================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______________ to ________________
Commission File Number : 0-12499
First Financial Bancorp
(Exact name of registrant as specified in its charter)
California 94-28222858
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701 South Ham Lane, Lodi, California 95242
(Address of principal executive offices) (Zip Code)
(209)-367-2000
(Registrant's telephone number, including area code)
NA
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
[ ] Yes [ X ] No
As of May 5, 2003 there were 1,623,257 shares of Common Stock, no par
value, outstanding.
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FIRST FINANCIAL BANCORP
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
Page
----
PART I
Item 1. Consolidated Financial Statements and Notes to Consolidated
Financial Statements ............................................. 1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk ....... 14
Item 4. Controls and Procedures .......................................... 14
PART II
Item 1. Legal Proceedings ................................................ 14
Item 2. Changes in Securities and Use of Proceeds ........................ 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
Signatures ................................................................. 15
Certifications ............................................................. 16
Index to Exhibits .......................................................... 18
i
ITEM 1. FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(in thousands except share amounts)
March 31, December 31,
Assets 2003 2002
- ------ -------- --------
Cash and due from banks $ 13,897 $ 14,988
Federal funds sold and securities purchased under resale
agreements 25,044 19,634
Investment securities available for sale, at fair value 28,680 33,125
Loans held for sale 5,663 7,578
Loans, net of deferred loan fees 163,625 157,147
Less allowance for loan losses 3,278 3,057
-------- --------
Net loans 160,347 154,090
Premises and equipment, net 6,598 6,745
Accrued interest receivable 848 772
Other assets 18,445 18,314
-------- --------
Total Assets $259,522 $255,246
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest bearing $ 35,534 $ 34,673
Interest bearing 190,704 176,006
-------- --------
Total deposits 226,238 210,679
Accrued interest payable 158 144
Short term borrowings 5,000 14,885
Other liabilities 3,574 5,268
Obligated mandatorily redeemable capital
Securities of subsidiary trust 5,000 5,000
-------- --------
Total liabilities 239,970 235,976
-------- --------
Stockholders' equity:
Preferred stock - no par value; authorized 1,000,000
shares; no shares issued and outstanding -- --
Common stock - no par value; authorized 9,000,000 shares;
issued and outstanding in 2003 and 2002, 1,623,257
and 1,621,837, respectively 10,161 10,143
Retained earnings 9,014 8,672
Accumulated other comprehensive income 377 455
-------- --------
Total stockholders' equity 19,552 19,270
-------- --------
$259,522 $255,246
======== ========
See accompanying notes.
1
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(in thousands except per share amounts)
Three Months Ended March 31,
2003 2002
------ ------
Interest income:
Loans, including fees $2,954 $2,737
Investment securities:
Taxable 252 322
Exempt from Federal taxes 37 44
Federal funds sold 33 46
------ ------
Total interest income 3,276 3,149
Interest expense:
Deposit accounts 581 994
Other borrowings 66 6
------ ------
Total interest expense 647 1,000
Net interest income 2,629 2,149
Provision for loan losses 257 195
------ ------
Net interest income after provision for loan 2,372 1,954
losses
Noninterest income:
Gain on sale of investment securities 88 262
Gain on sale of other real estate -- 22
Gain on sale of loans 306 229
Service charges 397 364
Premiums and fees from SBA and mortgage operations 129 97
Increase in cash surrender value of life insurance 142 171
Miscellaneous 116 80
------ ------
Total noninterest income 1,178 1,225
Noninterest expense:
Salaries and employee benefits 1,652 1,479
Occupancy 263 242
Equipment 303 248
Other 866 874
------ ------
Total noninterest expense 3,084 2,843
------ ------
Income before provision for income taxes 466 336
Provision for income taxes 124 55
------ ------
Net income $ 342 $ 281
====== ======
Net income per share:
Basic $ 0.21 $ 0.17
====== ======
Diluted $ 0.20 $ 0.17
====== ======
See accompanying notes.
2
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Unaudited)
(in thousands except share amounts)
Three Months Ended March 31, 2003
Accumulated
Common Common Other
Stock Stock Comprehensive Retained Comprehensive
Description Shares Amounts Income Earnings Income Total
- ------------------------------------- ------------ ------------ --------------- ------------- ----------------- ---------------
Balance at December 31, 2002 1,621,837 $ 10,143 8,672 455 19,270
Comprehensive income:
Net income $ 342 342 342
---------------
Other comprehensive income:
Unrealized holding loss
arising during the current
period, net of tax effect
of $18 (26)
Reclassification adjustment
due to gains realized,
net of tax effect of $36 (52)
Total other comprehensive
income, net of
tax effect of $54
---------------
(78) (78) (78)
---------------
Comprehensive income $ 264
===============
Options exercised 1,630 19 19
Stock repurchase (210) (1) (1)
------------ ------------ ------------- ----------------- ---------------
Balance at March 31, 2003 1,623,257 $ 10,161 9,014 377 19,552
============ ============ ============= ================= ===============
See accompanying notes.
3
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended March 31,
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 342 $ 281
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
(Decrease) Increase in deferred loan income (21) 16
Depreciation and amortization 459 432
Provision for loan losses 257 195
Gain on sale of available-for-sale securities (88) (262)
Loan held for sale:
Loans originated (16,921) (11,814)
Proceeds from sale 19,142 11,229
Gain on sale of loans (306) (229)
Gain on sale of other real estate owned -- (22)
(Increase) decrease in accrued interest
receivable (76) 243
Increase (decrease) in accrued interest payable 14 (46)
Decrease in other liabilities (1,690) (568)
Increase in cash surrender value of life insurance (142) (171)
Decrease in other assets 96 591
-------- --------
Net cash provided by (used in)
operating activities 1,066 (125)
Cash flows from investing activities:
Investment securities available-for-sale:
Purchases -- (8,580)
Proceeds from prepayments 3,203 3,681
Proceeds from maturity -- 3,500
Proceeds from sale 1,056 9,649
Increase in loans made to customers (6,566) (6,079)
Proceeds from sale of other real estate -- 90
Purchases of bank premises and equipment (128) (272)
-------- --------
Net cash (used in) provided by
investing activities (2,435) 1,989
Cash flows from financing activities:
Net increase in deposits 15,559 4,475
Proceeds from company obligated mandatorily
redeemable securities of subsidiary trust -- 5,000
Decrease in short term borrowings (9,885) (4,000)
Payments for repurchase of common stock (1) --
Proceeds from issuance of common stock 15 13
-------- --------
Net cash provided by financing activities 5,688 5,488
Net increase in cash and cash equivalents 4,319 7,352
Cash and cash equivalents at beginning of period 34,622 19,457
-------- --------
Cash and cash equivalents at end of period $ 38,941 $ 26,809
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest payments $ 633 1,046
Cash paid for taxes -- 262
See accompanying notes.
4
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003 and December 31, 2002
(Unaudited)
(1) Summary of Significant Accounting Policies
First Financial Bancorp (the "Company") operates principally as a bank
holding company for its wholly owned subsidiary, Bank of Lodi, N.A. (the
"Bank"). The Bank is the principal source of income for the Company. The
Company also holds all of the capital stock of its other subsidiaries,
Western Auxiliary Corporation and First Financial (CA) Statutory Trust I.
All references herein to the "Company" include the Bank and all other
subsidiaries, unless the context otherwise requires.
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States
of America for complete financial statements. In the opinion of management,
the consolidated financial statements reflect all normal recurring
adjustments necessary for a fair presentation of the results for the
interim periods.
Certain amounts in the prior year have been reclassified to conform with
the current presentation. These reclassifications have no effect on
previously reported income.
These statements should be read in conjunction with the audited
consolidated financial statements and related notes included in the
Company's 2002 Annual Report on Form 10-K. Operating results for the three
months ended March 31, 2003 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2003.
Stock Based Compensation
In December 2002, the FASB issued Statement No. 148 ("Statement 148"),
Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123. This statement amends Statement 123 to
provide alternative methods of transition to a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, Statement 148 amends the disclosure requirements to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Statement 148 is effective
for fiscal years ending after December 15, 2002, and for interim periods
beginning after December 15, 2002.
During the first quarter of 2003, the Company adopted the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), for stock-based compensation,
effective as of January 1, 2003. Under the provisions of Statement 148, the
Company has adopted the prospective method whereby stock-based employee
compensation costs are recognized as awards granted, modified or settled.
5
The following table presents the effect on net income and earnings per
share as if the fair value based method had been applied to all outstanding
and unvested awards in each period.
Three Month Period Ended
March 31,
2003 2002
Net income, as reported (in thousands) $ 342,000 $ 281,000
Add: Stock based employee compensation expense included in
reported net income, net of tax effects - -
Deduct: Stock based employee compensation determined under fair
value based method for all awards, net of tax effects (13,000) (10,000)
-----------------------------------
Pro forma net income $ 329,000 $ 271,000
===================================
Earnings per share-basic
As reported $ 0.21 $ 0.17
Pro-forma 0.20 0.17
Earnings per share-assuming dilution
As reported $ 0.20 $ 0.17
Pro-forma 0.19 0.16
(2) Weighted Average Shares Outstanding
Per share information is based on weighted average number of shares of
common stock outstanding during each three-month period. Basic earnings per
share (EPS) is computed by dividing net income 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 month periods ending March 31, 2003 and 2002:
Income Shares Per-Share
Three months ended March 31, 2003 (numerator) (denominator) Amount
---------------------------------------------------------- ------------------ ------------------- ----------
Basic earnings per share $ 342,000 1,623,357 $ .21
Effect of dilutive securities 72,678 -
------------------ -------------------
Diluted earnings per share $ 342,000 1,696,035 $ .20
================== ===================
Income Shares Per-Share
Three months ended March 31, 2002 (numerator) (denominator) Amount
---------------------------------------------------------- ------------------ ------------------- ----------
Basic earnings per share $ 281,000 1,623,281 $ .17
Effect of dilutive securities 46,698 -
------------------ -------------------
Diluted earnings per share $ 281,000 1,669,979 $ .17
================== ===================
(3) Allowance for Loan Losses
Quarter Year
Ended Ended
(in thousands) 3/31/03 12/31/02
-------- ----------
Balance at beginning of period $ 3,057 2,668
Loans charged off (46) (270)
Recoveries 10 34
Provisions charged to operations 257 625
---- ----
6
Balance at end of period $ 3,278 3,057
===== =====
(4) Impact Of Recently Issued Accounting Standards
In November 2002, the FASB issued FIN 45, which elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at the
inception of the guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of this Interpretation are applied
prospectively to guarantees issued or modified after December 31, 2002. The
adoption of these recognition provisions will result in recording
liabilities associated with certain guarantees provided by the Company.
These currently include standby letters of credit and first-loss guarantees
on securitizations. The disclosure requirements of this Interpretation are
effective for financial statements of interim or annual periods ending
after December 15, 2002. The Company has adopted the provision of FIN 45
and management does not expect this Interpretation to have a material
impact to the consolidated financial statements.
In January 2003, the FASB issued FIN 46, which clarifies the application of
Accounting Research Bulletin ("ARB") 51, consolidated financial statements,
to certain entities (called variable interest entities) in which equity
investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties. The disclosure requirements of this Interpretation are effective
for all financial statements issued after January 31, 2003. The
consolidation requirements apply to all variable interest entities created
after January 31, 2003. In addition, public companies must apply the
consolidation requirements to variable interest entities that existed prior
to February 1, 2003 and remain in existence as of the beginning of annual
or interim periods beginning after June 15, 2003. Management does not
expect this Interpretation to have a material impact to the consolidated
financial statements.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Cautionary Statement for the Purposes of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995.
Certain statements in this Quarterly Report on Form 10-Q include forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the "safe harbor" created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies, and expectations, are generally
identifiable by the use of words such as "believe", "expect", "intend",
"anticipate", "estimate", "project", "assume," "plan," "predict," "forecast" or
similar expressions. These forward-looking statements relate to, among other
things, expectations of the business environment in which the Company operates,
projections of future performance, potential future performance, potential
future credit experience, perceived opportunities in the market, and statements
regarding the Company's mission and vision.
The Company's actual results, performance, and achievements may differ
materially from the results, performance, and achievements expressed or implied
in such forward-looking statements due to a wide range of risks and
uncertainties. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in the banking industry; changes in the
interest rate environment; general economic conditions, either nationally or
regionally becoming less favorable than expected and resulting in, among other
things, a deterioration in credit quality and an increase in the provision for
possible loan losses; changes in the regulatory environment; monetary and fiscal
policies of the U.S. Government; changes in real estate valuations; changes in
business conditions; volatility of rate sensitive deposits; operational risks,
including data processing system failures or fraud; asset/liability matching
risks and liquidity risks; civil disturbances or terrorist threats or acts or
apprehension about the possible future occurrences of acts of this type; and
changes in the securities markets. In addition, other events have increased the
uncertainty related to the national and California economic outlook and could
have an effect on the future operations of the Company or its customers,
including borrowers.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, income and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to the allowance for loan losses, other real
estate owned, investments and income taxes. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. The Company maintains an allowance for loan losses
resulting from the inability to make required loan payments. If the financial
conditions of the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. The Company invests in debt and equity securities. If the Company
believes these securities have experienced a decline in value that is other than
temporary, an investment impairment charge is recorded. Future adverse changes
in market conditions or poor operating results of underlying investments could
result in losses or an inability to recover the carrying value of the
investments that may not be reflected in an investment's carrying value, thereby
requiring an impairment charge in the future.
The following discussion addresses information pertaining to the financial
condition and results of operations of the Company that may not be otherwise
apparent from a review of the consolidated financial statements and related
footnotes. It should be read in conjunction with those statements and notes
found on pages 1 through 7, as well as other information presented throughout
this report.
8
Changes in Financial Condition
As of March 31, 2003, consolidated total assets totaled $260 million, which
represents an increase of $4,276 thousand, or 1.7% above the comparable level at
December 31, 2002. The increase in total assets was attributable primarily to a
$15,559 thousand, or 7.4% increase in total deposits that was offset by a
decrease totaling $9,885 thousand, or 66.4% in short term borrowings.
The increase in total assets included an increase totaling $4,542 thousand, or
2.7%, in gross loans, a $5,410 thousand, or 27.6%, increase in federal funds
sold combined with a $4,445 thousand, or 13.4%, decrease in investment
securities as compared to December 31, 2002. The net increase in gross loans is
primarily the result of increases of $3,674 thousand, or 5.8%, $1,424 thousand,
or 10.0%, $1,251 thousand, or 4.7%, and $715 thousand, or 2.4%, in real estate
loans, agricultural loans, commercial loans and SBA loans, respectively,
combined with a decrease of $1,915 thousand, or 25.3%, in loans held for sale in
the secondary market and a decrease of $607 thousand, or 2.6% in other loans.
During the first quarter of 2003, non-interest bearing deposits increased $861
thousand, or 2.5% and interest bearing deposits increased $14,698 thousand, or
8.4%. The first quarter deposit growth consists of an increase of $7,097
thousand, or 12.8%, $2,826 thousand, or 9.3%, $2,553 thousand, or 5.0%, and
$2,222 thousand, or 5.6%, in certificates of deposit, money market accounts, NOW
accounts and savings accounts, respectively.
Allowance for Loan Losses
The allowance for loan losses (the "allowance") is established through a
provision for possible loan losses charged to expense. The allowance at March
31, 2003 was in excess of the December 31, 2002 allowance by $221 thousand, or
7.2%, as a result of a provision for $257 thousand combined with net charge-offs
of $36 thousand. During the first quarter, nonperforming loans increased by $300
thousand, to $2,709 thousand. Management continues to actively work to resolve
the nonperforming loans, the majority of which are secured by real estate that,
in the opinion of management, are well collateralized. Management believes that
the allowance at March 31, 2003 is adequate to absorb known and reasonably
estimated 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.
The following tables depict activity in the allowance for loan losses and
allocation of reserves for and at the three and twelve months ended March 31,
2003 and December 31, 2002, respectively:
Analysis of the Allowance for Loan Losses
Quarter Year
Ended Ended
3/31/03 12/31/02
------- -------
Balance at beginning of period $ 3,057 2,668
Charge-offs:
Commercial (38) (178)
Real estate -- (62)
Consumer (8) (30)
------- -------
Total charge-offs (46) (270)
Recoveries:
Commercial 9 26
Real estate -- --
Consumer 1 8
------- -------
Total recoveries 10 34
------- -------
Net charge-offs (36) (236)
Provision charged to operations 257 625
------- -------
Balance at end of period $ 3,278 $ 3,057
======= =======
9
Allocation of the Allowance for Loan Losses
3/31/03 3/31/03 12/31/02 12/31/02
Loan Category Amount % of Loans Amount % of Loans
- ------------- -------- ---------- -------- ----------
Commercial and other real estate $ 2,403 85.60% $ 2,182 85.77%
Real estate construction 807 12.52% 807 12.38%
Installment and other 68 1.88% 68 1.85%
-------- ------ -------- ------
$ 3,278 100.00% $ 3,057 100.00%
======== ====== ======== ======
Investments
Investment securities decreased $4,445 thousand, or 13.4%, from December 31,
2002 to March 31, 2003. This first quarter of 2003 decrease resulted primarily
from prepayments of mortgage backed securities totaling $3,203 thousand and
sales of investment securities totaling $1,056 thousand. The Company realized
gross gains totaling $88 thousand on the sale of investment securities during
the first quarter of 2003.
Equity
Consolidated equity increased $282 thousand from December 31, 2002 to March 31,
2003. Consolidated equity represented 7.53% and 7.55% of consolidated assets at
March 31, 2003 and December 31, 2002, respectively. The increase in equity
during the first quarter of 2003 resulted from earnings of $342 thousand for the
three months ended March 31, 2003 and a $19 thousand increase resulting from the
exercise of stock options combined with a decrease of $78 thousand to reflect
the after-tax market value decrease in the available-for-sale investment
securities portfolio. The decrease in the investment security portfolio's market
value resulted from gains realized on the sale of investment securities combined
with the effects of changes in interest rates at March 31, 2003 compared to
December 31, 2002.
The total risk-based capital ratio for the Company's wholly owned subsidiary,
Bank of Lodi was 11.14% at March 31, 2003 compared to 11.16% at December 31,
2002.
10
Changes in Results of Operations - Three Months ended March 31, 2003
Summary of Earnings Performance
- ----------------------------------------------------- --------------------------------------------------
For the three months ended March 31:
--------------------------------------------------
2003 2002
---- ----
Net income (in thousands) $ 342 $ 281
- ----------------------------------------------------- ------------------------- ------------------------
Basic net income per share $ .21 $ .17
Diluted net income per share .20 .17
Return on average assets 0.53% 0.51%
Return on average equity 7.05% 6.27%
- ----------------------------------------------------- ------------------------- ------------------------
Average equity to average assets 7.54% 8.07%
- ----------------------------------------------------- ------------------------- ------------------------
Net income for the first quarter of 2003 increased $61 thousand, or 21.7%,
compared to the first quarter of 2002. Net interest income increased $480
thousand, or 22.3% as a result of a $353 thousand decrease in interest expense
combined with a $127 thousand increase in interest income. The provision for
loan losses totaled $257 thousand representing an increase of $62 thousand, or
31.8%. Noninterest income decreased $47 thousand, or 3.8%, while noninterest
expense increased $241 thousand, or 8.5%. The provision for income taxes
increased $69 thousand, or 125.5%.
Net Interest Income
The following table provides a detailed analysis of the net interest spread and
net interest margin for the periods indicated:
-------------------------------------- ------------------------------- --------------------------------
For the Quarter Ended For the Quarter Ended
March 31, 2003 March 31, 2002
(in thousands) (in thousands)
-------------------------------------- ------------------------------- --------------------------------
Average Income/ Average Income/
Balance Expenses Yield(1) Balance Expenses Yield(1)
------- -------- ----- ------- -------- -----
Earning Assets:
Investment securities (2) $ 31,274 289 3.75% $ 30,074 366 4.94%
Federal funds sold 10,660 33 1.26% 10,742 46 1.74%
Loans (3) 167,259 2,954 7.16% 147,718 2,737 7.51%
------- ----- ----- ------- ----- -----
$ 209,193 3,276 6.35% $188,534 3,149 6.77%
========= ===== ===== ======== ===== =====
Liabilities:
Noninterest bearing deposits $ 37,581 -- -- $ 29,232 -- --
Savings, money market, & NOW deposits 121,832 240 .80% 102,431 337 1.33%
Time deposits 58,596 341 2.36% 70,210 657 3.80%
Other borrowings 5,760 66 4.65% 422 6 5.77%
------- ----- ----- ------- ----- -----
Total Liabilities $ 223,769 647 1.17% $202,295 1,000 2.00%
========= ===== ===== ======== ===== =====
Net Interest Spread 5.18% 4.77%
===== =====
-------------------------------------- ---------- ---------- --------- ---------- ----------- ---------
Earning Income Earning Income
Assets (Expense) Yield Assets (Expense) Yield
------- ------- ----- ------- ------- -----
Yield on average earning assets $ 209,193 3,276 6.35% $188,534 3,149 6.77%
Cost of funding average earning $ 209,193 (647) (1.25%) $188,534 (1,000) (2.15%)
----- ------- ------- -------
assets
Net Interest Margin $ 209,193 2,629 5.10% $188,534 2,149 4.62%
========= ===== ===== ======== ===== =====
-------------------------------------- ---------- ---------- --------- ---------- ----------- ---------
(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.
11
Net interest income for the first quarter of 2003 increased $480 thousand, or
22.3%, over the same quarter of 2002. The increase is attributable to the
effects of increases in volumes of earning assets and liabilities combined with
the effects of changes in interest rates. The increase in volumes of average
earning assets and liabilities resulted in an increase in net interest income
totaling $332 thousand while the decline in interest rates resulted in a
decrease in net interest income totaling $148 thousand when comparing the first
quarter of 2003 to the same period last year.
Average earning assets increased $20,659 thousand during the first quarter of
2003 as compared to the first quarter of 2002. Average loans increased $19,541
thousand and investment securities increased $1,200 thousand while federal funds
sold decreased $82 thousand. The increase in the volume of average earning
assets during the first quarter of 2003 as compared to the first quarter of 2002
resulted in an increase in interest income totaling $376 thousand. However,
interest rates on average earning assets declined 42 basis points (from 6.77% to
6.35%) when compared to the same period in 2002, resulting in a decrease in
interest income totaling $249 thousand.
Average liabilities increased $21,474 thousand during the first quarter of 2003
as compared to the same period last year. Of that increase, average noninterest
bearing deposits increased $8,349 thousand, NOW and money market accounts
increased $12,332 thousand, savings accounts increased $7,069 thousand, other
borrowings increased $5,338 thousand, while certificates of deposit decreased
$11,614 thousand. The increase in average liabilities resulted in an increase in
interest expense totaling $44 thousand. As a result of the declining interest
rate environment, the cost of interest bearing liabilities decreased 83 basis
points (from 2.00% to 1.17%) resulting in a reduction in interest expense
totaling $397 thousand.
Interest income is also affected by nonaccrual loan activity. Nonaccrual loans
at March 31, 2003 and March 31, 2002 totaled $2,709 thousand and $3,848
thousand, respectively. Interest forgone on nonaccrual loans totaled
approximately $69 thousand and $77 thousand for the three months ending March
31, 2003 and 2002, respectively.
Provision for Loan Losses
The provision for loan losses for the three months ended March 31, 2003 was $257
thousand compared with $195 thousand for the three months ended March 31, 2002,
an increase of $62 thousand or 31.8%. As of March 31, 2003 the allowance for
loan losses was $3,278 thousand or 1.9% of total loans, which compares to the
allowance for loan losses of $3,057 thousand or 1.8% of total loans as of
December 31, 2002. See "Allowance for Loan Losses" contained herein. As of March
31, 2003, nonperforming loans totaled $2,709 thousand or 1.6% of total loans
compared to $2,409 thousand or 1.5% at December 31, 2002. No assurance can be
given that nonperforming loans will not increase or that the allowance for loan
losses will be adequate to cover losses inherent in the loan portfolio.
Noninterest Income
Noninterest income for the first quarter of 2003 decreased $47 thousand, or
3.8%, compared to the same period last year. Included in noninterest income is
$88 thousand and $262 thousand attributable to gains resulting from the sale of
securities during the first quarter of 2003 and 2002, respectively. While there
were no other real estate sales during the first quarter of 2003, the Company
realized gains from the sale of other real estate totaling $22 thousand during
the first quarter of 2002.
Income from the sale and servicing of loans totaled $435 thousand during the
first quarter of 2003, which increased by $109 thousand, or 33.4%, compared to
the prior year quarter. The increased income from the sale and servicing of
loans is primarily the result of increased refinancing activity of residential
mortgage loans which resulted from declines in mortgage loan rates.
The increase in the cash surrender value of life insurance decreased $29
thousand, or 17.0%, during the first quarter of 2003 when compared to the same
quarter in 2002. The decrease was the result of an overall decline in interests
rates in 2003 as compared to the same period in 2002. The increase in the cash
surrender value of life insurance is exempt from income taxes. The tax effective
yield of the increase in the cash surrender value of the life insurance totaled
7.2% during the first quarter of 2003 as compared to 9.1% during the first
quarter of 2002.
Noninterest Expenses
Noninterest expenses increased $241 thousand, or 8.5%, compared to the prior
year quarter. Personnel expense increased $173 thousand, or 11.7%, as a result
of additions to staff during the year combined with general merit increases for
existing personnel. Occupancy expense increased $21 thousand or 8.7%, and
equipment expense increased $55 thousand, or 22.2%, as a result of depreciation
of new equipment and other investments in technology. The investments in
technology include projects designed to improve information security, operating
efficiencies and regulatory compliance in addition to product research and
development. Other noninterest expense decreased $8 thousand, or 0.9%.
12
Liquidity
The Company's primary sources of liquidity are the proceeds from the trust
preferred securities combined with dividends from the Bank. The Company's
primary uses of liquidity are associated with interest payments on the trust
preferred securities, dividend payments made to shareholders and operating
expenses.
The Bank's liquidity is managed on a daily basis by maintaining cash, federal
funds sold, and short-term investments at levels commensurate with the estimated
requirements for loan demand and fluctuations in deposits. Loan demand and
deposit fluctuations are affected by a number of factors, including economic
conditions, seasonality of the borrowing and deposit bases, and the general
level of interest rates. The Bank maintains two lines of credit with
correspondent banks as a supplemental source of short-term liquidity in the
event that saleable investment securities and loans or available new deposits
are not adequate to meet liquidity needs. The Bank has also established reverse
repurchase agreements with two brokerage firms, which allow for short-term
borrowings that are secured by the Bank's investment securities. Furthermore,
the Bank may also borrow on a short-term basis from the Federal Reserve in the
event that other liquidity sources are not adequate.
At March 31, 2003 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 2002 liquidity
increased in 2003 as a result of the growth in deposit portfolio and sales and
maturities of available-for-sale investment securities.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
While there are several varieties of market risk, the market risk material to
the Company and the Bank is interest rate risk. Within the context of interest
rate risk, market risk is the risk of loss due to changes in market interest
rates that have an adverse effect on net interest income, earnings, capital or
the fair value of financial instruments. Exposure to this type of risk is a
regular part of a financial institution's operations. The fundamental activities
of making loans, purchasing investment securities, and accepting deposits
inherently involve exposure to interest rate risk. The Company monitors the
repricing differences between assets and liabilities on a regular basis and
estimates exposure to net interest income, net income, and capital based upon
assumed changes in the market yield curve. As of and for the three months ended
March 31, 2003, there were no material changes in the market risk profile of the
Company or the Bank as described in the Company's 2002 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Within the 90 days prior to the filing date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our President and Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange
Act of 1934. Based on their review of our disclosure controls and procedures,
the President and Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to us that is required to be
included in our periodic SEC filings.
Internal Controls and Procedures
There were no significant changes in internal controls or in other factors that
could significantly affect these controls subsequent to the date of our
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No.
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
A report on Form 8-K, dated April 30, 2003, was filed under
report item numbers 7 and 9, concerning First Financial
Bancorp's results of operations for the first quarter of 2003.
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
By:
Date: May 12, 2003 /s/ Allen R. Christenson
------------ ------------------------
Allen R. Christenson
Senior Vice President
Chief Financial Officer
(Principal Accounting and Financial Officer)
15
CERTIFICATION
I, Leon Zimmerman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Financial
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003
/s/Leon Zimmerman
-----------------
Chief Executive Officer
16
CERTIFICATION
I, Allen R. Christenson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Financial
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003
/s/Allen R. Christenson
-----------------------
Chief Financial Officer
17
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
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
18