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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ______________________ to ______________________
Commission File Number : 0-12499
First Financial Bancorp
(Exact name of registrant as specified in its charter)
California 94-28222858
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701 South Ham Lane , Lodi, California 95242
(Address of principal executive offices) (Zip Code)
(209) 367-2000
(Registrant's telephone number, including area code)
NA
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
[ ] Yes [X] No
As of July 31, 2003 there were 1,629,711 shares of Common Stock, no par
value, outstanding.
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FIRST FINANCIAL BANCORP
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
TABLE OF CONTENTS
Page
PART I
Item 1. Consolidated Financial Statements and Notes to Consolidated
Financial Statements ............................................ 1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk ...... 14
Item 4. Controls and Procedures ......................................... 14
PART II
Item 1. Legal Proceedings ............................................... 15
Item 2. Changes in Securities and Use of Proceeds ....................... 15
Item 3. Defaults Upon Senior Securities ................................. 15
Item 4. Submission of Matters to a Vote of Security Holders.............. 15
Item 5. Other Information ............................................... 15
Item 6. Exhibits and Reports on Form 8-K ................................ 15
Signatures ............................................................... 16
Index to Exhibits ........................................................ 17
ITEM 1. FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(in thousands except share amounts)
June 30, December 31,
Assets 2003 2002
- ------ -------- --------
Cash and due from banks $ 16,434 $ 14,988
Federal funds sold and securities purchased under resale
agreements 22,395 19,634
Investment securities available for sale, at fair value 47,971 33,125
Loans held for sale 7,240 7,578
Loans, net of deferred loan fees 164,246 157,147
Less allowance for loan losses 3,260 3,057
-------- --------
Net loans 160,986 154,090
Premises and equipment, net 6,394 6,745
Accrued interest receivable 937 772
Other assets 18,155 18,314
-------- --------
Total Assets $280,512 $255,246
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits:
Noninterest bearing $ 39,063 $ 34,673
Interest bearing 207,476 176,006
-------- --------
Total deposits 246,539 210,679
Accrued interest payable 166 144
Short term borrowings 5,339 14,885
Other liabilities 3,651 5,268
Obligated mandatorily redeemable capital
Securities of subsidiary trust 5,000 5,000
-------- --------
Total liabilities 260,695 235,976
-------- --------
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 2003 and 2002, 1,629,711
and 1,621,837, respectively 10,234 10,143
Retained earnings 9,373 8,672
Accumulated other comprehensive income 210 455
-------- --------
Total stockholders' equity 19,817 19,270
-------- --------
$280,512 $255,246
======== ========
See accompanying notes.
1
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(in thousands except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
2003 2002 2003 2002
------ ------- ------ ------
Interest income:
Loans, including fees $3,298 $ 3,044 $6,252 $5,781
Investment securities:
Taxable 201 466 453 788
Exempt from federal taxes 26 45 63 89
Federal funds sold 36 35 69 81
------ ------- ------ ------
Total interest income 3,561 3,590 6,837 6,739
Interest expense:
Deposit accounts 619 867 1,200 1,861
Other borrowings 70 98 136 104
------ ------- ------ ------
Total interest expense 689 965 1,336 1,965
------ ------- ------ ------
Net interest income 2,872 2,625 5,501 4,774
Provision for loan losses 55 181 312 376
------ ------- ------ ------
Net interest income after provision for
loan losses 2,817 2,444 5,189 4,398
Noninterest income:
Gain on sale of investment securities -- -- 88 262
Gain on sale of other real estate 5 -- 5 22
Gain on sale of loans 320 145 626 374
Service charges 412 413 809 777
Premiums and fees from SBA and mortgage
operations 112 85 241 182
Increase in cash surrender value of life
insurance 141 195 283 337
Miscellaneous 102 77 218 186
------ ------- ------ ------
Total non-interest income 1,092 915 2,270 2,140
Noninterest expense:
Salaries and employee benefits 1,868 1,597 3,520 3,076
Occupancy 251 241 506 477
Equipment 212 195 438 402
Other 1,074 1,130 2,025 2,051
------ ------- ------ ------
Total non-interest expense 3,405 3,163 6,489 6,006
------ ------- ------ ------
Income before provision for income taxes 504 196 970 532
Provision for income tax (benefit) expense 145 (1) 269 54
------ ------- ------ ------
Net income $ 359 $ 197 $ 701 $ 478
====== ======= ====== ======
Earnings per share:
Basic $ 0.22 $ 0.12 $ 0.43 $ 0.29
====== ======= ====== ======
Diluted $ 0.21 $ 0.12 $ 0.41 $ 0.28
====== ======= ====== ======
See accompanying notes.
2
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Unaudited) (in thousands
except share amounts)
Six Months Ended June 30, 2003
Accumulated
Common Common Other
Stock Stock Comprehensive Retained Comprehensive
Description Shares Amounts Income Earnings Income Total
- ------------------------------------- ------------ ------------ --------------- ------------- ----------------- ---------------
Balance at December 31, 2002 1,621,837 $ 10,143 8,672 455 19,270
Comprehensive income:
Net income $ 701 701 701
---------------
Other comprehensive income:
Unrealized holding loss arising
during the current period, net of
tax effect of $134 (193)
Reclassification adjustment
due to gains realized, net of
tax effect of $36 (52)
Total other comprehensive
income, net of ---------------
tax effect of $170 (245) (245) (245)
---------------
Comprehensive income $ 456
===============
Options exercised 8,261 93 93
Stock repurchase (387) (2) (2)
------------ ------------ ------------- ----------------- ---------------
Balance at June 30, 2003 1,629,711 $ 10,234 9,373 210 19,817
============ ============ ============= ================= ===============
See accompanying notes.
3
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six Months Ended June 30,
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 701 $ 478
Adjustments to reconcile net income to net cash
used in operating activities:
Increase (decrease) in deferred loan income (62) 1
Depreciation and amortization 1,113 522
Provision for loan losses 312 376
Gain on sale of securities (88) (262)
Loans held for sale:
Loans originated (40,220) (1,680)
Proceeds from sale 41,184 (1,680)
Gain on sale of loans (626) (374)
Gain on sale of other real estate owned (5) (22)
(Increase) decrease in accrued interest
receivable (165) (30)
(Decrease) increase in accrued interest payable 22 (120)
Decrease in other liabilities (1,617) (15)
Increase in cash surrender value of life insurance (283) (337)
Decrease in other assets 270 400
-------- --------
Net cash used in operating activities 536 (1,063)
Cash flows from investing activities:
Investment securities available-for-sale
Purchases (25,112) (25,608)
Proceeds from prepayments 8,400 6,707
Proceeds from maturity -- 3,500
Proceeds from sale 1,056 9,649
Net increase in loans made to customers (7,219) (11,198)
Proceeds from sale of other real estate 334 90
Purchases of bank premises and equipment (193) (233)
-------- --------
Net cash used in investing activities (22,734) (17,093)
Cash flows from financing activities:
Net increase in deposits 35,860 1,149
Proceeds from issuance of company obligated mandatorily redeemable
securities of subsidiary trust -- 5,000
Increase (decrease) in other borrowings (9,546) 8,360
Payments for repurchase of common stock (2) (128)
Proceeds from issuance of common stock 93 25
-------- --------
Net cash provided by financing activities 26,405 14,406
Net (decrease) increase in cash and cash
equivalents 4,207 (3,750)
Cash and cash equivalents at beginning of period 34,622 19,457
-------- --------
Cash and cash equivalents at end of period $ 38,829 $ 15,707
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest payments $ 1,314 $ 2,085
Cash paid for taxes 50 707
Loans transferred to other real estate owned 73 --
See accompanying notes.
4
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and December 31, 2002
(Unaudited)
(1) Summary of Significant Accounting Policies
First Financial Bancorp (the "Company") operates principally as a bank
holding company for its wholly owned subsidiary, Bank of Lodi, N.A. (the
"Bank"). 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.
All references herein to the "Company" include the Bank and all other
subsidiaries, unless the context otherwise requires.
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States
of America for complete financial statements. In the opinion of management,
the consolidated financial statements reflect all normal recurring
adjustments necessary for a fair presentation of the results for the
interim periods.
Certain amounts in the prior year have been reclassified to conform with
the current presentation. These reclassifications have no effect on
previously reported income.
These statements should be read in conjunction with the audited
consolidated financial statements and related notes included in the
Company's 2002 Annual Report on Form 10-K. Operating results for the three
and six month periods ended June 30, 2003 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2003.
Stock Based Compensation
In December 2002, the FASB issued Statement No. 148 ("Statement 148"),
Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123. This statement amends Statement 123 to
provide alternative methods of transition to a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, Statement 148 amends the disclosure requirements 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. Statement 148 is effective
for fiscal years ending after December 15, 2002, and for interim periods
beginning after December 15, 2002.
During the first quarter of 2003, the Company adopted the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), for stock-based compensation,
effective as of January 1, 2003. Under the provisions of Statement 148, the
Company has adopted the prospective method whereby stock-based employee
compensation costs are recognized as awards are granted, modified or
settled.
5
The following table presents the effect on net income and earnings per
share as if the fair value based method had been applied to all outstanding
and unvested awards in each period.
Three Month Period Six Month Period
Ended June 30, Ended June 30,
2003 2002 2003 2002
------- ------ ------ ------
Net income, as reported (in thousands) $ 359 197 701 478
Add: Stock based employee compensation expense included
in reported net income, net of tax effects 1 -- 1 --
Deduct: Stock based employee compensation determined under
fair value based method for all awards, net of tax effects (13) (13) (26) (26)
------- ------ ------ ------
Pro forma net income $ 347 184 676 452
======= ====== ====== ======
Earnings per share-basic
As reported $ 0.22 0.12 0.43 0.29
Pro-forma 0.21 0.11 0.41 0.28
Earnings per share-assuming dilution
As reported $ 0.21 0.12 0.41 0.28
Pro-forma 0.20 0.11 0.40 0.27
(2) Weighted Average Shares Outstanding
Per share information is based on weighted average number of shares of
common stock outstanding during each three and six month period. Basic
earnings per share (EPS) is computed by dividing net income available to
shareholders by the weighted average common shares outstanding during the
period. Diluted earnings per share is computed by dividing net income
available to shareholders by the weighted average common shares outstanding
during the period plus potential common shares outstanding. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the Company.
The following tables provides a reconciliation of the numerator and
denominator of the basic and diluted earnings per share computation for the
three and six month periods ending June 30, 2003 and 2002:
Income Shares Per-Share
Three months ended June 30, 2003 (numerator) (denominator) Amount
- -------------------------------- -------- --------- ------
Basic earnings per share $359,000 1,629,872 $ .22
Effect of dilutive securities -- 95,436 --
-------- --------
Diluted earnings per share $359,000 1,725,308 $ .21
========= ========
Income Shares Per-Share
Three months ended June 30, 2002 (numerator) (denominator) Amount
- -------------------------------- -------- --------- ------
Basic earnings per share $197,000 1,624,308 $ .12
Effect of dilutive securities -- 66,559 --
-------- --------
Diluted earnings per share $197,000 1,690,867 $ .12
======== ========
6
Income Shares Per-Share
Six months ended June 30, 2003 (numerator) (denominator) Amount
- ----------------------------------------------------------------------------
Basic earnings per share $701,000 1,629,930 $ .43
Effect of dilutive securities -- 79,540 --
-------- --------
Diluted earnings per share $701,000 1,709,470 $ .41
======== ========
Income Shares Per-Share
Three months ended June 30, 2002 (numerator) (denominator) Amount
- ----------------------------------------------------------------------------
Basic earnings per share $478,000 1,625,949 $ .29
Effect of dilutive securities -- 63,059 --
-------- ---------
Diluted earnings per share $478,000 1,689,008 $ .28
======== =========
(3) Allowance for Loan Losses
The following summarizes changes in the allowance for loan losses for
the six month periods ended June 30, 2003 and 2002 and the twelve month
period ended December 31, 2002:
(in thousands) 6/30/03 6/30/02 12/31/02
------- ------ ------
Balance at beginning of period $ 3,057 2,668 2,668
Loans charged off (119) (83) (270)
Recoveries 10 19 34
Provisions charged to operations 312 376 625
------- ------ ------
Balance at end of period $ 3,260 2,980 3,057
======= ====== ======
(4) Impact Of Recently Issued Accounting Standards
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
does not expect this Interpretation to have a material impact to the
consolidated financial statements.
In May of 2003, the FASB issued Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities
and Equity. The provisions of this Statement are effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise are effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. It is to be implemented by
reporting the cumulative effect of a change in an accounting principle
for financial instruments created before May 15, 2003 and still
existing at the beginning of the interim period of adoption.
Restatement is not permitted. Management does not expect this Statement
to have a material impact to the consolidated financial statements upon
adoption of the Statement on July 1, 2003.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Cautionary Statement for the Purposes of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995.
Certain statements in this Quarterly Report on Form 10-Q 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; and
changes in the securities markets. In addition, other events 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.
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 an allowance for loan losses
resulting from the inability of borrowers 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.
The following discussion addresses information pertaining to the financial
condition and results of operations of the Company that may not be otherwise
apparent from a review of the consolidated financial statements and related
footnotes. It should be read in conjunction with those statements and notes
found on pages 1 through 7, as well as other information presented throughout
this report.
8
Changes in Financial Condition
As of June 30, 2003, consolidated total assets totaled $281 million, which
represents an increase of $25,266 thousand, or 9.9% above the comparable level
at December 31, 2002. The increase in total assets was attributable to a $35,860
thousand, or 17.0% increase in total deposits net of a a decrease in short term
borrowings totaling $9,546 thousand, or 64.1%.
During the first six months of 2003, the growth in deposits resulted primarily
from an increase of $31,470 thousand, or 17.9% in interest bearing deposits
combined with a $4,390 thousand or 12.7% increase in non-interest bearing
deposits. The interest bearing deposit growth consisted of an increase of
$19,963 thousand, or 35.9%, $4,528 thousand, or 15.0%, $3,974 thousand, or 10.0
%, and $3,005 thousand, or 5.9% in certificates of deposit, money market
accounts, savings accounts and NOW accounts, respectively.
The increase in total assets included an increase of $14,846 thousand, or 44.8%,
in investment securities, an increase totaling $6,699 thousand, or 4.0%, in
gross loans, and a $2,761 thousand, or 14.1%, increase in federal funds sold as
compared to December 31, 2002. The net increase in gross loans is primarily the
result of increases of $6,621 thousand, or 10.5%, $2,388 thousand, or 16.7%, and
$2,260 thousand, or 8.5%, in real estate loans, agricultural loans, and
commercial loans, respectively, combined with a decrease of $3,876 thousand, or
18.9%, in construction loans.
Allowance for Loan Losses
The allowance for loan losses (the "allowance") is established through a
provision for possible loan losses charged to expense. The allowance at June 30,
2003 was in excess of the December 31, 2002 allowance by $203 thousand, or 6.6%,
as a result of a provision of $312 thousand combined with net charge-offs of
$109 thousand. During the first six months of 2003, nonperforming loans
decreased by $359 thousand, to $2,350 thousand. Management continues to actively
work to resolve the nonperforming loans, the majority of which are secured by
real estate that, in the opinion of management, are well collateralized.
Management believes that the allowance at June 30, 2003 is adequate to absorb
known and reasonably estimated loan losses. However, there can be no assurances
that future economic events may not negatively impact the Bank's borrowers,
thereby causing loan losses to exceed the current allowance.
The following tables depict activity in the allowance for loan losses and
allocation of reserves for and at the six and twelve months ended June 30, 2003
and December 31, 2002, respectively:
Six Months Year Ended
Ended June 30, December 31,
2003 2002
------- -------
Balance at beginning of period $ 3,057 $ 2,668
Charge-offs:
Commercial (86) (178)
Real estate -- (62)
Consumer (33) (30)
------- -------
Total charge-offs (119) (270)
Recoveries:
Commercial 9 26
Real estate -- --
Consumer 1 8
------- -------
Total recoveries 10 34
------- -------
Net charge-offs (109) (236)
Provision charged to operations 312 625
------- -------
Balance at end of period $ 3,260 $ 3,057
======= =======
Allocation of the Allowance for Loan Losses
6/30/03 6/30/03 12/31/02 12/31/02
Loan Category Amount % of Loans Amount % of Loans
- ------------- ------ ---------- ------ ----------
Commercial and other real estate $2,380 88.30% $2,182 85.77%
Real estate construction 819 10.07% 807 12.38%
Installment and other 61 1.63% 68 1.85%
------ ------ ------ ------
$3,260 100.00% $3,057 100.00%
====== ====== ====== ======
9
Investments
Investment securities increased $14,486 thousand, or 44.8%, from December 31,
2002 to June 30, 2003. This increase resulted from the purchase of investment
securities totaling $25,112 thousand net of prepayments on mortgage-backed
securities totaling $8,389 thousand and sales of investment securities totaling
$1,056 thousand. The Company realized gross gains totaling $88 thousand on the
sale of investment securities during the first quarter of 2003.
Equity
Consolidated equity increased $547 thousand from December 31, 2002 to June 30,
2003. Consolidated equity represented 7.06% and 7.55% of consolidated assets at
June 30, 2003 and December 31, 2002, respectively. The increase in equity during
2003 resulted from earnings of $701 thousand for the six months ended June 30,
2003, $93 thousand in cash received on the exercise of stock options less a $245
thousand decline in the after-tax market value of the available-for-sale
investment securities portfolio. The decline in the investment security
portfolio's market value resulted from gains realized on the sale of investment
securities combined with the effects of changes in interest rates at June 30,
2003 compared to December 31, 2002.
The total risk-based capital ratio for the Company's wholly owned subsidiary,
Bank of Lodi was 11.24% at June 30, 2003 compared to 11.16% at December 31,
2002.
Changes in Results of Operations - Three and Six Months ended June 30, 2003
Summary of Earnings Performance
------------------- -------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Earnings (in thousands) $ 359 $ 197 $ 701 $ 478
Basic earnings per share $ 0.22 $ 0.12 $ 0.43 $ 0.29
Diluted earnings per share $ 0.21 $ 0.12 $ 0.41 $ 0.28
Return on average assets 0.53% 0.33% 0.52% 0.42%
Return on average equity 7.29% 4.34% 7.17% 5.11%
Average equity to average assets 7.29% 7.70% 7.30% 8.14%
10
Net Interest Income
The following tables provides a detailed analysis of the net interest spread and
net interest margin for the periods indicated:
---------------------------------------------------------------------------------------------
For the Three Months Ended June 30,
---------------------------------------------------------------------------------------------
2003 2002
---------------------------------------------- -------------------------------------------
Average Income/ Yield (1) Average Income/ Yield (1)
Dollars In Thousands Balance Expense Balance Expense
------------ ------------- ------------ ----------- ------------ -----------
Earning Assets:
Investment securities (1)(2) $ 42,185 $ 227 2.16% $ 40,096 511 5.11%
Federal funds sold 11,822 36 1.22% 7,584 35 1.85%
Loans (2) (3) 171,216 3,298 7.73% 147,690 3,044 8.27%
-------------- --------------- ----------- ------------- ------------ ----------
Total Earning Assets $ 225,223 $ 3,561 6.34% $ 195,370 3,590 7.37%
============== =============== =========== ============= ============ ==========
Liabilities:
Non-interest bearing
deposits $ 40,494 $ $ 35,515 -- --
Savings, money market, &
NOW deposits 128,284 259 0.81% 108,664 346 1.28%
Time deposits 65,276 360 2.21% 65,892 521 3.17%
Other borrowings 7,395 70 3.80% 10,616 98 3.70%
-------------- --------------- ----------- ------------- ------------ ----------
Total Liabilities $ 241,449 $ 689 1.14% $ 220,687 965 1.75%
============== =============== =========== ============= ============ ==========
Net Interest Spread 5.20% 5.62%
=========== ==========
---------------------------------------------------------------------------------------------
Earning Income Earning Income
Assets (Expense) Yield Assets (Expense) Yield
------------ ------------- ------------ ----------- ------------ -----------
Yield on average earning $ 225,223 $ 3,561 6.34% $ 195,370 3,590 7.37%
assets
Cost of funding average
earning assets $ 225,223 689 (1.23%) $ 195,370 (965) (1.98)%
-------------- ------------ ------------ -----------
Net Interest Margin $ 225,223 $ 2,872 5.11% $ 195,370 2,625 5.39%
============== ============ ============ ===========
(1) Yield for period annualized on actual number of days in period and
based on a 365-day year.
(2) Income on tax-exempt securities has not been adjusted to a tax
equivalent basis.
(3) Nonaccrual loans are included in the loan totals for each period;
however, only collected interest on such loans is included in interest
income.
Net interest income for the 2nd quarter of 2003 increased $247 thousand, or
9.4%, over the same quarter of 2002. The increase is attributable to the effects
of increases in volumes of earning assets and liabilities combined with the
effects of decreases in the yield on average earning assets and in the cost of
funding average earning assets. The increase in volumes of average earning
assets and liabilities resulted in an increase in net interest income totaling
$502 thousand while the decline in interest rates resulted in a decrease in net
interest income totaling $255 thousand when comparing the second quarter of 2003
to the same period last year.
Average earning assets increased $29,853 thousand during the second quarter of
2003 as compared to the second quarter of 2002. Average loans increased $23,526
thousand, federal funds sold increased $4,238 thousand, and investment
securities increased $2,089 thousand. The increase in the volume of average
earning assets during the second quarter of 2003 as compared to the second
quarter of 2002 resulted in an increase in interest income totaling $531
thousand. However, interest rates on average earning assets declined 103 basis
points (from 7.37% to 6.34%) when compared to the same period in 2002, resulting
in a decrease in interest income totaling $560 thousand, for a net decline in
interest income totaling $29 thousand.
11
Average liabilities increased $20,762 thousand during the second quarter of 2003
as compared to the same period last year. Of that increase, average noninterest
bearing deposits increased $4,979 thousand, NOW and money market accounts
increased $11,590 thousand, savings accounts increased $8,030 thousand while
other borrowings decreased $3,221 thousand, and certificates of deposit
decreased $616 thousand. The increase in average liabilities resulted in an
increase in interest expense totaling $29 thousand. As a result of the declining
interest rate environment, the cost of interest bearing liabilities decreased 61
basis points (from 1.75% to 1.14%) resulting in a reduction in interest expense
totaling $305 thousand.
-------------------------------------------------------------------------------------------
For the Six Months Ended June 30,
-------------------------------------------------------------------------------------------
2003 2002
-------------------------------------------- -------------------------------------------
Average Income/ Yield (1) Average Income/ Yield (1)
Dollars In Thousands Balance Expense Balance Expense
------------- -------------- --------- ------------ ----------- -----------
Earning Assets:
Investment securities (1)(2) $ 36,774 $ 516 2.83% $ 35,114 877 5.04%
Federal funds sold 11,208 69 1.24% 9,145 81 1.79%
Loans (2) (3) 169,254 6,252 7.45% 150,484 5,781 7.75%
-------------- --------------- ---------- ------------- ------------ -----------
Total Earning Assets $ 217,236 $ 6,837 6.35% $ 194,743 6,739 6.98%
============== =============== ========== ============= ============ ===========
Liabilities:
Non-interest bearing
deposits $ 39,041 $ $ 32,388 -- --
Savings, money market, &
NOW deposits 125,072 498 0.80% 105,563 682 1.30%
Time deposits 61,950 702 2.29% 68,040 1,179 3.49%
Other borrowings 6,579 136 4.17% 5,519 104 3.80%
-------------- --------------- ---------- ------------- ------------ -----------
Total Liabilities $ 232,642 $ 1,336 1.16% $ 211,510 1,965 1.87%
============== =============== ========== ============= ============ ===========
Net Interest Spread 5.19% 5.11%
========== ===========
-------------------------------------------------------------------------------------------
Earning Income Earning Income
Assets (Expense) Yield Assets (Expense) Yield
------------ -- ------------- ------------ ----------- ------------- -----------
Yield on average earning $ 217,236 $ 6,837 6.35% $ 194,743 6,739 6.98%
assets
Cost of funding average
earning assets $ 217,236 $ (1,336) (1.24)% $ 194,743 (1,965) (2.04)%
-------------- ---------- ------------- -----------
Net Interest Margin $ 217,236 $ 5,501 5.11% $ 194,743 4,774 4.94%
============== ========== ============= ===========
(1) Yield for period annualized on actual number of days in period and
based on a 365-day year.
(2) Income on tax-exempt securities has not been adjusted to a tax
equivalent basis.
(3) Nonaccrual loans are included in the loan totals for each period;
however, only collected interest on such loans is included in interest
income.
Net interest income for the first six months of 2003 increased $727 thousand, or
15.2%, over the same period of 2002. The increase is attributable to the effects
of increases in volumes of earning assets and liabilities combined with the
effects of decreases in the yield on average earning assets and in the cost of
funding average earning assets. The increase in volumes of average earning
assets and liabilities resulted in an increase in net interest income totaling
$738 thousand while the decline in interest rates resulted in a decrease in net
interest income totaling $11 thousand when comparing the first six months of
2003 to the same period last year.
12
Average earning assets increased $22,493 thousand during the first six months of
2003 as compared to the 2002. Average loans increased $18,770 thousand, federal
funds sold increased $2,063 thousand, and investment securities increased $1,660
thousand. The increase in the volume of average earning assets during the first
six months of 2003 as compared to the same period of last year resulted in an
increase in interest income totaling $781 thousand. However, interest rates on
average earning assets declined 63 basis points (from 6.98% to 6.35%) when
compared to the same period in 2002, resulting in a decrease in interest income
totaling $683 thousand.
Average liabilities increased $21,132 thousand during the first six months of
2003 as compared to the same period of 2002. Of that increase, average
noninterest bearing deposits increased $6,653 thousand, NOW and money market
accounts increased $11,955 thousand, savings accounts increased $7,554 thousand,
other borrowings increased $1,060 thousand while certificates of deposit
decreased $6,090 thousand. The increase in average liabilities resulted in an
increase in interest expense totaling $43 thousand. As a result of the declining
interest rate environment, the cost of interest bearing liabilities decreased 72
basis points (from 1.87% to 1.16%) resulting in a reduction in interest expense
totaling $672 thousand.
Interest income is also affected by nonaccrual loan activity. Interest forgone
or reversed on non-accrual loans during the first six months of 2003 was
approximately $175 thousand. For the second quarter of 2003, interest forgone on
non-accrual loans totaled $106 thousand. $23 thousand and $26 thousand of
interest was collected on non-accrual loans for the second quarter of 2003 and
for the first six months of 2003, respectively.
Provision for Loan Losses
The provision for loan losses for the three and six months ended June 30, 2003
was $55 and $312 thousand compared with $181 and $376 thousand for the three and
six months ended June 30, 2002. Though the Company reduced the provision for
loan loss (when compared to the prior year three and six month periods) the
allowance for loan losses has remained consistent as a percentage of totals
loans. As of June 30, 2003 the allowance for loan losses was $3,260 thousand or
1.9% of total loans, which compares to the allowance for loan losses of $3,057
thousand or 1.8% of total loans as of December 31, 2002. As of June 30, 2003,
nonperforming loans totaled $2,350 thousand or 1.4% of total loans compared to
$2,409 thousand or 1.5% at December 31, 2002. No assurance can be given that
nonperforming loans will not increase or that the allowance for loan losses will
be adequate to cover losses inherent in the loan portfolio. Also see "Allowance
for Loan Losses" contained herein.
Noninterest Income
Noninterest income for the second quarter of 2003 increased by $177 thousand, or
19.3%, over the same period last year. For the first six months of 2003,
non-interest income increased $130 thousand, or 6.1%, compared to the first six
months of 2002. During the first quarter of 2003 the Company realized gains on
the sale of investment securities totaling $88 thousand. The Company realized
gains from the sale of other real estate totaling $5 thousand during the second
quarter of 2003 and $22 thousand during the first quarter of 2002.
Income from the sale and servicing of loans totaled $432 thousand during the
second quarter of 2003, which increased by $202 thousand, or 87.8%, compared to
the prior year quarter. The increased income from the sale and servicing of
loans is primarily the result of increased refinancing activity of residential
mortgage loans which resulted from declines in mortgage loan rates.
The income recognized on the cash surrender value of life insurance decreased
$54 thousand during the second quarter and year to date for 2003 when compared
to the same periods in 2002. The decrease was the result of an overall decline
in interest rates in 2003 as compared to the same period in 2002. The income
recognized from the increase in the cash surrender value of life insurance is
exempt from income taxes. The tax effective yield of the increase in the cash
surrender value of the life insurance totaled 7.1% during the second quarter of
2003 as compared to 8.2% during the second quarter of 2002. For the first six
months of 2003, the tax effective yield totaled 7.2% as compared to 8.7% during
the same period in 2002.
Noninterest Expenses
Noninterest expenses increased $483 thousand, or 8.0%, compared to the first six
months of 2002. Personnel expense increased $444 thousand, or 14.4%. This
increase is primarily due to an increase in number of full time equivalent
employees, from 116 at June 30, 2002 to 133 at June 30, 2003 combined with
general merit increases for existing personnel. The increase in the Company's
mortgage origination activities has also lead to increased sales commissions.
Occupancy expense increased $29 thousand or 6.1% of which $21 thousand is due to
increased rental expense. Equipment expense increased $36 thousand, or 9.0% due
to a $20 thousand increase in depreciation expense and a $15 thousand increase
in equipment maintenance expense. Other noninterest expense decreased $26
thousand, or 1.3%.
Included in other noninterest expense during the second quarter of 2003 are
costs totaling $94,000 associated with responding to the disruptive actions
initiated by three dissident directors. Without this unanticipated expense, the
increase in noninterest expense would have been 4.7% and 6.5% for the second
quarter and six month period during 2003, respectively, when compared to the
same period in 2002.
13
Income Taxes
As a result of increases in taxable income combined with a reduction in tax
exempt income, the Company's provision for income taxes during the second
quarter of 2003 totaled $145,000 compared to a benefit of $1,000 during the
second quarter of 2002. For the first six months of 2003, the provision for
income taxes totaled $269,000 as compared to $54,000 during the same period last
year. The effective tax rate for the Company during the second quarter of 2003
was 28.8% as compared to a benefit of 0.5% during the second quarter of 2002.
For the first six months of 2003, the Company's effective tax rate was 27.7% as
compared to 10.2% for the same period in 2002.
Liquidity
The Company's primary sources of liquidity are the proceeds from the trust
preferred securities combined with dividends from the Bank. The Company's
primary uses of liquidity are associated with interest payments on the trust
preferred securities, dividend payments made to shareholders and operating
expenses.
Loan demand, deposit fluctuations, and investment leveraging opportunities are
affected by a number of factors, including economic conditions, seasonality of
the borrowing and deposit bases, and the general level of interest rates;
therefore, the Bank's liquidity is actively managed on a daily basis. The sale
of loans, sale of investment securities and use of borrowing facilities are all
employed to maintain cash, federal funds sold, and short-term investments at
levels commensurate with estimated liquidity needs. The Bank maintains two lines
of credit with correspondent banks and has reverse repurchase agreements with
two brokerage firms, which allow for short-term borrowings that are secured by
investment securities. Finally, the Bank may also borrow on a short-term basis
from the Federal Reserve in the event that the aforementioned liquidity sources
are not adequate.
At June 30, 2003 liquidity was considered adequate given the funds available in
the local deposit market, scheduled maturities of loans and investments, and the
available capacity on borrowing facilities.. Compared to 2002 liquidity
increased in 2003 as a result of the growth in deposit portfolio and sales and
maturities of available-for-sale investment securities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
While there are several varieties of market risk, the market risk material to
the Company and the Bank is interest rate risk. Within the context of interest
rate risk, market risk is the risk of loss due to changes in market interest
rates that have an adverse effect on net interest income, earnings, capital or
the fair value of financial instruments. Exposure to this type of risk is a
regular part of a financial institution's operations. The fundamental activities
of making loans, purchasing investment securities, and accepting deposits
inherently involve exposure to interest rate risk. The Company monitors the
repricing differences between assets and liabilities on a regular basis and
estimates exposure to net interest income, net income, and capital based upon
assumed changes in the market yield curve. As of and for the three months ended
March 31, 2003, there were no material changes in the market risk profile of the
Company or the Bank as described in the Company's 2002 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
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 as of the end of the period covered by this
report, 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 changes in our internal controls over financial reporting
identified in connection with the evaluation of our disclosure controls and
procedures described above that occurred during our last fiscal quarter that has
materially affected, or is reasonably likely to materially effect, our internal
controls over financial reporting.
14
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on April
22, 2003. At this meeting 982,215 shares of the Company's
common stock were represented in person or by proxy.
Stockholders voted in favor of the election of ten nominees
for director. The voting results for each nominee were as
follows:
-------------------------------- -------------------------------- --------------------------------
Nominee Votes in Favor of Election Votes Witheld
-------------------------------- -------------------------------- --------------------------------
Angelo J. Anagnos 974,760 7,455
-------------------------------- -------------------------------- --------------------------------
Steven M. Coldani 966,125 16,090
-------------------------------- -------------------------------- --------------------------------
Robert H. Daneke 974,760 7,455
-------------------------------- -------------------------------- --------------------------------
Benjamin R. Goehring 963,627 18,588
-------------------------------- -------------------------------- --------------------------------
Daniel M. Lewis 974,760 7,455
-------------------------------- -------------------------------- --------------------------------
Robert H. Miller III 966,276 15,939
-------------------------------- -------------------------------- --------------------------------
David M. Philipp 966,276 15,939
-------------------------------- -------------------------------- --------------------------------
Weldon D. Schumacher 966,756 15,459
-------------------------------- -------------------------------- --------------------------------
Kevin Van Steenberge 966,308 15,907
-------------------------------- -------------------------------- --------------------------------
Leon Zimmerman 966,458 15,757
-------------------------------- -------------------------------- --------------------------------
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibit list required by this item is
incorporated by reference to the Index to Exhibits
filed as part of this report.
(b) Reports on Form 8-K
A report on Form 8-K, dated July 8, 2003, was filed
under report item numbers 7 and 9, concerning First
Financial Bancorp's letter to shareholders in
response to a June 23, 2003 dissident director
letter.
A report on Form 8-K, dated July 25, 2003, was filed
under report item numbers 7 and 9, concerning First
Financial Bancorp's results of operations for the
three and six month periods ending June 30, 3003.
A report on Form 8-K dated July 25, 2003, was filed
under report item numbers 5 and 7, concerning the
adoption of a Code of Conduct Policy by the Board of
Directors of First Financial Bancorp and Bank of
Lodi, N.A.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FINANCIAL BANCORP
By:
Date: August 12, 2003 /s/ Allen R. Christenson
--------------- ------------------------
Allen R. Christenson
Senior Vice President
Chief Financial Officer
(Principal Accounting and Financial Officer)
INDEX TO EXHIBITS
Exhibit Description
31.1 Certification of Registrant's Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2003
31.2 Certification of Registrant's Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2003
32.1 Certification of Registrant's Chief Executive Officer Pursuant to 18
U.S.C. Section 1350
32.2 Certification of Registrant's Chief Financial Officer Pursuant to 18
U.S.C. Section 1350
17