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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number : 0-12499
First Financial Bancorp
(Exact name of registrant as specified in its charter)
California 94-28222858
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701 South Ham Lane , Lodi, California 95242
(Address of principal executive offices) (Zip Code)
(209)-367-2000
(Registrant's telephone number, including area code)
NA
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
As of June, 1998 there were 1,345,442 shares of Common Stock, no par value,
outstanding.
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FIRST FINANCIAL BANCORP
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
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 .......................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..... 13
PART II
Item 1. Legal Proceedings .............................................. 13
Item 2. Changes in Securities .......................................... 14
Item 3. Defaults Upon Senior Securities ................................ 14
Item 4. Submission of Matters to a Vote of Security Holders ............ 14
Item 5. Other Information .............................................. 14
Item 6. Exhibits and Reports on Form 8-K ............................... 14
i
ITEM 1. FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands except share amounts)
June 30 Dec. 31
Assets 1998 1997
- ------ ---- ----
Cash and due from banks $ 8,167 $ 7,183
Federal funds sold 3,500 4,900
Investment Securities:
Held-to-maturity securities at amortized cost, market value of
$1,759 and $1,785 at June 30, 1998 and Dec. 31, 1997,
respectively 1,705 1,716
Available-for-sale securities, at fair value 54,800 60,201
---------------- ----------------
Total investments 56,505 61,917
Loans 69,823 63,541
Less allowance for loan losses (Note 3) 1,358 1,313
---------------- ----------------
Net loans 68,465 62,228
Bank premises and equipment, net 7,089 7,233
Accrued interest receivable 1,454 1,473
Other assets (Note 4) 6,877 2,916
---------------- ----------------
$ 152,057 $ 147,850
================ ================
Liabilities and Stockholders' Equity
Liabilities:
Deposits
Noninterest bearing $ 15,674 $ 14,928
Interest bearing 122,538 118,963
---------------- ----------------
Total deposits 138,212 133,891
Accrued interest payable 398 429
Other liabilities (Note 5) 246 669
----------------- ----------------
Total liabilities 138,856 134,989
Stockholders' equity:
Commonstock - no par value; authorized 9,000,000 shares, issued and
outstanding in 1998 and 1997, 1,345,442
and 1,332,842 shares 7,559 7,455
Retained earnings 5,466 5,188
Accumulated other comprehensive income (Note 1) 176 218
---------------- ----------------
Total stockholders' equity 13,201 12,861
---------------- ----------------
$ 152,057 $ 147,850
================ ================
1
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands except per share amounts)
Three months ended June 30 Six months ended June 30
1998 1997 1998 1997
---- ---- ---- ----
(Dollar amounts in thousands, (Dollar amounts in thousands,
except per share amounts) except per share amounts)
Interest income:
Loans, including fees $ 1,776 $ 1,504 $ 3,462 $ 3,328
Investment securities:
Taxable 825 900 1,725 1,499
Exempt from Federal taxes 53 77 117 146
Federal funds sold 85 67 184 202
----------- ----------- ----------- -----------
Total interest income 2,739 2,548 5,488 5,175
Interest expense:
Deposit accounts 1,061 960 2,026 1,785
Total interest expense 1,061 960 2,026 1,785
----------- ----------- ----------- -----------
Net interest income 1,678 1,588 3,462 3,390
Provision for loan losses 30 20 60 (60)
----------- ----------- ----------- -----------
Net interest income after provision for loan 1,648 1,568 3,402 3,450
losses
Noninterest income:
Service charges 228 212 444 382
Premiums and fees from SBA and mortgage operations 150 170 344 285
Miscellaneous (Note 4) 61 17 67 27
----------- ----------- ----------- -----------
Total noninterest income 439 399 855 694
Noninterest expense:
Salaries and employee benefits 821 788 1,724 1,533
Occupancy 159 143 312 266
Equipment 136 119 271 212
Other 736 636 1,378 1,312
----------- ----------- ----------- -----------
Total noninterest expense 1,851 1,686 3,685 3,323
----------- ----------- ----------- -----------
Income before provision for income taxes 236 281 572 821
Provision for income taxes 55 75 161 275
----------- ----------- ----------- -----------
Net income $ 181 $ 206 $ 411 $ 546
Unrealized (loss) gain on available for sale
securities, net of tax (15) 183 (42) (25)
----------- ----------- ----------- -----------
Total comprehensive income $ 166 $ 391 $ 369 $ 521
=========== =========== =========== ===========
Net income per share:
Basic (Note 2) $ 0.14 $ 0.16 $ 0.31 $ 0.42
=========== =========== =========== ===========
Diluted (Note 2) $ 0.13 $ 0.15 $ 0.30 $ 0.40
=========== =========== =========== ===========
2
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended June 30
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 411 $ 546
Adjustments to reconcile net income to net cash provided by operating
activities:
Decrease (increase) in loans held for sale 722 (630)
Increase in deferred loan income 19 67
Provision for other real estate owned losses 16 50
Depreciation and amortization 528 520
Provision for loan losses 60 (60)
Provision for deferred taxes (37) (58)
Decrease (increase) in accrued interest receivable 19 (598)
(Decrease) Increase in accrued interest payable (31) 122
Decrease in other liabilities (423) (202)
Increase in Cash Surrender Value Life Insurance (55) -
Decrease in other assets 35 264
------------ ------------
Net cash provided by operating activities 1,264 21
Cash flows from investing activities:
Proceeds from maturity of held-to-maturity securities 10 -
Proceeds from maturity of available-for-sale securities 9,329 7,860
Proceeds from sale of available-for-sale securities - 22,000
Purchase of available-for-sale securities (4,000) (51,210)
Increase in loans made to customers (7,038) (3,478)
Proceeds from the sale of other real estate 40 -
Purchases of bank premises and equipment (187) (3,014)
Purchase of cash surrender value life insurance (4,125) -
------------ ------------
Net cash used in investing activities (5,971) (27,842)
Cash flows from financing activities:
Net increase in deposits 4,321 31,464
Dividends paid (134) (132)
Proceeds from issuance of common stock 104 104
------------ ------------
Net cash provided by financing activities 4,291 31,436
Net (decrease) increase in cash and cash
equivalents (416) 3,615
------------ ------------
Cash and cash equivalents at beginning of period 12,083 5,848
------------ ------------
Cash and cash equivalents at end of period $ 11,667 $ 9,463
============ ============
3
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998 and December 31, 1997
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of First Financial Bancorp (the Company)
and its subsidiaries, Bank of Lodi, N.A., (the Bank) and Western Auxiliary
Corporation (WAC) conform with generally accepted accounting principles and
prevailing practices within the banking industry. In preparing the consolidated
financial statements, Management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenue and expense for the period. Actual results could
differ from those estimates applied in the preparation of the consolidated
financial statements. The following is a description of a new accounting
standard adopted during the current period.
(a) Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 130, Reporting Comprehensive Income.
SFAS No. 130 is effective for interim and annual periods beginning after
December 15, 1997 and is to be applied retroactively to all periods presented.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
It does not, however, specify when to recognize or how to measure items that
make up comprehensive income. SFAS No. 130 was issued to address concerns over
the practice of reporting elements of comprehensive income directly in equity.
This statement requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed in equal prominence with the other
financial statements. It does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. Enterprises are
required to classify items of "other comprehensive income" by their nature in
the financial statement and display the balance of other comprehensive income
separately in the equity section of a statement of financial position.
4
(2) Weighted Average Shares Outstanding
Basic and diluted earnings per share for the three and six months ended June
30, 1998 and 1997 were computed as follows:
Income Shares Per-Share
Three months ended June 30, 1998 (numerator) (denominator) Amount
----------------------------------------- ------------------ ------------------- ----------
Basic earnings per share $ 181,000 1,338,186 $ .14
Effect of dilutive securities - 87,291 -
------------------ -------------------
Diluted earnings per share $ 181,000 1,425,477 $ .13
================== ===================
Income Shares Per-Share
Six months ended June 30, 1998 (numerator) (denominator) Amount
----------------------------------------- ------------------ ------------------- ----------
Basic earnings per share $ 411,000 1,335,514 $ .31
Effect of dilutive securities - 87,900 -
------------------ -------------------
Diluted earnings per share $ 411,000 1,423,414 $ .30
================== ===================
Income Shares Per-Share
Three months ended June 30, 1997 (numerator) (denominator) Amount
----------------------------------------- ------------------ ------------------- ----------
Basic earnings per share $ 206,000 1,320,621 $ .16
Effect of dilutive securities - 57,483 -
------------------ -------------------
Diluted earnings per share $ 206,000 1,378,104 $ .15
================== ===================
Income Shares Per-Share
Six months ended June 30, 1997 (numerator) (denominator) Amount
----------------------------------------- ------------------ ------------------- ----------
Basic earnings per share $ 546,000 1,315,443 $ .42
Effect of dilutive securities - 60,886 -
------------------ -------------------
Diluted earnings per share $ 546,000 1,376,329 $ .40
================== ===================
(3) Allowance for Loan Losses
6/30/98 12/31/97
------- --------
Balance at beginning of period $ 1,313,000 1,207,000
Loans charged off (58,000) (290,000)
Recoveries 43,000 456,000
Provisions charged to operations 60,000 (60,000)
----------- ---------
Balance at end of period $ 1,358,000 1,313,000
=========== =========
(4) Other Assets
Other assets include the cash surrender value of life insurance of
$4,178,000 at June 30, 1998. The cash surrender value of life insurance
consists primarily of the Bank's contractual rights under single-premium
life insurance policies written on the lives of certain officers and the
directors of the Company and the Bank. The policies were purchased in order
to indirectly offset anticipated costs of certain benefits payable upon the
retirement, and the death or disability of the directors and officers
pursuant to supplemental compensation agreements. The cash surrender value
accumulates tax-free based upon each policy's crediting rate which is
adjusted by the insurance company on an annual basis.
5
(5) Supplemental Compensation Agreements
Effective as of April 3, 1998 the Bank entered into nonqualified
supplemental compensation agreements with all of the directors and certain
executive officers for the provision of differing death, disability and
post-employment/retirement benefits. The agreements with directors includes
elective provisions for service as a director emeritus following termination
of service as a member of the Board of Directors. Directors who elect to
serve as a director emeritus receive certain benefits during such period of
service in addition to benefits applicable to all directors which commence
upon expiration of the three year emeritus period. The Bank will accrue for
the compensation based on anticipated years of service and the vesting
schedule provided in the agreements. The director agreements are defined
benefit agreements under which each director will receive $7,500 annually
from retirement until death. The executive officer agreements are defined
contribution agreements whereby the benefit accruals under the agreements
are the amount by which, if any, the increase in cash surrender value of the
related insurance policies exceeds a predetermined profitability index. At
June 30, 1998, accrued compensation under both the director and officer
agreements was $4,000.
(6) Western Auxiliary Corporation
On June 9, 1998 the Company incorporated Western Auxiliary Corporation (WAC)
as a California corporation. The Company expects to capitalize WAC as its
wholly-owned subsidiary during the quarter ended September 30, 1998 with an
initial capitalization of $10,000. WAC will earn fee income by acting as
trustee on the Bank's real estate trust deed transactions and will receive
the necessary operational resources under an intercompany services agreement
between WAC, the Company, and the Bank.
(7) Prospective Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activity
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires recognition of all derivatives as either assets or liabilities on
the balance sheet and measurement of those instruments at fair value. If
certain conditions are met, a derivative may be designated specifically as
(a) a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment (a fair value hedge)
or (b) a hedge of the exposure to variable cash flows of a forecasted
transaction (a cash flow hedge). SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company expects
to adopt the Statement beginning October 1, 1998. Management does not expect
that adoption of SFAS No. 133 will have a material impact on the Company's
consolidated financial statements.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
In March 1998, the American Society of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides
guidance on accounting for the costs of computer software developed or
obtained for internal use. It specifies that computer software meeting
certain characteristics be designated as internal-use software and sets
forth criteria for expensing, capitalizing, and amortizing certain costs
related to the development or acquisition of internal-use software. SOP 98-1
is effective for fiscal years beginning after December 15, 1998. The Company
expects to adopt the Statement beginning January 1, 1999. Management does
not expect that adoption of SOP 98-1 will have a material impact on the
Company's consolidated financial statements.
Reporting on the Costs of Start-Up Activities
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 provides guidance on the financial reporting of star-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. SOP 98-5 is effective for
fiscal years beginning after December 15, 1998. The Company expects to adopt
the Statement beginning January 1, 1999. Management does not expect that
adoption of SOP 98-5 will have a material impact on the Company's
consolidated financial statements.
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
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. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in the banking industry; changes in the
interest rate environment; general economic conditions, either nationally or
regionally becoming less favorable than expected and resulting in, among other
things, a deterioration in credit quality and an increase in the provision for
possible loan losses; changes in the regulatory environment; changes in business
conditions; volatility of rate sensitive deposits; operational risks, including
data processing system failures or fraud; asset/liability matching risks and
liquidity risks; and changes in the securities markets.
The following discussion addresses information pertaining to the financial
condition and results of operations of the Company that may not be otherwise
apparent from a review of the consolidated financial statements and related
footnotes. It should be read in conjunction with those statements and notes
found on pages 1 through 6, as well as other information presented throughout
this report.
Changes in Financial Condition
Consolidated total assets at June 30, 1998 were $4.2 million above the
comparable level at December 31, 1997. The 3% increase in assets was due
primarily to an increase in deposits of $4.3 million, or 3%. Noninterest bearing
deposits grew by 5%. Growth of 3% in interest bearing deposits occurred in core
NOW account deposits and certificates of deposit. The company experienced a 1%
increase in deposits during the first quarter that ran contrary to historical
trends which reflect a seasonal decline in deposits during the first quarter
that is typically associated with the local agricultural industry. Deposit
growth in the second quarter increased over the first quarter. Although
management cannot determine with certainty why a seasonal decline in deposits
has not occurred, the unseasonably wet weather during the first quarter impacted
local agriculture and may have impacted deposit flows. Nothwithstanding seasonal
trends, monthly deposit account growth has ranged between 5% and 12% through
June 30, 1998 and has impacted deposit growth favorably.
The loan portfolio increased by 10%, or $6.3 million, from December 31, 1997 to
June 30, 1998. The increase reflects the success of officer calling disciplines
within the Bank's business development program as well as economic improvement
in the Bank's market area. The real estate, construction, SBA and commercial
loan portfolios increased by 16%, 8%, 6%, and 4% respectively. From a geographic
perspective, the fastest loan portfolio growth has occurred in the markets of
Galt, Plymouth, and San Andreas, California that the Bank began to serve in
February, 1997 after acquiring the local branches from Wells Fargo Bank. Since
December 31, 1997, the loan portfolios of these branches has increased by 44%.
The allowance for loan losses at June 30, 1998 is in excess of the December 31,
1997 allowance by $45 thousand, or 3%. Nonperforming loans increased by $308
thousand, to $713 thousand from December 31, 1997 to June 30, 1998, and the
allowance for loan losses to nonperforming loan coverage ratio decreased to 1.90
times from 3.24 times. The increase in nonperforming loans was related to one
borrowing relationship that has been brought current subsequent to June 30,
1998. This borrowing relationship also impacted the delinquency ratio. Total
portfolio delinquency at June 30, 1998 was 1.23%, compared to 1.09% at December
31, 1997. Management believes that the allowance for loan losses at June 30,
1998 is adequate. The following tables depict activity in the allowance for loan
losses and allocation of reserves for and at the six and twelve months ended
June 30, 1998 and December 31, 1997, respectively:
7
Analysis of the Allowance for Loan Losses
6/30/98 12/31/97
------- --------
Balance at beginning of period $ 1,313 1,207
Charge-offs:
Commercial 18 249
Real estate 25 --
Consumer 15 41
--------- --------
Total charge-offs 58 290
Recoveries:
Commercial 30 434
Real estate -- --
Consumer 13 22
--------- --------
Total recoveries 43 456
--------- --------
Net charge-offs 15 (166)
(reductions)/additions (credited to)/charged to operations 60 (60)
--------- --------
Balance at end of period $ 1,358 1,313
========= ========
Allocation of the Allowance for Loan Losses
6/30/98 6/30/98 12/31/97 12/31/97
Loan Category Amount % of Loans Amount % of Loans
------------- ------ ---------- ------ ----------
Commercial $ 269 66.67% 309 60.95%
Real Estate 119 29.70% 192 37.87%
Consumer 20 3.63% 6 1.18%
Unallocated 950 N/A 806 N/A
--------- ------- ------- -------
$ 1,358 100.00% 1,313 100.00%
========= ======= ======= =======
Other Assets
Other assets increased by $4 million, or 136%, from December 31, 1997 to June
30, 1998. During the second quarter of 1998, the Bank's Board of Directors
authorized the execution of supplemental compensation agreements for directors
and certain executive officers. Similar programs have been endorsed by the
California Bankers Association and the American Bankers Association and have
been implemented at financial institutions throughout California and the United
States. The nature of these programs enable the Bank to fund the related
financial obligations in a cost-effective manner through investments in life
insurance. Accordingly, the Bank invested $4.2 million in single-premium life
insurance contracts written on the lives of the directors and officers. The
contracts provide for a cash surrender value to the Bank that increases each
year based upon a crediting rate that is adjusted annually. The increase in cash
surrender value is recognized on a tax-free basis because the Bank's intent is
to carry the policies until the death of the insured individuals. The
tax-equivalent yield on the insurance investment provides for an incremental
return over alternative investment securities that both improves profitability
and ultimately provides the funds necessary to settle the financial obligations
under the supplemental compensation agreements. Under the supplemental
compensation agreements for certain executive officers, benefits are accrued
annually only after a pre-determined profitability target for the insurance
investment is met. Under the director agreements, each director will receive
$7,500 annually from retirement until death.
Investment Securities
The growth in the loan portfolio and other assets was funded by maturities of
investment securities in addition to the deposit growth discussed above.
Investment securities declined by $5.4 million, or 9%, from December 31, 1997 to
June 30, 1998. The decline represents approximate maturities of $9.3 million net
of investment purchases of $4.0 million. Some of the maturities represent
callable agency securities that were called by the issuer. At June 30, 1998, the
bank held approximately $18.5 million in callable agency securities with an
average maturity, months to first call, and average yield of 8 years, 8 months,
and 6.98%, respectively.
8
Equity
Consolidated equity increased by $340 thousand from December 31, 1997 to June
30, 1998. Consolidated equity represented 8.7% of consolidated assets at June
30, 1998 and December 31, 1997. Stock option exercises during the six months
ended June 30, 1998 increased equity by $104 thousand. The increase in equity
from earnings of $411 thousand for the six months ended June 30, 1998 exceeded
reductions from dividend payments of $134 thousand and a reduction to equity of
$42 thousand to reflect the after-tax market value decline of the
available-for-sale portion of the investment securities portfolio. The decline
in the investment security portfolio's market value reflects the impact of both
changing interest rates and the underlying cash flow and maturity
characteristics of the investment portfolio at June 30, 1998 compared to
December 31, 1997. The total risk-based capital ratio for the Company's wholly
owned subsidiary, Bank of Lodi was 12.92% at June 30, 1998 compared to 12.95% at
December 31, 1997. The Bank's leverage capital ratio was 7.21% at June 30, 1998
versus 7.11% at December 31, 1997. The capital ratios are in excess of the
regulatory minimums for a well-capitalized bank.
Changes in Results of Operation - Three Months ended June 30, 1998
Summary of Earnings Performance
- ----------------------------------------------------- --------------------------------------------------
For the three months ended June 30:
--------------------------------------------------
1998 1997
---- ----
Earnings (in thousands) $ 181 206
---------------------------------------------------- ------------------------- ------------------------
Basic earnings per share $ .14 .16
Diluted earnings per share .13 .15
Return on average assets 0.48% 0.60%
Return on average equity 5.50% 6.70%
Dividend payout ratio 38.46% 33.33%
---------------------------------------------------- ------------------------- ------------------------
"Cash" earnings (in thousands) (1) $ 235 276
Diluted "cash" earnings per share .16 .20
"Cash" return on average assets 0.62% .80%
"Cash" return on average equity 7.20% 9.00%
- ----------------------------------------------------- ------------------------- ------------------------
Operating "cash" earnings (in thousands) (2) $ 301 276
Diluted operating "cash" earnings per share .21 .20
Operating "cash" return on average assets 0.80% 0.80%
Operating "cash" return on average equity 9.10% 9.10%
- ----------------------------------------------------- ------------------------- ------------------------
Average equity to average assets 8.73% 8.96%
- ----------------------------------------------------- ------------------------- ------------------------
<FN>
(1) "Cash" earnings represent earnings based upon generally accepted accounting
principles plus the after-tax, non-cash effect on earnings of the
amortization of intangible assets. Following the 1997 acquisition of three
branches from Wells Fargo Bank, the "cash" earnings, return on assets, and
return on equity are the most comparable to prior year numbers. They are
also the more relevant performance measures for shareholders because they
measure the Company's ability to support growth and pay dividends.
(2) Operating "Cash" earnings is computed by excluding the after-tax impact of
significant elements of revenue or costs that obscure the operating results
of core operations. Adjustments for the second quarter of 1998 have been
made to exclude from net income the preliminary costs of a strategic growth
initiative for which the company ceased further pursuit in May, 1998.
</FN>
Operating "Cash" earnings for the quarter increased by 9.1% compared to the
prior year quarter. Net interest income increased by 6%, or $90 thousand.
Noninterest income increased by 10%, or $40 thousand, while noninterest expenses
increased by 3%, or $51 thousand, before the costs associated with the strategic
growth initiative discussed in footnote two of the above table. Based upon the
earnings for the three months ended June 30, 1998, the Company's board of
directors declared a cash dividend of $.05 per share payable August 28, 1998 to
shareholders of record on August 14, 1998.
9
Net Interest Income
Net interest income increased by $90 thousand, or 6%, relative to the comparable
prior year quarter. Net interest margin decreased to 5.17% for the quarter
compared to 5.24% in the prior year quarter. Interest income increased by $191
thousand, or 7%, while interest expense increased by $101 thousand, or 11%. The
yield on average earning assets for the three months ended June 30, 1998 was
8.44% compared to 8.40% in the prior year period. The increase in interest
income was the result of growth in average earning assets and an improved mix of
average earning assets. The yield on average deposits for the three months ended
June 30, 1998 was 3.10% compared to 3.09% in the prior year period. The increase
in interest expense reflects growth in average deposits, although favorable
changes in the mix of deposits offset a portion of the gross increase in
interest expense related to the increase in deposits.
Average earning assets for the three months ended June 30, 1998 increased by
$8.2 million, or 6.7%, compared to the prior year quarter. Earning asset growth
would have been $12.4 million, or 10.2%, without the investment in life
insurance contracts discussed above under Changes in Financial Condition--Other
Assets. Although the insurance contracts have a cash surrender value that
increases based upon an annual earnings rate, the contracts are accounted for as
other assets, and the earnings are recorded as a component of other noninterest
income.
Loan yields were stable, while average loans increased by $10.2 million, or
17.9%, over the prior year. The increase in average loans outstanding increased
loans as a percentage of earning assets to 52% compared to 47% in the prior year
quarter. The increased mix of loans in earning assets offset the effect of
declines in investment portfolio yields. The growth in average loans is
attributed to persistent business development efforts on the part of the Bank's
officers and employees in both existing and new-branch markets and favorable
economic conditions that have stimulated mortgage demand and real estate
activity.
Average deposits for the three months ended June 30, 1998 increased by $12.4
million, or 9.9%, compared to the prior year quarter. The mix of deposits
shifted away from higher cost certificates of deposit to lower yielding
noninterest bearing and interest bearing demand deposit accounts. Average
certificates of deposit were 33% of average deposits compared to 34% in the
prior year quarter. The impact of the changed deposit mix offset $109 thousand
of the gross increase in interest expense that resulted from the increase in
deposits. In addition, reductions in the interest rates paid on transaction
accounts offset an additional $15 thousand in interest expense.
Provision for Loan Losses
The provision for loan losses increased by $10 thousand compared to the prior
year quarter. General increases in the provision for loan losses have been
partially offset by improvements in the credit quality of the loan portfolio.
The allowance for loan losses is discussed above under Changes in Financial
Condition.
Noninterest Income
Noninterest income increased by $40 thousand, or 10%, over the prior year
quarter. Increased service charge income combined with income related to new
investment in insurance contracts offset a decline in income from the sale and
servicing of loans. Service charge income increased by $16 thousand, or 8%, as a
result of increases in deposit accounts. Other noninterest income was $61
thousand compared to $17 thousand in the prior year due to $55 thousand in
income from the investment in insurance contracts discussed above under Changes
in Financial Condition--Other Assets.
Income from the sale and servicing of loans declined by $20 thousand, or 12%,
compared to the prior year quarter. The decline resulted from a significant
decline in the volume of SBA loan sales. SBA loan sales income for the quarter
was $4 thousand compared to $103 thousand in the prior year. The decline appears
to be a matter of timing as opposed to a real decline in volume. The pipeline of
SBA loans in process is currently larger than in the prior year, and SBA loan
sales volume for the third and fourth quarter is expected to be significantly
higher than the second quarter. Income from the origination and sale of mortgage
loans increased by $60 thousand, or 100%, over the prior year quarter. The
increased mortgage income is attributable to declining interest rates, improving
economic conditions, and business development efforts in the mortgage and
construction lending area.
Noninterest Expenses
Noninterest expenses increased by $165 thousand, or 10%, compared to the prior
year quarter. Approximately $114 thousand of the increase represented costs
associated with a strategic growth initiative that was discontinued by the
Company in May, 1998. Excluding those costs, noninterest expenses increased by
3%. Salaries and benefit expenses increased by $33 thousand, or 4%. A portion of
the increase is related to a new loan production office in Folsom, California
that was opened earlier in 1998. Staffing was also increased by three full-time
equivalents in the mortgage department as a result of the
10
increase in origination volume. Occupancy expense increased by $16 thousand, or
11%. The increase in occupancy expenses is principally the result of the new
loan production office in Folsom, California. These costs were partially offset
by increased rental income resulting from increased occupancy at Bank of Lodi's
main office building in Lodi. Other noninterest expenses increased by $100
thousand, or 16%. Approximately $60 thousand of the increase was related to the
strategic costs that were discussed earlier in this paragraph. Excluding those
costs, other noninterest expense increased by 6.3% due to increased processing
costs and other costs related to the growth in deposits as well as business
development efforts.
Changes in Results of Operation - Six Months ended June 30, 1998
Summary of Earnings Performance
- ----------------------------------------------------- --------------------------------------------------
For the six months ended June 30:
--------------------------------------------------
1998 1997
---- ----
Earnings (in thousands) $ 411 546
---------------------------------------------------- ------------------------- ------------------------
Basic earnings per share $ .31 .42
Diluted earnings per share $ .30 .41
Return on average assets 0.55% .86%
Return on average equity 6.31% 9.12%
Dividend payout ratio 33.33% 24.39%
---------------------------------------------------- ------------------------- ------------------------
"Cash" earnings (in thousands) (1) $ 519 $ 687
Diluted "cash" earnings per share .36 .50
"Cash" return on average assets 0.69% 1.08%
"Cash" return on average equity 7.97% 11.50%
---------------------------------------------------- ------------------------- ------------------------
Operating "cash" earnings (in thousands) (2) $ 626 687
Diluted operating "cash" earnings per share .44 .50
Operating "cash" return on average assets 0.83% 1.08%
Operating "cash" return on average equity 9.61% 11.50%
- ----------------------------------------------------- ------------------------- ------------------------
Average equity to average assets 8.69% 9.52%
- ----------------------------------------------------- ------------------------- ------------------------
<FN>
(1) "Cash" earnings represent earnings based upon generally accepted accounting
principles plus the after-tax, non-cash effect on earnings of the
amortization of intangible assets. Following the 1997 acquisition of three
branches from Wells Fargo Bank, the "cash" earnings, return on assets, and
return on equity are the most comparable to prior year numbers. They are
also the more relevant performance measures for shareholders because they
measure the Company's ability to support growth and pay dividends.
(2) Operating "Cash" earnings is computed by excluding the after-tax impact of
significant elements of revenue or costs that obscure the operating results
of core operations. Adjustments for the six months ended June 30, 1998 have
been made to exclude from net income the preliminary costs of a strategic
growth initiative for which the company ceased further pursuit in May,
1998.
</FN>
Operating "Cash" earnings for the six months ended June 30, 1998 declined by $61
thousand, or 8.9% compared to the prior year period. Operating "Cash" earnings
for the prior year period included a significant contribution to performance
that was realized when several loans that had been charged off in prior periods
were paid in full. The repayment of these loans resulted in the recognition of
$445 thousand in recovered interest income and a negative provision for loan
losses of $80 thousand. Excluding the after-tax impact of the recovered interest
from operating "cash" earnings for the prior year, current year operating "cash"
earnings were $197 thousand, or 46% higher, than the prior year period.
Excluding the prior year recovery of interest income, net interest income for
the current period increased by 18%, or $518 thousand, over the prior year
period. Noninterest income increased by 23%, or $161 thousand, while noninterest
expenses increased by 5%, or $179 thousand, before the costs associated with the
strategic growth initiative discussed in footnote two of the above table.
11
Net Interest Income
Excluding the prior year recovery of interest, net interest income increased by
$518 thousand, or 18%, relative to the prior year period. Net interest margin
increased to 5.33% for the quarter compared to 5.23% in the prior year period,
exclusive of the prior year recovery of interest. Interest income increased by
$761 thousand, or 16%, excluding the prior year recovery of interest, while
interest expense increased by $241 thousand, or 13%. The yield on average
earning assets for the six months ended June 30, 1998 was 8.45% compared to
8.39% in the prior year period, exclusive of the prior year recovery of
interest. The increase in interest income was the result of growth in average
earning assets combined with the six basis point increase in earning asset
yields. The yield on average deposits for the six months ended June 30, 1998 was
3.00% compared to 3.14% in the prior year period. The increase in interest
expense reflects growth in average deposits, although favorable changes in the
mix of deposits offset a portion of the gross increase in interest expense
related to the increase in deposits.
Average earning assets for the six months ended June 30, 1998 increased by $17.5
million, or 15.4%, compared to the prior year period. A portion of the increase
in average earning assets relative to the prior year period is attributable to
the acquisition of three branches from Wells Fargo Bank on February 22, 1997.
Deposits totaling $34 million were acquired with these branches and are only
reflected in four out of the six months used to compute the average in the prior
year. Excluding the impact of the initial acquisition of the branches, average
earning assets would have increased by $6.2 million, or 5.2%. The gross earning
asset growth would have been $19.6 million, or 17.3%, without the investment in
life insurance contracts discussed above under Changes in Financial
Condition--Other Assets. Although the insurance contracts have a cash surrender
value that increases based upon an annual earnings rate, the contracts are
accounted for as other assets, and the earnings are recorded as a component of
other noninterest income.
Loan yields increased by 8 basis points, while average loans increased by $10.6
million, or 19.2%, over the prior year period. The increase in average loans
outstanding increased loans as a percentage of earning assets to 50% compared to
49% in the prior year period. The increased mix of earning assets offset the
effect of declines in investment portfolio yields. The growth in average loans
was the result of persistent business development efforts on the part of the
banks officers and employees in both existing and new-branch markets and
favorable economic conditions that have stimulated mortgage demand and real
estate activity.
Average deposits for the six months ended June 30, 1998 increased by $21.6
million, or 18.8%, compared to the prior year period. A portion of the increase
in average deposits relative to the prior year period is attributable to the
acquisition of three branches from Wells Fargo Bank on February 22, 1997.
Deposits totaling $34 million were acquired with these branches and are only
reflected in four out of the six months used to compute the average in the prior
year. Excluding the impact of the initial acquisition of the branches, average
deposits would have increased by $10.3 million, or 8.2%. The mix of deposits
shifted away from higher cost certificates of deposit to noninterest bearing and
lower yielding interest bearing demand deposit accounts. Average certificates of
deposit were 33% of average deposits compared to 35% in the prior year quarter.
The impact of the changed deposit mix offset $57 thousand of the gross increase
in interest expense that resulted from the increase in deposits. In addition,
reductions in the interest rates paid on transaction accounts offset an
additional $41 thousand in interest expense.
Provision for Loan Losses
The provision for loan losses increased by $120 thousand compared to the
negative $60 thousand recorded in the prior year period. The principal reason
for the increase is the significant recoveries in the prior year period that led
to the negative provision for that period. Total recoveries of loans charged off
in previous years added $456 thousand to the allowance for loan losses during
the prior year period compared to $43 thousand in the current year. Management's
analysis of the allowance for loan losses as of March 31, 1997 indicated an
overfunded condition, and $80 thousand of the reserve was credited to the
provision for loan losses.
Noninterest Income
Noninterest income increased by $161 thousand, or 23%, over the prior year
period. Service charge income increased by $62 thousand, or 16%, as a result of
both the acquisition of three branches from Wells Fargo Bank on February 22,
1997 and increases in deposit accounts bankwide. Other noninterest income was
$67 thousand compared to $27 thousand in the prior year due to $55 thousand in
income from the investment in insurance contracts discussed above under Other
Assets.
12
Income from the sale and servicing of loans increased by $59 thousand, or 21%,
compared to the prior year period. The increase was dampened by a decline in SBA
loan sales income. SBA loan sales income for the period declined by $68
thousand, or 57%, compared to the prior year period. The decline appears to be a
matter of timing as opposed to a real decline in volume. The pipeline of SBA
loans in process is currently larger than in the prior year, and SBA loan sales
volume for the third and fourth quarter is expected to be significantly higher
than the first half of the year. Income from the origination and sale of
mortgage loans increased by $91 thousand, or 350%, over the prior year period.
The increased mortgage income is attributable to declining interest rates,
improving economic conditions, and business development efforts in the mortgage
and construction lending area.
Noninterest Expenses
Noninterest expenses increased by $362 thousand, or 11%, compared to the prior
year quarter. Approximately $184 thousand of the increase represents costs
associated with a strategic growth initiative that was discontinued by the
Company in May, 1998. Excluding those costs, noninterest expenses increased by
5.4%. Salaries and benefit expenses increased by $191 thousand, or 12%. A
significant portion of the increase is attributable to the acquisition of three
branches from Wells Fargo Bank on February 22, 1997. Some of the increase was
also related to a new loan production office in Folsom, California that was
opened earlier in 1998. Mortgage department staffing was also increased by three
full-time equivalents relative to the prior year as a result of the increase in
volumes. Occupancy expense increased by $46 thousand, or 17%. The increase in
occupancy expenses is principally the result of three additional branch
locations and the new loan production office in Folsom, California. These costs
were partially offset by increased rental income resulting from increased
occupancy at Bank of Lodi's main office building in Lodi. Other noninterest
expenses increased by $66 thousand, or 5%. Approximately $72 thousand of this
increase was related to the strategic costs that were discussed earlier in this
paragraph. Excluding those costs, other noninterest expense declined by $5
thousand as reductions in intangible amortization offset increases related to
the expanded branch network and account transaction volumes.
Basis of Presentation
First Financial Bancorp is the holding company for Bank of Lodi, N.A. and
Western Auxiliary Corporation. In the opinion of management, the accompanying
unaudited consolidated financial statements reflect all adjustments (consisting
of normal recurring accruals and other accruals as explained above) necessary
for a fair presentation of financial position as of the dates indicated and
results of operations for the periods shown. All material intercompany accounts
and transactions have been eliminated in consolidation. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts. The results for the three and six months ended
June 30, 1998 are not necessarily indicative of the results which may be
expected for the year ended December 31, 1998. The unaudited consolidated
financial statements presented herein should be read in conjunction with the
consolidated financial statements and notes included in the 1997 Annual Report
to Shareholders.
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. At and for the three and six months
ended June 30, 1998, there were no material changes in the market risk profile
of the Company or the Bank as described in the Company's 1997 Form 10-K.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
13
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Investment Services
On April 17, 1998, the Bank entered into an agreement with
Investment Centers of America, Inc. (ICA) whereby ICA would
provide stock, bond, mutual fund, annuity, and insurance
services on-site at certain Bank branches. Under the
agreement, ICA provides an investment representative and rents
office space from the Bank, while the Bank pays for certain
marketing and administrative costs related. The lease
agreement is for a five year period, and the lease payment is
based upon the transaction volume of the ICA office. ICA
opened a sales office at the Bank's Lodi branch in May 1998.
Elk Grove Branch
On June 15, 1998, the Bank received approval from Office of
the Comptroller of the Currency for a new branch in Elk Grove,
California. The Bank has leased approximately 4,800 feet in
the Elk Park Village shopping center in Elk Grove and is
improving the space for use as a full service branch,
including an ICA financial services sales office. The Bank
expects to open the branch during the quarter ended September
30, 1998.
Western Auxiliary Corporation
On June 9, 1998 the Company incorporated Western Auxiliary
Corporation (WAC). The Company expects to capitalize WAC as a
wholly-owned subsidiary during the quarter ended September 30,
1998 with an initial capitalization of $10,000. WAC will earn
fee income by acting as trustee on the Bank's trust deed
transactions and will receive the necessary operational
resources under an intercompany services agreement between the
WAC, the Company, and the Bank.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number
11 Statement re computation of earnings per share is incorporated
herein by reference to footnote 2 to the consolidated financial
statements included in this report.
27 Financial Data Schedule.
(b) Reports on Form 8-K
On July 31, 1998 the Company filed a Current Report on Form 8-K
regarding earnings for the quarter ended June 30, 1998 and the
declaration of a cash dividend of $.05 per share payable August
28, 1998 to shareholders of record on August 14, 1998.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FINANCIAL BANCORP
Date August 7, 1998 /s/ David M. Philipp
-------------- ----------------------------
David M. Philipp
Executive Vice-President
Chief Financial Officer
Corporate Secretary