,064 >4.0% 12,095 >6.0%
Tier I Capital (to Average Assets) $ 19,979 8.22% 9,722 >4.0% 12,153 >5.0%
The Bank's actual capital amounts and ratios as of December 31, 2001
are as follows:
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------------------
Total Risk-based Capital
(to Risk Weighted Assets) $ 18,461 10.24% 14,425 >8.0% 18,031 >10.0%
Tier I Capital (to Risk Weighted Assets) $ 16,202 8.99% 7,212 >4.0% 10,819 >6.0%
Tier I Capital (to Average Assets) $ 16,202 7.45% 8,703 >4.0% 10,878 >5.0%
(19) Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and due from banks and federal funds sold and
securities purchased under resale agreements are a reasonable
estimate of fair value.
Investment securities: Fair values for investment securities are
based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market
prices of comparable instruments. (See Note 3).
Loans: For variable-rate loans that re-price frequently and with no
significant change in credit risk, fair values are based on carrying
values. The fair values for fixed-rate loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality.
Commitments to extend credit and standby letters of credit: The fair
value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining
terms of the agreement and the present creditworthiness of the
counter parties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates
and the committed rates. The fair value of letters of credit is
based upon fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation
with the counter parties at the reporting date.
Deposit liabilities: The fair values disclosed for demand deposits
(e.g., interest and non-interest checking, savings, and money market
accounts) are, by definition, equal to the amount payable on demand
at the reporting date (i.e., their carrying amounts). The fair
values for fixed-rate time deposits are estimated using a discounted
cash flow calculation that applies interest rates currently being
offered on time deposits to a schedule of aggregated expected
monthly maturities on time deposits.
63
Short-term borrowings: The discounted value of contractual cash
flows at market interest rates for short term borrowings with
similar terms and remaining maturities are used to estimate the fair
value of existing short-term borrowings.
Other borrowings: Other borrowings consist of the Trust Preferred
Securities. The fair value of the Trust Preferred Securities is
estimated by the contractual cash flows using the current interest
rate at which similar borrowing for the same remaining maturity
could be made.
Limitations: Fair value estimates are made at a specific point in
time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument.
Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Other significant
assets and liabilities that are not considered financial assets or
liabilities include deferred tax assets, premises, and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in many of the
estimates.
The estimated fair values of the Company's financial instruments at
December 31, 2002 are approximately as follows:
2002
Carrying Fair
(in thousands) Amount Value
--------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and due from banks and federal funds sold and
securities purchased under resale agreements $ 34,622 34,622
Investment securities 33,125 33,125
Loans held for sale 7,578 7,600
Loans, net 154,090 156,762
Financial liabilities:
Deposits:
Demand 34,673 34,673
Now and Super Now accounts 50,582 50,993
Money Market 30,248 30,319
Savings 39,597 40,177
Time 55,579 55,881
-------------------------------------------------------------------------------------------
Total deposits 210,679 212,043
Short term borrowings 14,885 14,885
Other Borrowings 5,000 5,000
Contract Carrying Fair
(in thousands) Amount Amount Value
--------------------------------------------------------------------------------------------------------------
Unrecognized financial instruments:
Commitments to extend credit $ 40,717 407
Standby letters of credit 1,038 1
64
2001
Carrying Fair
(in thousands) Amount Value
------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and due from banks and federal funds sold and
securities purchased under resale agreements $ 19,457 19,457
Investment securities 41,015 41,015
Loans held for sale 3,876 3,900
Loans, net 135,430 137,138
Financial liabilities:
Deposits:
Demand 29,758 29,758
Now and Super Now accounts 48,928 48,928
Money Market 21,119 21,119
Savings 31,793 31,793
Time 69,973 70,906
-----------------------------------------------------------------------------------------
Total deposits 201,571 202,504
Short term borrowings 4,000 4,000
Contract Carrying Fair
(in thousands) Amount Amount Value
------------------------------------------------------------------------------------------------------------
Unrecognized financial instruments:
Commitments to extend credit $ 41,822 - 418
Standby letters of credit 920 - 1
(20) Legal Proceedings
The bank is involved in various legal actions arising in the
ordinary course of business. In the opinion of management, after
consulting with legal counsel, the ultimate disposition of these
matters will not have a material effect on the Bank's financial
condition, results of operations, or liquidity.
(21) Derivative Financial Instruments
As of December 31, 2002 and 2001, the Company has no off-balance
sheet derivatives. The Company held $25,463 thousand and $23,203
thousand in collateralized mortgage obligations as of December 31,
2002 and 2001, respectively. These investments are held in the
available for sale portfolio.
65
(22) Quarterly Financial Information (Unaudited)
----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data and
price range of common stock) March 31, June 30, September 30, December 31,
----------------------------------------------------------------------------------------------------------------------
2002
Interest income $ 3,149 3,590 3,539 3,399
Net interest income 2,149 2,625 2,740 2,704
Provision for loan losses 195 181 162 87
Noninterest income 1,225 915 1,418 1,145
Noninterest expense 2,843 3,163 3,080 3,400
Income before taxes 336 196 916 362
Net income 281 197 612 265
Basic earnings per share .17 .12 .37 .16
Diluted earnings per share .17 .12 .36 .15
Dividends paid per share - - -
Price range, common stock 11.35-10.40 12.50-11.00 11.88-11.65 12.65-11.71
----------------------------------------------------------------------------------------------------------------------
2001
Interest income $ 3,310 3,383 3,563 3,602
Net interest income 2,204 2,153 2,377 2,480
Provision for loan losses 190 - 55 146
Noninterest income 953 758 1,030 1,087
Noninterest expense 2,665 2,782 2,933 2,846
Income before taxes 302 129 419 575
Net income 255 153 322 477
Basic earnings per share .15 .10 .20 .30
Diluted earnings per share .15 .09 .19 .30
Dividends paid per share - - - -
Price range, common stock 10.13 - 9.00 9.87 - 9.12 10.42 - 9.00 11.15 - 9.90
----------------------------------------------------------------------------------------------------------------------
66
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) 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, on the .
FIRST FINANCIAL BANCORP
/s/ LEON J. ZIMMERMAN
------------------------------------
Leon J. Zimmerman
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
following persons on behalf of the registrant and in the capacities and on the
dates indicated have signed this report.
Capacity Date
-------- ----
/s/ BENJAMIN R. GOEHRING Director and Chairman of the Board March 21, 2003
- -------------------------------------------
Benjamin R. Goehring
/s/ WELDON D. SCHUMACHER Director and Vice Chairman of the Board March 21, 2003
- --------------------------------------------
Weldon D. Schumacher
/s/ ANGELO J. ANAGNOS Director March 21, 2003
- --------------------------------------------
Angelo J. Anagnos
/s/ STEVE M. COLDANI Director March 21, 2003
- --------------------------------------------
Steve M. Coldani
/s/ DAVID M. PHILIPP Director March 21, 2003
- --------------------------------------------
David M. Philipp
/s/ ROBERT H. MILLER, III Director March 21, 2003
- --------------------------------------------
Robert H. Miller, III
/s/ KEVIN VAN STEENBERGE Director March 21, 2003
- --------------------------------------------
Kevin Van Steenberge
/s/ LEON J. ZIMMERMAN Director, President and March 21, 2003
- -------------------------------------------- Chief Executive Officer
Leon J. Zimmerman (Principal Executive Officer)
/s/ ROBERT H. DANEKE Director, Executive Vice President and March 21, 2003
- -------------------------------------------- Chief Credit Officer
Robert H. Daneke
/s/ ALLEN R. CHRISTENSON Senior Vice President, March 21, 2003
- --------------------------------------------- Chief Financial Officer and Secretary
Allen R. Christenson (Principal Financial and Accounting Officer)
67
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
I, Leon Zimmerman, certify that:
1. I have reviewed this annual report on Form 10-K of First Financial Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Leon Zimmerman
-------------------------------------
Leon Zimmerman
President and Chief Executive Officer
(Principal Executive Officer)
Dated: March 21, 2003
68
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
I, Allen R. Christenson, certify that:
1. I have reviewed this annual report on Form 10-K of First Financial Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with a respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this annual report whether or not there were significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Allen R. Christenson
-----------------------------------------------
Allen R. Christenson
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: March 21, 2003
69
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
1 Placement Agreement dated March 14, 2002 for the First Financial
Bancorp 5,000 Floating Rate Capital Securities (Liquidation
Amount $1,000.00 per Capital Security)
3(a) Articles of Incorporation, as amended, filed as Exhibit 3.1 to
the Company's General Form for Registration of Securities on Form
10, filed on September 21, 1983, is hereby incorporated by
reference.
3(b) Bylaws, as amended, filed as Exhibit 3(b) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, is
hereby incorporated by reference.
4(a) Specimen Common Stock Certificate, filed as Exhibit 4.1 to the
Company's General Form for Registration of Securities on Form 10,
filed on September 21, 1983, is hereby incorporated by reference.
4(b) Rights Agreement between First Financial Bancorp and Mellon
Investor Services LLC, dated as of June 15, 2001, including Form
of Right Certificate, filed as Exhibit 4 to the Company's Form
8-K filed on June 28, 2001, is hereby incorporated by reference.
4(c) Amended and Restated Declaration of Trust dated as of March 26,
2002 by and Among State Street Bank and Trust Company of
Connecticut, National Association, As institutional Trustee,
First Financial Bancorp, As Sponsor, and Benjamin R. Goehring,
Weldon D. Schumacher And Leon J. Zimmerman As Administrators
4(d) Guarantee Agreement dated as of March 26, 2002 by and between
First Financial Bancorp and State Street Bank and Trust Company
of Connecticut, National Association
4(e) Indenture of dated as of March 26, 2002 of First Financial
Bancorp as Issuer and State Street Bank and Trust Company of
Connecticut, National Association, as Trustee for the
registrant's Floating Rate Junior Subordinated Deferrable
Interest Debentures due 2032
10(a)* First Financial Bancorp 1991 Director Stock Option Plan and form
of Non-statutory Stock Option Agreement, filed as Exhibit 4.1 to
the Company's Form S-8 Registration Statement (Registration No.
33-40954), filed on May 31, 1991, is hereby incorporated by
reference.
10(b)* Amendment to First Financial Bancorp 1991 Director Stock Option
Plan, filed as Exhibit 4.3 to the Company's Post-Effective
Amendment No. 1 to Form S-8 Registration Statement (Registration
No. 33-40954), filed as Exhibit 10 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1995, is
hereby incorporated by reference.
10(c)* First Financial Bancorp 1991 Employee Stock Option Plan and forms
of Incentive Stock Option Agreement and Non-statutory Stock
Option Agreement, filed as Exhibit 4.2 to the Company's Form S-8
Registration Statement (Registration No. 33-40954), filed on May
31, 1991, is hereby incorporated by reference.
10(d) Bank of Lodi Employee Stock Ownership Plan, filed as Exhibit 10
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992, is hereby incorporated by reference.
10(e)* First Financial Bancorp 1997 Stock Option Plan, filed as Exhibit
10 to the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1997, is hereby incorporated by reference.
10(f)* Bank of Lodi Incentive Compensation Plan, filed as Exhibit 10(f)
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, is hereby incorporated by reference.
10(g) First Financial Bancorp 401(k) Profit Sharing Plan, filed as
Exhibit 10(g) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, is hereby incorporated by
reference.
70
10(h)* Employment Agreement dated as of September 30, 1998, between
First Financial Bancorp and Leon J. Zimmerman., filed as Exhibit
10(h) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, is hereby incorporated by
reference.
10(i)* Executive Supplemental Compensation Agreement effective as of
April 3, 1998, between Bank of Lodi, N.A. and Leon J. Zimmerman,
filed as Exhibit 10(j) to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998, is hereby
incorporated by reference.
10(j)* Life Insurance Endorsement Method Split Dollar Plan Agreement
effective as of April 3, 1998, between Bank of Lodi, N.A. and
Leon J. Zimmerman, filed as Exhibit 10(l) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, is hereby incorporated by reference.
10(k)* Form of Director Supplemental Compensation Agreement, effective
as of April 3, 1998, as executed between Bank of Lodi, N.A. and
each of Benjamin R. Goehring, Michael D. Ramsey, Weldon D.
Schumacher and Dennis R. Swanson, filed as Exhibit 10(n) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, is hereby incorporated by reference.
10(l)* Form of Life Insurance Endorsement Method Split Dollar Plan
Agreement, effective as of April 3, 1998, as executed between
Bank of Lodi, N.A. and each of Benjamin R. Goehring, Michael D.
Ramsey, Weldon D. Schumacher and Dennis R. Swanson, filed as
Exhibit 10(o) to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998, is hereby incorporated by
reference.
10(m)* Form of Director Supplemental Compensation Agreement, effective
as of April 3, 1998, as executed between Bank of Lodi, N.A. and
each of Angelo J. Anagnos, Raymond H. Coldani, Bozant Katzakian
and Frank M. Sasaki, filed as Exhibit 10(p) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, is hereby incorporated by reference.
10(n)* Form of Life Insurance Endorsement Method Split Dollar Plan
Agreement, effective as of April 3, 1998, as executed between
Bank of Lodi, N.A. and each of Angelo J. Anagnos, Raymond H.
Coldani, Bozant Katzakian and Frank M. Sasaki, filed as Exhibit
10(q) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, is hereby incorporated by
reference.
10(o)* Form of Long Term Care Agreement by and between Bank of Lodi,
N.A. and certain directors and executive officers filed as
Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001, is hereby incorporated by
reference.
11 Statement re computation of earnings per share is incorporated
herein by reference to Notes 1(j) and 13 to the consolidated
financial statements included in this report.
21 Subsidiaries of the Company: The Company owns 100 percent of the
capital stock of Bank of Lodi, National Association, a national
banking association, 100 percent of the capital stock of Western
Auxiliary Corporation and 100 percent of the capital stock of
First Financial (CA) Statutory Trust I.
23 Consent of KPMG LLP, independent auditors
99.1 Certification of Registrant's Chief Executive Officer Pursuant To
18 U.S.C. Section 1350
99.2 Certification of Registrant's Chief Financial Officer Pursuant To
18 U.S.C. Section 1350
71