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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 SEPTEMBER 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 November 9, 2004 there were 1,824,929 shares of Common Stock no par
value, outstanding.
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FIRST FINANCIAL BANCORP
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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 ............................................ 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk .......18
Item 4. Controls and Procedures ..........................................18
PART II
Item 1. Legal Proceedings ................................................18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......19
Item 3. Defaults Upon Senior Securities ..................................19
Item 4. Submission of Matters to a Vote of Security Holders...............19
Item 5. Other Information ................................................19
Item 6. Exhibits..........................................................20
Signatures ................................................................21
Index to Exhibits .........................................................22
i
ITEM 1. FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
(Unaudited)
September 30, December 31,
ASSETS 2004 2003
--------- ---------
Cash and due from banks $ 13,072 $ 17,497
Federal funds sold and securities purchased under resale agreements 12,564 8,034
Investment securities available for sale, at fair value 65,021 90,270
Loans held for sale 2,711 3,076
Loans, net of deferred loan fees 214,313 178,711
Less allowance for loan losses (2,964) (3,262)
--------- ---------
Net loans 211,349 175,449
Premises and equipment, net 6,694 6,903
Accrued interest receivable 1,382 1,322
Other assets 20,472 19,262
--------- ---------
Total Assets $ 333,265 $ 321,813
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing $ 51,529 $ 47,765
Interest bearing 224,454 230,390
--------- ---------
Total deposits 275,983 278,155
Accrued interest payable 104 205
Short term borrowings 25,258 14,100
Other liabilities 4,847 4,231
Junior subordinated debentures 5,155 5,155
--------- ---------
Total liabilities 311,347 301,846
--------- ---------
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, 1,824,929
and 1,782,983, respectively 13,129 12,950
Retained earnings 8,680 7,004
Accumulated other comprehensive income 109 13
--------- ---------
Total stockholders' equity 21,918 19,967
--------- ---------
Total liabilities and stockholders' equity $ 333,265 $ 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 Nine Months Ended
September 30, September30,
------------------------ ---------------------
2004 2003 2004 2003
---------- -------- -------- -------
Interest income:
Loans, including fees $ 3,661 $ 2,996 $10,168 $ 9,248
Investment securities:
Taxable 553 110 1,795 563
Exempt from federal taxes 62 65 201 128
Federal funds sold 25 25 54 94
------- ------- ------- -------
Total interest income 4,301 3,196 12,218 10,033
Interest expense:
Deposit accounts 499 680 1,654 1,880
Other borrowings 162 70 396 206
------- ------- ------- -------
Total interest expense 661 750 2,050 2,086
------- ------- ------- -------
Net interest income 3,640 2,446 10,168 7,947
Provision for loan losses 326 -- 561 312
------- ------- ------- -------
Net interest income after provision for 3,314 2,446 9,607 7,635
loan losses
Noninterest income:
Gain on sale of securities available for sale 21 -- 86 88
Gain on sale of other real estate owned -- -- -- 5
Gain on sale of loans 102 313 449 939
Service charges 444 424 1,307 1,233
Premiums and fees from SBA and mortgage
operations 107 135 325 376
Increase in cash surrender value of life
insurance 138 121 471 404
Miscellaneous 128 98 345 316
------- ------- ------- -------
Total noninterest income 940 1,091 2,983 3,361
Noninterest expense:
Salaries and employee benefits 1,977 1,756 5,515 5,276
Occupancy 364 289 1,036 795
Equipment 200 207 579 645
Other 1,121 1,081 3,111 3,106
------- ------- ------- -------
Total noninterest expense 3,662 3,333 10,241 9,822
------- ------- ------- -------
Income before provision for income taxes 592 204 2,349 1,174
Provision for income tax expense 147 13 659 282
------- ------- ------- -------
Net income $ 445 $ 191 $ 1,690 $ 892
======= ======= ======= =======
Earnings per share:
Basic $ 0.25 $ 0.11 $ 0.94 $ 0.50
======= ======= ======= =======
Diluted $ 0.23 $ 0.10 $ 0.88 $ 0.47
======= ======= ======= =======
See accompanying notes.
2
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Unaudited) (in thousands except share amounts)
NINE MONTHS ENDED SEPTEMBER 30, 2004
Accumulated
Common Common Other
Stock Stock Comprehensive Retained Comprehensive
Description Shares Amounts Income Earnings Income Total
- ------------------------------------- ------------ ------------ --------------- ------------- ----------------- ---------------
Balance at December 31, 2003 1,782,983 $ 12,950 7,004 13 19,967
Comprehensive income:
Net income $ 1,690 1,690 1,690
-------------
Other comprehensive income:
Unrealized holding gain
arising
during the current 147
period, net of
tax benefit of $102
Reclassification adjustment
due to gains realized,
net of tax benefit of $35 (51)
-------------
Total other comprehensive
gain, net of
tax benefit of $67 96 96 96
-------------
Comprehensive income $ 1,786
=============
Options exercised, including tax 51,321 315 315
benefits
Cash issued in lieu of stock (14) (14)
dividend
)
Stock-based compensation and
related tax benefits 30 30
Stock repurchases (9,375) (166) (166)
------------ ------------ ------------- ------------ ---------------- ---------------
Balance at September 30, 2004 1,824,929 $ 13,129 8,680 109 21,918
============ ============ ============= ================= ===============
See accompanying notes.
3
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
2004 2003
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,690 $ 892
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase (decrease) in deferred loan income 168 (60)
Depreciation and amortization 1,659 2,103
Stock-based compensation 30 --
Provision for loan losses 561 312
Gain on sale of securities available for sale (86) (88)
Loans originated for sale (23,311) (56,298)
Proceeds from loans sold 24,125 59,205
Gain on sale of loans (449) (939)
Gain on sale of other real estate owned -- (5)
Increase in accrued interest receivable (60) (475)
(Decrease) increase in accrued interest payable (101) 41
Increase (decrease) in other liabilities 616 (188)
Increase in cash surrender value of life insurance (471) (404)
(Increase) decrease in other assets (936) 77
-------- --------
Net cash provided by operating activities 3,435 4,173
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities available for sale:
Purchases (290) (62,474)
Proceeds from prepayments 15,913 24,149
Proceeds from sale 9,100 1,056
Increase in loans made to customers, net (36,629) (14,777)
Proceeds from sale of other real estate -- 334
Purchases of bank premises and equipment (545) (690)
-------- --------
Net cash used in investing activities (12,451) (52,402)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (2,172) 49,282
Increase (decrease) in short term borrowings 11,158 (14,885)
Dividends paid (14) --
Payments for repurchase of common stock (166) (152)
Proceeds from issuance of common stock 315 101
-------- --------
Net cash provided by financing activities 9,121 34,346
Net increase (decrease) in cash and cash equivalents 105 (13,883)
Cash and cash equivalents at beginning of period 25,531 34,622
-------- --------
Cash and cash equivalents at end of period $ 25,636 $ 20,739
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest payments $ 2,151 2,045
Cash paid for income taxes 175 230
Unrealized gain (loss) on available-for-sale securities, net of tax 147 (338)
Loans transferred to other real estate owned -- 73
See accompanying notes.
4
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 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 nine
months ended September 30, 2004 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2004.
In December 2003, FASB issued Statement No. 132 (revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits. This
Statement prescribes employers' disclosures about pension plans and other
postretirement benefit plans; it does not change the measurement or
recognition of those plans. The Statement retains and revises the
disclosure requirements contained in the original Statement 132. It also
requires additional disclosures about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit plans and other
postretirement benefit plans. The Statement generally is effective for
fiscal years ending after December 15, 2003. The Company currently has
postretirement benefit plans that are within the scope of this Statement.
Management has done an analysis of the impact of this accounting
pronouncement and this has been disclosed in the Notes To Unaudited
Condensed Consolidated Financial Statements entitled "RETIREMENT PLANS".
In March, 2004, the Emerging Issues Task Force ("EITF") Issue No. 03-1 "The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments" consensus was published. Issue No. 03-1 contained new guidance
effectively codifying the provisions of SEC Staff Accounting Bulletin No.
59 and creates a new model that calls for new judgments and additional
evidence gathering. The Company does not expect the adoption of this EITF
to have a material impact on the Company's Consolidated Financial
Statements.
(2) Pending Merger
On September 7, 2004, the Company entered into a definitive Agreement and
Plan of Merger with Placer Sierra Bancshares, headquartered in Sacramento,
California, pursuant to which the Company will merge with and into Placer
Sierra Bancshares, with Placer Sierra Bancshares as the surviving
corporation. On November 3, 2004, the shareholders approved the merger
agreement and the Company is now awaiting regulatory approval. If the
merger is approved, the Company's stockholders will receive $25.40 in cash
in exchange for each share of the Company's common stock held. The proposed
merger is expected to close by the end of 2004 or early 2005.
5
(3) 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 nine 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 nine month periods ended September 30, 2004 and 2003:
Income Shares Per Share
Three months ended September 30, 2004 (numerator) (denominator) Amount
---------------------------------------------------------- ------------------ ------------------- -------------
Basic earnings per share $ 445,000 1,815,658 $ 0.25
Effect of dilutive securities 140,803 -
------------------ -------------------
Diluted earnings per share $ 445,000 1,956,461 $ 0.23
================== ===================
Income Shares Per-Share
Three months ended September 30, 2003 (numerator) (denominator) Amount
---------------------------------------------------------- ------------------ ------------------- -------------
Basic earnings per share $ 191,000 1,789,582 $ 0.11
Effect of dilutive securities 126,247 -
------------------ -------------------
Diluted earnings per share $ 191,000 1,915,829 $ 0.10
================== ===================
Income Shares Per-Share
Nine months ended September 30, 2004 (numerator) (denominator) Amount
---------------------------------------------------------- ------------------ ------------------- -------------
Basic earnings per share $ 1,690,000 1,793,590 $ 0.94
Effect of dilutive securities 127,047 -
------------------ -------------------
Diluted earnings per share $ 1,690,000 1,920,637 $ 0.88
================== ===================
Income Shares Per-Share
Nine months ended September 30, 2003 (numerator) (denominator) Amount
---------------------------------------------------------- ------------------ ------------------- -------------
Basic earnings per share $ 892,000 1,791,797 $ 0.50
Effect of dilutive securities 102,444 -
------------------ -------------------
Diluted earnings per share $ 892,000 1,894,241 $ 0.47
================== ===================
All share and per share data has been adjusted for the 10% stock dividend
declared on March 25, 2004.
(4) Allowance for Loan Losses
The following summarizes changes in the allowance for loan losses for the
nine-month periods ended September 30, 2004 and 2003 and the twelve month
period ended December 31, 2003:
(in thousands) 9/30/04 9/30/03 12/31/03
------- -------- -------
Balance at beginning of period $ 3,262 3,057 3,057
Loans charged off (879) (134) (143)
Recoveries 20 29 36
Provisions charged to operations 561 312 312
------- ------- -------
Balance at end of period $ 2,964 3,264 3,262
======= ======= =======
6
(5) 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 Nine Month Period
Ended September 30, Ended September 30,
2004 2003 2004 2003
-------- ------ ------- -----
Net income, as reported (in thousands) $ 445 191 1,690 892
Add: Stock based employee compensation expense included
In reported net income, net of tax effect 6 2 18 6
Deduct: Stock based employee compensation determined under
fair value based method for all awards, net of tax effect (9) (7) (27) (21)
-------- ------ -------- ------
Pro forma net income $ 442 186 1,681 877
======== ====== ======== ======
Earnings per share-basic
As reported $ 0.25 0.11 0.94 0.50
Pro-forma 0.24 0.10 0.94 0.49
Earnings per share-assuming dilution
As reported $ 0.23 0.10 0.88 0.47
Pro-forma 0.23 0.10 0.88 0.46
======== ====== ======== ======
All share and per share data has been adjusted for the 10% stock dividend
declared on March 25, 2004.
(6) 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:
Nine months Ended September 30,
(in thousands) 2004 2003
--------------------- --------------------
Net pension cost included the following components:
Service cost-benefits earned during the period $ 93 $ 78
Interest cost on projected benefit obligation 111 99
Amortization of prior service cost 57 54
Recognized net actuarial loss 6 4
-----------------------------------------
Net periodic pension cost $ 267 $ 235
=========================================
The Company estimates at December 31, 2004 that the net periodic benefit
cost will be $369,783. This compares to net periodic benefit costs of
$345,663 at December 31, 2003. During the nine months ended September 30,
2004, the Company contributed and paid out as benefits $20.0 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.
7
(7) Legal Proceedings
On March 23, 2004, a lawsuit was filed naming First Financial Bancorp, Bank
of Lodi, N.A. and certain named directors and officers of the Company. The
suit 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 referred the matter to independent Special Litigation
Committees composed of two disinterested 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. While the Special Litigation
Committees were performing their investigations, the matter was settled,
with the sole monetary consideration being a payment of $25,000 towards the
plaintiff's attorneys' fees. The Special Litigation Committees subsequently
completed their investigations and recommended that the matter be
dismissed. On October 15, 2004, the court entered an order dismissing
plaintiff's complaint with prejudice.
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 consolidated financial position, results
of operations, or liquidity.
(8) Stock Repurchase Program
In April 2002, the Board of Directors authorized a stock repurchase program
approving the repurchase of up to $2 million of the Company's stock. 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, 9,375
shares were repurchased at an average cost of $17.71 per share for a total
of $166 thousand.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. 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,
internationally 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 receipt of regulatory approval for the Placer Sierra Bancshares
acquisition; 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 8, as well as other information presented throughout
this report.
9
SUMMARY
For the quarter ended September 30, 2004, the Company recorded net income of
$445 thousand, representing an increase of $254 thousand or 133.0% over net
income of $191 thousand for the same period in 2003. Diluted earnings per share
for the third quarter of 2004 totaled $0.23, a 130% increase from the $0.10 per
diluted share earnings for the third quarter in 2003. The increase resulted from
an increase in net interest income of $1,194 thousand, which was partially
offset by an increase in noninterest expense of $329 thousand, an increase in
the provision for loan losses of $326 thousand, an increase in the provision for
income tax of $134 thousand, and a decrease in noninterest income of $151
thousand.
For the nine month period ended September 30, 2004, the Company recorded net
income totaling $1,690 thousand, representing an increase of $798 thousand or
89.5% over net income of $892 thousand for the same period in 2003. The increase
resulted primarily from an increase in net interest income of $2,221 thousand
combined with a decrease in noninterest income of $378 thousand, an increase in
noninterest expense of $419 thousand and an increase in the provision for income
tax of $377 thousand. Year to date diluted earnings per share for the first nine
months of 2004 totaled $0.88, an increase of 87% over the prior year per diluted
share earnings, which totaled $0.47.
Return on average equity for the three and nine month periods ended September
30, 2004 totaled 8.58% and 10.78%, respectively, compared to 3.86% and 6.10% for
the same periods in 2003. Return on average assets during the same periods
totaled 0.55% and 0.69% in 2004 compared to 0.27% and 0.44% in 2003,
respectively.
Included in net income during the nine month period ended September 30, 2004
were gains on the sale of investment securities totaling $86 thousand. During
the same period in 2003, gains on the sale of investment securities totaled $88
thousand, a reduction of $2 thousand from the prior year. Additionally, included
in noninterest expense during 2004 are year-to-date costs totaling $325,000
associated with responding to the actions initiated by three dissident
directors.
CHANGES IN FINANCIAL CONDITION
Consolidated total assets as of September 30, 2004 totaled $333 million, which
represents an increase of $11,452 thousand, or 3.6% when compared to December
31, 2003. The increase in total assets was attributable primarily to a $11,158
thousand increase in short term borrowings. Total gross loans increased $35,405
thousand, or 19.4% during the first nine months of 2004. The loan growth was
funded by a decrease of $25,249, or 28.0%, in the investment portfolio due to
prepayments of mortgage-backed securities (including CMOs) of $15,914 thousand
and proceeds from the sale of securities of $9,100 thousand and an increase of
$11,158 thousand, or 79.1%, in short term borrowings.
The net increase in gross loans is the result of increases of $32,057 thousand,
or 39.6%, $4,641 thousand, or 15.3%, $2,378 thousand, or 14.9%, in real estate
loans, commercial loans and construction loans, respectively, combined with
decreases of $2,010 thousand, or 6.5%, $876 thousand, or 4.6%, $420 thousand, or
18.5%, and $365 thousand, or 11.9%, in SBA loans, agricultural loans, consumer
loans and loans held for sale, respectively.
During the first nine months of 2004, non-interest bearing deposits increased
$3,764 thousand, or 7.9% and interest bearing deposits decreased $5,936
thousand, or 2.6%. The year-to-date deposit decrease consists of increases of
$3,764 thousand, or 7.9%, $2,831 thousand, or 6.2%, and $1,173 thousand, or 2.1%
in non-interest bearing, savings accounts and NOW accounts combined with
decreases of $9,258 thousand, or 12.6%, and $682 thousand, or 1.2%, in
certificates of deposit and money market accounts, respectively.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses (the "allowance") is established through a
provision for possible loan losses charged to expense. The allowance at
September 30, 2004 decreased by $298 thousand, or 9.1%, when compared to
December 31, 2003 as a result of a provision for $561 thousand combined with net
charge-offs of $859 thousand. During the second and third quarters of 2004, the
Company charged-off $879 thousand in loans, which were primarily related to
nonperforming agricultural loans of a single borrower. During the first nine
months of 2004, nonperforming loans decreased by $2,733 thousand, to $1,147
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 which, in the opinion of management, renders the loans well
collateralized. Management believes that the allowance at September 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.
10
The following tables depict activity in the allowance for loan losses and
allocation of reserves for the nine months ended September 30, 2004 and year
ended December 31, 2003, respectively:
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Nine months Year
Ended Ended
9/30/04 12/31/03
------- --------
Balance at beginning of period $ 3,262 3,057
Charge-offs:
Commercial (853) (88)
Consumer (26) (55)
------- -------
Total charge-offs (879) (143)
Recoveries:
Commercial 16 27
Consumer 4 9
------- -------
Total recoveries 20 36
------- -------
Net charge-offs (859) (107)
Provision charged to operations 561 312
------- -------
Balance at end of period $ 2964 $ 3,262
======= =======
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
9/30/04 9/30/04 12/31/03 12/31/03
Loan Category Amount % of Loans Amount % of Loans
- ------------- ------- --------- ------- ---------
Commercial and other real estate $ 2,031 90.72% $ 2,381 89.99%
Real estate construction 890 8.43% 828 8.76%
Installment and other 43 0.85% 53 1.25%
------- --------- --------- --------
$ 2,964 100.00% $ 3,262 100.00%
======= ======== ========= =======
INVESTMENTS
Investment securities decreased $25,249 thousand, or 28.0%, from December 31,
2003 to September 30, 2004. This decrease resulted primarily from prepayments of
mortgage-backed securities (including CMOs) totaling $15,914 thousand and sales
of investment securities totaling $9,100 thousand. The Company realized gross
gains totaling $86 thousand on the sale of investment securities during the
first nine months of 2004 which is a decrease of $2 thousand when compared to
the same period of 2003.
STOCKHOLDERS' EQUITY
Consolidated stockholders' equity increased $1,951 thousand, from $19,967
thousand at December 31, 2003 to $21,918 thousand at September 30, 2004.
Consolidated stockholders' equity represented 6.58% and 6.20% of consolidated
assets at September 30, 2004 and December 31, 2003, respectively. The increase
in equity during the first nine months of 2004 resulted primarily from net
income of $1,690 thousand for the nine months ended September 30, 2004 and $315
thousand from the exercise of stock options.
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 nine months of 2004, 9,375
shares of stock were repurchased at an average cost of $17.71 per share totaling
$166 thousand.
The total risk-based capital ratio for the Company's wholly owned subsidiary,
Bank of Lodi, was 10.18% at September 30, 2004 compared to 10.68% at December
31, 2003.
11
CHANGES IN RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2004
SUMMARY OF EARNINGS PERFORMANCE
------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
2004 2003 2004 2003
---------- ---------- ------------ ----------
Net income (in thousands) $ 445 $ 191 $ 1,690 $ 892
Basic net income per share $ 0.25 $ 0.11 $ 0.94 $ 0.50
Diluted net income per share $ 0.23 $ 0.10 $ 0.88 $ 0.47
Return on average assets 0.55% 0.27% 0.69% 0.44%
Return on average equity 8.58% 3.86% 10.78% 6.10%
Average equity to average assets 6.37% 6.93% 6.42% 7.15%
Net income for the three months ended September 30, 2004 increased $254
thousand, or 133.0%, compared to the same period of 2003. Net interest income
increased $1,194 thousand, or 48.8% as a result of a $89 thousand decrease in
interest expense combined with a $1,105 thousand increase in interest income.
The provision for loan losses totaled $326 thousand representing an increase of
$326 thousand when compared to the same period in 2003. Noninterest income
decreased $151 thousand, or 13.8%, while noninterest expense increased $329
thousand, or 9.9%. The provision for income taxes increased $134 thousand. Net
income for the nine months ended September 30, 2004 increased $798 thousand, or
89.5%, compared to the same period of 2003. Net interest income increased $2,221
thousand, or 27.9% as a result of a $36 thousand decrease in interest expense
combined with a $2,185 thousand increase in interest income. The provision for
loan losses totaled $561 thousand representing an increase of $249 thousand, or
79.8% when compared to the first nine months of 2003. Noninterest income
decreased $378 thousand, or 11.2%, while noninterest expense increased $419
thousand, or 4.3%. The provision for income taxes increased $377 thousand, or
133.7%. The return on average equity for the three and nine months ended
September 30, 2004 was 8.58% and 10.78% compared to 3.86% and 6.10% for the same
periods of 2003.
12
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 SEPTEMBER 30,
-----------------------------------------------------------------------------------------
2004 2003
-------------------------------------------- -------------------------------------------
Average Income/ Yield(1) Average Income/ Yield (1)
Dollars In Thousands Balance Expense Balance Expense
----------- ------------ --------- ------------ ----------- ----------
EARNING ASSETS:
Investment securities (1)(2) $ 69,462 $ 615 3.55% $ 68,213 $ 175 1.03%
Federal funds sold 6,191 25 1.62% 9,938 25 1.01%
Loans (2)(3) 216,851 3,661 6.77% 171,891 2,996 6.99%
----------- ------------ ---------- ------------- ------------ ----------
TOTAL EARNING ASSETS $ 292,504 $ 4,301 5.90% 250,042 $ 3,196 5.13%
=========== ============ ========= ============= ============ ==========
LIABILITIES:
Non-interest bearing deposits $ 51,920 $ -- $ 43,769 $ --
Savings, money market, &
NOW deposits 160,889 251 0.63% 137,127 290 0.85%
Time deposits 64,392 248 1.54% 76,948 390 2.03%
Other borrowings 27,644 162 2.35% 8,541 70 3.29%
----------- ------------ --------- ------------- ------------ ---------
TOTAL LIABILITIES $ 304,845 $ 661 0.87% $ 266,385 $ 750 1.13%
=========== ============ ========= ============= ============ ==========
NET INTEREST SPREAD 5.03% 4.00%
========= ==========
----------- ------------ --------- ------------- ------------ ----------
Earning Income/ Earning Income/
Assets Expense Yield Assets Expense Yield
----------- ------------ --------- ------------- ------------ ---------
Yield on average earning $ 292,504 $ 4,301 5.90% $ 250,042 $ 3,196 5.13%
assets
Cost of funding average
earning assets $ 292,504 661 (0.91%) $ 250,042 750 (1.20%)
------------ --------- ------------ -----------
NET INTEREST MARGIN $ 292,504 $ 3,640 4.99% $ 250,042 $ 2,446 3.93%
============ ========= ============ ===========
(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 third quarter of 2004 increased $1,194 thousand, or
48.8%, 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 $617 thousand while interest rates resulted in an increase in
net interest income totaling $577 thousand when comparing the third quarter of
2004 to the same period last year.
Average earning assets increased $42,462 thousand during the third quarter of
2004 as compared to the third quarter of 2003. Average loans increased $44,960
thousand and investment securities increased $1,249 thousand while federal funds
sold decreased $3,747 thousand. The increase in the volume of average earning
assets during the third quarter of 2004 as compared to the same period of 2003
resulted in an increase in interest income totaling $777 thousand. Interest
rates on average earning assets increased 77 basis points (from 5.13% to 5.90%)
when compared to the same period in 2003, resulting in an increase in interest
income totaling $328 thousand.
13
Average liabilities increased $38,460 thousand during the third quarter of 2004
as compared to the same period last year. The increase consists of $16,795
thousand, $8,151 thousand, $3,655 thousand and $3,312 thousand in money market
accounts, non-interest bearing deposits, NOW, and savings accounts,
respectively. Certificates of deposit decreased $12,556 thousand. Other
borrowings increased $19,103. The increase in average liabilities resulted in an
increase in interest expense totaling $161 thousand. The cost of interest
bearing liabilities decreased 26 basis points (from 1.13% to 0.87%) resulting in
a reduction in interest expense totaling $250 thousand.
-------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------------
2004 2003
------------------------------------------- -------------------------------------------
Average Income/ Yield (1) Average Income/ Yield (1)
Dollars In Thousands Balance Expense Balance Expense
------------ ------------- --------- ------------- ------------ ----------
EARNING ASSETS:
Investment securities (1)(2) $ 79,164 $ 1,996 3.36% $ 47,359 $ 691 1.95%
Federal funds sold 6,175 54 1.16% 10,803 94 1.16%
Loans (2)(3) 202,280 10,168 6.70% 170,133 9,248 7.27%
----------- ------------ --------- ------------- ------------ ----------
TOTAL EARNING ASSETS $ 287,619 $ 12,218 5.66% $ 228,295 $ 10,033 5.88%
=========== ============ ========= ============= ============ ==========
LIABILITIES:
Non-interest bearing deposits $ 48,680 $ $ 38,030 $
Savings, money market, &
NOW deposits 159,333 842 0.70% 129,121 788 0.81%
Time deposits 68,308 812 1.58% 67,005 1,092 2.18%
Other borrowings 24,311 396 2.17% 7,408 206 3.72%
----------- ------------ --------- ------------- ------------ ----------
TOTAL LIABILITIES $ 300,632 $ 2,050 0.91% $ 241,563 $ 2,086 1.15%
=========== ============ ========= ============= ============ ==========
NET INTEREST SPREAD 4.75% 4.73%
========= ==========
----------- ------------ --------- ----------- ------------ ----------
Earning Income/ Earning Income/
Assets Expense Yield Assets Expense Yield
----------- ------------ --------- ------------- ------------ ----------
Yield on average earning $ 287,619 $ 12,218 5.66% $ 228,295 $ 10,033 5.88%
assets
Cost of funding average
earning assets $ 287,619 $ 2,050 (0.95)% $ 228,295 $ 2,086 (1.23)%
------------ --------- ------------ ----------
NET INTEREST MARGIN $ 287,619 $ 10,168 4.71% $ 228,295 $ 7,947 4.65%
============ ========= ============ ==========
(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.
14
Net interest income for the first nine months of 2004 increased $2,221 thousand,
or 27.9%, 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 $1,436 thousand while interest rates resulted in an
increase in net interest income totaling $785 thousand when comparing the first
nine months of 2004 to the same period last year.
Average earning assets increased $59,324 thousand during the nine month period
ended September 30, 2004 as compared to the same period of 2003. Average loans
increased $32,147 thousand and investment securities increased $31,805 thousand
while federal funds sold decreased $4,628 thousand. The increase in the volume
of average earning assets during the first nine months of 2004 as compared to
the same period of 2003 resulted in an increase in interest income totaling
$2,179 thousand. Changes in interest rates on average earning assets resulted in
an increase in interest income totaling $6 thousand when compared to the same
period of 2003.
Average liabilities increased $59,069 thousand during the nine month period
ended September 30, 2004 as compared to the same period last year. The increase
consists of $20,991 thousand, $10,650 thousand, $4,993 thousand, $4,229 thousand
and $1,303 thousand in money market accounts, non-interest bearing deposits, NOW
accounts, savings accounts and certificates of deposit, respectively. Other
borrowings increased $16,903. The increase in average liabilities resulted in an
increase in interest expense totaling $743 thousand. As a result of the
declining interest rate environment, the cost of interest bearing liabilities
decreased 25 basis points (from 1.15% to 0.91%) resulting in a reduction in
interest expense totaling $779 thousand.
Interest income is also affected by nonaccrual loan activity. Nonaccrual loans
at September 30, 2004 and September 30, 2003 totaled $1,147 thousand and $2,360
thousand, respectively. Interest forgone on nonaccrual loans totaled
approximately $69 thousand and $244 thousand for the three and nine months ended
September 30, 2004 compared to $76 thousand and $251 thousand for the same
periods of 2003, respectively.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three and nine months ended September 30,
2004 was $326 thousand and $561 thousand compared with $0 thousand and $312
thousand for the three and nine months ended September 30, 2003, an increase of
$326 thousand and $249 thousand. As of September 30, 2004 the allowance for loan
losses was $2,964 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
September 30, 2004, nonperforming loans totaled $1,147 thousand or 0.5% of total
loans compared to $3,880 thousand or 2.1% at December 31, 2003. No assurance can
be given that nonperforming loans will not increase or that the allowance for
loan losses will be adequate to cover losses inherent in the loan portfolio.
NONINTEREST INCOME
Noninterest income for the three and nine months ended September 30, 2004
decreased by $151 thousand, or 13.8%, and $378 thousand, or 11.2%, 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 $211 thousand and
$490 thousand when compared to the three and nine months ended September 30,
2003. During the third quarter of 2004, the Company sold $4,955 thousand of
investment securities for a gain of $21 thousand. During the first nine months
of 2004, the Company realized gains on the sale of investment securities
totaling $86 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 nine months of 2004 and 2003,
respectively.
Income from the sale and servicing of loans totaled $209 thousand during the
third quarter of 2004, which decreased by $239 thousand, or 53.3%, compared to
the prior year quarter. During the first nine months of 2004, income from the
sale and servicing of loans totaled $774 thousand, a decrease of $541 thousand
or 41.1% 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
$17 thousand and $67 thousand, during the third 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 6.5% during the third quarter of
2004 as compared to 5.9% during the second quarter of 2003. For the first nine
months of 2004, the tax effective yield totaled 7.6% as compared to 6.8% during
the same period in 2003.
15
NONINTEREST EXPENSE
Noninterest expense increased $329 thousand, or 9.9%, and $419 thousand, or
4.3%, when comparing the three and nine month periods ended September 30, 2004
to the same periods of 2003. When comparing the third quarter of 2004 to 2003,
personnel expense increased $221 thousand, or 12.6% primarily as a result of the
addition of the Sacramento branch in September 2003. When comparing the nine
month periods ended September 30, 2004 to 2003, personnel expense increased $239
thousand or 4.5%. This increase is primarily due to addition of the Sacramento
branch in September 2003 combined with a decrease of $93 thousand in commissions
due to the decreased volume of residential mortgage activity. When comparing the
three and nine month periods ended September 30, 2004, occupancy expense
increased $75 thousand, or 26.0% and $241 thousand, or 30.3%, 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
third quarter of 2004, equipment expense decreased $7 thousand, or 3.4%, when
compared to the third quarter of 2003. Equipment expense during the first nine
months of 2004 decreased $66 thousand, or 10.2% when compared to 2003. Decreases
in both periods are due to a decrease in depreciation expense. For the three and
nine month periods ended September 30, 2004, other noninterest expense increased
$40 thousand, or 3.7% and $5 thousand, or 0.2%, respectively, when compared to
the same periods of 2003.
Included in other noninterest expense are costs associated with responding to
the disruptive actions initiated by three dissident directors. During the three
and nine month periods ended September 30,2004 these costs totaled $130 thousand
and $325 thousand compared to $64 thousand and $158 thousand for the same
periods of 2003. On October 27, 2004, the dissident directors signed a
settlement and standstill agreement in which they agreed to support the proposed
merger of the bank with Placer Sierra Bancshares. The Company agreed to make
certain payments to the three directors and the parties agreed to take other
actions described in the agreement, including, if a 2004 annual meeting is held,
nominating the three directors as part of management's slate of directors. The
three directors and the Company also agreed to a mutual release of any legal
liability to the other arising out of the matters described in the standstill
agreement. The Company had filed the standstill agreement with the SEC as an
exhibit to an 8-K report and mailed it to the Company's shareholders and the
agreement is incorporated by reference as an exhibit to this report
INCOME TAXES
- -------------
In the three months ended September 30, 2004, taxes increased $134 thousand to
$147 thousand from $13 thousand for the same period in 2003. The Company's
effective tax rate for the three months ended September 30, 2004 was 24.8%,
compared to 6.4% for the same period in 2003. For the first nine months of 2004,
the provision for income taxes totaled $659 thousand as compared to $282
thousand during the same period last year. For the first nine months of 2004,
the Company's effective tax rate was 28.1% as compared to 24.0% for the same
period in 2003.
OFF-BALANCE SHEET COMMITMENTS
- ------------------------------
The following table shows the distribution of the Company's undisbursed loan
commitments at the dates indicated.
(IN THOUSANDS) September 30, 2004 December 31, 2003
- ---------------------------------------------------------------------------
Commitments to extend credit $ 57,149 49,643
===========================================================================
Standby letters of credit $ 312 488
16
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 September 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
increased $105 thousand in 2004.
As of September 30, 2004, the Bank's capital ratios exceeded applicable
regulatory requirements. The following tables present the capital ratios for the
Bank, compared to the standards for well-capitalized depository institutions, as
of September 30, 2004 (amounts in thousands except percentage amounts).
Actual
------------------------------------- Well Capitalized Minimum Capital
Capital Ratio Ratio Requirement Requirement
-------- ------ ----------------- ---------------
Leverage $ 23,468 7.2% 5.0% 4.0%
Tier 1 Risk-Based $ 23,468 9.0% 6.0% 4.0%
Total Risk-Based $ 26,433 10.2% 10.0% 8.0%
RECENT ACCOUNTING PRONOUNCEMENTS
- ---------------------------------
In December 2003, FASB issued Statement No. 132 (revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits. This Statement
prescribes employers' disclosures about pension plans and other postretirement
benefit plans; it does not change the measurement or recognition of those plans.
The Statement retains and revises the disclosure requirements contained in the
original Statement 132. It also requires additional disclosures about the
assets, obligations, cash flows, and net periodic benefit cost of defined
benefit plans and other postretirement benefit plans. The Statement generally is
effective for fiscal years ending after December 15, 2003. The Company currently
has postretirement benefit plans that are within the scope of this Statement.
Management has done an analysis of the impact of this accounting pronouncement
and this has been disclosed in the Notes To Unaudited Condensed Consolidated
Financial Statements entitled "RETIREMENT PLANS".
In March, 2004, the Emerging Issues Task Force ("EITF") Issue No. 03-1 "The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments" consensus was published. Issue No. 03-1 contained new guidance
effectively codifying the provisions of SEC Staff Accounting Bulletin No. 59 and
creates a new model that calls for new judgments and additional evidence
gathering. The Company does not expect the adoption of this EITF to have a
material impact on the Company's Consolidated Financial Statements.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
While there are several varieties of market risk, the market risk material to
the Company and the Bank is interest rate risk. Within the context of interest
rate risk, market risk is the risk of loss due to changes in market interest
rates that have an adverse effect on net interest income, earnings, capital or
the fair value of financial instruments. Exposure to this type of risk is a
regular part of a financial institution's operations. The fundamental activities
of making loans, purchasing investment securities, and accepting deposits
inherently involve exposure to interest rate risk. The Company monitors the
repricing differences between assets and liabilities on a regular basis and
estimates exposure to net interest income, net income, and capital based upon
assumed changes in the market yield curve. As of and for the nine months ended
September 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 September 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 September 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 September 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 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 referred the
matter to independent Special Litigation Committees composed
of two disinterested 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. While the
Special Litigation Committees were performing their
investigations, the matter was settled, with the sole monetary
consideration being a payment of $25,000 towards the
plaintiff's attorneys' fees. The Special Litigation Committees
subsequently completed their investigations and recommended
that the matter be dismissed. On October 15, 2004, the court
entered an order dismissing plaintiff's complaint with
prejudice.
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 consolidated financial position, results of
operations, or liquidity.
18
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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 September 30, 2004.
Approximate Dollar
Total Number Value of Shares
of Shares That
Purchased as Part May Yet Be
of Purchased Under
Total Number Average Publicly Announced the Plans or
of Shares Price Paid Plans or Programs Programs(1)
Period Purchased Per Share (1) (in thousands)
- --------------------------- -------------- -------------- ------------------- ---------------------
Month #1 -- -- -- $1,296
(July 1, 2004 to
July 31, 2004)
Month #2 484 $ 15.59 484 $1,288
(August 1, 2004 to
August 31, 2004)
Month #3 -- -- -- $1,288
(September 1, 2004 to
September 30, 2004)
-------------- -------------- -------------------
Total 484 $ 15.59 484
============== ============== ===================
(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
$1,168 thousand as of September 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
On November 3, 2004, the Company held a special meeting of
shareholders to vote on the approval of the proposed merger
with Placer Sierra Bancshares. The merger was approved by the
following vote:
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
1,378,868 50,746 6,349
(75.6% of shares (2.8% of shares (0.3% of shares
outstanding) outstanding) outstanding)
The proposed merger is expected to close by the end of 2004 or
early 2005.
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.
19
ITEM 6. EXHIBITS
EXHIBITS
The exhibit list required by this item is
incorporated by reference to the Index to Exhibits
filed as part of this report.
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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: NOVEMBER 12, 2004 /S/ ALLEN R. CHRISTENSON
----------------- ------------------------
Allen R. Christenson
Executive Vice President
Chief Financial Officer
(Principal Accounting and Financial Officer)
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INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
10 Settlement and Standstill Agreement dated as of October 27, 2004, by
First Financial Bancorp, Bank of Lodi, N.A. , Angelo Anagnos, Steven
Coldani, Kevin Van Steenberge and Placer Sierra Bancshares
(incorporated by reference to Exhibit 10 to Current Report on Form 8-K
dated October 27, 2004)
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
22