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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission File Number : 0-12499
First Financial Bancorp
(Exact name of registrant as specified in its charter)
California 94-28222858
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701 South Ham Lane, Lodi, California 95242
(Address of principal executive offices) (Zip Code)
(209)-367-2000
(Registrant's telephone number, including area code)
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 August 5, 2002 there were 1,616,884 shares of Common Stock, no
par value, outstanding.
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FIRST FINANCIAL BANCORP
FORM 10-Q
FOR THE QUARTER AND SIX MONTH PERIOD ENDED JUNE 30, 2002
TABLE OF CONTENTS
Page
----
PART I
Item 1. Consolidated Financial Statements and Notes to Consolidated
Financial Statements ............................................ 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk ...... 18
PART II
Item 1. Legal Proceedings ............................................... 18
Item 2. Changes in Securities ........................................... 18
Item 3. Defaults Upon Senior Securities ................................. 18
Item 4. Submission of Matters to a Vote of Security Holders ............. 18
Item 5. Other Information ............................................... 18
Item 6. Exhibits and Reports on Form 8-K ................................ 18
i
ITEM 1. FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(in thousands except share amounts)
June 30, December 31,
Assets 2002 2001
- ------ ---- ----
Cash and due from banks $ 15,707 $ 13,328
Federal funds sold and securities purchased
under resale agreements -- 6,129
Investment securities available for sale, at fair value 47,080 41,015
Loans held for sale 5,930 3,876
Loans, net of deferred loan fees 149,141 138,098
Less allowance for loan losses 2,980 2,668
-------- --------
Net loans 146,161 135,430
Premises and equipment, net 7,230 7,185
Accrued interest receivable 1,295 1,265
Other assets 17,660 17,947
-------- --------
Total Assets $241,063 $226,175
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Deposits
Noninterest bearing $ 33,796 $ 29,758
Interest bearing 168,924 171,813
-------- --------
Total deposits 202,720 201,571
Accrued interest payable 187 307
Short term borrowings 12,360 4,000
Other liabilities 2,419 2,434
-------- --------
Total liabilities 217,686 208,312
Obligated mandatorily redeemable capital
securities of subsidiary trust 5,000 --
-------- --------
Stockholders' equity:
Preferred stock - no par value; authorized 1,000,000
shares, no shares issued and outstanding
Common stock - no par value; authorized 9,000,000
shares, issued and outstanding in 2002 and 2001,
1,616,884 and 1,622,300 respectively 10,088 10,191
Retained earnings 7,795 7,317
Accumulated other comprehensive income 494 355
-------- --------
Total stockholders' equity 18,377 17,863
-------- --------
$241,063 $226,175
======== ========
See accompanying notes.
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2002 2001 2002 2001
------- ------- ------- -------
Interest income:
Loans, including fees $ 3,044 $ 2,645 $ 5,781 $ 5,330
Investment securities:
Taxable 466 475 788 848
Exempt from federal taxes 45 67 89 138
Federal funds sold 35 196 81 377
------- ------- ------- -------
Total interest income 3,590 3,383 6,739 6,693
Interest expense:
Deposit accounts 867 1,229 1,861 2,332
Other borrowings 98 1 104 4
------- ------- ------- -------
Total interest expense 965 1,230 1,965 2,336
------- ------- ------- -------
Net interest income 2,625 2,153 4,774 4,357
Provision for loan losses 181 -- 376 190
------- ------- ------- -------
Net interest income after provision for
loan losses 2,444 2,153 4,398 4,167
Non-interest income:
Gain on sale of investment securities -- -- 262 --
Gain on sale of other real estate -- -- 22 222
Gain on sale of loans 145 109 374 216
Service charges 413 373 777 706
Premiums and fees from SBA and mortgage
operations 230 203 556 420
Miscellaneous 127 73 149 147
------- ------- ------- -------
Total non-interest income 915 758 2,140 1,711
Non-interest expense:
Salaries and employee benefits 1,597 1,396 3,076 2,801
Occupancy 251 335 493 556
Equipment 231 145 479 376
Other 1,084 906 1,958 1,714
------- ------- ------- -------
Total non-interest expense 3,163 2,782 6,006 5,447
------- ------- ------- -------
Income before provision for income taxes 196 129 532 431
Provision for income tax (benefit) expense (1) (24) 54 23
------- ------- ------- -------
Net income $ 197 $ 153 $ 478 $ 408
======= ======= ======= =======
Earnings per share:
Basic $ 0.12 $ 0.10 $ 0.29 $ 0.25
======= ======= ======= =======
Diluted $ 0.12 $ 0.09 $ 0.28 $ 0.25
======= ======= ======= =======
See accompanying notes
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Unaudited)
(in thousands except share amounts)
Six Months Ended June 30, 2002
Accumulated
Common Common Other
Stock Stock Comprehensive Retained Comprehensive
Description Shares Amounts Income Earnings Income Total
- ------------------------------------- ------------ ------------ --------------- ------------- ----------------- ---------------
Balance at December 31, 2001 1,622,300 $ 10,191 7,317 355 17,863
Comprehensive income:
Net income $ 478 478 478
---------------
Other comprehensive income:
Unrealized holding gain arising
during the current period, net
of tax effect of $204 294
Reclassification adjustment
due to gains realized, net of
tax effect of $107 (155)
Total other comprehensive
income, net of
tax effect of $97 ---------------
139 139 139
---------------
Comprehensive income $ 617
===============
Options exercised 5,309 25 25
Stock repurchase (10,725) (128) (128)
------------ ------------ ------------- ----------------- ---------------
Balance at June 30, 2002 1,616,884 $ 10,088 7,795 494 18,377
============ ============ ============= ================= ===============
See accompanying notes.
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six Months Ended June 30,
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 478 $ 408
Adjustments to reconcile net income to net cash used in operating
activities:
Loans held for sale:
Increase in loans held for sale (1,680) (2,098)
Gain on sale of loans (374) (216)
Increase (decrease) in deferred loan income 1 (4)
Depreciation and amortization 522 584
Provision for loan losses 376 190
Gain on sale of securities (262) -
Gain on sale of other real estate owned (22) (222)
(Increase) decrease in accrued interest
receivable (30) 29
(Decrease) increase in accrued interest payable (120) 20
Decrease in other liabilities (15) (97)
Increase in cash surrender value of life insurance (337) (285)
Decrease (increase) in other assets 400 (269)
-------- --------
Net cash used in operating activities (1,063) (1,960)
Cash flows from investing activities:
Investment securities available-for-sale
Purchases (25,608) (22,366)
Proceeds from prepayments 6,707 2,947
Proceeds from maturity 3,500 7,353
Proceeds from sale 9,649 -
Net increase in loans made to customers (11,198) (3,497)
Proceeds from sale of other real estate 90 627
Purchase of cash surrender value life insurance - (1,500)
Purchases of bank premises and equipment (233) (507)
-------- --------
Net cash used in investing activities (17,093) (16,943)
Cash flows from financing activities:
Net increase in deposits 1,149 28,035
Proceeds from issuance of company obligated mandatorily redeemable
securities of subsidiary trust 5,000 -
Increase (decrease) in other borrowings 8,360 (4,588)
Payment for fractional stock dividends - (4)
Payments for repurchase of common stock (128) -
Proceeds from issuance of common stock 25 18
-------- --------
Net cash provided by financing activities 14,406 23,461
Net (decrease) increase in cash and cash
equivalents (3,750) 4,558
Cash and cash equivalents at beginning of period 19,457 21,024
-------- --------
Cash and cash equivalents at end of period $ 15,707 $ 25,582
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest payments $ 2,085 $ 2,316
Cash paid for taxes 707 285
Loans transferred to other real estate owned - 90
See accompanying notes.
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and December 31, 2001
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of First Financial Bancorp (the
Company) and its subsidiaries, Bank of Lodi, N.A., (the Bank), Western
Auxiliary Corporation (WAC) and First Financial (CA) Statutory Trust I
conform with accounting principles generally accepted in the United States
of America and prevailing practices within the banking industry. In
preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenue and expense
for the period. Actual results could differ from those estimates applied in
the preparation of the consolidated financial statements.
(2) Weighted Average Shares Outstanding
Per share information is based on weighted average number of shares of
common stock outstanding during each three- and six-month periods. Basic
earnings per share (EPS) is computed by dividing net income available to
shareholders by the weighted average common shares outstanding during the
period. Diluted earnings per share is computed by dividing net income
available to shareholders by the weighted average common shares outstanding
during the period plus potential common shares outstanding. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the Company.
The following table provides a reconciliation of the numerator and
denominator of the basic and diluted earnings per share computation of the
three- and six-month period ending June 30, 2002 and 2001:
Income Shares Per-Share
Three months ended June 30, 2002 (numerator) (denominator) Amount
-----------------------------------------------------------------------------------------------
Basic earnings per share $ 197,000 1,624,308 $ .12
Effect of dilutive securities - 66,559 -
--------------- ---------------
Diluted earnings per share $ 197,000 1,690,867 $ .12
=============== ===============
Income Shares Per-Share
Three months ended June 30, 2001 (numerator) (denominator) Amount
-----------------------------------------------------------------------------------------------
Basic earnings per share $ 153,000 1,604,056 $ .10
Effect of dilutive securities - 34,825 -
--------------- ---------------
Diluted earnings per share $ 153,000 1,638,881 $ .09
=============== ===============
Income Shares Per-Share
Six months ended June 30, 2002 (numerator) (denominator) Amount
-----------------------------------------------------------------------------------------------
Basic earnings per share $ 478,000 1,625,949 $ .29
Effect of dilutive securities - 63,059 -
--------------- ---------------
Diluted earnings per share $ 478,000 1,689,008 $ .28
=============== ===============
Income Shares Per-Share
Six months ended June 30, 2001 (numerator) (denominator) Amount
-----------------------------------------------------------------------------------------------
Basic earnings per share $ 408,000 1,603,130 $ .25
Effect of dilutive securities - 36,003 -
--------------- ----------------
Diluted earnings per share $ 408,000 1,639,133 $ .25
=============== ================
-5-
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and December 31, 2001
(3) Allowance for Loan Losses
The following summarizes changes in the allowance for loan losses for
the six month periods ended June 30, 2002 and 2001 and the twelve month
period ended December 31, 2001:
(in thousands) 6/30/02 6/30/01 12/31/01
-------------- ------------- --------------
Balance at beginning of period $ 2,668 2,499 2,499
Loans charged off (83) (163) (283)
Recoveries 19 15 61
Provisions charged to operations 376 190 391
-------------- ------------- --------------
Balance at end of period $ 2,980 2,541 2,668
============== ============= ==============
(4) Trust Preferred Securities
On March 26, 2002, First Financial (CA) Statutory Trust I (Trust), a
Connecticut statutory business trust and 100%-owned finance subsidiary
of First Financial Bancorp, issued $5 million in floating rate
Cumulative Trust Preferred Securities (Securities). The securities have
an initial interest rate of 5.59% and mature on March 26, 2032, but
prior redemption is permitted under certain circumstances, such as
changes in tax or regulatory capital rules. The principal asset of the
Trust is a $5.2 million floating rate subordinated debenture of the
Company. The subordinated debenture bears an initial interest rate of
5.59% and matures March 26, 2032, subject to prior redemption under
certain circumstances. First Financial Bancorp owns all of the common
securities of the Trust.
The Securities, the assets of the Trust, and the common securities
issued by the Trust are redeemable in whole or in part on or after
March 26, 2007, or at any time in whole, but not in part, from the date
of issuance upon the occurrence of certain events. The Securities are
included in Tier 1 capital for regulatory capital adequacy
determination purposes, subject to certain limitations. The obligations
of the Company with respect to the issuance of the Securities
constitute a full and unconditional guarantee by the Company of the
Trust's obligation with respect to the Securities.
Subject to certain exceptions and limitations, the Company may, from
time to time, defer subordinated debenture interest payments, which
would result in a deferral of distribution payments on the related
Securities and, with certain exceptions, prevent the Company from
declaring or paying cash distributions on the Company's common stock or
debt securities that rank junior to the subordinated debenture.
(5) Basis of Presentation
First Financial Bancorp is the holding company for Bank of Lodi, N.A.,
Western Auxiliary Corporation and First Financial (CA) Statutory Trust
I. 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, 2002
are not necessarily indicative of the results which may be expected for
the year ended December 31, 2002. The unaudited consolidated financial
statements presented herein should be read in conjunction with the
consolidated financial statements and notes included in the 2001 Annual
Report to Shareholders.
-6-
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and December 31, 2001
(6) Impact Of Recently Issued Accounting Standards
In July 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets. Statement No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized,
but instead tested for impairment at least annually in accordance with
the provisions of Statement No. 142. Statement No. 142 also requires
that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.
The Company adopted the provisions of Statement No. 142 on January 1,
2002. The adoption of Statement No. 142 did not have a material impact
on the financial condition or operating results of the Company. The
only exception to Statement No. 142 is the amortization of goodwill and
intangible assets acquired under the provisions of Statement No. 72,
Accounting of Certain Acquisitions of Banking or Thrift Institutions.
The Company will continue to amortize goodwill and intangible assets
acquired in accordance with this statement. At June 30, 2002, the
Company's goodwill totaled $16 thousand, net of accumulated
amortization of $42 thousand and intangible assets (consisting of core
deposit premiums) totaled $412 thousand, net of accumulated
amortization of $1,563 thousand. Goodwill and intangible assets are
amortized over 7 years.
The Financial Accounting Standards Board (FASB) issued Statement No.
143, Accounting for Asset Retirement Obligations in August 2001. This
Statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. As a result, FASB Statement No. 143
applies to all entities that have legal obligations associated with the
retirement of long-lived tangible assets that result from the
acquisition, construction, development or normal use of the asset. As
used in this Statement, a legal obligation results from existing law,
statute, ordinance, written or oral contract, or by legal construction
of a contract under the doctrine of promissory estoppels. Statement No.
143 requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of a tangible
long-lived asset. Since the requirement is to recognize the obligation
when incurred, approaches that have been used in the past to accrue the
asset retirement obligation over the life of the asset are no longer
acceptable. Statement No. 143 also requires the enterprise to record
the contra to the initial obligation as an increase to the carrying
amount of the related long-lived asset (i.e., the associated asset
retirement costs) and to depreciate that cost over the remaining useful
life of the asset. The liability is changed at the end of each period
to reflect the passage of time (i.e., accretion expense) and changes in
the estimated future cash flows underlying the initial fair value
measurement. Enterprises are required to adopt Statement No. 143 for
fiscal years beginning after June 15, 2002. Early adoption is
encouraged. The Company does not expect adoption of Statement No. 143
to have a material impact on the financial condition or operating
results of the Company.
-7-
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and December 31, 2001
On October 3, 2001, the Financial Accounting Standards Board issued
FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. While Statement
No. 144 supersedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, it retains many of the fundamental provisions of that
Statement. Statement No. 144 also supersedes the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions, for the disposal of a segment of a business. However,
it retains the requirement in Opinion 30 to report separately
discontinued operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. By
broadening the presentation of discontinued operations to include more
disposal transactions, the FASB has enhanced management's ability to
provide information that helps financial statement users to assess the
effects of a disposal transaction on the ongoing operations of an
entity. The Company adopted the provisions of Statement 144 on January
1, 2002. The adoption of Statement No. 144 did not have a material
impact on the financial condition or operating results of the Company.
Statement Financial Accounting Standards No. 145 rescinds SFAS No. 4,
which requires all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. As a result, the criteria in Opinion No.
30 will now be used to classify those gains and losses. SFAS No. 64
amended SFAS No. 4, and is no longer necessary because SFAS No. 4 has
been rescinded. The accounting, disclosure and financial statements
provision of SFAS No. 145 are effective for financial statements in
fiscal years beginning after May 15, 2002. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in
prior periods presented that does not meet the criteria in Opinion No.
30 for classification as an extraordinary item shall be reclassified.
The implementation of Statement No. 145 is not expected to have a
material impact on the financial condition or operating results of the
Company.
The Financial Accounting Standards Board issued FASB Statement No. 146,
Accounting for Costs Associated with Exit or Disposal Activities which
requires the Company to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 replaces Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of SFAS 146 are to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.
-8-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement for the Purposes of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995.
The Company is including the following cautionary statement to take advantage of
the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of
1995 for any forward-looking statement made by, or on behalf of, the Company.
The factors identified in this cautionary statement are important factors (but
not necessarily all important factors) that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, the Company.
Where any such forward-looking statement includes a statement of the assumptions
of bases underlying such forward-looking statement, the Company cautions that,
while it believes such assumptions or bases to be reasonable and makes them in
good faith, assumed facts or bases almost always vary from actual results, and
the differences between assumed facts or bases and actual results can be
material, depending on the circumstances. Where, in any forward-looking
statement, the Company expresses an expectation or belief as to future results,
such expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result, or be achieved or accomplished.
Taking into account the foregoing, 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 7, as well as other information presented throughout
this report.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, income and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to the allowance for loan losses, other real
estate owned, investments and income taxes. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. The Company maintains allowances for loan losses resulting
from the 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 6, as well as other information presented throughout
this report.
-9-
Changes in Financial Condition
Consolidated total assets at June 30, 2002 totaled $241 million, which
represents an increase of $14,888 thousand, or 6.6%, above the comparable level
at December 31, 2001. The increase in total assets was attributable to a $13,114
thousand, or 9.2%, increase in gross loans, and a $6,065 thousand, or 14.8%,
increase in investment securities combined with a $6,129 thousand, or 100.0%,
decrease in federal funds sold as compared to December 31, 2001. The net
increase in gross loans is primarily the result of increases of $6,145 thousand,
or 11.6%, $3,673 thousand, or 26.8%, $2,054 thousand, or 53.0%, and $988
thousand, or 6.1%, in real estate loans, construction loans, loans held for sale
and agricultural loans, respectively, combined with a decrease of $511 thousand,
or 2.3%, in commercial loans.
Total deposits increased $1,149 thousand, or 0.6%, from December 31, 2001 to
June 30, 2002. The growth in deposits is the result of a $7,440 thousand, or
7.4%, increase in demand deposits and a $3,559 thousand, or 11.2% increase in
savings accounts combined with a $9,850, or 14.1% decrease in certificates of
deposit. The decrease in certificates of deposit resulted from management's
decision to focus on increasing core deposits rather than pay higher interest
rates for certificates of deposit. In order to maintain a desired level of
liquidity, the company obtained short-term borrowings and sold securities under
agreements to repurchase (reverse repo).
Allowance for Loan Losses
The allowance for loan losses (the "allowance") is established through a
provision for loan losses charged to expense. The allowance at June 30, 2002 was
in excess of the December 31, 2001 allowance by $312 thousand, or 11.7%, as a
result of a provision for $376 thousand and net charge offs totaling $64
thousand. This compares to a provision of $190 thousand for the first six months
of 2001. The increased provision is a result of the general growth of the loan
portfolio during the first six months of 2002 ($13.1 million, or 9.2%) exceeding
the rate that occurred during the first six months of 2001 ($5.5 million, or
4.8%).
At June 30, 2002, nonperforming loans were $3,454 thousand, or 2.2% of gross
loans outstanding. This compares to $3,246 thousand or 2.3% of gross loans
outstanding at December 31, 2001. The allowance to nonperforming loan coverage
ratio increased to 0.86 times at June 30, 2002 from 0.82 times at December 31,
2001. Management continues to actively work to resolve the nonperforming loans,
the majority of which are secured by real estate that, in the opinion of
management, are well collateralized. Management believes that the allowance at
June 30, 2002 is adequate to absorb known and reasonably estimable loan losses.
However, there can be no assurances that future economic events may negatively
impact the Bank's borrowers, thereby causing loan losses to exceed the current
allowance.
-10-
The following tables depict activity in the allowance for loan losses and
allocation of reserves as of and for the six months and year ended June 30, 2002
and December 31, 2001, respectively:
Analysis of the Allowance for Loan Losses
June 30, December 31,
2002 2001
------- -------
Balance at beginning of period $ 2,668 $ 2,499
Charge-offs:
Commercial (13) (226)
Real estate (62) --
Consumer (8) (57)
------- -------
Total charge-offs (83) (283)
Recoveries:
Commercial 15 21
Real estate -- --
Consumer 4 40
------- -------
Total recoveries 19 61
------- -------
Net charge-offs (64) (222)
Provision charged to operations 376 391
------- -------
Balance at end of period $ 2,980 $ 2,668
======= =======
Allocation of the Allowance for Loan Losses
--------------------------------- ----------------------------------
June 30, 2002 December 31, 2001
--------------------------------- ----------------------------------
Amount Amount
Loan Category (000's) % of Loans (000's) % of Loans
- ---------------------------------------- ---------------- ------------- --------------- ---------------
Commercial and other real estate $2,104 85.75% $2,122 87.82%
Real estate construction 801 11.60% 466 9.61%
Installment and other 75 2.65% 0 2.57%
------ ------ ------ ------
$2,980 100.00% $2,668 100.00%
====== ====== ====== ======
Investments
Investments consist of federal funds sold and investment securities. Investment
securities increased $6,065 thousand, or 14.8%, from December 31, 2001 to June
30, 2002. Federal funds sold decreased $6,129 thousand, or 100.0% from December
31, 2001 to June 30, 2002. The increase in investment securities and the
corresponding decrease in Federal funds sold resulted from utilizing Federal
funds sold to purchase short term investment securities. The investment
securities purchased were collateralized mortgage obligations, the majority of
which have average lives of less than five years.
-11-
Equity
Consolidated equity increased $514 thousand from December 31, 2001 to June 30,
2002. Consolidated equity represented 7.62% and 7.90% of consolidated assets at
June 30, 2002 and December 31, 2001, respectively. In addition to the earnings
of $478 thousand, equity capital increased by $25 thousand from the exercise of
stock options over the six months ended June 30, 2002 and $139 thousand to
reflect the increase in the after-tax market value of the available-for-sale
investment securities portfolio. The increase in the investment security
portfolio's market value reflects the decrease in the level of market interest
rates at June 30, 2002 compared to December 31, 2001. Year-to-date capital
reductions totaled $128 thousand resulting from the repurchase of shares. The
total risk-based capital ratio for the Company's wholly owned subsidiary, Bank
of Lodi was 11.18% at June 30, 2002 compared to 10.24% at December 31, 2001. The
Bank's leverage capital ratio was 8.37% at June 30, 2002 versus 7.45% at
December 31, 2001. The capital ratios are in excess of the regulatory minimums
for a well-capitalized bank.
The funds for the capital contribution by the holding company were provided as a
result of a $5 million floating rate pooled trust preferred securities offering
which closed March 26, 2002. Subsequent to the issuance of the trust preferred
securities the Company announced a stock repurchase program effective through
December 31, 2002 whereby the Company, as authorized by the Board of Directors,
intends to purchase up to $2 million of the Company's stock in privately
negotiated transactions or on the open market. The Board allocated $2 million of
the proceeds from the trust preferred securities offering to be used to fund the
stock repurchase program.
Changes in Results of Operations - Three and Six Months ended June 30, 2002
Summary of Earnings Performance
--------------------------------- --------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- --------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Earnings (in thousands) $ 197 $ 153 $ 478 $ 408
Basic earnings per share $ 0.12 $ 0.10 $0.29 $0.25
Diluted earnings per share $ 0.12 $ 0.09 $0.28 $0.25
Return on average assets 0.33% 0.30% 0.42% 0.42%
Return on average equity 4.34% 3.74% 5.11% 4.87%
Average equity to average assets 7.70% 8.13% 8.14% 8.68%
The Company reported net income of $197 thousand ($0.12 per share, diluted) for
the three months ended June 30, 2002, compared to $153 thousand ($0.09 per
share, diluted) for the same period in 2001. Net income for the six months ended
June 30, 2002 was $478 thousand ($0.28 per share, diluted) compared to $408
thousand ($0.25 per share, diluted). The increase in net income for the second
quarter in 2002 when compared to the same period one year ago is due to an
increase of $472 thousand in net interest income, a increase of $181 thousand in
the provision for loan losses, an increase of $157 thousand in non-interest
income, an increase of $381 thousand in non-interest expense and a decrease of
$23 thousand in the provision for income tax benefit. The increase in net income
during the first six months of 2002 when compared to the same period in 2001 is
due to an increase of $417 thousand in net interest income, an increase of $186
thousand in the provision for loan losses, an increase of $429 thousand in
non-interest income, an increase of $559 thousand in non-interest expense and a
increase of $31 thousand in the provision for income tax.
-12-
Net Interest Income
The following tables provides a detailed analysis of the net interest spread and
net interest margin for the periods indicated:
-------------------------------------------------------------------------------------------
For the Three Months Ended June 30,
-------------------------------------------------------------------------------------------
2002 2001
-------------------------------------------- -------------------------------------------
Average Income/ Yield Average Income/ Yield
Dollars In Thousands Balance Expense (1) Balance Expense (1)
------------ ------------- ---------- ----------- ------------ -----------
Earning Assets:
Investment securities (1)(2) $ 40,096 $ 511 5.11% $ 33,347 $ 542 6.52%
Federal funds sold 7,584 35 1.85% 18,089 196 4.35%
Loans (2) (3) 147,690 3,044 8.27% 117,868 2,645 9.00%
------------ ------------- ---------- ----------- ------------ -----------
$ 195,370 $ 3,590 7.37% $ 169,304 $ 3,383 8.01%
============ ============= ========== =========== ============ ===========
Liabilities:
Non-interest bearing
deposits $ 35,515 $ -- -- $ 24,572 $ -- --
Savings, money market, &
NOW deposits 108,664 346 1.28% 90,391 325 1.44%
Time deposits 65,892 521 3.17% 67,643 904 5.36%
Other borrowings 10,616 98 3.70% 78 1 5.14%
------------ ------------- ---------- ----------- ------------ -----------
Total Liabilities $ 220,687 $ 965 1.75% $ 182,684 $ 1,230 2.70%
============ ============= ========== =========== ============ ===========
Net Interest Spread 5.62% 5.31%
========== ===========
-------------------------------------------------------------------------------------------
Earning Income Earning Income
Assets (Expense) Yield Assets (Expense) Yield
------------ ------------- ---------- ----------- ------------ -----------
Yield on average earning $ 195,370 $ 3,590 7.37% $ 169,304 $ 3,383 8.01%
assets
Cost of funding average
earning assets $ 195,370 ( 965) (1.98)% $ 169,304 ( 1,230) (2.91)%
------------- ---------- ------------ -----------
Net Interest Margin $ 195,370 $ 2,625 5.39% $ 169,304 $ 53 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.
-13-
-------------------------------------------------------------------------------------------
For the Six Months Ended June 30,
-------------------------------------------------------------------------------------------
2002 2001
-------------------------------------------- -------------------------------------------
Average Income/ Yield Average Income/ Yield
Dollars In Thousands Balance Expense (1) Balance Expense (1)
------------ ------------- ---------- ----------- ------------ -----------
Earning Assets:
Investment securities (1)(2) $ 35,114 $ 877 5.04% $ 29,355 $ 986 6.77%
Federal funds sold 9,145 81 1.79% 15,569 377 4.88%
Loans (2) (3) 150,484 5,781 7.75% 116,371 5,330 9.24%
------------ ------------- ---------- ----------- ------------ -----------
$ 194,743 $ 6,739 6.98% $ 161,295 $ 6,693 8.37%
============ ============= ========== =========== ============ ===========
Liabilities:
Non-interest bearing
deposits $ 32,388 $ -- -- $ 23,464 $ -- --
Savings, money market, &
NOW deposits 105,563 682 1.30% 88,552 666 1.52%
Time deposits 68,040 1,179 3.49% 61,617 1,666 5.45%
Other borrowings 5,519 104 3.80% 140 4 5.76%
------------ ------------- ---------- ----------- ------------ -----------
Total Liabilities $ 211,510 $ 1,965 1.87% $ 173,773 $ 2,336 2.71%
============ ============= ========== =========== ============ ===========
Net Interest Spread 5.11% 5.66%
========== ===========
-------------------------------------------------------------------------------------------
Earning Income Earning Income
Assets (Expense) Yield Assets (Expense) Yield
------------ ------------- ---------- ----------- ------------ -----------
Yield on average earning $ 194,743 $ 6,739 6.98% $ 161,295 $ 6,693 8.37%
assets
Cost of funding average
earning assets $ 194,743 $ (1,965) (2.04)% $ 161,295 $ (2,336) (2.92)%
------------- ---------- ------------ -----------
Net Interest Margin $ 194,743 $ 4,774 4.94% $ 161,295 $ 57 5.45%
============= ========== ============ ===========
(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.
Interest income for the second quarter of 2002 increased by $207 thousand, or
6.1%, over the same quarter of 2001. The net interest margin of 5.39% for the
second quarter of 2002 increased from 5.10% for the second quarter of 2001. For
the first six months of 2002, interest income increased by $46 thousand, or
0.7%, over the same period one year ago. The net interest margin of 4.94% for
the first six months of 2002 decreased from 5.45% over the same period one year
ago. Improvement in interest income was the result of the higher volume of loans
combined with an increase in total earning assets
-14-
Average loans for the three months ended June 30, 2002 increased by $29,822
thousand, or 25.3% compared to the prior year quarter. For the first six months
of 2002, average loans increased $34,113 thousand, or 29.3%, compared to the
first six months of 2001. Average liabilities for the three months ended June
30, 2002 increased by $38,003 thousand, or 20.8%, compared to the prior year
quarter. The average rate paid on savings, money market and NOW accounts
decreased from 1.44% in the second quarter of 2001 to 1.28% for the second
quarter of 2002. The average rate paid on certificates of deposits decreased,
from 5.36% for the second quarter of 2001 to 3.17% for the same quarter of 2002.
For the first six months of 2002, average liabilities increased $37,737
thousand, or 21.7%, compared to the first six months of 2001.
Interest income is also affected by nonaccrual loan activity. Interest forgone
or reversed on non-accrual loans during the first six months of 2002 totals
approximately $170 thousand. For the second quarter of 2002, interest forgone on
non-accrual loans totaled $93 thousand. When combined with a $180 thousand
collection of interest on non-accrual loans, there is a net recovery of $87
thousand for the second quarter of 2002 or $10 thousand for the first six months
of 2002.
Average non-interest bearing deposits have kept pace with the growth in interest
bearing deposits from a year ago and make up 17% of average total deposits for
the second quarter and 16% for the first six months of 2002. This has helped to
keep down the cost of funding earning assets. Average certificates of deposit
for the second quarter and the first six months of 2002 were 31% and 33% of
average deposits, respectively, compared to 37% and 35% for the same periods of
2001.
Provision for Loan Losses
The provision for loan losses for the three and six months ended June 30, 2002
was $181 and $376 thousand compared with $0 and $190 thousand for the three and
six months ended June 30, 2001. The year-to-date increase is consistent with the
increase in the growth rate of gross loans during the first six months of 2002
as compared to the first six months of 2001. Also see "Allowance for Loan
Losses" contained herein.
Noninterest Income
Non-interest income for the second quarter of 2002 increased by $157 thousand,
or 20.7%, over the same period last year. For the first six months of 2002,
non-interest income increased $429 thousand, or 25.1%, compared to the first six
months of 2001. During the first quarter of 2002, the Company realized gains on
the sale of investment securities totaling $262 thousand.
Service charge income for the second quarter of 2002 increased by $40 thousand,
or 10.7%, compared to the same quarter of 2001. For the first six months of
2002, service charge income increased $71 thousand, or 10.1%, compared to the
first six months of 2001. The increases in service charge income are directly
related to the growth in average demand deposits and savings accounts.
Income from premiums and fees from SBA and mortgage operations increased $27
thousand, or 13.3%, during the second quarter of 2002 as compared to the prior
year second quarter. For the first six months of 2002, premiums and fees from
SBA and mortgage operations increased $136 thousand, or 32.4%, compared to the
first six months of 2001. The increase in income is a result of increases in
total volumes of loans generated and sold combined with changes in market rates
paid for sold loans. During the second quarter of 2002, the Company sold SBA
loans totaling $1,002 thousand and mortgage loans totaling $5,454 thousand as
compared to the same period last year in which the Company sold SBA loans
totaling $437 thousand and mortgage loans totaling $6,892 thousand. During the
first six months of 2002, the Company sold SBA loans totaling $3,573 thousand
and mortgage loans totaling $14,031 thousand as compared to SBA loans sales
totaling $1,148 thousand and mortgage loans sales totaling $10,234 thousand
during the first six months of 2001.
-15-
Noninterest Expenses
Non-interest expenses increased by $381 thousand, or 13.7%, during the second
quarter of 2002 compared to the prior year quarter. For the first six months of
2002, non-interest expense increased $559 thousand, or 10.3%, compared to the
first six months of 2001. The increase in non-interest expense results primarily
from increases in salary and benefits, equipment and accounting fees combined
with decreases in consulting and legal.
For the second quarter of 2002, salary and employee benefits expense increased
$201 thousand, or 14.4%, equipment expense increased $86 thousand, or 59.3%,
accounting fees increased $58 thousand, or 214.8%, consulting expenses increased
$20 thousand, or 90.9%, while legal expenses decreased $35 thousand, or 72.9%,
and occupancy decreased $84 thousand, or 25.1% compared to the prior year.
Year to date, salary and employee benefits expense increased $275 thousand, or
9.8%, equipment expense increased $103 thousand, or 27.4%, accounting fees
increased $59 thousand, or 107.0%, while occupancy expense decreased $63
thousand, or 11.3%, consulting expenses decreased $36 thousand, or 43.9%, and
legal expenses decreased $24 thousand, or 35.8% compared to the prior year.
Salary and employee benefits expense increased as a result of the addition of
certain staffing positions combined with general merit increases in salaries and
increased employee benefit costs. The increase in equipment expenses occurred
primarily as a result of the increase in depreciation expense for the new
equipment combined with other general upgrades in equipment and technology. The
increase in the accounting expenses relates primarily to the Company's expansion
of its internal audit function. Occupancy expense decreases were due to higher
expenses in the prior year for the addition of the Folsom SBA lending office and
the relocation of the Folsom branch.
Income Taxes
The Company recorded a tax benefit of $1 thousand and $24 thousand during the
second quarter of 2001 and 2002, respectively. For the first six months of 2002,
the provision for income taxes totaled $54 thousand compared to $23 thousand for
the first six months of 2001. The tax benefit during the second quarter of 2002
and 2001 resulted primarily from the level of tax exempt income relative to
total pre-tax income. The increase in income taxes during the six months ending
June 30, 2002 as compared to the same period in 2001 is primarily related to an
overall increase in pretax earnings.
The two primary components of tax exempt income are income from tax exempt
investment securities and increases in the cash surrender value of life
insurance. Income from tax exempt investment securities decreased $22 thousand,
or 32.8% during the second quarter of 2002 as compared to the same period in
2001. Income from tax exempt investment securities decreased $49 thousand, or
35.5% during the first six months of 2002 as compared to the first six months of
2001. During the second quarter of 2002, the cash surrender value of life
insurance increased $23 thousand, or 16.1% compared to same period in 2001.
During the first six months of 2002, the cash surrender value of life insurance
increased $52 thousand, or 18.2% when compared to the first six months of 2001.
Liquidity
The Company's primary source of liquidity is dividends from the Bank. The
Company's primary uses of liquidity are associated with dividend payments made
to the shareholders, and operating expenses.
The Bank's liquidity is managed on a daily basis by maintaining cash, federal
funds sold, and 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 three 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 June 30, 2002 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 2001 liquidity
increased in 2002 as a result of the growth in deposit portfolio combined with
the sales and maturities of available-for-sale investment securities.
-16-
Basis of Presentation
First Financial Bancorp is the holding company for Bank of Lodi, N.A., Western
Auxiliary Corporation and First Financial (CA) Statutory Trust I. 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, 2002 are not necessarily indicative
of the results which may be expected for the year ended December 31, 2002. The
unaudited consolidated financial statements presented herein should be read in
conjunction with the consolidated financial statements and notes included in the
2001 Annual Report to Shareholders.
-17-
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 six months ended
June 30, 2002, there were no material changes in the market risk profile of the
Company or the Bank as described in the Company's 2001 Form 10-K.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
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
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Registrant's Chief Executive Officer
Pursuant To 18 U.S.C. Section 1350
99.2 Certification of Registrant's Chief Financial Officer
Pursuant To 18 U.S.C. Section 1350
(b) Reports on Form 8-K
Not Applicable
-18-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FINANCIAL BANCORP
Date: August 13, 2002 /s/ Allen R. Christenson
------------------------
Allen R. Christenson
Senior Vice President
Chief Financial Officer
-19-