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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 QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____________ TO _______________
COMMISSION FILE NUMBER : 0-12499
FIRST FINANCIAL BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-28222858
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
701 SOUTH HAM LANE, LODI, CALIFORNIA 95242
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(209) 367-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NA
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
[ ] Yes [ X ] No
As of August 9, 2004 there were 1,830,692 shares of Common Stock no par
value, outstanding.
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FIRST FINANCIAL BANCORP
FORM 10-Q
FOR THE QUARTER ENDED JUNE, 30 2004
TABLE OF CONTENTS
PAGE
PART I
Item 1. Financial Statements................................................................ 1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk ......................... 17
Item 4. Controls and Procedures ............................................................ 17
PART II
Item 1. Legal Proceedings .................................................................. 17
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity 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
Signatures ........................................................................................... 19
Index to Exhibits .................................................................................... 20
i
ITEM 1. FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands except share amounts)
JUNE 30, DECEMBER 31,
ASSETS 2004 2003
---------- ---------
Cash and due from banks $ 11,990 $ 17,497
Federal funds sold and securities purchased under resale agreements 6,337 8,034
Investment securities available for sale, at fair value 73,215 90,270
Loans held for sale 3,443 3,076
Loans, net of deferred loan fees 204,835 178,711
Less allowance for loan losses (2,890) (3,262)
--------- ---------
Net loans 201,945 175,449
Premises and equipment, net 6,698 6,903
Accrued interest receivable 1,243 1,322
Other assets 19,267 19,262
--------- ---------
Total Assets $ 324,138 $ 321,813
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing $ 49,383 $ 47,765
Interest bearing 225,364 230,390
--------- ---------
Total deposits 274,747 278,155
Accrued interest payable 95 205
Short term borrowings 19,278 14,100
Other liabilities 4,339 4,231
Junior subordinated debentures 5,155 5,155
--------- ---------
Total liabilities 303,614 301,846
--------- ---------
Stockholders' equity:
Preferred stock - no par value; authorized 1,000,000 shares;
no shares issued and outstanding -- --
Common stock - no par value; authorized 9,000,000 shares;
issued and outstanding in 2004 and 2003, 1,779,804
and 1,782,983, respectively 12,867 12,950
Retained earnings 8,235 7,004
Accumulated other comprehensive (loss) income (578) 13
--------- ---------
Total stockholders' equity 20,524 19,967
--------- ---------
$ 324,138 $ 321,813
========= =========
See accompanying notes.
1
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,
--------------------- ---------------------
2004 2003 2004 2003
------ ------ ------ ------
Interest income:
Loans, including fees $3,383 $3,298 $6,507 $6,252
Investment securities:
Taxable 530 201 1,242 453
Exempt from federal taxes 62 26 139 63
Federal funds sold 19 36 29 69
------ ------ ------ ------
Total interest income 3,994 3,561 7,917 6,837
Interest expense:
Deposit accounts 515 619 1,155 1,200
Other borrowings 131 70 234 136
------ ------ ------ ------
Total interest expense 646 689 1,389 1,336
------ ------ ------ ------
Net interest income 3,348 2,872 6,528 5,501
Provision for loan losses 165 55 235 312
------ ------ ------ ------
Net interest income after provision for 3,183 2,817 6,293 5,189
loan losses
Noninterest income:
Gain on sale of securities available for sale -- -- 65 88
Gain on sale of other real estate owned -- 5 -- 5
Gain on sale of loans 203 320 347 626
Service charges 441 412 863 809
Premiums and fees from SBA and mortgage
operations 108 112 218 241
Increase in cash surrender value of life
insurance 175 142 333 283
Miscellaneous 131 101 217 218
------ ------ ------ ------
Total noninterest income 1,058 1,092 2,043 2,270
Noninterest expense:
Salaries and employee benefits 1,742 1,868 3,538 3,520
Occupancy 354 251 672 506
Equipment 185 212 379 438
Other 992 1,074 1,990 2,025
------ ------ ------ ------
Total non-interest expense 3,273 3,405 6,579 6,489
------ ------ ------ ------
Income before provision for income taxes 968 504 1,757 970
Provision for income tax expense 290 145 512 269
------ ------ ------ ------
Net income $ 678 $ 359 $1,245 $ 701
====== ====== ====== ======
Earnings per share:
Basic $ 0.38 $ 0.20 $ 0.70 $ 0.39
====== ====== ====== ======
Diluted $ 0.35 $ 0.19 $ 0.65 $ 0.37
====== ====== ====== ======
See accompanying notes.
2
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Unaudited)
(in thousands except share amounts)
SIX MONTHS ENDED JUNE 30, 2004
Accumulated
Common Common Other
Stock Stock Comprehensive Retained Comprehensive
Description Shares Amounts Income Earnings Income (Loss) Total
- ------------------------------------- ---------- --------- ------------ ----------- --------------- ----------
Balance at December 31, 2003 1,782,983 $ 12,950 7,004 13 19,967
Comprehensive income:
Net income $ 1,245 1,245 1,245
-----------
Other comprehensive income:
Unrealized holding loss
arising during the current
period, net of tax
benefit of $384 (553)
Reclassification adjustment
due to gains realized,
net of tax benefit of $27 (38)
------------
Total other comprehensive
loss, net of
tax benefit of $411 (591) (591) (591)
------------
Comprehensive income $ 654
============
Options exercised, including tax
benefits 5,712 55 55
Cash issued in lieu of stock (14) (14)
dividend
Stock-based compensation and
related tax benefits 20 20
Stock repurchases (8,891) (158) (158)
---------- --------- ------------ ------------- ---------
Balance at June 30, 2004 1,779,804 $ 12,867 8,235 (578) 20,524
========== ========= ============ ============= =========
See accompanying notes.
3
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,245 $ 701
Adjustments to reconcile net income to net cash provided by operating
activities:
Increase (decrease) in deferred loan income 164 (62)
Depreciation and amortization 1,154 1,113
Stock-based compensation 20 --
Provision for loan losses 235 312
Gain on sale of securities available for sale (65) (88)
Loans originated for sale (17,314) (40,220)
Proceeds from loans sold 17,294 41,184
Gain on sale of loans (347) (626)
Gain on sale of other real estate owned -- (5)
Decrease (increase) in accrued interest receivable 79 (165)
(Decrease) increase in accrued interest payable (110) 22
Increase (decrease) in other liabilities 108 (1,617)
Increase in cash surrender value of life insurance (333) (283)
Decrease in other assets 652 270
-------- --------
Net cash provided by operating activities 2,782 536
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities available for sale:
Purchases (290) (25,112)
Proceeds from prepayments 11,700 8,400
Proceeds from sale 4,145 1,056
Increase in loans made to customers, net (26,895) (7,219)
Proceeds from sale of other real estate -- 334
Purchases of bank premises and equipment (299) (193)
-------- --------
Net cash used in investing activities (11,639) (22,734)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (3,408) 35,860
Increase (decrease) in short term borrowings 5,178 (9,546)
Dividends paid (14) --
Payments for repurchase of common stock (158) (2)
Proceeds from issuance of common stock 55 93
-------- --------
Net cash provided by financing activities 1,653 26,405
Net (decrease) increase in cash and cash equivalents (7,204) 4,207
Cash and cash equivalents at beginning of period 25,531 34,622
-------- --------
Cash and cash equivalents at end of period $ 18,327 $ 38,829
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest payments $ 1,499 1,314
Cash paid for taxes 175 50
Unrealized (loss) on available-for-sale securities, net of tax (553) (193)
Loans transferred to other real estate owned -- 73
See accompanying notes.
4
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Unaudited)
(1) Summary of Significant Accounting Policies
First Financial Bancorp (the "Company") operates principally as a bank
holding company for its wholly owned subsidiary, Bank of Lodi, N.A. (the
"Bank"). The Bank is the principal source of income for the Company. The
Company also holds all of the capital stock of its other subsidiary,
Western Auxiliary Corporation. All references herein to the "Company"
include the Bank and all other subsidiaries, unless the context otherwise
requires.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States
of America for complete financial statements. In the opinion of management,
the consolidated financial statements reflect all normal recurring
adjustments necessary for a fair presentation of the results for the
interim periods.
Certain amounts in the prior year have been reclassified to conform with
the current presentation. These reclassifications have no effect on
previously reported income.
These statements should be read in conjunction with the audited
consolidated financial statements and related notes included in the
Company's 2003 Annual Report on Form 10-K. Operating results for the six
months ended June 30, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004.
(2) Outstanding Shares and Earnings Per Share
On March 25, 2004, the Board of Directors of the Company declared a 10%
stock dividend payable as of May 14, 2004. All share and per share amounts
have been adjusted to reflect the effect of the stock dividend. In
addition, the December 31, 2003 number of shares outstanding was adjusted
to properly reflect the stock dividend.
Per share information is based on weighted average number of shares of
common stock outstanding during each three-month and six month period.
Basic earnings per share (EPS) is computed by dividing net income by the
weighted average common shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by the weighted
average common shares outstanding during the period plus potential common
shares outstanding. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Company.
The following tables provide a reconciliation of the numerator and
denominator of the basic and diluted earnings per share computation of the
three and six month periods ended June 30, 2004 and 2003:
Income Shares Per Share
Three months ended June 30, 2004 (numerator) (denominator) Amount
-------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 678,000 1,785,657 $ 0.38
Effect of dilutive securities 139,403 -
-------------------------------------
Diluted earnings per share $ 678,000 1,925,060 $ 0.35
=====================================
Income Shares Per-Share
Three months ended June 30, 2003 (numerator) (denominator) Amount
-------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 359,000 1,792,859 $ 0.20
Effect of dilutive securities 104,980 -
-------------------------------------
Diluted earnings per share $ 359,000 1,897,839 $ 0.19
=====================================
5
Income Shares Per-Share
Six months ended June 30, 2004 (numerator) (denominator) Amount
------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1,245,000 1,782,254 $ 0.70
Effect of dilutive securities - 135,618 -
-------------------------------------
Diluted earnings per share $ 1,245,000 1,917,872 $ 0.65
=====================================
Income Shares Per-Share
Six months ended June 30, 2003 (numerator) (denominator) Amount
---------------------------------------------------------- ------------------ ------------------- -------------
Basic earnings per share $ 701,000 1,792,923 $ .39
Effect of dilutive securities - 87,494 -
-------------------------------------
Diluted earnings per share $ 701,000 1,880,417 $ .37
=====================================
All share and per share data has been adjusted for the 10% stock dividend
declared on March 25, 2004.
(3) Allowance for Loan Losses
The following summarizes changes in the allowance for loan losses for the
six-month periods ended June 30, 2004 and 2003 and the twelve month period
ended December 31, 2003:
----------------------------------------------------------------------------------------------------------
(in thousands) 6/30/04 6/30/03 12/31/03
Balance at beginning of period $ 3,262 3,057 3,057
Loans charged off (624) (119) (143)
Recoveries 17 10 36
Provisions charged to operations 235 312 312
------------ ------------ ------------
Balance at end of period $ 2,890 3,260 3,262
============ ============ ============
(4) Stock Based Compensation
Effective as of January 1, 2003, the Company adopted the fair value
recognition provisions of FASB Statement No. 148, Accounting for
Stock-Based Compensation (SFAS No. 148). Under the prospective method of
adoption selected by the Company, stock-based employee compensation costs
are recognized as awards are granted, modified or settled. Prior to January
1, 2003, these plans were accounted for under the intrinsic value method as
prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees.
Under the intrinsic value method, compensation expense was recognized on
the date of grant only if the market price of the underlying stock exceeded
the exercise price on that date.
The following table presents the effect on net income and earnings per
share as if the fair value based method had been applied to all outstanding
and unvested awards in each period.
THREE MONTH PERIOD SIX MONTH PERIOD
ENDED JUNE 30, ENDED JUNE 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported (in thousands) $ 678 359 1,245 701
Add: Stock based employee compensation expense included
In reported net income, net of tax effect 6 2 12 4
Deduct: Stock based employee compensation determined under
fair value based method for all awards, net of tax effect (9) (7) (18) (14)
------------------------------------------------------
Pro forma net income $ 675 354 1,239 691
======================================================
Earnings per share-basic
As reported $ 0.38 0.20 0.70 0.39
Pro-forma 0.38 0.20 0.70 0.39
Earnings per share-assuming dilution
As reported $ 0.35 0.19 0.65 0.37
Pro-forma 0.35 0.19 0.65 0.37
All share and per share data has been adjusted for the 10% stock dividend
declared on March 25, 2004.
6
(5) Retirement Plans
The Company has a supplemental retirement plan for directors and a
supplemental executive retirement plan covering key executives. These plans
are non-qualified defined benefit plans and are unsecured and unfunded. The
Company has purchased insurance on the lives of the participants and
intends to use the cash values of these policies to pay the retirement
obligations.
The following table sets forth the net periodic benefit cost recognized for
the plans:
Six Months Ended June 30,
(in thousands) 2004 2003
----------------------------------------
Net pension cost included the following components:
Service cost-benefits earned during the period $ 57 $ 44
Interest cost on projected benefit obligation 68 55
Amortization of prior service cost 35 30
Recognized net actuarial loss 3 2
----------------------------------------
Net periodic pension cost $ 163 $ 131
========================================
During the six months ended June 30, 2004, the Company contributed and paid
out as benefits $12.5 thousand to participants under the plans. For the
year ending December 31, 2004, the Company expects to contribute and pay
out as benefits $27.5 thousand to participants under the plans.
(6) Legal Proceedings
On March 23, 2004, a lawsuit was filed naming First Financial Bancorp, Bank
of Lodi, N.A. and certain named directors and officers of the Company. The
suit was brought as a derivative action commenced by two shareholders on
behalf of the Company. It alleges intentional and negligent breach of
fiduciary duty, abuse of control, waste of corporate assets, unjust
enrichment and imposition of constructive trust.
The matter was tendered to the Company's carrier for its director and
officer liability insurance, which accepted the tender of defense. The
Boards of Directors of the Company and the Bank have appointed independent
Special Litigation Committees composed of two new directors, one of whom is
a retired San Joaquin County Judge, to evaluate the allegations of the
Complaint and determine what action, if any, the Company and the Bank
should take with respect to the action. If the allegations are proven, any
recovery in the suit will benefit the Company.
The Company is involved in various legal actions arising in the ordinary
course of business. In the opinion of management, after consulting with
legal counsel, the ultimate disposition of these matters will not have a
material effect on the Company's financial position, results of operations,
or liquidity.
(7) Stock Repurchase Program
In April 2002, the Board of Directors authorized a stock repurchase program
approving the repurchase of up to $2 million of the Company's stock. Since
the program's inception, 51,087 shares were repurchased at an average cost
of $13.93 per share for a total of $712 thousand. Year-to-date, 8,891
shares were repurchased at an average cost of $17.77 per share for a total
of $158 thousand.
7
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.
Certain statements in this Quarterly Report on Form 10-Q include forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the "safe harbor" created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies, and expectations, are generally
identifiable by the use of words such as "believe," "expect," "intend,"
"anticipate," "estimate," "project," "assume," "plan," "predict," "forecast" or
similar expressions. These forward-looking statements relate to, among other
things, expectations of the business environment in which the Company operates,
projections of future performance, potential future performance, potential
future credit experience, perceived opportunities in the market, and statements
regarding the Company's mission and vision.
The Company's actual results, performance, and achievements may differ
materially from the results, performance, and achievements expressed or implied
in such forward-looking statements due to a wide range of risks and
uncertainties. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in the banking industry; changes in the
interest rate environment; general economic conditions, either nationally or
regionally becoming less favorable than expected and resulting in, among other
things, a deterioration in credit quality and an increase in the provision for
possible loan losses; changes in the regulatory environment; monetary and fiscal
policies of the U.S. Government; changes in real estate valuations; changes in
business conditions; volatility of rate sensitive deposits; operational risks,
including data processing system failures or fraud; asset/liability matching
risks and liquidity risks; impact of litigation; the ability of management and
directors to work together cooperatively and efficiently; civil disturbances or
terrorist threats or acts or apprehension about the possible future occurrences
of acts of this type; and changes in the securities markets. In addition, other
events have increased the uncertainty related to the national and California
economic outlook and could have an effect on the future operations of the
Company or its customers, including borrowers.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, income and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to the allowance for loan losses, other real
estate owned, investments and income taxes. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. The Company maintains an allowance for loan losses
resulting from the inability of borrowers to make required loan payments. If the
financial conditions of the Company's customers were to deteriorate, resulting
in an impairment of their ability to make payments, additional allowances may be
required. The Company invests in debt and equity securities. If the Company
believes these securities have experienced a decline in value that is other than
temporary, an investment impairment charge is recorded. Future adverse changes
in market conditions or poor operating results of underlying investments could
result in losses or an inability to recover the carrying value of the
investments that may not be reflected in an investment's carrying value, thereby
requiring an impairment charge in the future.
The following discussion addresses information pertaining to the financial
condition and results of operations of the Company that may not be otherwise
apparent from a review of the consolidated financial statements and related
footnotes. It should be read in conjunction with those statements and notes
found on pages 1 through 7, as well as other information presented throughout
this report.
8
SUMMARY
For the quarter ended June 30, 2004, the Company recorded net income of $678
thousand, representing an increase of $319 thousand or 88.9% over net income of
$359 thousand for the same period in 2003. Diluted earnings per share for the
second quarter of 2004 totaled $0.35, an 84% increase from the $0.19 per diluted
share earnings for the second quarter in 2003. The increase resulted from an
increase in net interest income of $476 thousand combined with a decrease in
noninterest expense of $132 thousand, which was partially offset by an increase
in the provision for income tax of $145 thousand, an increase in the provision
for loan losses of $110 thousand and a decrease in noninterest income of $34
thousand.
For the six month period ended June 30, 2004, the Company recorded net income
totaling $1,245 thousand, representing an increase of $544 thousand or 77.6%
over net income of $701 thousand for the same period in 2003. The increase
resulted primarily from an increase in net interest income of $1,027 thousand
combined with a decrease in noninterest income of $227 thousand and an increase
in the provision for income tax of $243 thousand. Year to date diluted earnings
per share for the first six months of 2004 totaled $0.65, an increase of 76%
over the prior year per diluted share earnings, which totaled $0.37.
Return on average equity for the three and six month periods ended June 30, 2004
totaled 13.07% and 12.12%, respectively, compared to 7.29% and 7.17% for the
same periods in 2003. Return on average assets during the same periods totaled
0.83% and 0.77% in 2004 compared to 0.53% and 0.52% in 2003, respectively.
Included in net income during the six month period ended June, 30, 2004 were
gains on the sale of investment securities totaling $65 thousand. During the
same period in 2003, gains on the sale of investment securities totaled $88
thousand, a reduction of $23 thousand from the prior year. Additionally,
included in noninterest expense during 2004 are year-to-date costs totaling
$195,000 associated with responding to the actions initiated by three dissident
directors.
CHANGES IN FINANCIAL CONDITION
Consolidated total assets as of June 30, 2004 totaled $324 million, which
represents an increase of $2,325 thousand, or 0.7% when compared to December 31,
2003. The increase in total assets was attributable primarily to a $5,178
thousand, or 36.7%, increase in short term borrowings, which was offset by a
$3,408 thousand, or 1.2%, decrease in total deposits. Total gross loans
increased $26,655 thousand, or 14.6% during the first six months of 2004. The
loan growth was funded by a reduction of federal funds sold of $1,697 thousand,
or 21.1%, a decrease of $17,055, or 18.9%, in the investment portfolio due to
prepayments of mortgage-backed securities (including CMOs) of $11,700 thousand
and proceeds from the sale of securities of $4,145 thousand and an increase of
$5,178 thousand, or 36.7%, in short term borrowings.
The net increase in gross loans is the result of increases of $21,822 thousand,
or 27.0%, $4,295 thousand, or 14.1%, $875 thousand, or 5.5%, $635 thousand, or
2.0%, and $367 thousand, or 11.9%, in real estate loans, commercial loans,
construction loans, SBA loans and loans held for sale, respectively, combined
with decreases of $1,155 thousand, or 6.1%, and $184 thousand, or 8.1%, in
agricultural and consumer loans, respectively.
During the first six months of 2004, non-interest bearing deposits increased
$1,618 thousand, or 3.4% and interest bearing deposits decreased $5,026
thousand, or 2.2%. The year-to-date deposit decrease consists of increases of
$1,951 thousand, or 4.3%, $1,618 thousand, or 3.4%, and $1,990 thousand, or 3.5%
in savings, non-interest bearing and NOW accounts combined with decreases of
$3,157 thousand, or 5.7%, and $5,810 thousand, or 7.9%, in money market accounts
and certificates of deposit, 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 June 30,
2004 decreased by $372 thousand, or 11.4%, when compared to December 31, 2003 as
a result of a provision for $235 thousand combined with net charge-offs of $607
thousand. During the second quarter of 2004, the Company charged-off $587
thousand in loans, which were primarily related to nonperforming agricultural
loans of a single borrower. During the first six months of 2004, nonperforming
loans decreased by $2,030 thousand, to $1,850 thousand when compared to December
31, 2003. 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, 2004 is adequate to absorb known and reasonably estimated loan losses.
However, there can be no assurances that future economic events will not
negatively impact the Bank's borrowers, thereby causing loan losses to exceed
the current allowance.
9
The following tables depict activity in the allowance for loan losses and
allocation of reserves for the six months ended June 30, 2004 and year ended
December 31, 2003, respectively:
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Six Months Year
Ended Ended
6/30/04 12/31/03
------- --------
Balance at beginning of period $ 3,262 3,057
Charge-offs:
Commercial (598) (88)
Consumer (26) (55)
------- --------
Total charge-offs (624) (143)
Recoveries:
Commercial 15 27
Consumer 2 9
------- --------
Total recoveries 17 36
------- --------
Net charge-offs (607) (107)
Provision charged to operations 235 312
------- --------
Balance at end of period $ 2,890 $ 3,262
======= ========
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
6/30/04 6/30/04 12/31/03 12/31/03
LOAN CATEGORY AMOUNT % OF LOANS AMOUNT % OF LOANS
-------- ---------- -------- ----------
Commercial and other real estate $ 2,038 90.94% $ 2,381 89.99%
Real estate construction 809 8.06% 828 8.76%
Installment and other 43 1.00% 53 1.25%
-------- ---------- -------- ----------
$ 2,890 100.00% $ 3,262 100.00%
======== ========== ======== ==========
INVESTMENTS
Investment securities decreased $17,055 thousand, or 18.9%, from December 31,
2003 to June 30, 2004. This decrease resulted primarily from prepayments of
mortgage-backed securities (including CMOs) totaling $11,700 thousand and sales
of investment securities totaling $4,145 thousand. The Company realized gross
gains totaling $65 thousand on the sale of investment securities during the
first six months of 2004 which is a decrease of $23 thousand when compared to
the same period of 2003.
STOCKHOLDERS' EQUITY
Consolidated stockholders' equity increased $557 thousand from December 31, 2003
to June 30, 2004. Consolidated stockholders' equity represented 6.33% and 6.20%
of consolidated assets at June 30, 2004 and December 31, 2003, respectively. The
increase in equity during the first six months of 2004 resulted primarily from
net income of $1,245 thousand for the six months ended June 30, 2004 and a $591
thousand decrease resulting from the after-tax market value decrease in the
available-for-sale investment securities portfolio.
In April 2002, the Board of Directors authorized a stock repurchase program
approving the repurchase of up to $2 million of the Company's stock. Originally
scheduled to terminate on December 31, 2003, the repurchase program has been
extended to December 31, 2004. During the first six months of 2004, 8,891 shares
of stock were repurchased at an average cost of $17.77 per share totaling $158
thousand.
The total risk-based capital ratio for the Company's wholly owned subsidiary,
Bank of Lodi was 10.30% at June 30, 2004 compared to 10.68% at December 31,
2003.
10
CHANGES IN RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 2004
SUMMARY OF EARNINGS PERFORMANCE
----------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (in thousands) $ 678 $ 359 $ 1,245 $ 701
Basic net income per share $ 0.38 $ 0.20 $ 0.70 $ 0.39
Diluted net income per share $ 0.35 $ 0.19 $ 0.65 $ 0.37
Return on average assets 0.83% 0.53% 0.77% 0.52%
Return on average equity 13.07% 7.29% 12.12% 7.17%
Average equity to average assets 6.37% 7.29% 6.35% 7.30%
Net income for the three months ended June 30, 2004 increased $319 thousand, or
88.9%, compared to the same period of 2003. Net interest income increased $476
thousand, or 16.6% as a result of a $43 thousand decrease in interest expense
combined with a $433 thousand increase in interest income. The provision for
loan losses totaled $165 thousand representing an increase of $110 thousand, or
200.0% when compared to the same period in 2003. Noninterest income decreased
$34 thousand, or 3.1%, while noninterest expense decreased $132 thousand, or
3.9%. The provision for income taxes increased $145 thousand, or 100.0%. Net
income for the six months ended June 30, 2004 increased $544 thousand, or 77.6%,
compared to the same period of 2003. Net interest income increased $1,027
thousand, or 18.7% as a result of a $53 thousand increase in interest expense
combined with a $1,080 thousand increase in interest income. The provision for
loan losses totaled $235 thousand representing a decrease of $77 thousand, or
24.7% when compared to the first six months of 2003. Noninterest income
decreased $227 thousand, or 10.0%, while noninterest expense increased $90
thousand, or 1.4%. The provision for income taxes increased $243 thousand, or
90.3%. The return on average equity for the three and six months ended June 30,
2004 was 13.07 and 12.12% compared to 7.29 and 7.17% for the same periods of
2003.
11
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 THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------------
2004 2003
---------------------------------------------- -------------------------------------------
Average Income/ Yield (1) Average Income/ Yield (1)
Dollars In Thousands Balance Expense Balance Expense
------------ ------------- ------------ ----------- ------------ -----------
EARNING ASSETS:
Investment securities(1)(2) $ 77,570 $ 592 3.06% $ 42,185 $ 227 2.16%
Federal funds sold 7,883 19 0.97% 11,822 36 1.22%
Loans (2) (3) 206,128 3,383 6.58% 171,216 3,298 7.73%
------------ ------------- ------------ ----------- ------------ -----------
TOTAL EARNING ASSETS $ 291,581 $ 3,994 5.49% $ 225,223 $ 3,561 6.34%
============ ============= ============ =========== ============ ===========
LIABILITIES:
Non-interest bearing
deposits $ 50,308 $ -- $ 40,494 $ --
Savings, money market, &
NOW deposits 159,149 249 0.63% 128,284 259 0.81%
Time deposits 69,659 266 1.53% 65,276 360 2.21%
Other borrowings 20,258 131 2.59% 7,395 70 3.80%
------------ ------------- ------------ ----------- ------------ -----------
TOTAL LIABILITIES $ 299,374 $ 646 0.87% $ 241,449 $ 689 1.14%
============ ============= ============ =========== ============ ===========
NET INTEREST SPREAD 4.62% 5.20%
============ ===========
---------------------------------------------------------------------------------------------
Earning Income Earning Income
Assets (Expense) Yield Assets (Expense) Yield
------------ ------------- ------------ ----------- ------------ -----------
Yield on average earning $ 291,581 $ 3,994 5.49% $ 225,223 $ 3,561 6.34%
assets
Cost of funding average
earning assets $ 291,581 646 (0.88%) $ 225,223 689 (1.23%)
------------- ------------ ------------ -----------
NET INTEREST MARGIN $ 291,581 $ 3,348 4.61% $ 225,223 $ 2,872 5.11%
============= ============ ============ ===========
(1) Yield for period annualized on actual number of days in period and based on
a 365-day year.
(2) Income on tax-exempt securities has not been adjusted to a tax equivalent
basis.
(3) Nonaccrual loans are included in the loan totals for each period; however,
only collected interest on such loans is included in interest income.
Net interest income for the second quarter of 2004 increased $476 thousand, or
16.6%, when compared to the same period of 2003. The increase is attributable to
the effects of increases in volumes of earning assets and liabilities combined
with the effects of changes in interest rates. The increase in volumes of
average earning assets and liabilities resulted in an increase in net interest
income totaling $620 thousand while interest rates resulted in a decrease in net
interest income totaling $144 thousand when comparing the second quarter of 2004
to the same period last year.
Average earning assets increased $66,358 thousand during the second quarter of
2004 as compared to the second quarter of 2003. Average loans increased $34,912
thousand and investment securities increased $35,385 thousand while federal
funds sold decreased $3,939 thousand. The increase in the volume of average
earning assets during the second quarter of 2004 as compared to the same period
of 2003 resulted in an increase in interest income totaling $851 thousand.
However, interest rates on average earning assets declined 85 basis points (from
6.34% to 5.49%) when compared to the same period in 2003, resulting in a
decrease in interest income totaling $418 thousand.
12
Average liabilities increased $57,925 thousand during the second quarter of 2004
as compared to the same period last year. The increase consists of $22,007
thousand, $9,814 thousand, $4,778 thousand, $4,383 thousand and $4,080 thousand
in money market accounts, non-interest bearing deposits, NOW, certificates of
deposit and savings accounts, respectively. Other borrowings increased $12,863.
The increase in average liabilities resulted in an increase in interest expense
totaling $231 thousand. As a result of the declining interest rate environment,
the cost of interest bearing liabilities decreased 27 basis points (from 1.14%
to 0.87%) resulting in a reduction in interest expense totaling $274 thousand.
-------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------------------
2004 2003
-------------------------------------------- -------------------------------------------
Average Income/ Yield (1) Average Income/ Yield (1)
Dollars In Thousands Balance Expense Balance Expense
------------ ------------- ---------- ----------- ------------ -----------
EARNING ASSETS:
Investment securities(1)(2) $ 83,298 $ 1,381 3.32% $ 36,774 $ 516 2.83%
Federal funds sold 5,962 29 0.98% 11,208 69 1.24%
Loans (2) (3) 196,065 6,507 6.66% 169,254 6,252 7.45%
------------ ------------- ---------- ----------- ------------ -----------
TOTAL EARNING ASSETS $ 285,325 $ 7,917 5.56% $ 217,236 $ 6,837 6.35%
============ ============= ========== =========== ============ ===========
LIABILITIES:
Non-interest bearing
deposits $ 47,199 $ $ 36,277 $
Savings, money market, &
NOW deposits 159,085 591 0.75% 125,072 498 0.80%
Time deposits 69,975 564 1.62% 61,950 702 2.29%
Other borrowings 22,641 234 2.07% 6,734 136 4.07%
------------ ------------- ---------- ----------- ------------ -----------
TOTAL LIABILITIES $ 298,900 $ 1,389 0.93% $ 230,033 $ 1,336 1.17%
============ ============= ========== =========== ============ ===========
NET INTEREST SPREAD 4.63% 5.18%
========== ===========
-------------------------------------------------------------------------------------------
Earning Income Earning Income
Assets (Expense) Yield Assets (Expense) Yield
------------ ------------- ---------- ----------- ------------ -----------
Yield on average earning $ 285,325 $ 7,917 5.56% $ 217,236 $ 6,837 6.35%
assets
Cost of funding average
earning assets $ 285,325 $ (1,389) (0.97)% $ 217,236 $ (1,336) (1.24)%
------------- ---------- ------------ -----------
NET INTEREST MARGIN $ 285,325 $ 6,528 4.59% $ 217,236 $ 5,501 5.11%
============= ========== ============ ===========
(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
Net interest income for the first six months of 2004 increased $1,027 thousand,
or 18.7%, when compared to the same period of 2003. The increase is attributable
to the effects of increases in volumes of earning assets and liabilities
combined with the effects of changes in interest rates. The increase in volumes
of average earning assets and liabilities resulted in an increase in net
interest income totaling $1,019 thousand while interest rates resulted in an
increase in net interest income totaling $8 thousand when comparing the first
six months of 2004 to the same period last year.
Average earning assets increased $68,089 thousand during the six month period
ended June 30, 2004 as compared to the same period of 2003. Average loans
increased $26,811 thousand and investment securities increased $46,524 thousand
while federal funds sold decreased $5,246 thousand. The increase in the volume
of average earning assets during the first six months of 2004 as compared to the
same period of 2003 resulted in an increase in interest income totaling $1,620
thousand. However, interest rates on average earning assets declined 79 basis
points (from 6.35% to 5.56%) when compared to the same period in 2003, resulting
in a decrease in interest income totaling $540 thousand.
Average liabilities increased $68,867 thousand during the six month period ended
June 30, 2004 as compared to the same period last year. The increase consists of
$23,891 thousand, $10,922 thousand, $8,025 thousand, $5,294 thousand and $4,828
thousand in money market accounts, non-interest bearing deposits, certificates
of deposit, NOW and savings accounts, respectively. Other borrowings increased
$15,907. The increase in average liabilities resulted in an increase in interest
expense totaling $601 thousand. As a result of the declining interest rate
environment, the cost of interest bearing liabilities decreased 24 basis points
(from 1.17% to 0.93%) resulting in a reduction in interest expense totaling $548
thousand.
Interest income is also affected by nonaccrual loan activity. Nonaccrual loans
at June 30, 2004 and June 30, 2003 totaled $1,850 thousand and $2,350 thousand,
respectively. Interest forgone on nonaccrual loans totaled approximately $82
thousand and $174 thousand for the three and six months ended June 30, 2004
compared to $106 thousand and $175 thousand for the same periods of 2003,
respectively.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three and six months ended June 30, 2004
was $165 thousand and $235 thousand compared with $55 thousand and $312 thousand
for the three and six months ended June 30, 2003, an increase of $110 thousand,
or 200.0%, and a decrease of $77 thousand, or 24.7%. As of June 30, 2004 the
allowance for loan losses was $2,890 thousand or 1.4% of total loans, which
compares to the allowance for loan losses of $3,262 thousand or 1.8% of total
loans as of December 31, 2003. See "Allowance for Loan Losses" contained herein.
As of June 30, 2004, nonperforming loans totaled $1,850 thousand or 0.9% of
total loans compared to $3,880 thousand or 2.1% at December 31, 2003. No
assurance can be given that nonperforming loans will not increase or that the
allowance for loan losses will be adequate to cover losses inherent in the loan
portfolio.
NONINTEREST INCOME
Noninterest income for the three and six months ended June 30, 2004 decreased by
$34 thousand, or 3.1%, and $227 thousand, or 10.0%, when compared to the same
periods in 2003. The decreases are primarily the result of reductions in the
gains realized on the sale of loans totaling $117 thousand and $279 thousand
during the three and six months ended June 30, 2003. During the second quarter
of 2004, the Company did not sell any investment securities. During the first
six months of 2004, the Company realized gains on the sale of investment
securities totaling $65 thousand compared to $88 thousand for the same period of
2003. In addition, the Company realized gains from the sale of other real estate
totaling $0 thousand and $5 thousand during the first six months of 2004 and
2003, respectively.
Income from the sale and servicing of loans totaled $311 thousand during the
second quarter of 2004, which decreased by $121 thousand, or 28.0%, compared to
the prior year quarter. During the first six months of 2004, income from the
sale and servicing of loans totaled $565 thousand, a decrease of $302 thousand
or 34.8% over the same period of 2003. The decreases in income from sale and
servicing of loans are principally related to a decline in the Company's
residential mortgage lending activity during 2004 when compared to 2003
resulting from an increase in mortgage lending rates.
The income recognized on the cash surrender value of life insurance increased
$33 thousand and $50 thousand, during the second quarter and year to date for
2004, respectively, when compared to the same periods in 2003. The income
recognized from 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 8.5% during the second quarter of
2004 as compared to 7.1% during the second quarter of 2003. For the first six
months of 2004, the tax effective yield totaled 8.1% as compared to 7.2% during
the same period in 2003.
14
NONINTEREST EXPENSES
Noninterest expenses decreased $132 thousand, or 3.9%, and increased $90
thousand, or 1.4%, when comparing the three and six month periods ended June 30,
2004 to the same periods of 2003. When comparing the second quarter of 2004 to
2003, personnel expense decreased $126 thousand, or 6.7% primarily as a result
of reduced commissions due to the decline in residential mortgage lending
activity. When comparing the six month periods ended June 30, 2004 to 2003,
personnel expense increased $18 thousand or 0.5%. This increase is primarily due
to general merit increases for existing personnel. When comparing the three and
six month periods ended June 30, 2004, occupancy expense increased $103
thousand, or 41.0% and $166 thousand, or 32.8%, respectively. This is primarily
the result of increased rent expense due to the addition of the Sacramento
location and a Credit Administration office in Folsom. During the second quarter
of 2004, equipment expense decreased $27 thousand, or 12.7%, when compared to
the second quarter of 2003. Equipment expense during the first six months of
2004 decreased $59 thousand, or 13.5% when compared to 2003. Decraeses in both
periods are due to a decrease in depreciation expense. For the three and six
month periods ended June 30, 2004, other noninterest expense decreased $82
thousand, or 7.6% and $35 thousand, or 1.7%, respectively, when compared to the
same periods of 2003.
Included in other noninterest expense during the three and six month periods
ended June 30, 2004 are costs totaling $129 thousand and $195 thousand
associated with responding to the disruptive actions initiated by three
dissident directors. Without these expenses, other noninterest expense would
have decreased $211 thousand, or 19.6% and $230 thousand, or 11.4%, during the
three and six month periods during 2004 when compared to the same period in
2003.
INCOME TAXES
In the three months ended June 30, 2004, taxes increased $145 thousand to $290
thousand from $145 thousand for the same period in 2003. The Company's effective
tax rate for the three months ended June 30, 2004 was 30.0%, compared to 28.8%
for the same period in 2003. For the first six months of 2004, the provision for
income taxes totaled $512 thousand as compared to $269 thousand during the same
period last year. For the first six months of 2004, the Company's effective tax
rate was 29.1% as compared to 27.7% for the same period in 2003.
OFF-BALANCE SHEET COMMITMENTS
The following table shows the distribution of the Company's undisbursed loan
commitments at the dates indicated.
June 30, 2004 December 31, 2003
- --------------------------------------------------------------------------------
Commitments to extend credit $ 52,071 49,643
================================================================================
Standby letters of credit $ 158 488
================================================================================
15
LIQUIDITY AND CAPITAL RESOURCES
One of the Company's goals is to provide adequate funds to meet changes in loan
demand or any potential increase in the normal level of deposit withdrawals.
This goal is accomplished primarily by generating cash from operating activities
and maintaining sufficient short-term liquid assets. These sources, coupled with
a stable deposit base and a strong reputation in the capital markets, allow the
Company to fund earning assets and maintain the availability of funds.
Management believes that the Company's traditional sources of maturing loans and
investment securities, sales of loans held for sale, cash from operating
activities and a strong base of core deposits are adequate to meet the Company's
liquidity needs for normal operations.
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.
If the Company's traditional sources of liquidity were constrained, the Company
would be forced to pursue avenues of funding not typically used by the Company
and the Company's net interest margin could be impacted negatively. The Company
does utilize, among other tools, maturity gap tables, interest rate shock
scenarios and an active asset and liability management committee to analyze,
manage and plan asset growth and to assist in managing the Company's net
interest margin and overall level of liquidity. The Company's approach to
providing adequate liquidity has been successful in the past and management does
not anticipate any near- or long-term changes to its liquidity strategies.
At June 30, 2004, liquidity was considered adequate, and funds available in the
local deposit market and scheduled maturities of investments are considered
sufficient to meet long-term liquidity needs. Compared to 2003 liquidity
decreased in 2004 as a result of the growth in the loan portfolio and purchases
of available-for-sale investment securities.
ACTUAL
--------------------- WELL CAPITALIZED MINIMUM CAPITAL
CAPITAL RATIO RATIO REQUIREMENT REQUIREMENT
------- ----- ----------------- -----------
Leverage $ 22,813 7.0% 5.0% 4.0%
Tier 1 Risk-Based $ 22,813 9.1% 6.0% 4.0%
Total Risk-Based $ 25,703 10.3% 10.0% 8.0%
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
While there are several varieties of market risk, the market risk material to
the Company and the Bank is interest rate risk. Within the context of interest
rate risk, market risk is the risk of loss due to changes in market interest
rates that have an adverse effect on net interest income, earnings, capital or
the fair value of financial instruments. Exposure to this type of risk is a
regular part of a financial institution's operations. The fundamental activities
of making loans, purchasing investment securities, and accepting deposits
inherently involve exposure to interest rate risk. The Company monitors the
repricing differences between assets and liabilities on a regular basis and
estimates exposure to net interest income, net income, and capital based upon
assumed changes in the market yield curve. As of and for the six months ended
June 30, 2004, there were no material changes in the market risk profile of the
Company or the Bank as described in the Company's 2003 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officers, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as of June 30, 2004. Based on their evaluation, the Company's principal
executive and principal financial officers concluded that the Company's
disclosure controls and procedures were effective as of June 30, 2004.
There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the Company's fiscal quarter ended June 30, 2004, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 23, 2004, a lawsuit was filed naming First Financial
Bancorp, Bank of Lodi, N.A. and certain named directors and
officers of the Company. The suit was brought as a derivative
action commenced by two shareholders on behalf of the Company.
It alleges intentional and negligent breach of fiduciary duty,
abuse of control, waste of corporate assets, unjust enrichment
and imposition of constructive trust.
The matter has been tendered to the Company's carrier for its
director and officer liability insurance, which accepted the
tender of defense. The Boards of Directors of the Company and
the Bank have appointed independent Special Litigation
Committees composed of two new directors, one of whom is a
retired San Joaquin County Judge, to evaluate the allegations
of the Complaint and determine what action, if any, the
Company and the Bank should take with respect to the action.
If the allegations are proven, any recovery in the suit will
benefit the Company.
The Company is involved in various legal actions arising in
the ordinary course of business. In the opinion of management,
after consulting with legal counsel, the ultimate disposition
of these matters will not have a material effect on the
Company's financial position, results of operations, or
liquidity.
17
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
The table below sets forth the information with respect to purchases made by or
on behalf of First Financial Bancorp or any "affiliated purchaser" (as defined
in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the
Company's common stock during the three months ended June 30, 2004.
Total Number Approximate Dollar
of Shares Value of Shares That
Total Number Average Purchased as Part of May Yet Be Purchased Under
of Shares Price Paid Publicly Announced the Plans or Programs(1)
Period Purchased Per Share Plans or Programs(1) (in thousands)
- ------------------------------------------------------------------------------------------------------------
Month #1 -- -- -- $1,453
(April 1, 2004 to
April 30, 2004)
Month #2 -- -- -- $1,453
(May 1, 2004 to
May 31, 2004)
Month #3 8,891 $ 17.77 8,891 $1,288
(June 1, 2004 to
June 30, 2004)
-------------------------------------------------
Total 8,891 $ 17.77 8,891
=================================================
(1) On April 4, 2002, the Company announced that the Board of Directors had
approved a share repurchase program, pursuant to which up to $2 million of
its common stock may be repurchased. The repurchase program is being
effected from time to time, depending on market conditions and other
factors, through open market purchases and privately negotiated
transactions. The total remaining authorization under the repurchase
program was $1,288 thousand as of June 30, 2004. Originally scheduled to
terminate on December 31, 2003, the repurchase program has been extended to
December 31, 2004.
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
SHAREHOLDERS' PROPOSALS FOR 2004 ANNUAL MEETING; DISCRETIONARY
VOTING
Any proposal of a shareholder intended to be presented at the
Company's 2004 Annual Meeting must be received by the Company
a reasonable time before the Company begins to print and mail
its proxy materials for the meeting for inclusion in the Proxy
Statement and form of proxy for that meeting and must meet the
requirements of the SEC's proxy rules. Any such proposal
should be directed to the attention of the President, First
Financial Bancorp, 701 South Ham Lane, Lodi, California 95242.
The proxy holders may vote in their discretion all proxies
solicited for the Company's 2004 Annual Meeting on any matter
raised at that meeting of which the Company did not have
notice by the close of business on the tenth (10th) day
following the day on which the notice of the annual meeting
date was mailed to shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The exhibit list required by this item is
incorporated by reference to the Index to Exhibits
filed as part of this report.
18
(B) REPORTS ON FORM 8-K
During the second quarter of 2004, the Company
furnished a Current Report on 8-K dated April 9, 2004
(Items 7 and 9).
During the second quarter of 2004, the Company
furnished a Current Report on 8-K dated April 13,
2004 (Items 7 and 9).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FINANCIAL BANCORP
By:
Date: AUGUST 12, 2004 /S/ ALLEN R. CHRISTENSON
------------------------
Allen R. Christenson
Executive Vice President
Chief Financial Officer
(Principal Accounting and Financial
Officer)
19
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
31.1 Certification of Registrant's Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Registrant's Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Registrant's Chief Executive Officer Pursuant to
18 U.S.C. Section 1350
32.2 Certification of Registrant's Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
20