================================================================================
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 March 31, 2004
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 May 5, 2004 there were 1,783,728 shares of Common Stock (adjusted for
the 10% stock dividend declared March 25, 2004) no par value, outstanding.
================================================================================
FIRST FINANCIAL BANCORP
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004
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 ................................. 14
Item 4. Controls and Procedures .................................................................... 14
PART II
Item 1. Legal Proceedings .......................................................................... 14
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities............ 15
Item 3. Defaults Upon Senior Securities ............................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders......................................... 15
Item 5. Other Information .......................................................................... 15
Item 6. Exhibits and Reports on Form 8-K ........................................................... 15
Signatures ................................................................................................... 16
Index to Exhibits ............................................................................................ 17
ITEM 1. FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(in thousands except share amounts)
March 31, December 31,
Assets 2004 2003
-------- --------
Cash and due from banks $ 15,733 $ 17,497
Federal funds sold and securities purchased under resale agreements 585 8,034
Investment securities available for sale, at fair value 81,682 90,270
Loans held for sale 3,156 3,076
Loans, net of deferred loan fees 202,383 178,711
Less allowance for loan losses 3,314 3,262
-------- --------
Net loans 199,069 175,449
Premises and equipment, net 6,780 6,903
Accrued interest receivable 1,223 1,322
Other assets 19,247 19,262
-------- --------
Total Assets $327,475 $321,813
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest bearing $ 46,548 $ 47,765
Interest bearing 232,084 230,390
-------- --------
Total deposits 278,632 278,155
Accrued interest payable 181 205
Short term borrowings 18,110 14,100
Other liabilities 4,435 4,231
Junior subordinated debentures 5,155 5,155
-------- --------
Total liabilities 306,513 301,846
-------- --------
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 2004 and 2003, 1,783,728
and 1,783,420, respectively 12,963 12,950
Retained earnings 7,571 7,004
Accumulated other comprehensive income 428 13
-------- --------
Total stockholders' equity 20,962 19,967
-------- --------
$327,475 $321,813
======== ========
<FN>
See accompanying notes.
</FN>
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(in thousands except per share amounts)
Three Months Ended March 31,
2004 2003
------ ------
Interest income:
Loans, including fees $3,124 $2,954
Investment securities:
Taxable 712 252
Exempt from Federal taxes 77 37
Federal funds sold 10 33
------ ------
Total interest income 3,923 3,276
Interest expense:
Deposit accounts 640 581
Other borrowings 103 66
------ ------
Total interest expense 743 647
Net interest income 3,180 2,629
Provision for loan losses 70 257
------ ------
Net interest income after provision for loan losses 3,110 2,372
Noninterest income:
Gain on sale of investment securities 65 88
Gain on sale of loans 144 306
Service charges 422 397
Premiums and fees from SBA and mortgage operations 110 129
Increase in cash surrender value of life insurance 158 141
Miscellaneous 86 117
------ ------
Total noninterest income 985 1,178
Noninterest expense:
Salaries and employee benefits 1,796 1,652
Occupancy 318 263
Equipment 194 303
Other 998 866
------ ------
Total noninterest expense 3,306 3,084
------ ------
Income before provision for income taxes 789 466
Provision for income taxes 222 124
------ ------
Net income $ 567 $ 342
====== ======
Net income per share:
Basic $ 0.32 $ 0.19
====== ======
Diluted $ 0.30 $ 0.18
====== ======
<FN>
See accompanying notes.
</FN>
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Unaudited)
(in thousands except share amounts)
Three Months Ended March 31, 2004
Accumulated
Common Common Other
Stock Stock Comprehensive Retained Comprehensive
Description Shares Amounts Income Earnings Income Total
- ------------------------------------- ------------ ------------ --------------- ------------- ----------------- ---------------
Balance at December 31, 2003 1,783,420 $ 12,950 7,004 13 19,967
Comprehensive income:
Net income $ 567 567 567
---------------
Other comprehensive income:
Unrealized holding gain
arising during the current
period, net of
tax effect of $316 453
Reclassification adjustment
due to gains realized,
net of tax benefit of $27 (38)
Total other comprehensive
income, net of ---------------
tax effect of $289 415 415 415
---------------
Comprehensive income $ 982
===============
Options exercised, including
tax benefits 308 3 3
Stock-based compensation and
related tax benefits 10 10
------------ ------------ ------------- ----------------- ---------------
Balance at March 31, 2004 1,783,728 $ 12,963 7,571 428 20,962
============ ============ ============= ================= ===============
<FN>
See accompanying notes.
</FN>
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended March 31,
2004 2003
-------- --------
Cash flows from operating activities:
Net income $ 567 $ 342
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Increase (decrease) in deferred loan income 136 (21)
Depreciation and amortization 540 459
Stock-based compensation 10 --
Provision for loan losses 70 257
Gain on sale of available-for-sale securities (65) (88)
Gain on sale of loans (144) (306)
Decrease (increase) in accrued interest receivable 99 (76)
(Decrease) increase in accrued interest payable (24) 14
Increase (decrease) in other liabilities 757 (1,690)
Increase in cash surrender value of life insurance (158) (141)
(Increase) decrease in other assets (713) 95
-------- --------
Net cash provided by (used in) operating activities 1,075 (1,155)
Cash flows from investing activities:
Investment securities available-for-sale:
Purchases (290) --
Proceeds from prepayments 5,257 3,203
Proceeds from sale 4,145 1,056
Loan held for sale:
Loans originated (8,109) (16,921)
Proceeds from sale 8,173 19,142
Increase in loans made to customers (23,826) (6,566)
Purchases of bank premises and equipment (128) (128)
-------- --------
Net cash used in investing activities (14,778) (214)
Cash flows from financing activities:
Net increase in deposits 477 15,559
Increase (decrease) in short term borrowings 4,010 (9,885)
Payments for repurchase of common stock -- (1)
Proceeds from issuance of common stock 3 15
-------- --------
Net cash provided by financing activities 4,490 5,688
Net (decrease) increase in cash and cash equivalents (9,213) 4,319
Cash and cash equivalents at beginning of period 25,531 34,622
-------- --------
Cash and cash equivalents at end of period $ 16,318 $ 38,941
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest payments $ 767 586
Cash paid for taxes 175 --
Unrealized gain (loss) on available-for-sale securities, net of tax 453 (26)
Loans transferred to other real estate owned -- 73
<FN>
See accompanying notes.
</FN>
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2004 and December 31, 2003
(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 subsidiary,
Western Auxiliary Corporation. 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 2003 Annual Report on Form 10-K. Operating results for the three
months ended March 31, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004.
(2) Outstanding Shares and Earnings Per Share
On March 25, 2004, the Board of Directors of the Company declared a 10%
stock dividend payable as of May 14, 2004. All share and per share amounts
have been adjusted to reflect the effect of the stock dividend.
Per share information is based on weighted average number of shares of
common stock outstanding during each three-month period. Basic earnings per
share (EPS) is computed by dividing net income by the weighted average
common shares outstanding during the period. Diluted earnings per share is
computed by dividing net income 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 table provides a reconciliation of the numerator and
denominator of the basic and diluted earnings per share computation of the
three month periods ended March 31, 2004 and 2003:
Income Shares Per-Share
Three months ended March 31, 2004 (numerator) (denominator) Amount
------------------------------------------------------------------------ -----------------------------
Basic earnings per share $ 567,000 1,783,538 $ .32
Effect of dilutive securities 124,743 -
------------------ -------------------
Diluted earnings per share $ 567,000 1,908,281 $ .30
================== ===================
Income Shares Per-Share
Three months ended March 31, 2003 (numerator) (denominator) Amount
------------------------------------------------------------------------ -----------------------------
Basic earnings per share $ 342,000 1,785,693 $ .19
Effect of dilutive securities 79,946 -
------------------ -------------------
Diluted earnings per share $ 342,000 1,865,639 $ .18
================== ===================
All share and per share data has been adjusted for the 10% stock dividend
declared on March 25, 2004.
(3) Allowance for Loan Losses
Quarter Year
Ended Ended
(in thousands) 3/31/04 12/31/03
-------- --------
Balance at beginning of period $ 3,262 3,057
Loans charged off (20) (143)
Recoveries 2 36
Provisions charged to operations 70 312
-------- --------
Balance at end of period $ 3,314 3,262
======== =======
(4) Stock Based Compensation
Effective as of January 1, 2003, the Company adopted the fair value
recognition provisions of FASB Statement No. 148, Accounting for
Stock-Based Compensation (SFAS No. 148). Under the prospective method of
adoption selected by the Company, stock-based employee compensation costs
are recognized as awards are granted, modified or settled. Prior to January
1, 2003, these plans were accounted for under the intrinsic value method as
prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees.
Under the intrinsic value method, compensation expense was recognized on
the date of grant only if the market price of the underlying stock exceeded
the exercise price on that date.
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 Ended
March 31,
2004 2003
-------- --------
Net income, as reported (in thousands) $ 567 $ 342
Add: Stock based employee compensation expense included in
reported net income, net of tax effects 6 2
Deduct: Stock based employee compensation determined under fair
value based method for all awards, net of tax effects (9) (7)
---------------------
Pro forma net income $ 564 $ 337
=====================
Earnings per share-basic
As reported $ 0.32 $ 0.19
Pro-forma 0.32 0.19
Earnings per share-assuming dilution
As reported $ 0.30 $ 0.18
Pro-forma 0.30 0.18
All share and per share data has been adjusted for the 10% stock dividend
declared on March 25, 2004.
(5) Retirement Plans
The Company has a supplemental retirement plan for directors and a
supplemental executive retirement plan covering key executives. These plans
are non-qualified defined benefit plans and are unsecured and unfunded. The
Company has purchased insurance on the lives of the participants and
intends to use the cash values of these policies to pay the retirement
obligations.
The following table sets forth the net periodic benefit cost recognized for
the plans:
Three Months Ended March 31,
(in thousands) 2004 2003
---------------------------
Net pension cost included the following components:
Service cost-benefits earned during the period $ 21 $ 13
Interest cost on projected benefit obligation 25 16
Amortization of prior service cost 13 9
Recognized net actuarial loss 2 -
---------------------------
Net periodic pension cost $ 61 $ 38
===========================
During the three months ended March 31, 2004, the Company contributed and
paid out as benefits $5.6 thousand to participants under the plans. For the
year ending December 31, 2004, the Company expects to contribute and pay
out as benefits $27.5 thousand to participants under the plans.
(6) Impact Of Recently Issued Accounting Standards
In December 2003, FASB issued Statement No. 132 (revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits. This
Statement prescribes employers' disclosures about pension plans and other
postretirement benefit plans; it does not change the measurement or
recognition of those plans. The Statement retains and revises the
disclosure requirements contained in the original Statement 132. It also
requires additional disclosures about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit plans and other
postretirement benefit plans. The Statement generally is effective for
fiscal years ending after December 15, 2003. The Company currently does not
have any postretirement benefit plans that are within the scope of the
Statement.
(7) Legal Proceedings
On March 23, 2004, a lawsuit was filed naming First Financial Bancorp, Bank
of Lodi, N.A. and certain named directors and officers of the Company. The
suit is filed as a derivative action alleging various charges of breach of
fiduciary duty and corporate mismanagement against the named officers and
directors. The lawsuit was commenced by two shareholders on behalf of the
Company. The complaint also alleges intentional and negligent breach of
fiduciary duty, abuse of control, waste of corporate assets, unjust
enrichment and imposition of constructive trust.
The matter has been tendered to the Company's carrier for its director and
officer liability insurance and the insurance company is expected to
respond to the tender of defense in due course. If coverage under the
policy is denied, the Company may be obligated to provide indemnification
to the named officers and directors. The Company is evaluating the
allegations of the Complaint and will vigorously defend them, as
appropriate. If the allegations are proven, any recovery in the suit will
benefit the Company.
The bank is involved in various legal actions arising in the ordinary
course of business. In the opinion of management, after consulting with
legal counsel, the ultimate disposition of these matters will not have a
material effect on the Bank's financial condition, results of operations,
or liquidity.
(8) Stock Repurchase Program
In April 2002, the Board of Directors authorized a stock repurchase program
approving the repurchase of up to $2 million of the Company's stock. The
repurchase program has been extended to December 31, 2004. No stock was
repurchased during the first quarter of 2004.
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; impact of litigation; the ability of management and
directors to work together cooperatively and efficiently; 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 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.
Summary
The Company recorded net income of $567 thousand for the quarter ended March 31,
2004, representing an increase of $225 thousand or 65.8% over net income of $342
thousand for the same period in 2003. The increase resulted primarily from an
increase in net interest income of $551 thousand which was partially offset by a
decrease in noninterest income of $193 thousand and an increase in noninterest
expenses of $222 thousand.
Included in net income during the three month period ended March 31, 2004 were
gains on the sale of investment securities totaling $65 thousand. During the
same period in 2003, gains on the sale of investment securities totaled $88
thousand, a reduction of $23 thousand from the prior year. Additionally, during
the three month period ended March 31, 2004, the Company incurred unanticipated
costs totaling $67 thousand in response to disruptive actions initiated by three
dissident directors.
On March 25, 2004, the Board of Directors of the Company declared a 10% stock
dividend payable as of May 14, 2004. All share and per share amounts have been
adjusted to reflect the effect of the stock dividend.
Changes in Financial Condition
Consolidated total assets as of March 31, 2004 totaled $327 million, which
represents an increase of $5,662 thousand, or 1.8% above the comparable level at
December 31, 2003. The increase in total assets was attributable primarily to a
$4,010 thousand, or 28.4%, increase in short term borrowings. Total gross loans
increased $23,888 thousand, or 13.1% during the first quarter of 2004. The loan
growth was funded by a reduction of federal funds sold of $7,449 thousand, or
92.7%, a decrease of $8,588, or 9.5%, in the investment portfolio due to
prepayments of mortgage-backed securities (including CMOs) of $5,257 thousand
and proceeds from the sale of securities of $4,145 thousand and an increase of
$4,010 thousand, or 28.4%, in short term borrowings.
The net increase in gross loans is primarily the result of increases of $20,640
thousand, or 25.5%, $3,782 thousand, or 12.5%, and $676 thousand, or 2.2%, in
real estate loans, commercial loans and SBA loans, respectively, combined with
decreases of $944 thousand, or 5.0%, and $324 thousand, or 14.2%, in
agricultural and consumer loans, respectively.
During the first quarter of 2004, non-interest bearing deposits decreased $1,217
thousand, or 2.5% and interest bearing deposits increased $1,694 thousand, or
0.7%. The first quarter deposit growth consists of increases of $1,800 thousand,
or 4.0%, and $907 thousand, or 1.6% in savings and NOW accounts combined with
decreases of $1,217 thousand, or 2.5%, $909 thousand, or 1.2%, and $104
thousand, or 0.2%, in non-interest bearing, certificates of deposit and money
market accounts, respectively.
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 March
31, 2004 was in excess of the December 31, 2003 allowance by $52 thousand, or
1.6%, as a result of a provision for $70 thousand combined with net charge-offs
of $18 thousand. During the first quarter, nonperforming loans decreased by $768
thousand, to $3,112 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 March 31, 2004 is adequate to absorb known and reasonably
estimated loan losses. However, there can be no assurances that future economic
events will 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 three months ended March 31, 2004 and year
ended December 31, 2003, respectively:
Analysis of the Allowance for Loan Losses
- -----------------------------------------
Quarter Year
Ended Ended
3/31/04 12/31/03
------- -------
Balance at beginning of period $ 3,262 3,057
Charge-offs:
Commercial -- (88)
Consumer (20) (55)
------- -------
Total charge-offs (20) (143)
Recoveries:
Commercial 1 27
Consumer 1 9
------- -------
Total recoveries 2 36
------- -------
Net charge-offs (18) (107)
Provision charged to operations 70 312
------- -------
Balance at end of period $ 3,314 $ 3,262
======= =======
Allocation of the Allowance for Loan Losses
- -------------------------------------------
3/31/04 3/31/04 12/31/03 12/31/03
Loan Category Amount % of Loans Amount % of Loans
- ------------- ------ ---------- ------ ----------
Commercial and other real estate $ 2,378 91.32% $ 2,381 89.99%
Real estate construction 892 7.74% 828 8.76%
Installment and other 44 0.94% 53 1.25%
-------- ------- -------- -------
$ 3,314 100.00% $ 3,262 100.00%
======== ======= ======== =======
Investments
- -----------
Investment securities decreased $8,588 thousand, or 9.5%, from December 31, 2003
to March 31, 2004. This first quarter of 2004 decrease resulted primarily from
prepayments of mortgage-backed securities (including CMOs) totaling $5,257
thousand and sales of investment securities totaling $4,145 thousand. The
Company realized gross gains totaling $65 thousand on the sale of investment
securities during the first quarter of 2004 which is a decrease of $23 thousand
when compared to the same period of 2003.
Equity
- ------
Consolidated equity increased $995 thousand from December 31, 2003 to March 31,
2004. Consolidated equity represented 6.40% and 6.20% of consolidated assets at
March 31, 2004 and December 31, 2003, respectively. The increase in equity
during the first quarter of 2004 resulted primarily from net income of $567
thousand for the three months ended March 31, 2004 and a $415 thousand increase
resulting from the after-tax market value increase in the available-for-sale
investment securities portfolio.
In April 2002, the Board of Directors authorized a stock repurchase program
approving the repurchase of up to $2 million of the Company's stock. The
repurchase program has been extended to December 31, 2004. No stock was
repurchased during the first quarter of 2004.
The total risk-based capital ratio for the Company's wholly owned subsidiary,
Bank of Lodi was 10.01% at March 31, 2004 compared to 10.68% at December 31,
2003.
Changes in Results of Operations - Three Months ended March 31, 2004
Summary of Earnings Performance
- -------------------------------
- --------------------------------------------------------------------------------
For the three months ended March 31:
----------------------------------------
----------------------------------------
2004 2003
---- ----
Net income (in thousands) $ 567 $ 342
- --------------------------------------------------------------------------------
Basic net income per share $.32 $.19
Diluted net income per share .30 .18
Return on average assets 0.71% 0.56%
Return on average equity 11.10% 7.02%
- --------------------------------------------------------------------------------
Average equity to average assets 6.38% 7.95%
- --------------------------------------------------------------------------------
Net income for the first quarter of 2004 increased $225 thousand, or 65.8%,
compared to the first quarter of 2003. Net interest income increased $551
thousand, or 21.0% as a result of a $96 thousand increase in interest expense
combined with a $647 thousand increase in interest income. The provision for
loan losses totaled $70 thousand representing a decrease of $187 thousand, or
72.8% when compared to the first quarter of 2003. Noninterest income decreased
$193 thousand, or 16.4%, while noninterest expense increased $222 thousand, or
7.2%. The provision for income taxes increased $98 thousand, or 79.0%. The
return on average equity at March 31, 2004 was 11.10% compared to 7.02% at
December 31, 2003.
Net Interest Income
- -------------------
The following table provides a detailed analysis of the net interest spread and
net interest margin for the periods indicated:
-------------------------------------------------------------------------------------------------------
For the Quarter Ended For the Quarter Ended
March 31, 2004 March 31, 2003
(in thousands) (in thousands)
-------------------------------------------------------------------------------------------------------
Average Income/ Average Income/
Balance Expense Yield(1) Balance Expense Yield(1)
------- ------- -------- ------- ------- --------
Earning Assets:
Investment securities (2) $ 86,914 789 3.64% $ 31,274 289 3.75%
Federal funds sold 3,292 10 1.22% 10,660 33 1.26%
Loans (3) 186,008 3,124 6.74% 167,259 2,954 7.16%
--------- ----- ---- --------- ----- ----
$ 276,214 3,923 5.70% $ 209,193 3,276 6.35%
========= ===== ===== ========= ===== =====
Liabilities:
Noninterest bearing deposits $ 45,684 -- -- $ 34,817 -- --
Savings, money market, & NOW deposits 158,825 342 .86% 121,832 240 .79%
Time deposits 71,035 298 1.68% 58,596 341 2.36%
Other borrowings 20,258 103 2.04% 5,915 66 4.53%
--------- ----- ---- --------- ----- ----
Total Liabilities $295,802 743 1.01% $221,160 647 1.19%
========= ===== ===== ========= ===== =====
Net Interest Spread 4.69% 5.16%
===== =====
-------------------------------------------------------------------------------------------------------
Earning Income Earning Income
Assets (Expense) Yield Assets (Expense) Yield
------ --------- ----- ------ --------- -----
Yield on average earning assets $276,214 3,923 5.70% $209,193 3,276 6.35%
Cost of funding average earning assets $276,214 (743) (1.08%) $209,193 (647) (1.25%)
----- ------ ----- ------
Net Interest Margin $276,214 3,180 4.62% $209,193 2,629 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.
Net interest income for the first quarter of 2004 increased $551 thousand, or
21.0%, when compared to the same period of 2003. The increase is attributable to
the effects of increases in volumes of earning assets and liabilities combined
with the effects of changes in interest rates. The increase in volumes of
average earning assets and liabilities resulted in an increase in net interest
income totaling $497 thousand while interest rates resulted in an increase in
net interest income totaling $54 thousand when comparing the first quarter of
2004 to the same period last year.
Average earning assets increased $67,021 thousand during the first quarter of
2004 as compared to the first quarter of 2003. Average loans increased $18,749
thousand and investment securities increased $55,640 thousand while federal
funds sold decreased $7,368 thousand. The increase in the volume of average
earning assets during the first quarter of 2004 as compared to the first quarter
of 2003 resulted in an increase in interest income totaling $832 thousand.
However, interest rates on average earning assets declined 65 basis points (from
6.35% to 5.70%) when compared to the same period in 2003, resulting in a
decrease in interest income totaling $185 thousand.
Average liabilities increased $74,642 thousand during the first quarter of 2004
as compared to the same period last year. The increase consists of $25,447
thousand, $12,439 thousand, $10,867 thousand, $6,003 thousand and $5,543
thousand in money market accounts, certificates of deposit, non-interest bearing
deposits, NOW and savings accounts. Other borrowings increased $14,343. The
increase in average liabilities resulted in an increase in interest expense
totaling $335 thousand. As a result of the declining interest rate environment,
the cost of interest bearing liabilities decreased 18 basis points (from 1.19%
to 1.01%) resulting in a reduction in interest expense totaling $239 thousand.
Interest income is also affected by nonaccrual loan activity. Nonaccrual loans
at March 31, 2004 and March 31, 2003 totaled $3,112 thousand and $2,709
thousand, respectively. Interest forgone on nonaccrual loans totaled
approximately $92 thousand and $69 thousand for the three months ended March 31,
2004 and 2003, respectively.
Provision for Loan Losses
- -------------------------
The provision for loan losses for the three months ended March 31, 2004 was $70
thousand compared with $257 thousand for the three months ended March 31, 2003,
a decrease of $187 thousand or 72.8%. As of March 31, 2004 the allowance for
loan losses was $3,314 thousand or 1.6% of total loans, which compares to the
allowance for loan losses of $3,262 thousand or 1.8% of total loans as of
December 31, 2003. See "Allowance for Loan Losses" contained herein. As of March
31, 2004, nonperforming loans totaled $3,112 thousand or 1.5% of total loans
compared to $3,880 thousand or 2.1% at December 31, 2003. 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.
Noninterest Income
- ------------------
Noninterest income for the first quarter of 2004 decreased $193 thousand, or
16.4%, compared to the same period last year. Included in noninterest income is
$65 thousand and $88 thousand attributable to gains resulting from the sale of
securities during the first quarter of 2004 and 2003, respectively. Income from
the sale and servicing of loans totaled $254 thousand during the first quarter
of 2004, which decreased by $181 thousand, or 41.6%, compared to the prior year
quarter. As a result of an overall increase in mortgage lending rates in 2004 as
compared to the prior year, the Company experienced a decline in its residential
mortgage lending activity during the first quarter of 2004.
The cash surrender value of life insurance increased $17 thousand, or 12.1%,
during the first quarter of 2004 when compared to the same quarter in 2003. 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 7.7% during the first quarter of 2004 as compared to
7.3% during the first quarter of 2003.
Noninterest Expense
- -------------------
Noninterest expense increased $222 thousand, or 7.2%, compared to the prior year
quarter. The leading factors contributing to the increase in noninterest expense
were reflected in increases of $144 thousand, or 8.7% in salaries and employee
benefits combined with expenses totaling $67,000 associated with actions
initiated by three dissident directors. The actions initiated by the dissidents
represent 30.2% of the total increase in noninterest expense during 2004. The
opening of the new branch in Sacramento in late 2003 accounted for over 90% of
the increase in salaries and employee benefits expense.
Income Taxes
- -------------
In the three months ended March 31, 2004, taxes increased $98 thousand to $222
thousand from $124 thousand for the same period in 2003. The Bank's effective
tax rate for the three months ended March 31, 2004 was 28.1%, compared to 26.6%
for the same period in 2003.
Off-Balance Sheet Commitments
- ------------------------------
The following table shows the distribution of the Company's undisbursed loan
commitments at the dates indicated.
(in thousands) March 31, 2004 December 31, 2003
- --------------------------------------------------------------------------------
Commitments to extend credit $ 52,684 49,643
================================================================================
Standby letters of credit $ 355 488
================================================================================
Liquidity
The Company's primary sources of liquidity are the proceeds from the junior
subordinated debentures combined with dividends from the Bank. The Company's
primary uses of liquidity are associated with interest payments on the junior
subordinated debentures, dividend payments made to shareholders, stock
repurchases and operating expenses. The Company also has liquidity available to
provide capital to the Bank as needed in order to support the Bank's capital
plan and growth objectives.
The Bank's liquidity is managed on a daily basis by maintaining cash, federal
funds sold, and short-term investments at levels commensurate with the estimated
requirements for loan demand and fluctuations in deposits. Loan demand and
deposit fluctuations are affected by a number of factors, including economic
conditions, seasonality of the borrowing and deposit bases, and the general
level of interest rates. The Bank maintains two lines of credit with
correspondent banks as a supplemental source of short-term liquidity in the
event that saleable investment securities and loans or available new deposits
are not adequate to meet liquidity needs. The Bank has also established reverse
repurchase agreements with two brokerage firms, which allow for short-term
borrowings that are secured by the Bank's investment securities. Furthermore,
the Bank may also borrow on a short-term basis from the Federal Reserve in the
event that other liquidity sources are not adequate.
At March 31, 2004, liquidity was considered adequate, and funds available in the
local deposit market and scheduled maturities of investments are considered
sufficient to meet long-term liquidity needs. Compared to 2003 liquidity
decreased in 2004 as a result of the growth in the loan portfolio and purchases
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, 2004, there were no material changes in the market risk profile of the
Company or the Bank as described in the Company's 2003 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officers, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as of March 31, 2004. Based on their evaluation, the Company's principal
executive and principal financial officers concluded that the Company's
disclosure controls and procedures were effective as of March 31, 2004.
There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the Company's fiscal quarter ended March 31, 2004, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 23, 2004, a lawsuit was filed naming First Financial
Bancorp, Bank of Lodi, N.A. and certain named directors and
officers of the Company. The suit is filed as a derivative
action alleging various charges of breach of fiduciary duty
and corporate mismanagement against the named officers and
directors. The lawsuit was commenced by two shareholders on
behalf of the Company. The complaint also alleges intentional
and negligent breach of fiduciary duty, abuse of control,
waste of corporate assets, unjust enrichment and imposition of
constructive trust.
The matter has been tendered to the Company's carrier for its
director and officer liability insurance and the insurance
company is expected to respond to the tender of defense in due
course. If coverage under the policy is denied, the Company
may be obligated to provide indemnification to the named
officers and directors. The Company is evaluating the
allegations of the Complaint and will vigorously defend them,
as appropriate. If the allegations are proven, any recovery in
the suit will benefit the Company.
The bank is involved in various legal actions arising in the
ordinary course of business. In the opinion of management,
after consulting with legal counsel, the ultimate disposition
of these matters will not have a material effect on the Bank's
financial condition, results of operations, or liquidity.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
The table below sets forth the information with respect to
purchases made by or on behalf of First Financial Bancorp or
any "affiliated purchaser" (as defined in Rule 10b-18(a)(3)
under the Securities Exchange Act of 1934), of the Company's
common stock during the three months ended March 31, 2004.
Total Approximate Dollar
Number Value of Shares
of Shares That
Purchased May Yet Be
as Part of Purchased Under
Total Number Average Publicly Announced the Plans or
of Shares Price Paid Plans or Programs(1)
Period Purchased Per Share Programs (1) (in thousands)
---------------------------------------------------------------------------------------------------
Month #1 -- -- -- $1,453
(January 1, 2004 to
January 31, 2004)
Month #2 -- -- -- $1,453
(February 1, 2004 to
February 29, 2004)
Month #3 -- -- -- $1,453
(March 1, 2004 to
March 31, 2004)
-------------------------------------------------
-------------------------------------------------
Total -- -- --
=================================================
<FN>
(1) On April 4, 2002, the Company announced that the Board of Directors had approved a share
repurchase program, pursuant to which up to $2 million of its common stock may be repurchased. The
repurchase program is being effected from time to time, depending on market conditions and other
factors, through open market purchases and privately negotiated transactions. The total remaining
authorization under the repurchase program was $1,453 thousand as of April 30, 2004. The repurchase
program expires December 31, 2004.
</FN>
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
During the first quarter of 2004, the Company
furnished a Current Report on 8-K dated March 5, 2004
(Items 7 and 9).
During the second quarter of 2004, the Company
furnished a Current Report on 8-K dated April 9, 2004
(Items 7 and 9).
During the second quarter of 2004, the Company
furnished a Current Report on 8-K dated April 13,
2004 (Items 7 and 9).
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: May 12, 2004 /s/ Allen R. Christenson
------------ --------------------------------------------
Allen R. Christenson
Executive 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 2002
31.2 Certification of Registrant's Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
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