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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission File Number : 0-12499
First Financial Bancorp
(Exact name of registrant as specified in its charter)
California 94-28222858
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701 South Ham Lane, Lodi, California 95242
(Address of principal executive offices) (Zip Code)
(209)-367-2000
(Registrant's telephone number, including area code)
NA
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
As of March 31, 1999 there were 1,379,817 shares of Common Stock, no par
value, outstanding.
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<PAGE>
FIRST FINANCIAL BANCORP
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
Page
----
PART I
Item 1. Financial Statements ............................................. 1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk ....... 14
PART II
Item 1. Legal Proceedings ................................................ 14
Item 2. Changes in Securities ............................................ 14
Item 3. Defaults Upon Senior Securities .................................. 14
Item 4. Submission of Matters to a Vote of Security Holders .............. 14
Item 5. Other Information ................................................ 14
Item 6. Exhibits and Reports on Form 8-K ................................. 14
i
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands except share amounts)
Mar. 31 Dec. 31
Assets 1999 1998
-------- --------
Cash and due from banks $ 7,551 $ 7,329
Federal funds sold 5,100 4,800
Investment securities, at fair value 46,562 45,647
Loans 90,563 92,642
Less allowance for loan losses (Note 3) 1,666 1,564
-------- --------
Net loans 88,897 91,078
Bank premises and equipment, net 7,229 7,261
Accrued interest receivable 1,064 1,353
Other assets 6,970 6,932
-------- --------
$163,373 $164,400
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Deposits
Noninterest bearing $ 18,858 $ 18,535
Interest bearing 129,483 131,009
-------- --------
Total deposits 148,341 149,544
Accrued interest payable 335 389
Other liabilities 527 610
-------- --------
Total liabilities 149,203 150,543
Stockholders' equity:
Common stock - no par value; authorized 9,000,000
shares, issued and outstanding in 1999 and 1998,
1,379,817 and 1,349,292 shares 7,790 7,584
Retained earnings 6,176 5,971
Accumulated other comprehensive income 204 302
-------- --------
Total stockholders' equity 14,170 13,857
-------- --------
$163,373 $164,400
======== ========
1
<PAGE>
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands except per share amounts)
Three Months Ended March 31,
1999 1998
------ ------
(Dollar amounts in thousands,
except per share amounts)
Interest income:
Loans, including fees $2,246 $1,686
Investment securities:
Taxable 580 900
Exempt from Federal taxes 52 64
Federal funds sold 80 99
------ ------
Total interest income 2,958 2,749
Interest expense:
Deposit accounts 938 965
------ ------
Net interest income 2,020 1,784
Provision for loan losses 100 30
------ ------
Net interest income after provision
for loan losses 1,920 1,754
Noninterest income:
Service charges 208 216
Premiums and fees from SBA and mortgage operations 216 194
Miscellaneous 61 6
------ ------
Total noninterest income 485 416
Noninterest expense:
Salaries and employee benefits 932 903
Occupancy 199 153
Equipment 156 135
Other 702 643
------ ------
Total noninterest expense 1,989 1,834
------ ------
Income before provision for income taxes 416 336
Provision for income taxes 143 106
------ ------
Net income $ 273 $ 230
====== ======
Net income per share:
Basic (Note 2) $ 0.20 $ 0.17
====== ======
Diluted (Note 2) $ 0.19 $ 0.16
====== ======
2
<PAGE>
<TABLE>
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended March 31
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 273 $ 230
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Decrease in loans held for sale (2,164) (610)
(Decrease) increase in deferred loan income (11) 31
Provision for other real estate owned losses -- 6
Depreciation and amortization 266 352
Provision for loan losses 100 30
Provision for deferred taxes -- (14)
Decrease in accrued interest receivable 289 431
Decrease in accrued interest payable (54) (24)
Decrease in other liabilities (83) (231)
Increase in cash surrender value of life insurance (29) --
(Increase) decrease in other assets (10) 123
-------- --------
Net cash (used in) provided by operating activities (1,423) 324
Cash flows from investing activities:
Proceeds from maturity of available-for-sale securities 6,313 9,138
Proceeds from sale of available-for-sale securities 750 --
Purchases of available-for-sale securities (8,150) (4,002)
Net decrease in loans made to customers 4,256 (275)
Purchases of bank premises and equipment (159) (221)
-------- --------
Net cash provided by investing
activities 3,010 4,640
Cash flows from financing activities:
Net (decrease) increase in deposits (1,203) 1,670
Dividends paid (68) (67)
Proceeds from issuance of common stock 206 --
-------- --------
Net cash (used in) provided by financing activities (1,065) 1,603
Net increase in cash and cash equivalents 522 6,567
Cash and cash equivalents at beginning of period 12,129 12,083
-------- --------
Cash and cash equivalents at end of period $ 12,651 $ 18,650
======== ========
</TABLE>
3
<PAGE>
<TABLE>
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands except share amounts)
Three Months Ended March 31, 1998
<CAPTION>
Accumulated
Common Common Other
Stock Stock Comprehensive Retained Comprehensive
Description Shares Amounts Income Earnings Income Total
- ------------------------------------ ----------- ------------ --------------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 1,332,842 $ 7,455 5,188 218 12,861
Comprehensive income:
Net income $ 230 230 230
---------------
Other comprehensive loss:
Unrealized holding losses
arising during the current
period, net of tax
effect of $20 (27)
---------------
Total other
comprehensive loss (27) (27) (27)
---------------
Comprehensive income $ 203
===============
Cash dividend declared (67) (67)
----------- ------------ --------- ---------------- ------------
Balance at March 31, 1998 1,332,842 $ 7,455 5,351 191 12,997
=========== ============ ========= ================ ============
Three Months Ended March 31, 1999
Accumulated
Common Common Other
Stock Stock Comprehensive Retained Comprehensive
Description Shares Amounts Income Earnings Income Total
- ------------------------------------ ----------- ------------ --------------- --------- ---------------- ------------
Balance at December 31, 1998 1,349,292 $ 7,584 5,971 302 13,857
Comprehensive income:
Net income $ 273 273 273
---------------
Other comprehensive loss:
Unrealized holding losses
arising during the current
period, net of tax
effect of $48 (98)
---------------
Total other
comprehensive loss (98) (98) (98)
---------------
Comprehensive income $ 175
===============
Options exercised 30,525 206 206
Cash dividend declared (68) (68)
----------- ------------ --------- ---------------- ------------
Balance at March 31, 1999 1,379,817 $ 7,790 6,176 204 14,170
=========== ============ ========= ================ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and December 31, 1998
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of First Financial Bancorp (the
Company) and its subsidiaries, Bank of Lodi, N.A., (the Bank) and Western
Auxiliary Corporation (WAC) conform with generally accepted accounting
principles and prevailing practices within the banking industry. In
preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenue and expense
for the period. Actual results could differ from those estimates applied in
the preparation of the consolidated financial statements. The following is
a description of new accounting standards adopted during the current
period.
Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
134, Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise beginning January 1, 1999. SFAS No. 134 requires that after the
securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent to
sell or hold those investments. Adoption of this standard did not have a
material impact on the financial statements of the company.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
The Company adopted Statement of Position (SOP) 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use beginning
January 1, 1999. SOP 98-1 provides guidance on accounting for the costs of
computer software developed or obtained for internal use. It specifies that
computer software meeting certain characteristics be designated as
internal-use software and sets forth criteria for expensing, capitalizing,
and amortizing certain costs related to the development or acquisition of
internal-use software. Adoption of this standard did not have a material
impact on the financial statements of the company.
Reporting on the Costs of Start-Up Activities
The Company adopted SOP 98-5, Reporting on the Costs of Start-Up Activities
beginning January 1, 1999. SOP 98-5 provides guidance on the financial
reporting of start-up costs and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred.
Adoption of this standard did not have a material impact on the financial
statements of the company.
<TABLE>
(2) Weighted Average Shares Outstanding
Basic and diluted earnings per share for the three months ended March 31,
1999 and 1998 were computed as follows:
<CAPTION>
Income Shares Per-Share
Three months ended March 31, 1999 (numerator) (denominator) Amount
-------------------------------------------------------- ------------------ ------------------- ----------
<S> <C> <C> <C>
Basic earnings per share $ 273,000 1,350,982 $ .20
Effect of dilutive securities -- 61,449 --
------------------ -------------------
Diluted earnings per share $ 273,000 1,412,432 $ .19
================== ===================
Income Shares Per-Share
5
<PAGE>
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and December 31, 1998 (Cont.)
Three months ended March 31, 1998 (numerator) (denominator) Amount
-------------------------------------------------------- ------------------ ------------------- ----------
Basic earnings per share $ 230,000 1,332,842 $ .17
Effect of dilutive securities -- 88,508 --
------------------ -------------------
Diluted earnings per share $ 230,000 1,421,350 $ .16
================== ===================
</TABLE>
<TABLE>
(3) Allowance for Loan Losses
<CAPTION>
3/31/99 12/31/98
----------- ---------
<S> <C> <C>
Balance at beginning of period $ 1,564,000 1,313,000
Loans charged off (8,000) (132,000)
Recoveries 10,000 133,000
Provisions charged to operations 100,000 250,000
----------- ---------
Balance at end of period $ 1,666,000 1,564,000
=========== =========
</TABLE>
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Cautionary Statement for the Purposes of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995.
The Company is including the following cautionary statement to take advantage of
the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of
1995 for any forward-looking statement made by, or on behalf of, the Company.
The factors identified in this cautionary statement are important factors (but
not necessarily all important factors) that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, the Company.
Where any such forward-looking statement includes a statement of the assumptions
of bases underlying such forward-looking statement, the Company cautions that,
while it believes such assumptions or bases to be reasonable and makes them in
good faith, assumed facts or bases almost always vary from actual results, and
the differences between assumed facts or bases and actual results can be
material, depending on the circumstances. Where, in any forward-looking
statement, the Company expresses an expectation or belief as to future results,
such expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result, or be achieved or accomplished.
Taking into account the foregoing, such risks and uncertainties include, but are
not limited to, the following factors: competitive pressure in the banking
industry; changes in the interest rate environment; general economic conditions,
either nationally or regionally becoming less favorable than expected and
resulting in, among other things, a deterioration in credit quality and an
increase in the provision for possible loan losses; changes in the regulatory
environment; changes in business conditions; volatility of rate sensitive
deposits; operational risks, including data processing system failures or fraud;
asset/liability matching risks and liquidity risks; and changes in the
securities markets.
In addition, the dates on which the Company believes the Year 2000 project will
be completed are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved, or that there will not be a delay in, or increased costs associated
with, the implementation of the Year 2000 project. Specific factors that might
cause differences between the estimates and actual results include, but are not
limited to, the availability and cost of trained personnel, ability to locate
and correct all computer related issues, timely responses to and corrections by
third-parties and suppliers, the availability to implement interfaces between
new systems and the systems not being replaced, and similar uncertainties. Due
to the general uncertainty inherent in the Year 2000 problem, resulting in part
from the uncertainty of the Year 2000 readiness of third-parties, the Company
cannot ensure its ability to timely and cost-effectively resolve problems
associated with the Year 2000 issues that may affect its operations and
business, or expose it to third-party liability.
The following discussion addresses information pertaining to the financial
condition and results of operations of the Company that may not be otherwise
apparent from a review of the consolidated financial statements and related
footnotes. It should be read in conjunction with those statements and notes
found on pages 1 through 6, as well as other information presented throughout
this report.
Changes in Financial Condition
Consolidated total assets at March 31, 1999 were down approximately $1 million
from December 31, 1998, reflecting a similar decrease in deposits. While
non-interest bearing deposits grew by $323,000 or 2% during the first quarter,
interest bearing deposits decreased $1.5 million or 1%. Such a decrease in
deposits is consistent with historical trends which reflect a seasonal decline
in deposits during the first quarter that is typically associated with the local
agricultural industry.
7
<PAGE>
The loan portfolio decreased by 2%, or $2.1 million, from December 31, 1998 to
March 31, 1999. The decrease reflects the sale of approximately $2.6 million in
mortgage loans which were held for sale to the secondary market at December 31,
1998. At March 31, 1999, the Bank had $455,000 in mortgage loans held for sale
to the secondary market. The portion of the commercial loan portfolio consisting
of agriculture lines of credit started to increase towards the end of 1998 and
continued throughout the first quarter of 1999. Agriculture lines of credit are
cyclical in nature as historically borrowers draw on their lines of credit in
the Spring. It is anticipated that the agriculture lines of credit will peak to
$12 million in the Spring before payoffs occur in the Fall. At March 31, 1999,
agricultural lines of credit were approximately $7.8 million. Real estate and
Small Business Administration ("SBA") loans increased 3% and 1%, respectively,
from the end of 1998. Commercial (excluding agriculture loans) construction,
mortgage and consumer loans decreased 6%, 5%, 13% and 7%, respectively, during
the first quarter.
The allowance for loan losses (the "allowance") is established through a
provision for possible loan losses charged to expense. The allowance at March
31, 1999 was in excess of the December 31, 1998 allowance by $102 thousand, or
0.77%, as a result of a provision for $100 thousand and net recoveries of $2
thousand. Nonperforming loans decreased by $132 thousand, to $305 thousand from
December 31, 1998 to March 31, 1999, and the allowance for loan losses to
nonperforming loan coverage ratio increased to 5.46 times from 3.56 times. Total
portfolio delinquency at March 31, 1999 was 1.46%, compared to 1.40% at December
31, 1998. Management believes that the allowance at March 31, 1999 is adequate
to absorb known and reasonably estimated loan losses. However, there can be no
assurances that future economic events may negatively impact the Bank's
borrowers, thereby causing loan losses to exceed the current allowance. The
following tables depict activity in the allowance for loan losses and allocation
of reserves for and at the three and twelve months ended March 31, 1999 and
December 31, 1998, respectively:
Analysis of the Allowance for Loan
Losses
3/31/99 12/31/98
--------- --------
Balance at beginning of period $ 1,564 $ 1,313
Charge-offs:
Commercial -- (67)
Real estate -- (25)
Consumer (8) (40)
--------- ---------
Total charge-offs (8) (132)
Recoveries:
Commercial 8 112
Real estate -- --
Consumer 2 21
--------- ---------
Total recoveries 10 133
--------- ---------
Net recoveries 2 1
Provision charged to operations 100 250
--------- ---------
Balance at end of period $ 1,666 $ 1,564
========= =========
Allocation of the Allowance for Loan Losses
3/31/99 3/31/99 12/31/98 12/31/98
Loan Category Amount % of Loans Amount % of Loans
- ------------- ------ ---------- ------ ----------
Commercial $ 235 62.33% 240 63.16%
Real Estate 140 37.14% 129 33.95%
Consumer 2 0.53% 11 2.89%
Unallocated 1,289 N/A 1,184 N/A
-------- ------- ------- -------
$ 1,666 100.00% 1,564 100.00%
======== ======= ======= =======
8
<PAGE>
Investments
Investment in bonds decreased by $6.5 million, or 24%, from December 31, 1998 to
March 31, 1999. The decline represents matured bonds and securities
contractually called by issuers. As a result of the Bank's projections for the
funding of loans, the matured and called bonds over the first quarter of 1999
were reinvested primarily money market mutual funds in order to avoid market
risk over the short-term before funding loans. As a result, the balance in money
market mutual funds represents an increase of $7.6 million or 43% from December
31, 1998. At March 31, 1999, the Bank held approximately $4.5 million in
callable U.S. Agency securities with an average maturity, months to first call,
and average yield of 9 years, 6 months, and 6.99%, respectively.
Equity
Consolidated equity increased by $313 thousand from December 31, 1998 to March
31, 1999. Consolidated equity represented 8.67% and 8.43% of consolidated assets
at March 31, 1999 and December 31, 1998, respectively. Stock option exercises
during the three months ended March 31, 1999 increased equity by $206 thousand.
The increase in equity from earnings of $273 thousand for the three months ended
March 31, 1999 exceeded reductions from dividend payments of $68 thousand and a
reduction to equity of $98 thousand to reflect the after-tax market value
decline of the available-for-sale investment securities portfolio. The decrease
in the investment security portfolio's market value reflects the increase in the
level market interest rates at March 31, 1999 compared to December 31, 1998.
The total risk-based capital ratio for the Company's wholly owned subsidiary,
Bank of Lodi was 11.40% at March 31, 1999 compared to 11.10% at December 31,
1998. The increase in the total risk-based capital ratio is largely a function
of the decrease in loan volume. Loans carry a risk weight of 100% compared to an
average risk-weight of 20% for the funds used to make loans. For each dollar in
new loans, risk-weighted assets increases by eighty cents. The Bank's leverage
capital ratio was 7.48% at March 31, 1999 versus 7.35% at December 31, 1998. The
capital ratios are in excess of the regulatory minimums for a well-capitalized
bank.
Year 2000 Preparedness
Preparedness for the Year 2000 date change with respect to computer systems is
recognized as a serious issue throughout the banking industry. Progress reports
prepared by management are provided monthly to the Board of Directors at its
regularly scheduled meetings and to the audit committee. The potential impact of
the Year 2000 compliance issue on the financial services industry could be
material, as virtually every aspect of the industry and processing of
transactions will be affected. Due to the size of the task facing the financial
services industry and the interdependent nature of its transactions, the Company
may be adversely affected by this problem, depending on whether it and the
entities with which it does business address this issue successfully. The impact
of Year 2000 issues on the Company will depend not only on corrective actions
that the Company takes, but also on the way in which Year 2000 issues are
addressed by governmental agencies, businesses and other third parties that
provide services or data to, or receive services or data from, the Company, or
whose financial condition or operational capability is important to the Company.
The Company's State of Readiness
The Company engages the services of third-party software vendors and service
providers for substantially all of its electronic data processing. Thus, the
focus of the Company is to monitor the progress of its primary software
providers toward Year 2000 compliance and prepare to test future-date sensitive
data of the Company in simulated processing.
The Company's Year 2000 compliance program has been divided into phases, all of
them common to all sections of the process: (1) inventorying date-sensitive
information technology and other business systems; (2) assigning priorities to
identified items and assessing the efforts required for Year 2000 compliance of
those determined to be material to the Company; (3) upgrading or replacing
material items that are determined not to be Year 2000 compliant and testing
material items; (4) assessing the status of third party risks; and (5) designing
and implementing contingency and business resumption plans.
9
<PAGE>
As part of the on-going supervision of the banking industry, bank regulatory
agencies are continuously surveying the Company's progression and results of
each one of these phases. Progress reports are provided monthly at regularly
scheduled Board meetings.
In the first phase, the Company conducted a thorough evaluation of current
information technology systems, software and embedded technologies, resulting in
the identification of 21 Mission Critical Systems that could be affected by Year
2000 issues. Non-information technology systems such as climate control systems,
elevators and vault security equipment, were also surveyed. This stage of the
Year 2000 process is complete.
The Bank's lending department made its own initial inquiries regarding
commercial borrower's Year 2000 compliance in 1998. As new loans are made (or
existing loans renewed), responses to inquiries are documented in the loan file
and updated as necessary. This is done in order to properly assess the state of
readiness and evaluate any potential impact to commercial borrowers which may
affect their ability to repay their loans.
In phase two of the process, results from the inventory were assessed to
determine the Year 2000 impact and what actions were required to obtain Year
2000 compliance. For the Company's mission-critical systems, actions needed
consist principally of upgrades to application versions that vendors have tested
for Year 2000 compliance. The Bank's core information system is The Phoenix
Banking System (PBS) from Phoenix International Ltd., which was developed in the
early 1990's. The Bank converted to PBS in 1996. PBS was developed with a
four-digit year field. Phoenix International Ltd. has completed Year 2000
testing on version 2.01 of PBS. No code changes to PBS were necessary to
complete those tests.
The third phase includes the upgrading, replacement and/or retirement of
systems, and testing. This stage of the Year 2000 process has been substantially
completed for mission critical systems. The Company and the Bank upgraded to
version 2.01 of PBS and completed all on-site testing of mission critical
systems. Each of the upgrades, to the extent economically feasible, is run
through a test environment before it is implemented. It is also tested to see
how well it integrates with the Company's overall data processing environment.
Validation of testing by a third party is scheduled to be completed in the
Spring of 1999.
The fourth phase, assessing third party risks, includes the process of
identifying and prioritizing critical suppliers and customers at the direct
interface level, as well as other material relationship with third parties,
including various exchanges, clearing houses, other banks, telecommunication
companies and public utilities. This evaluation includes communicating with the
third parties about their plans and progress in addressing Year 2000 issues.
Detailed evaluations of the most critical third parties have been initiated.
These evaluations will be followed with a validation process, which are ongoing
and scheduled to be completed in the second quarter of 1999, with follow up
reviews scheduled through the remainder of 1999.
Business Resumption and Contingency Plan
The final phase of the Company's Year 2000 compliance program relates to
business resumption and contingency plans. The Company maintains contingency
plans in the normal course of business designed to be deployed in the event of
various potential business interruptions. These plans have been expanded and
will be tested, to address Year 2000-specific interruptions such as power and
telecommunication infrastructure failures, and will continue to be supplemented
if and when the results of systems integration testing identify additional
business functions at risk. The Company is defining core business processes that
are dependent upon mission-critical systems and reviewing the business impact on
those processes from the failure of mission critical systems in order to develop
specific business resumption contingency plans. Management anticipates that
these tests and reviews will be completed in the Fall of 1999.
Costs
As the Company relies upon third-party software vendors and service providers
for substantially all of its electronic data processing, the primary cost of the
Year 2000 Project has been and will continue to be the reallocation of internal
resources and, therefore, does not represent incremental expense to the Company.
Management estimates that the incremental cost of mitigating Year 2000 risk and
third-party reviews of results will be $135 thousand ("cash budget"), and the
cost of management's time invested in this project will be approximately $30
thousand.
10
<PAGE>
Management warns that the paid expenses associated with this project as a
percentage of the total budget or the cash budget should not be construed as a
percentage of completion. In addition to the budget, the Bank has allocated
approximately $30 thousand within the allowance for potential loan losses
stemming from the Year 2000 problem. Borrowers are continuing to be evaluated
for Year 2000 compliance and, as a result of such evaluation, additional
allocations within the allowance or specific provisions to the allowance may be
taken in the future. While an amount of $25 thousand is included in the cash
budget for the costs of contingencies for the Year 2000, the Company did not
provide this amount in the first quarter.
Risks
Failure to correct a material Year 2000 problem could result in an interruption
in, or a failure of, certain normal business activities or operations. The
Company believes that, with the implementation of upgraded business systems and
completion of the Year 2000 Project as scheduled, the possibility of significant
interruptions of normal operations due to the failure of those systems will be
reduced. However, the Company is also dependent upon the power and
telecommunications infrastructure within the United States, and processes large
volumes of transactions through various clearing houses and correspondent banks.
The most reasonably likely worst case scenario would be that the Company may
experience disruption in its operations if any of these third-party suppliers
reported a system failure. Although the Company's Year 2000 Project will reduce
the level of uncertainty about the compliance and readiness of its material
third-party providers, due to the general uncertainty over Year 2000 readiness
of these third-party suppliers, the Company is unable to determine at this time
whether the consequences of Year 2000 failures will have a material impact.
Changes in Results of Operation - Three Months ended March 31, 1999
Summary of Earnings Performance
- ----------------------------------------- --------------------------------------
For the three months ended March 31:
--------------------------------------
1999 1998
---- ----
Net income (in thousands) $ 273 230
- ----------------------------------------- --------------------- ----------------
Basic net income per share $ .20 .17
Diluted net income per share .19 .16
Return on average assets 0.68% 0.64%
Return on average equity 7.90% 7.10%
Dividend payout ratio 24.91% 29.41%
- ----------------------------------------- --------------------- ----------------
"Cash" net income (in thousands) (1) $ 314 284
Diluted "cash" net income per share .22 .20
"Cash" return on average assets 0.77% .76%
"Cash" return on average equity 9.09% 8.80%
- ----------------------------------------- --------------------- ----------------
Average equity to average assets 8.55% 8.70%
- ----------------------------------------- --------------------- ----------------
(1) "Cash" net income represent earnings based upon generally accepted
accounting principles plus the after-tax, non-cash effect on earnings of
the amortization of intangible assets. Following the 1997 acquisition of
three branches from Wells Fargo Bank, the "cash" net income, return on
assets, and return on equity are the most comparable to prior year numbers.
They are also the more relevant performance measures for shareholders
because they measure the Company's ability to support growth and pay
dividends.
11
<PAGE>
Net income for the quarter increased 19% compared to the first quarter of 1998.
Net interest income increased by 13% as a result of the better pricing on
certain interest bearing deposit products. Noninterest income increased by 17%,
while noninterest expense increased by 8%. Based upon the net income for the
three months ended March 31, 1999, the Company's board of directors declared a
cash dividend of $.05 per share payable May 28, 1999 to shareholders of record
on May 14, 1999. This is the seventeenth consecutive quarterly dividend paid by
the Company.
Net Interest Income
<TABLE>
The following table provides a detailed analysis of the net interest spread and
net interest margin for the periods indicated:
<CAPTION>
------------------------------------ ------------------------------- --------------------------------
For the Quarter Ended For the Quarter Ended
March 31, 1999 March 31, 1998
(in thousands) (in thousands)
------------------------------------ ------------------------------- ------------------------------
Average Income/ Average Income/
Balance Expenses Yield(1) Balance Expenses Yield(1)
------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Investment securities (1) $ 48,425 632 5.29% $ 59,825 964 6.53%
Federal funds sold 6,796 80 4.77% 7,900 99 5.08%
Loans (2) 92,137 2,246 9.89% 64,741 1,686 10.56%
--------- ----- ---- --------- ----- -----
$ 147,358 2,958 8.14% $ 132,466 2,749 8.42%
========= ===== ==== ========= ===== =====
Liabilities:
Noninterest bearing deposits $ 18,098 -- -- $ 15,692 -- --
Savings, money market, & NOW
deposits 80,748 330 1.66% 74,437 429 2.34%
Time deposits 50,071 608 4.92% 44,819 535 4.84%
--------- ----- ---- --------- ----- -----
Total Liabilities $ 148,917 938 2.55% $ 134,948 964 2.90%
========= ===== ==== ========= ===== =====
Net Interest Spread 5.59% 5.52%
==== =====
------------------------------------ ---------- ---------- --------- ---------- ----------- ---------
Earning Income Earning Income
Assets (Expense) Yield Assets (Expense) Yield
------ --------- ----- ------ --------- -----
Yield on average earning assets $147,358 2,958 8.14% $132,466 2,749 8.42%
Cost of funding average earning
assets $147,358 (938) (2.58%) $132,466 (965) (2.95%)
----- ----- ----- -----
Net Interest Margin $147,358 2,020 5.56% $132,466 1,784 5.47%
===== ==== ===== =====
------------------------------------ ---------- ---------- --------- ---------- ----------- ---------
<FN>
(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.
</FN>
</TABLE>
Net interest income for the first quarter of 1999 increased by $236 thousand, or
13%, over the same quarter of 1998. The net interest margin of 5.56% was a
slight increase from the 5.47% for the first quarter of 1998. Improvement in the
net interest margin over the same period of 1998 was the result of the higher
volume of earning assets, a more profitable mix of earning assets, and the
continued growth in non-interest bearing deposits to help lower the cost of
funding earning assets.
The stronger mix of earning assets is a direct result of the Company's continued
efforts to more profitably employ funds through the generation of quality loans.
Significant progress has been made at the three branches acquired in February of
1997 and the Elk Grove branch which opened in August of 1998. At the time of the
acquisition from
12
<PAGE>
Wells Fargo, there were no loans associated with the three branches while
deposits totaled approximately $34 million. At March 31, 1999, after slightly
more than two years of operations, gross loans at these branches totaled $13.5
million against deposits of $39.5 million while the Elk Grove branch had gross
loans of $627 thousand and total deposits of $526 thousand. In addition, the
loan production office in Folsom, California, which opened in January of 1998
had gross loans of $5 million.
Loan yields for the first quarter of 1999 were 67 basis points lower from a year
ago, while average loans increased by $27.4 million, or 42%, over the prior
year. As a percentage of total earning assets, average loans outstanding were
63% compared to 49% at the end of the first quarter of 1998 and 55% at year-end
1998. The increased mix of loans in earning assets helped to offset the effect
of declining market yields in investments. The growth in average loans was the
result of persistent business development efforts on the part of the banks
officers and employees in both existing and new-branch markets and favorable
economic conditions that have stimulated mortgage demand and real estate
activity.
Average deposits for the three months ended March 31, 1999 increased by $14
million, or 10%, compared to the prior year quarter. Average noninterest bearing
deposits have kept pace with the growth in interest bearing deposits from a year
ago and continue to make up 12% of average total deposits. This has helped to
keep down the cost of funding earning assets. Average certificates of deposit
were 34% of average deposits compared to 33% in the prior year quarter.
Provision for Loan Losses
The Bank provided $100 thousand to the allowance in the first quarter of 1999
which is attributable to general loss reserves that have been established in
connection with loan portfolio growth. The allowance for loan losses is
discussed above under Changes in Financial Condition.
Noninterest Income
Noninterest income for the first quarter of 1999 increased by $69 thousand, or
17%, over the same period last year. The most significant cause for this
increase is the excess in the cash surrender value of insurance contracts over
the predetermined profitability index that is recognized as income.
Service charge income decreased by $8 thousand, or 4%, primarily as a result of
higher average balances maintained in certain deposit accounts thereby avoiding
monthly service charges. Income from the sale and servicing of loans increased
by $22 thousand, or 11%, compared to the prior year quarter. The increased
income from the sale and servicing of loans is due to a larger portfolio of
mortgage loans being serviced and a higher volume of SBA loans sold than in the
same quarter of 1998.
Noninterest Expenses
Noninterest expenses increased by $155 thousand, or 8%, compared to the prior
year quarter. The increase in noninterest expense is primarily due to the
expenses associated with the Folsom loan production office which were only
partially incurred in the first quarter of 1998 and the exclusion of the Elk
Grove branch which did not open until the third quarter of 1998. Included in
other noninterest expense are expenses associated with the Year 2000
preparedness. The Company has a total budget for the Year 2000 preparedness
project of $165 thousand, of which $110 thousand is for actual expenses, $25
thousand as a provision for contingencies and the remaining $30 thousand
represents the opportunity cost of management's time needed to focus on this
issue. Approximately $15 thousand was spent in the first quarter of 1999, the
majority of which was for system testing and validation. This brings the total
expenses associated with this project at $42 thousand or 38% of the cash budget
for actual expenses. Management estimates that the Year 2000 project is 80%
completed and it is anticipated that the project will be complete in the third
quarter of 1999. While the Company believes that the budget for the Year 2000
preparedness project is adequate to mitigate the risks with the Year 2000
problem, there can be no assurances that the Company will not incur costs
exceeding such budget.
13
<PAGE>
Basis of Presentation
First Financial Bancorp is the holding company for Bank of Lodi, N.A. and
Western Auxiliary Corporation. In the opinion of management, the accompanying
unaudited consolidated financial statements reflect all adjustments (consisting
of normal recurring accruals and other accruals as explained above) necessary
for a fair presentation of financial position as of the dates indicated and
results of operations for the periods shown. All material intercompany accounts
and transactions have been eliminated in consolidation. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts. The results for the three months ended March
31, 1999 are not necessarily indicative of the results which may be expected for
the year ended December 31, 1999. The unaudited consolidated financial
statements presented herein should be read in conjunction with the consolidated
financial statements and notes included in the 1998 Annual Report to
Shareholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
While there are several varieties of market risk, the market risk material to
the Company and the Bank is interest rate risk. Within the context of interest
rate risk, market risk is the risk of loss due to changes in market interest
rates that have an adverse effect on net interest income, earnings, capital or
the fair value of financial instruments. Exposure to this type of risk is a
regular part of a financial institution's operations. The fundamental activities
of making loans, purchasing investment securities, and accepting deposits
inherently involve exposure to interest rate risk. The Company monitors the
repricing differences between assets and liabilities on a regular basis and
estimates exposure to net interest income, net income, and capital based upon
assumed changes in the market yield curve. As of and for the three months ended
March 31, 1999, there were no material changes in the market risk profile of the
Company or the Bank as described in the Company's 1998 Form 10-K.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
3(a) Articles of Incorporation, as amended, filed
as Exhibit 3.1 to the Company's General Form
for Registration of Securities on Form 10,
filed on September 21, 1983, is hereby
incorporated by reference.
3(b) Bylaws, as amended, filed as Exhibit 3(b) to
the Company's Form 10K for the year ended
December 31, 1998 are hereby incorporated by
reference.
14
<PAGE>
4 Specimen Common Stock Certificate, filed as
Exhibit 4.1 to the Company's General Form
for Registration of Securities on Form 10,
filed on September 21, 1983, is hereby
incorporated by reference.
10(a) First Financial Bancorp 1991 Director Stock
Option Plan and form of Nonstatutory Stock
Option Agreement, filed as Exhibit 4.1 to
the Company's Form S-8 Registration
Statement (Registration No. 33-40954), filed
on May 31, 1991, is hereby incorporated by
reference.
10(b) Amendment to First Financial Bancorp 1991
Director Stock Option Plan, filed as Exhibit
4.3 to the Company's Post-Effective
Amendment No. 1 to Form S-8 Registration
Statement (Registration No. 33-40954), filed
as Exhibit 10 to the Company's Quarterly
Report on Form 10-Q for the period ended
March 31, 1995, is hereby incorporated by
reference.
10(c) First Financial Bancorp 1991 Employee Stock
Option Plan and forms of Incentive Stock
Option Agreement and Nonstatutory Stock
Option Agreement, filed as Exhibit 4.2 to
the Company's Form S-8 Registration
Statement (Registration No. 33-40954), filed
on May 31, 1991, is hereby incorporated by
reference.
10(d) Bank of Lodi Employee Stock Ownership Plan,
filed as Exhibit 10 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1992, is hereby incorporated by
reference.
10(e) First Financial Bancorp 1997 Stock Option
Plan, filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the period
ended September 30, 1997, is hereby
incorporated by reference.
10(f) Bank of Lodi Incentive Compensation Plan,
filed as Exhibit 10(f) to the Company's
Annual Report on Form 10-K for the year
ended December 31, 1997, is hereby
incorporated by reference.
10(g) First Financial Bancorp 401(k) Profit
Sharing Plan, filed as Exhibit 10(g) to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1997, is hereby
incorporated by reference.
10(h) Employment Agreement dated as of September
30, 1998, between First Financial Bancorp
and Leon J. Zimmerman., filed as Exhibit
10(h) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September
30, 1998, is hereby incorporated by
reference.
10(i) Employment Agreement dated as of September
30, 1998, between First Financial Bancorp
and David M. Philipp, filed as Exhibit 10(i)
to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30,
1998, is hereby incorporated by reference.
10(j) Executive Supplemental Compensation
Agreement effective as of April 3, 1998,
between Bank of Lodi, N.A. and Leon J.
Zimmerman, filed as Exhibit 10(j) to the
Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998, is
hereby incorporated by reference.
10(k) Executive Supplemental Compensation
Agreement effective as of April 3, 1998,
between Bank of Lodi, N.A. and David M.
Philipp, filed as Exhibit 10(k) to the
Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998, is
hereby incorporated by reference.
15
<PAGE>
10(l) Life Insurance Endorsement Method Split
Dollar Plan Agreement effective as of April
3, 1998, between Bank of Lodi, N.A. and Leon
J. Zimmerman, filed as Exhibit 10(l) to the
Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998, is
hereby incorporated by reference.
10(m) Life Insurance Endorsement Method Split
Dollar Plan Agreement effective as of April
3, 1998, between Bank of Lodi, N.A. and
David M. Philipp, filed as Exhibit 10(m) to
the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, is
hereby incorporated by reference.
10(n) Form of Director Supplemental Compensation
Agreement, effective as of April 3, 1998, as
executed between Bank of Lodi, N.A. and each
of Benjamin R. Goehring, Michael D. Ramsey,
Weldon D. Schumacher and Dennis R. Swanson,
filed as Exhibit 10(n) to the Company's
Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, is hereby
incorporated by reference.
10(o) Form of Life Insurance Endorsement Method
Split Dollar Plan Agreement, effective as of
April 3, 1998, as executed between Bank of
Lodi, N.A. and each of Benjamin R. Goehring,
Michael D. Ramsey, Weldon D. Schumacher and
Dennis R. Swanson, filed as Exhibit 10(o) to
the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, is
hereby incorporated by reference.
10(p) Form of Director Supplemental Compensation
Agreement, effective as of April 3, 1998, as
executed between Bank of Lodi, N.A. and each
of Angelo J. Anagnos, Raymond H. Coldani,
Bozant Katzakian and Frank M. Sasaki, filed
as Exhibit 10(p) to the Company's Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1998, is hereby incorporated
by reference.
10(q) Form of Life Insurance Endorsement Method
Split Dollar Plan Agreement, effective as of
April 3, 1998, as executed between Bank of
Lodi, N.A. and each of Angelo J. Anagnos,
Raymond H. Coldani, Bozant Katzakian and
Frank M. Sasaki, filed as Exhibit 10(q) to
the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, is
hereby incorporated by reference.
11 Statement re computation of earnings per
share is incorporated herein by reference to
Footnotes 2 to the consolidated financial
statements included in this report.
21 Subsidiaries of the Company: The Company
owns 100 percent of the capital stock of
Bank of Lodi, National Association, a
national banking association, and 100
percent of the capital stock of Western
Auxiliary Corporation.
27 Financial Data Schedule (electronic
submission only).
(b) Reports on Form 8-K
Not Applicable.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FINANCIAL BANCORP
Date: May 14, 1999 /s/ Leon J. Zimmerman
------------ ---------------------
Leon J. Zimmerman
President & CEO
17
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS DATED MARCH 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,551
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 46,562
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 90,563
<ALLOWANCE> 1,666
<TOTAL-ASSETS> 163,373
<DEPOSITS> 148,341
<SHORT-TERM> 0
<LIABILITIES-OTHER> 862
<LONG-TERM> 0
0
0
<COMMON> 7,790
<OTHER-SE> 6,380
<TOTAL-LIABILITIES-AND-EQUITY> 163,373
<INTEREST-LOAN> 2,246
<INTEREST-INVEST> 632
<INTEREST-OTHER> 80
<INTEREST-TOTAL> 2,958
<INTEREST-DEPOSIT> 938
<INTEREST-EXPENSE> 938
<INTEREST-INCOME-NET> 2,020
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,989
<INCOME-PRETAX> 416
<INCOME-PRE-EXTRAORDINARY> 416
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 273
<EPS-PRIMARY> .20
<EPS-DILUTED> .19
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,564
<CHARGE-OFFS> 8
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 1,666
<ALLOWANCE-DOMESTIC> 1,666
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,289
</TABLE>
