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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 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 October 31, 2003 there were 1,621,104 shares of Common Stock, no
par value, outstanding.
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FIRST FINANCIAL BANCORP
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
Page
----
PART I
Item 1. 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 ......... 17
Item 4. Controls and Procedures ............................................ 17
PART II
Item 1. Legal Proceedings .................................................. 18
Item 2. Changes in Securities and Use of Proceeds .......................... 18
Item 3. Defaults Upon Senior Securities .................................... 18
Item 4. Submission of Matters to a Vote of Security Holders................. 18
Item 5. Other Information .................................................. 18
Item 6. Exhibits and Reports on Form 8-K ................................... 18
Signatures .................................................................. 19
Index to Exhibits ........................................................... 20
i
ITEM 1. FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(in thousands except share amounts)
Sept. 30, Dec. 31,
Assets 2003 2002
-------- --------
Cash and due from banks $ 18,030 $ 14,988
Federal funds sold and securities purchased under resale
agreements 2,709 19,634
Investment securities available for sale, at fair value 68,650 33,125
Loans held for sale 5,610 7,578
Loans, net of deferred loan fees 171,806 157,147
Less allowance for loan losses 3,264 3,057
-------- --------
Net loans 168,542 154,090
Premises and equipment, net 6,632 6,745
Accrued interest receivable 1,247 772
Other assets 18,527 18,314
-------- --------
Total Assets $289,947 $255,246
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest bearing $ 42,416 $ 34,673
Interest bearing 217,545 176,006
-------- --------
Total deposits 259,961 210,679
Accrued interest payable 185 144
Short term borrowings -- 14,885
Other liabilities 5,080 5,268
Obligated mandatorily redeemable capital
securities of subsidiary trust 5,000 5,000
-------- --------
Total liabilities 270,226 235,976
-------- --------
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, 1,621,104 and 1,621,837,
respectively 10,092 10,143
Retained earnings 9,564 8,672
Accumulated other comprehensive income 65 455
-------- --------
Total stockholders' equity 19,721 19,270
-------- --------
$289,947 $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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
------- ------- ------- -------
Interest income:
Loans, including fees $ 2,996 $ 3,081 $ 9,248 $ 8,862
Investment securities:
Taxable 110 389 563 1,177
Exempt from federal taxes 65 39 128 128
Federal funds sold 25 30 94 111
------- ------- ------- -------
Total interest income 3,196 3,539 10,033
10,278
Interest expense:
Deposit accounts 680 702 1,880 2,563
Other borrowings 70 97 206 201
------- ------- ------- -------
Total interest expense 750 799 2,086 2,764
------- ------- ------- -------
Net interest income 2,446 2,740 7,947 7,514
Provision for loan losses -- 162 312 538
------- ------- ------- -------
Net interest income after provision for
loan losses 2,446 2,578 7,635 6,976
Noninterest income:
Gain on sale of investment securities -- 341 88 603
Gain (loss) on sale of other real estate -- (6) 5 16
Gain on sale of loans 313 296 939 670
Service charges 424 404 1,233 1,181
Premiums and fees from SBA and mortgage
operations 135 114 376 296
Increase in cash surrender value of life
insurance 121 156 404 493
Miscellaneous 98 113 316 299
------- ------- ------- -------
Total non-interest income 1,091 1,418 3,361 3,558
Noninterest expense:
Salaries and employee benefits 1,756 1,644 5,276 4,720
Occupancy 289 271 795 764
Equipment 207 252 645 654
Other 1,081 913 3,106 2,948
------- ------- ------- -------
Total non-interest expense 3,333 3,080 9,822 9,086
------- ------- ------- -------
Income before provision for income taxes 204 916 1,174 1,448
Provision for income tax (benefit) expense 13 304 282 358
------- ------- ------- -------
Net income $ 191 $ 612 $ 892 $ 1,090
======= ======= ======= =======
Earnings per share:
Basic $ 0.12 $ 0.37 $ 0.55 $ 0.66
======= ======= ======= =======
Diluted $ 0.11 $ 0.36 $ 0.52 $ 0.64
======= ======= ======= =======
See accompanying notes.
2
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Unaudited)
(in thousands except share amounts)
Nine Months Ended September 30, 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 $ 892 892 892
----------
Other comprehensive income:
Unrealized holding loss
arising during the current
period, net of tax effect
of $235 (338)
Reclassification adjustment
due to gains realized, net of
tax effect of $36 (52)
Total other comprehensive
income, net of
tax effect of $271 (390) (390)
----------
(390)
----------
Comprehensive income $ 502
==========
Options exercised 8,261 101 101
Stock repurchase 8,994 (152) (152)
----------- ----------- ----------- ----------- -----------
Balance at September 30, 2003 1,621,104 $ 10,092 9,564 65 19,721
=========== =========== =========== =========== ===========
See accompanying notes.
3
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended September 30,
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 892 $ 1,090
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
(Decrease) increase in deferred loan income (60) 84
Depreciation and amortization 2,103 1,313
Provision for loan losses 312 538
Gain on sale of securities (88) (603)
Loans held for sale:
Loans originated (56,298) (31,793)
Proceeds from sale 59,205 30,151
Gain on sale of loans (939) (670)
Gain on sale of other real estate owned (5) (16)
(Increase) decrease in accrued interest
receivable (475) 179
Increase (decrease) in accrued interest payable 41 (160)
(Decrease) increase in other liabilities (188) 479
Increase in cash surrender value of life insurance (404) (493)
Decrease (increase) in other assets 77 (2,208)
-------- --------
Net cash provided by (used in) operating activities 4,173 (2,109)
Cash flows from investing activities:
Investment securities available-for-sale
Purchases (62,474) (25,892)
Proceeds from prepayments 24,149 9,597
Proceeds from maturity -- 3,600
Proceeds from sale 1,056 23,487
Net increase in loans made to customers (14,777) (19,440)
Proceeds from sale of other real estate 334 296
Purchases of bank premises and equipment (690) (618))
-------- --------
Net cash used in investing activities (52,402) (8,970)
Cash flows from financing activities:
Net increase in deposits 49,282 8,989
Proceeds from issuance of company obligated
mandatorily redeemable securities of subsidiary trust -- 5,000
(Decrease) increase in other borrowings (14,885) 4,059
Payments for repurchase of common stock (152) (162)
Proceeds from issuance of common stock 101 281
-------- --------
Net cash provided by financing activities 34,346 18,167
Net (decrease) increase in cash and cash
equivalents (13,883) 7,088
Cash and cash equivalents at beginning of period 34,622 19,457
-------- --------
Cash and cash equivalents at end of period $ 20,739 $ 26,545
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest payments $ 2,045 $ 2,924
Cash paid for taxes 230 707
Loans transferred to other real estate owned 73 --
Unrealized (loss) gain on available-for-sale securities, net of tax (338) 657
See accompanying notes.
4
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 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 adjustments, including 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 nine month periods ended September 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 expense is 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 Nine Month Period
Ended September 30, Ended September 30,
-------------------- --------------------
2003 2002 2003 2002
------ ------ ------ ------
Net income, as reported (in thousands) $ 191 612 892 1,090
Add: Stock based employee compensation expense included
in reported net income, net of tax effects 1 -- 2 --
Deduct: Stock based employee compensation determined under
fair value based method for all awards, net of tax effects (12) (16) (24) (39)
------ ------ ------ ------
Pro forma net income 180 596 870 1,051
====== ====== ====== ======
Earnings per share-basic
As reported $ 0.12 0.37 0.55 0.66
Pro-forma
Earnings per share-assuming dilution
As reported $ 0.11 0.36 0.52 0.64
Pro-forma
(2) Weighted Average Shares Outstanding
Per share information is based on weighted average number of shares of
common stock outstanding during each three and nine month 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 nine month periods ending September 30, 2003 and 2002:
Income Shares Per-Share
Three months ended September 30, 2003 (numerator) (denominator) Amount
- ------------------------------------------------------------------------------
Basic earnings per share $ 191,000 1,626,893 $.12
Effect of dilutive securities -- 114,770 --
--------- ---------
Diluted earnings per share $ 191,000 1,741,663 $ 11
========= =========
Income Shares Per-Share
Three months ended September 30, 2002 (numerator) (denominator) Amount
- ------------------------------------------------------------------------------
Basic earnings per share $ 612,000 1,642,422 $.37
Effect of dilutive securities -- 55,626 --
--------- ---------
Diluted earnings per share $ 612,000 1,698,048 $.36
========= =========
6
Income Shares Per-Share
Nine months ended September 30, 2003 (numerator) (denominator) Amount
- ------------------------------------------------------------------------------
Basic earnings per share $ 892,000 1,628,906 $ .55
Effect of dilutive securities -- 93,131 --
---------- ----------
Diluted earnings per share $ 892,000 1,722,037 $ .52
========== ==========
Income Shares Per-Share
Nine months ended September 30, 2002 (numerator) (denominator) Amount
- ------------------------------------------------------------------------------
Basic earnings per share $1,090,000 1,648,865 $ .66
Effect of dilutive securities -- 56,116 --
---------- ----------
Diluted earnings per share $1,090,000 1,704,981 $ .64
========== ==========
(3) Investment Securities
During the three month period ending September 30, 2003, interest
income for investment securities was reduced as a result of accelerated
prepayments of mortgage backed securities and collateralized mortgage
obligations (MBS/CMO) combined with the impact from general declines in
interest rates. As a result of the accelerated prepayments, the Company
was required to accelerate the amortization of premiums paid to
purchase MBS/CMO securities.
(4) Allowance for Loan Losses
The following summarizes changes in the allowance for loan losses for
the nine month periods ended September 30, 2003 and 2002 and the twelve
month period ended December 31, 2002:
(in thousands) 9/30/03 9/30/02 12/31/02
------- ------- -------
Balance at beginning of period $ 3,057 2,668 2,668
Loans charged off (134) (146) (270)
Recoveries 29 30 34
Provisions charged to operations 312 538 625
------- ------- -------
Balance at end of period $ 3,264 3,090 3,057
======= ======= =======
(5) 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. The interpretation's effective date was postponed
from June 30, 2003 to December 31, 2003 and requires existing variable
interest entities to be consolidated if those entities do not
effectively disburse risks among parties involved. 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
Summary
The Company recorded net income totaling $892 thousand for the nine month period
ended September 30, 2003, representing a decrease of $198 thousand or 18.2% over
net income of $1,090 thousand for the same period in 2002 and had net income of
$191 thousand for the three month period ended September 30, 2003, representing
a decrease of $421 thousand or 68.8% over net income of $612 thousand for the
same period in 2002.
Included in net income during the nine month period ending September 30, 2002
were gains on the sale of investment securities totaling $603 thousand. During
the same period in 2003, gains on the sale of investment securities totaled $88
thousand, a reduction of $515 thousand from the prior year. Additionally, during
the nine month period ending September 30, 2003, the Company incurred
unanticipated costs totaling $158 thousand in response to disruptive actions
initiated by three dissident directors.
During the third quarter of 2002, the Company reported gains on the sale of
investment securities totaling $341 thousand. The Company did not sell any
securities during the third quarter of 2003. In addition, during the third
quarter of 2003, the Company incurred unanticipated costs totaling $64 thousand
in response to disruptive actions initiated by three dissident directors.
Additionally, on September 2, 2003 the Company opened a new full service branch
in downtown Sacramento, adding its ninth full service branch. The addition of
the Downtown Sacramento Branch further enhances the Company's ability to market
within the greater Sacramento Area, adding to the existing Sacramento area
branches which are located in Elk Grove and Folsom.
Changes in Financial Condition
Consolidated total assets as of September 30, 2003 were $290 million, which
represents an increase of $34,701 thousand, or 13.6% above the amount reported
at December 31, 2002. The increase in total assets was attributable to a $49,282
thousand, or 23.4% increase in total deposits net of a decrease in short term
borrowings totaling $14,885 thousand, or 100.0% since December 31, 2002.
During the first nine months of 2003, the growth in deposits resulted primarily
from an increase of $41,539 thousand, or 23.6% in interest bearing deposits
combined with a $7,743 thousand or 22.3% increase in non-interest bearing
deposits. The interest bearing deposit growth consisted of an increase of
$19,637 thousand, or 35.3%, $9,996 thousand, or 33.0%, $6,722 thousand, or
17.0%, and $5,184 thousand, or 10.2% in certificates of deposit, money market
accounts, savings accounts and NOW accounts, respectively.
The increase in total assets included an increase of $35,525 thousand, or
107.2%, in investment securities, an increase totaling $12,631 thousand, or
7.6%, in gross loans combined with a $16,925 thousand, or 86.2%, decrease in
federal funds sold as compared to December 31, 2002. The net increase in gross
loans is primarily the result of increases of $8,643 thousand, or 13.7%, $4,058
thousand, or 28.4%, and $2,896 thousand, or 10.9%, in real estate loans,
agricultural loans, and commercial loans, respectively, combined with a decrease
of $1,198 thousand, or 5.8%, 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
September 30, 2003 was in excess of the December 31, 2002 allowance by $207
thousand, or 6.8%, as a result of a provision of $312 thousand combined with net
charge-offs of $105 thousand. During the first nine months of 2003,
nonperforming loans decreased by $49 thousand, to $2,360 thousand. Management
continues to actively work to resolve the nonperforming loans, the majority of
which are secured by real estate and, in the opinion of management, are well
collateralized. Management believes that the allowance at September 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 nine and twelve months ended September 30,
2003 and December 31, 2002, respectively:
9
Nine Months Ended Year Ended
September 30, December 31,
2003 2002
------- -------
Balance at beginning of period $ 3,057 $ 2,668
Charge-offs:
Commercial (88) (178)
Real estate -- (62)
Consumer (46) (30)
------- -------
Total charge-offs (134) (270)
Recoveries:
Commercial 25 26
Real estate -- --
Consumer 4 8
------- -------
Total recoveries 29 34
------- -------
Net charge-offs (105) (236)
Provision charged to operations 312 625
------- -------
Balance at end of period $ 3,264 $ 3,057
======= =======
Allocation of the Allowance for Loan Losses
9/30/03 9/30/03 12/31/02 12/31/02
Loan Category Amount % of Loans Amount % of Loans
- ------------- ------ ---------- ------ ----------
Commercial and other real estate $ 2,212 87.27% $ 2,182 85.77%
Real estate construction 992 11.18% 807 12.38%
Installment and other 60 1.55% 68 1.85%
-------- ------ -------- ------
$ 3,264 100.00% $ 3,057 100.00%
======== ====== ======== ======
Investments
Investment securities increased $35,525 thousand, or 107.2%, from December 31,
2002 to September 30, 2003. This increase resulted from the purchase of
investment securities totaling $62,474 thousand net of prepayments on
mortgage-backed securities totaling $24,149 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 $451 thousand from December 31, 2002 to September
30, 2003. Consolidated equity represented 6.80% and 7.55% of consolidated assets
at September 30, 2003 and December 31, 2002, respectively. The increase in
equity during 2003 resulted from earnings of $892 thousand for the nine months
ended September 30, 2003 and $101 thousand in cash received on the exercise of
stock options combined with reductions to equity totaling $152 thousand
resulting from stock repurchases and a $390 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 September 30, 2003 compared to December 31, 2002.
The total risk-based capital ratio for the Company's wholly owned subsidiary,
Bank of Lodi was 10.98% at September 30, 2003 compared to 11.16% at December 31,
2002.
10
Changes in Results of Operations - Three and Nine Months ended September 30,
2003
Summary of Earnings Performance
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2003 2002 2003 2002
------ ----- ----- -------
Earnings (in thousands) $ 191 $ 612 $ 892 $ 1,090
Basic earnings per share $ 0.12 $ 0.37 $ 0.55 $ 0.66
Diluted earnings per share $ 0.11 $ 0.36 $ 0.52 $ 0.64
Return on average assets 0.27% 1.01% 0.44% 0.62%
Return on average equity 3.86% 12.97% 6.10% 7.90%
Average equity to average assets 6.93% 7.75% 7.15% 7.79%
Dividend Payout Ratio -- -- -- --
11
Net Interest Income
The following tables provides a detailed analysis of the net interest spread and
net interest margin for the periods indicated:
--------------------------------------------------------------------------------------
For the Three Months Ended September 30,
--------------------------------------------------------------------------------------
2003 2002
----------------------------------------- ---------------------------------------
Average Income/ Average Income/
Dollars In Thousands Balance Expense Yield(1) Balance Expense Yield(1)
-------- -------- ------- -------- -------- -------
Earning Assets:
Investment securities(1)(2) $ 68,213 $ 175 1.03% $ 36,766 428 4.67%
Federal funds sold 9,938 25 1.01% 7,020 30 1.71%
Loans(2)(3) 171,891 2,996 6.99% 160,315 3,081 7.71%
-------- -------- ------- -------- -------- -------
Total Earning Assets $250,042 $ 3,196 5.13% $204,101 3,539 6.95%
======== ======== ======= ======== ======== =======
Liabilities:
Non-interest bearing
deposits $ 43,769 $ $ 37,053 -- --
Savings, money market,
& NOW deposits 137,127 290 0.85% 118,508 332 1.12%
Time deposits 76,948 390 2.03% 56,347 370 2.63%
Other borrowings 8,541 70 3.29% 10,613 97 3.67%
-------- -------- ------- -------- -------- -------
Total Liabilities $266,385 $ 750 1.13% $222,521 799 1.44%
======== ======== ======= ======== ======== =======
Net Interest Spread 4.00% 5.51%
======= =======
--------------------------------------------------------------------------------------
Earning Income Earning Income
Assets (Expense) Yield Assets (Expense) Yield
------ --------- ----- ------ --------- -----
Yield on average earning
assets $250,042 $ 3,196 5.13% $204,101 3,539 6.95%
Cost of funding average
earning assets $250,042 (750) (1.20%) $204,101 (799) (1.57)%
-------- ---- ----- ----
Net Interest Margin $250,042 $ 2,446 3.93% $204,101 2,740 5.38%
======== ==== ===== ====
(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.
12
Net interest income for the third quarter of 2003 decreased $294 thousand, or
10.7%, over the same quarter of 2002. The change 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
$431 thousand while the decline in interest rates resulted in a decrease in net
interest income totaling $725 thousand when comparing the third quarter of 2003
to the same period last year.
Average earning assets increased $45,941 thousand during the third quarter of
2003 as compared to the third quarter of 2002. Average loans increased $11,576
thousand, federal funds sold increased $2,918 thousand, and investment
securities increased $31,447 thousand. When comparing the third quarter of 2003
to the third quarter of 2002, the increase in the volume of average earning
assets resulted in an increase in interest income totaling $601 thousand.
However, interest rates on average earning assets declined 183 basis points
(from 6.95% to 5.13%) when compared to the same period in 2002, resulting in a
decrease in interest income totaling $944 thousand, for a net decline in
interest income totaling $343 thousand.
In addition, during the third quarter of 2003, interest income for investment
securities was reduced as a result of continued accelerated prepayments of
mortgage backed securities and collateralized mortgage obligations (MBS/CMO)
combined with the impact from general declines in interest rates. As a result of
the accelerated prepayments, the Company was required to accelerate the
amortization of premiums paid to purchase MBS/CMO securities. During the third
quarter of 2003, the Company received proceeds from prepayments of MBS/CMO
totaling $15,749 thousand as compared to proceeds totaling $8,400 thousand
during the first six months of 2003 and proceeds totaling $2,890 thousand during
the third quarter of 2002. As a result of increased liquidity during the third
quarter of 2003 (resulting primarily from increased deposits combined with the
proceeds from prepayments of MBS/CMO), the Company purchased $37,362 thousand in
investment securities. The purchases represent a 78% increase in the balance of
investment securities owned by the Company at June 30, 2003. These securities
were purchased with a weighted average yield of 2.45% and a weighted average
life of 3.45 years. Hence, the effect of the accelerated amortization combined
with the purchases of investment securities during a lower interest rate
environment resulted in a reduction in the yield of the investment securities
from 2.16% during the second quarter of 2003 to 1.03% during the third quarter
of 2003. At September 30, 2003, the investment securities portfolio is projected
to yield 2.24% with an average life of 3.05 years. While the direction of future
interest rates and the prepayment pattern of MBS/CMO is uncertain, management
does not anticipate the accelerated level of prepayments experienced during the
third quarter of 2003 to continue throughout the remainder of the year.
When compared to the same period last year, average liabilities increased
$43,864 thousand during the third quarter of 2003. Of that increase, average
noninterest bearing deposits increased $6,716 thousand, NOW and money market
accounts increased $11,084 thousand, savings accounts increased $7,535 thousand
and certificates of deposit increased $20,601 thousand while other borrowings
decreased $2,072 thousand. The increase in average liabilities resulted in an
increase in interest expense totaling $170 thousand. As a result of the
declining interest rate environment, the cost of interest bearing liabilities
decreased 31 basis points (from 1.44% to 1.13%) resulting in a reduction in
interest expense totaling $219 thousand.
13
--------------------------------------------------------------------------------------
For the Nine Months Ended September 30,
--------------------------------------------------------------------------------------
2003 2002
----------------------------------------- ---------------------------------------
Average Income/ Average Income/
Dollars In Thousands Balance Expense Yield(1) Balance Expense Yield(1)
-------- -------- ------- -------- -------- -------
Earning Assets:
Investment securities(1)(2) $ 47,359 $ 691 1.95% $ 35,690 1,305 4.89%
Federal funds sold 10,803 94 1.16% 8,428 111 1.76%
Loans(2)(3) 170,133 9,248 7.27% 152,858 8,862 7.75%
-------- -------- ------- -------- -------- -------
Total Earning Assets $228,295 $ 10,033 5.88% $196,976 10,278 6.98%
======== ======== ======= ======== ======== =======
Liabilities:
Non-interest bearing
deposits $ 40,631 $ $ 33,954 -- --
Savings, money market,
& NOW deposits 129,121 788 0.82% 109,919 1,015 1.23%
Time deposits 67,005 1,092 2.18% 64,105 1,549 3.23%
Other borrowings 7,253 206 3.80% 8.791 200 3.04%
-------- -------- ------- -------- -------- -------
Total Liabilities $244,010 $ 2,086 1.14% $216,990 2,764 1.70%
======== ======== ======= ======== ======== =======
Net Interest Spread 4.74% 5.28%
======= =======
--------------------------------------------------------------------------------------
Earning Income Earning Income
Assets (Expense) Yield Assets (Expense) Yield
------ --------- ----- ------ --------- -----
Yield on average earning
assets $228,295 $ 10,033 5.88% $196,976 10,278 6.98%
Cost of funding average
earning assets $228,295 $ (2,086) (1.23)% $196,976 (2,764) (1.88)%
-------- ---- ------ ----
Net Interest Margin $228,295 $ 7,947 4.65% $196,976 7,514 5.10%
======== ==== ====== ====
(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.
During the first nine months of 2003, net interest income increased $433
thousand, or 5.8%, over the same period of 2002. The increase is the result 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. An increase in net interest income totaling $1,243
thousand resulted from the increase in volumes of average earning assets and
liabilities while the decline in interest rates resulted in a decrease in net
interest income totaling $810 thousand when comparing the first nine months of
2003 to 2002.
14
During the first nine months of 2003, average earning assets increased $31,319
thousand when compared to the same period of 2002. Average loans increased
$17,275 thousand, federal funds sold increased $2,375 thousand, and investment
securities increased $11,669 thousand. The September 30, 2003 year-to-date
increase in the volume of average earning assets resulted in an increase in
interest income totaling $1,459 thousand when compared to the September 30, 2002
year-to-date figures. However, interest rates on average earning assets declined
110 basis points (from 6.98% to 5.88%) when compared to the same period in 2002,
resulting in a decrease in interest income totaling $1,704 thousand.
In addition, during the first nine months of 2003, interest income for
investment securities was reduced as a result of accelerated prepayments of
mortgage backed securities and collateralized mortgage obligations (MBS/CMO)
combined with the impact from general declines in interest rates. As a result of
the accelerated prepayments, the Company was required to accelerate the
amortization of premiums paid to purchase MBS/CMO securities. During the first
nine months of 2003, the Company received proceeds from prepayments of MBS/CMO
totaling $24,149 thousand versus proceeds totaling $9,597 thousand during the
same period in 2002. As a result of increased liquidity during the third quarter
of 2003 (resulting primarily from increased deposits combined with the proceeds
from prepayments of MBS/CMO), the Company purchased $62,474 thousand in
investment securities. The purchases represent an increase of 189% in the
balance of investment securities owned by the Company at December 31, 2002.
These securities were purchased with a weighted average yield of 2.56% and a
weighted average life of 3.03 years. At September 30, 2003, the investment
securities portfolio is projected to yield 2.24% with an average life of 3.05
years. While the direction of future interest rates and the prepayment pattern
of MBS/CMO is uncertain, management does not anticipate the accelerated level of
prepayments experienced during the third quarter of 2003 to continue throughout
the remainder of the year.
Average liabilities increased $27,241 thousand during the first nine months of
2003 as compared to the same period of 2002. Of that increase, average
noninterest bearing deposits increased $6,677 thousand, NOW and money market
accounts increased $11,657 thousand, savings accounts increased $7,545 thousand,
certificates of deposit increased $2,900 thousand while other borrowings
decreased $1,538. An increase in interest expense totaling $216 thousand
resulted from the increased volume in average liabilities. As a result of the
decline in interest rates from 2003 to 2002, the cost of interest bearing
liabilities decreased 56 basis points (from 1.70% to 1.14%) resulting in a
reduction in interest expense totaling $894 thousand.
Nonaccrual loan activity also affects interest income. Interest forgone or
reversed on nonaccrual loans during the first nine months of 2003 was
approximately $251 thousand and approximately $76 thousand for the third quarter
of 2003. Interest was collected on nonaccrual loans for the first nine months of
2003 and for the third quarter of 2003 in the amount of $35 thousand and $9
thousand, respectively.
Provision for Loan Losses
The provision for loan losses for the three and nine months ended September 30,
2003 was $0 and $312 thousand compared with $162 and $538 thousand for the three
and nine months ended September 30, 2002. Though the Company reduced the
provision for loan loss (when compared to the prior year three and nine month
periods) the allowance for loan losses has remained consistent as a percentage
of total loans. As of September 30, 2003 the allowance for loan losses was
$3,264 thousand or 1.8% 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
September 30, 2003, nonperforming loans totaled $2,360 thousand or 1.3% 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 three and nine months ended September 30, 2003
decreased by $327 thousand, or 23.1%, and $197 thousand, or 5.5%, when compared
to the same periods in 2002. The decreases are primarily the result of
reductions in the gains realized on the sale of investment securities totaling
$341 thousand and $515 thousand during the three and nine months ending
September 30, 2003. During the third quarter of 2003, the Company did not sell
any investment securities. During the third quarter of 2002, the Company
realized gains on the sale of investment securities totaling $341 thousand.
During the first nine months of 2003, the Company realized gains on the sale of
investment securities totaling $88 thousand compared to $603 thousand for the
same period of 2002. In addition, the Company realized gains from the sale of
other real estate totaling $5 thousand and $16 thousand during the first nine
months of 2003 and 2002, respectively.
Income from the sale and servicing of loans totaled $448 thousand during the
third quarter of 2003, which increased by $38 thousand, or 9.3%, compared to the
prior year quarter. During the first nine months of 2003, income from the sale
and servicing of loans totaled $1,315 thousand, an increase of $349 thousand or
36.1% over the same period of 2002. The decline in mortgage loan rates during
2002 and 2003 led to increased refinancing activity of residential mortgage
loans resulting in increased income from the sale and servicing of those loans.
The income recognized on the cash surrender value of life insurance decreased
$35 thousand and $89 thousand, during the third quarter and year to date for
2003, respectively, 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
15
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 third quarter of 2003 as compared to 8.2% during the third
quarter of 2002. For the first nine months of 2003, the tax effective yield
totaled 6.8% as compared to 5.9% during the same period in 2002.
Noninterest Expenses
Noninterest expenses increased $253 thousand, or 8.2%, and $736 thousand, or
8.1%, when comparing the three and nine month periods ending September 30, 2003
to the same periods of 2002. Personnel expense increased $112 thousand, or 6.8%
and $556 thousand, or 11.8% when comparing the three and nine month periods
ending September 30, 2003 to 2002. This increase is primarily due to general
merit increases for existing personnel combined with an increase in number of
full time equivalent employees, from 122 at September 30, 2002 to 136 at
September 30, 2003. Four of the additional full time equivalent employees were
new hires for the Sacramento branch. The increase in the Company's mortgage
origination activities has also led to increased sales commissions. When
comparing the first nine months of 2003 to 2002, occupancy expense increased $31
thousand or 4.1% of which $20 thousand is due to increased taxes, insurance and
utilities. Occupancy expense increased $18 thousand, or 6.6% when comparing the
third quarter of 2003 to 2002. Equipment expense during the first nine months of
2003 decreased $9 thousand, or 1.4% when compared to 2002 and is due to a $17
thousand decrease in depreciation expense and a $7 thousand increase in
equipment maintenance expense. During the third quarter of 2003, equipment
expense decreased $45 thousand, or 17.9%, when compared to the third quarter of
2002. For the three and nine month periods ended September 30, 2003, other
noninterest expense increased $168 thousand, or 18.4% and $158 thousand, or
5.4%, respectively, when compared to the same periods of 2002.
Included in other noninterest expense during the three and nine month periods
ended September 30, 2003 are costs totaling $64 thousand and $158 thousand
associated with responding to the disruptive actions initiated by three
dissident directors. Without this unanticipated expense, other noninterest
expense would have increased $104 thousand, or 11.3% and would have been
unchanged during the three and nine month periods during 2003 when compared to
the same period in 2002.
Income Taxes
As a result of increases in tax exempt income combined with reduced taxable
income, the Company's income tax provision for the third quarter of 2003 was
$13,000 compared to a tax provision of $304,000 during the third quarter of
2002. For the first nine months of 2003, the provision for income taxes totaled
$282,000 as compared to $358,000 during the same period last year. During the
third quarter of 2003 the Company had an effective tax rate of 6.4% compared to
33.2% during the third quarter of 2002. For the first nine months of 2003, the
Company's effective tax rate was 24.0% as compared to 24.7% 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 September 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 decreased in 2003 primarily as a as a result of reductions in
short term borrowings.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
While there are several varieties of market risk, the market risk material to
the Company and the Bank is interest rate risk. Within the context of interest
rate risk, market risk is the risk of loss due to changes in market interest
rates that have an adverse effect on net interest income, earnings, capital or
the fair value of financial instruments. Exposure to this type of risk is a
regular part of a financial institution's operations. The fundamental activities
of making loans, purchasing investment securities, and accepting deposits
inherently involve exposure to interest rate risk. The Company monitors the
repricing differences between assets and liabilities on a regular basis and
estimates exposure to net interest income, net income, and capital based upon
assumed changes in the market yield curve. As of and for the three and nine
months ended September 30, 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 that
occurred during our last fiscal quarter that has materially affected, or are
reasonably likely to materially effect, our internal controls over financial
reporting.
17
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
Not Applicable.
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
None.
18
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: /s/ Allen R. Christenson
Date: November 12, 2003 -------------------------------
----------------- Allen R. Christenson
Senior Vice President
Chief Financial Officer
(Principal Accounting and
Financial Officer)
19
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
20