-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IePSDu//FwilND/LvXADO8hmUTyDOF7QdnzhUa0jxDHnkVzKLXvBsBrSG12ZnBTW G4Eg/S1LWS0zYaohyOiohQ== 0000950005-98-000656.txt : 19980810 0000950005-98-000656.hdr.sgml : 19980810 ACCESSION NUMBER: 0000950005-98-000656 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980807 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST FINANCIAL BANCORP /CA/ CENTRAL INDEX KEY: 0000729502 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 942822858 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12499 FILM NUMBER: 98679017 BUSINESS ADDRESS: STREET 1: 701 S HAM LN CITY: LODI STATE: CA ZIP: 95242 BUSINESS PHONE: 2093672000 MAIL ADDRESS: STREET 1: 701 S HAM LANE CITY: LODI STATE: CA ZIP: 95242 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended June 30, 1998 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 June, 1998 there were 1,345,442 shares of Common Stock, no par value, outstanding. ================================================================================ FIRST FINANCIAL BANCORP FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 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 ..... 13 PART II Item 1. Legal Proceedings .............................................. 13 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 ITEM 1. FINANCIAL STATEMENTS FIRST FINANCIAL BANCORP AND SUBSIDIARIES Consolidated Balance Sheets (in thousands except share amounts)
June 30 Dec. 31 Assets 1998 1997 - ------ ---- ---- Cash and due from banks $ 8,167 $ 7,183 Federal funds sold 3,500 4,900 Investment Securities: Held-to-maturity securities at amortized cost, market value of $1,759 and $1,785 at June 30, 1998 and Dec. 31, 1997, respectively 1,705 1,716 Available-for-sale securities, at fair value 54,800 60,201 ---------------- ---------------- Total investments 56,505 61,917 Loans 69,823 63,541 Less allowance for loan losses (Note 3) 1,358 1,313 ---------------- ---------------- Net loans 68,465 62,228 Bank premises and equipment, net 7,089 7,233 Accrued interest receivable 1,454 1,473 Other assets (Note 4) 6,877 2,916 ---------------- ---------------- $ 152,057 $ 147,850 ================ ================ Liabilities and Stockholders' Equity Liabilities: Deposits Noninterest bearing $ 15,674 $ 14,928 Interest bearing 122,538 118,963 ---------------- ---------------- Total deposits 138,212 133,891 Accrued interest payable 398 429 Other liabilities (Note 5) 246 669 ----------------- ---------------- Total liabilities 138,856 134,989 Stockholders' equity: Commonstock - no par value; authorized 9,000,000 shares, issued and outstanding in 1998 and 1997, 1,345,442 and 1,332,842 shares 7,559 7,455 Retained earnings 5,466 5,188 Accumulated other comprehensive income (Note 1) 176 218 ---------------- ---------------- Total stockholders' equity 13,201 12,861 ---------------- ---------------- $ 152,057 $ 147,850 ================ ================
1 FIRST FINANCIAL BANCORP AND SUBSIDIARIES Consolidated Statements of Income (in thousands except per share amounts)
Three months ended June 30 Six months ended June 30 1998 1997 1998 1997 ---- ---- ---- ---- (Dollar amounts in thousands, (Dollar amounts in thousands, except per share amounts) except per share amounts) Interest income: Loans, including fees $ 1,776 $ 1,504 $ 3,462 $ 3,328 Investment securities: Taxable 825 900 1,725 1,499 Exempt from Federal taxes 53 77 117 146 Federal funds sold 85 67 184 202 ----------- ----------- ----------- ----------- Total interest income 2,739 2,548 5,488 5,175 Interest expense: Deposit accounts 1,061 960 2,026 1,785 Total interest expense 1,061 960 2,026 1,785 ----------- ----------- ----------- ----------- Net interest income 1,678 1,588 3,462 3,390 Provision for loan losses 30 20 60 (60) ----------- ----------- ----------- ----------- Net interest income after provision for loan 1,648 1,568 3,402 3,450 losses Noninterest income: Service charges 228 212 444 382 Premiums and fees from SBA and mortgage operations 150 170 344 285 Miscellaneous (Note 4) 61 17 67 27 ----------- ----------- ----------- ----------- Total noninterest income 439 399 855 694 Noninterest expense: Salaries and employee benefits 821 788 1,724 1,533 Occupancy 159 143 312 266 Equipment 136 119 271 212 Other 736 636 1,378 1,312 ----------- ----------- ----------- ----------- Total noninterest expense 1,851 1,686 3,685 3,323 ----------- ----------- ----------- ----------- Income before provision for income taxes 236 281 572 821 Provision for income taxes 55 75 161 275 ----------- ----------- ----------- ----------- Net income $ 181 $ 206 $ 411 $ 546 Unrealized (loss) gain on available for sale securities, net of tax (15) 183 (42) (25) ----------- ----------- ----------- ----------- Total comprehensive income $ 166 $ 391 $ 369 $ 521 =========== =========== =========== =========== Net income per share: Basic (Note 2) $ 0.14 $ 0.16 $ 0.31 $ 0.42 =========== =========== =========== =========== Diluted (Note 2) $ 0.13 $ 0.15 $ 0.30 $ 0.40 =========== =========== =========== ===========
2 FIRST FINANCIAL BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) Six Months Ended June 30
1998 1997 ---- ---- Cash flows from operating activities: Net income $ 411 $ 546 Adjustments to reconcile net income to net cash provided by operating activities: Decrease (increase) in loans held for sale 722 (630) Increase in deferred loan income 19 67 Provision for other real estate owned losses 16 50 Depreciation and amortization 528 520 Provision for loan losses 60 (60) Provision for deferred taxes (37) (58) Decrease (increase) in accrued interest receivable 19 (598) (Decrease) Increase in accrued interest payable (31) 122 Decrease in other liabilities (423) (202) Increase in Cash Surrender Value Life Insurance (55) - Decrease in other assets 35 264 ------------ ------------ Net cash provided by operating activities 1,264 21 Cash flows from investing activities: Proceeds from maturity of held-to-maturity securities 10 - Proceeds from maturity of available-for-sale securities 9,329 7,860 Proceeds from sale of available-for-sale securities - 22,000 Purchase of available-for-sale securities (4,000) (51,210) Increase in loans made to customers (7,038) (3,478) Proceeds from the sale of other real estate 40 - Purchases of bank premises and equipment (187) (3,014) Purchase of cash surrender value life insurance (4,125) - ------------ ------------ Net cash used in investing activities (5,971) (27,842) Cash flows from financing activities: Net increase in deposits 4,321 31,464 Dividends paid (134) (132) Proceeds from issuance of common stock 104 104 ------------ ------------ Net cash provided by financing activities 4,291 31,436 Net (decrease) increase in cash and cash equivalents (416) 3,615 ------------ ------------ Cash and cash equivalents at beginning of period 12,083 5,848 ------------ ------------ Cash and cash equivalents at end of period $ 11,667 $ 9,463 ============ ============
3 FIRST FINANCIAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1998 and December 31, 1997 (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 a new accounting standard adopted during the current period. (a) Reporting Comprehensive Income In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130 is effective for interim and annual periods beginning after December 15, 1997 and is to be applied retroactively to all periods presented. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. It does not, however, specify when to recognize or how to measure items that make up comprehensive income. SFAS No. 130 was issued to address concerns over the practice of reporting elements of comprehensive income directly in equity. This statement requires all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed in equal prominence with the other financial statements. It does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. Enterprises are required to classify items of "other comprehensive income" by their nature in the financial statement and display the balance of other comprehensive income separately in the equity section of a statement of financial position. 4 (2) Weighted Average Shares Outstanding Basic and diluted earnings per share for the three and six months ended June 30, 1998 and 1997 were computed as follows:
Income Shares Per-Share Three months ended June 30, 1998 (numerator) (denominator) Amount ----------------------------------------- ------------------ ------------------- ---------- Basic earnings per share $ 181,000 1,338,186 $ .14 Effect of dilutive securities - 87,291 - ------------------ ------------------- Diluted earnings per share $ 181,000 1,425,477 $ .13 ================== =================== Income Shares Per-Share Six months ended June 30, 1998 (numerator) (denominator) Amount ----------------------------------------- ------------------ ------------------- ---------- Basic earnings per share $ 411,000 1,335,514 $ .31 Effect of dilutive securities - 87,900 - ------------------ ------------------- Diluted earnings per share $ 411,000 1,423,414 $ .30 ================== =================== Income Shares Per-Share Three months ended June 30, 1997 (numerator) (denominator) Amount ----------------------------------------- ------------------ ------------------- ---------- Basic earnings per share $ 206,000 1,320,621 $ .16 Effect of dilutive securities - 57,483 - ------------------ ------------------- Diluted earnings per share $ 206,000 1,378,104 $ .15 ================== =================== Income Shares Per-Share Six months ended June 30, 1997 (numerator) (denominator) Amount ----------------------------------------- ------------------ ------------------- ---------- Basic earnings per share $ 546,000 1,315,443 $ .42 Effect of dilutive securities - 60,886 - ------------------ ------------------- Diluted earnings per share $ 546,000 1,376,329 $ .40 ================== ===================
(3) Allowance for Loan Losses 6/30/98 12/31/97 ------- -------- Balance at beginning of period $ 1,313,000 1,207,000 Loans charged off (58,000) (290,000) Recoveries 43,000 456,000 Provisions charged to operations 60,000 (60,000) ----------- --------- Balance at end of period $ 1,358,000 1,313,000 =========== ========= (4) Other Assets Other assets include the cash surrender value of life insurance of $4,178,000 at June 30, 1998. The cash surrender value of life insurance consists primarily of the Bank's contractual rights under single-premium life insurance policies written on the lives of certain officers and the directors of the Company and the Bank. The policies were purchased in order to indirectly offset anticipated costs of certain benefits payable upon the retirement, and the death or disability of the directors and officers pursuant to supplemental compensation agreements. The cash surrender value accumulates tax-free based upon each policy's crediting rate which is adjusted by the insurance company on an annual basis. 5 (5) Supplemental Compensation Agreements Effective as of April 3, 1998 the Bank entered into nonqualified supplemental compensation agreements with all of the directors and certain executive officers for the provision of differing death, disability and post-employment/retirement benefits. The agreements with directors includes elective provisions for service as a director emeritus following termination of service as a member of the Board of Directors. Directors who elect to serve as a director emeritus receive certain benefits during such period of service in addition to benefits applicable to all directors which commence upon expiration of the three year emeritus period. The Bank will accrue for the compensation based on anticipated years of service and the vesting schedule provided in the agreements. The director agreements are defined benefit agreements under which each director will receive $7,500 annually from retirement until death. The executive officer agreements are defined contribution agreements whereby the benefit accruals under the agreements are the amount by which, if any, the increase in cash surrender value of the related insurance policies exceeds a predetermined profitability index. At June 30, 1998, accrued compensation under both the director and officer agreements was $4,000. (6) Western Auxiliary Corporation On June 9, 1998 the Company incorporated Western Auxiliary Corporation (WAC) as a California corporation. The Company expects to capitalize WAC as its wholly-owned subsidiary during the quarter ended September 30, 1998 with an initial capitalization of $10,000. WAC will earn fee income by acting as trustee on the Bank's real estate trust deed transactions and will receive the necessary operational resources under an intercompany services agreement between WAC, the Company, and the Bank. (7) Prospective Accounting Pronouncements Accounting for Derivative Instruments and Hedging Activity In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires recognition of all derivatives as either assets or liabilities on the balance sheet and measurement of those instruments at fair value. If certain conditions are met, a derivative may be designated specifically as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (a fair value hedge) or (b) a hedge of the exposure to variable cash flows of a forecasted transaction (a cash flow hedge). SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company expects to adopt the Statement beginning October 1, 1998. Management does not expect that adoption of SFAS No. 133 will have a material impact on the Company's consolidated financial statements. Accounting for the Costs of Computer Software Developed or Obtained for Internal Use In March 1998, the American Society of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. 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. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The Company expects to adopt the Statement beginning January 1, 1999. Management does not expect that adoption of SOP 98-1 will have a material impact on the Company's consolidated financial statements. Reporting on the Costs of Start-Up Activities In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 provides guidance on the financial reporting of star-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The Company expects to adopt the Statement beginning January 1, 1999. Management does not expect that adoption of SOP 98-5 will have a material impact on the Company's consolidated financial statements. 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 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. Such risks and uncertainties include, but are not limited to, the following factors: competitive pressure in the banking industry; changes in the interest rate environment; general economic conditions, either nationally or regionally becoming less favorable than expected and resulting in, among other things, a deterioration in credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment; changes in business conditions; volatility of rate sensitive deposits; operational risks, including data processing system failures or fraud; asset/liability matching risks and liquidity risks; and changes in the securities markets. The following discussion addresses information pertaining to the financial condition and results of operations of the Company that may not be otherwise apparent from a review of the consolidated financial statements and related footnotes. It should be read in conjunction with those statements and notes found on pages 1 through 6, as well as other information presented throughout this report. Changes in Financial Condition Consolidated total assets at June 30, 1998 were $4.2 million above the comparable level at December 31, 1997. The 3% increase in assets was due primarily to an increase in deposits of $4.3 million, or 3%. Noninterest bearing deposits grew by 5%. Growth of 3% in interest bearing deposits occurred in core NOW account deposits and certificates of deposit. The company experienced a 1% increase in deposits during the first quarter that ran contrary to historical trends which reflect a seasonal decline in deposits during the first quarter that is typically associated with the local agricultural industry. Deposit growth in the second quarter increased over the first quarter. Although management cannot determine with certainty why a seasonal decline in deposits has not occurred, the unseasonably wet weather during the first quarter impacted local agriculture and may have impacted deposit flows. Nothwithstanding seasonal trends, monthly deposit account growth has ranged between 5% and 12% through June 30, 1998 and has impacted deposit growth favorably. The loan portfolio increased by 10%, or $6.3 million, from December 31, 1997 to June 30, 1998. The increase reflects the success of officer calling disciplines within the Bank's business development program as well as economic improvement in the Bank's market area. The real estate, construction, SBA and commercial loan portfolios increased by 16%, 8%, 6%, and 4% respectively. From a geographic perspective, the fastest loan portfolio growth has occurred in the markets of Galt, Plymouth, and San Andreas, California that the Bank began to serve in February, 1997 after acquiring the local branches from Wells Fargo Bank. Since December 31, 1997, the loan portfolios of these branches has increased by 44%. The allowance for loan losses at June 30, 1998 is in excess of the December 31, 1997 allowance by $45 thousand, or 3%. Nonperforming loans increased by $308 thousand, to $713 thousand from December 31, 1997 to June 30, 1998, and the allowance for loan losses to nonperforming loan coverage ratio decreased to 1.90 times from 3.24 times. The increase in nonperforming loans was related to one borrowing relationship that has been brought current subsequent to June 30, 1998. This borrowing relationship also impacted the delinquency ratio. Total portfolio delinquency at June 30, 1998 was 1.23%, compared to 1.09% at December 31, 1997. Management believes that the allowance for loan losses at June 30, 1998 is adequate. The following tables depict activity in the allowance for loan losses and allocation of reserves for and at the six and twelve months ended June 30, 1998 and December 31, 1997, respectively: 7 Analysis of the Allowance for Loan Losses
6/30/98 12/31/97 ------- -------- Balance at beginning of period $ 1,313 1,207 Charge-offs: Commercial 18 249 Real estate 25 -- Consumer 15 41 --------- -------- Total charge-offs 58 290 Recoveries: Commercial 30 434 Real estate -- -- Consumer 13 22 --------- -------- Total recoveries 43 456 --------- -------- Net charge-offs 15 (166) (reductions)/additions (credited to)/charged to operations 60 (60) --------- -------- Balance at end of period $ 1,358 1,313 ========= ========
Allocation of the Allowance for Loan Losses 6/30/98 6/30/98 12/31/97 12/31/97 Loan Category Amount % of Loans Amount % of Loans ------------- ------ ---------- ------ ---------- Commercial $ 269 66.67% 309 60.95% Real Estate 119 29.70% 192 37.87% Consumer 20 3.63% 6 1.18% Unallocated 950 N/A 806 N/A --------- ------- ------- ------- $ 1,358 100.00% 1,313 100.00% ========= ======= ======= ======= Other Assets Other assets increased by $4 million, or 136%, from December 31, 1997 to June 30, 1998. During the second quarter of 1998, the Bank's Board of Directors authorized the execution of supplemental compensation agreements for directors and certain executive officers. Similar programs have been endorsed by the California Bankers Association and the American Bankers Association and have been implemented at financial institutions throughout California and the United States. The nature of these programs enable the Bank to fund the related financial obligations in a cost-effective manner through investments in life insurance. Accordingly, the Bank invested $4.2 million in single-premium life insurance contracts written on the lives of the directors and officers. The contracts provide for a cash surrender value to the Bank that increases each year based upon a crediting rate that is adjusted annually. The increase in cash surrender value is recognized on a tax-free basis because the Bank's intent is to carry the policies until the death of the insured individuals. The tax-equivalent yield on the insurance investment provides for an incremental return over alternative investment securities that both improves profitability and ultimately provides the funds necessary to settle the financial obligations under the supplemental compensation agreements. Under the supplemental compensation agreements for certain executive officers, benefits are accrued annually only after a pre-determined profitability target for the insurance investment is met. Under the director agreements, each director will receive $7,500 annually from retirement until death. Investment Securities The growth in the loan portfolio and other assets was funded by maturities of investment securities in addition to the deposit growth discussed above. Investment securities declined by $5.4 million, or 9%, from December 31, 1997 to June 30, 1998. The decline represents approximate maturities of $9.3 million net of investment purchases of $4.0 million. Some of the maturities represent callable agency securities that were called by the issuer. At June 30, 1998, the bank held approximately $18.5 million in callable agency securities with an average maturity, months to first call, and average yield of 8 years, 8 months, and 6.98%, respectively. 8 Equity Consolidated equity increased by $340 thousand from December 31, 1997 to June 30, 1998. Consolidated equity represented 8.7% of consolidated assets at June 30, 1998 and December 31, 1997. Stock option exercises during the six months ended June 30, 1998 increased equity by $104 thousand. The increase in equity from earnings of $411 thousand for the six months ended June 30, 1998 exceeded reductions from dividend payments of $134 thousand and a reduction to equity of $42 thousand to reflect the after-tax market value decline of the available-for-sale portion of the investment securities portfolio. The decline in the investment security portfolio's market value reflects the impact of both changing interest rates and the underlying cash flow and maturity characteristics of the investment portfolio at June 30, 1998 compared to December 31, 1997. The total risk-based capital ratio for the Company's wholly owned subsidiary, Bank of Lodi was 12.92% at June 30, 1998 compared to 12.95% at December 31, 1997. The Bank's leverage capital ratio was 7.21% at June 30, 1998 versus 7.11% at December 31, 1997. The capital ratios are in excess of the regulatory minimums for a well-capitalized bank. Changes in Results of Operation - Three Months ended June 30, 1998
Summary of Earnings Performance - ----------------------------------------------------- -------------------------------------------------- For the three months ended June 30: -------------------------------------------------- 1998 1997 ---- ---- Earnings (in thousands) $ 181 206 ---------------------------------------------------- ------------------------- ------------------------ Basic earnings per share $ .14 .16 Diluted earnings per share .13 .15 Return on average assets 0.48% 0.60% Return on average equity 5.50% 6.70% Dividend payout ratio 38.46% 33.33% ---------------------------------------------------- ------------------------- ------------------------ "Cash" earnings (in thousands) (1) $ 235 276 Diluted "cash" earnings per share .16 .20 "Cash" return on average assets 0.62% .80% "Cash" return on average equity 7.20% 9.00% - ----------------------------------------------------- ------------------------- ------------------------ Operating "cash" earnings (in thousands) (2) $ 301 276 Diluted operating "cash" earnings per share .21 .20 Operating "cash" return on average assets 0.80% 0.80% Operating "cash" return on average equity 9.10% 9.10% - ----------------------------------------------------- ------------------------- ------------------------ Average equity to average assets 8.73% 8.96% - ----------------------------------------------------- ------------------------- ------------------------ (1) "Cash" earnings 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" earnings, 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. (2) Operating "Cash" earnings is computed by excluding the after-tax impact of significant elements of revenue or costs that obscure the operating results of core operations. Adjustments for the second quarter of 1998 have been made to exclude from net income the preliminary costs of a strategic growth initiative for which the company ceased further pursuit in May, 1998.
Operating "Cash" earnings for the quarter increased by 9.1% compared to the prior year quarter. Net interest income increased by 6%, or $90 thousand. Noninterest income increased by 10%, or $40 thousand, while noninterest expenses increased by 3%, or $51 thousand, before the costs associated with the strategic growth initiative discussed in footnote two of the above table. Based upon the earnings for the three months ended June 30, 1998, the Company's board of directors declared a cash dividend of $.05 per share payable August 28, 1998 to shareholders of record on August 14, 1998. 9 Net Interest Income Net interest income increased by $90 thousand, or 6%, relative to the comparable prior year quarter. Net interest margin decreased to 5.17% for the quarter compared to 5.24% in the prior year quarter. Interest income increased by $191 thousand, or 7%, while interest expense increased by $101 thousand, or 11%. The yield on average earning assets for the three months ended June 30, 1998 was 8.44% compared to 8.40% in the prior year period. The increase in interest income was the result of growth in average earning assets and an improved mix of average earning assets. The yield on average deposits for the three months ended June 30, 1998 was 3.10% compared to 3.09% in the prior year period. The increase in interest expense reflects growth in average deposits, although favorable changes in the mix of deposits offset a portion of the gross increase in interest expense related to the increase in deposits. Average earning assets for the three months ended June 30, 1998 increased by $8.2 million, or 6.7%, compared to the prior year quarter. Earning asset growth would have been $12.4 million, or 10.2%, without the investment in life insurance contracts discussed above under Changes in Financial Condition--Other Assets. Although the insurance contracts have a cash surrender value that increases based upon an annual earnings rate, the contracts are accounted for as other assets, and the earnings are recorded as a component of other noninterest income. Loan yields were stable, while average loans increased by $10.2 million, or 17.9%, over the prior year. The increase in average loans outstanding increased loans as a percentage of earning assets to 52% compared to 47% in the prior year quarter. The increased mix of loans in earning assets offset the effect of declines in investment portfolio yields. The growth in average loans is attributed to persistent business development efforts on the part of the Bank's 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 June 30, 1998 increased by $12.4 million, or 9.9%, compared to the prior year quarter. The mix of deposits shifted away from higher cost certificates of deposit to lower yielding noninterest bearing and interest bearing demand deposit accounts. Average certificates of deposit were 33% of average deposits compared to 34% in the prior year quarter. The impact of the changed deposit mix offset $109 thousand of the gross increase in interest expense that resulted from the increase in deposits. In addition, reductions in the interest rates paid on transaction accounts offset an additional $15 thousand in interest expense. Provision for Loan Losses The provision for loan losses increased by $10 thousand compared to the prior year quarter. General increases in the provision for loan losses have been partially offset by improvements in the credit quality of the loan portfolio. The allowance for loan losses is discussed above under Changes in Financial Condition. Noninterest Income Noninterest income increased by $40 thousand, or 10%, over the prior year quarter. Increased service charge income combined with income related to new investment in insurance contracts offset a decline in income from the sale and servicing of loans. Service charge income increased by $16 thousand, or 8%, as a result of increases in deposit accounts. Other noninterest income was $61 thousand compared to $17 thousand in the prior year due to $55 thousand in income from the investment in insurance contracts discussed above under Changes in Financial Condition--Other Assets. Income from the sale and servicing of loans declined by $20 thousand, or 12%, compared to the prior year quarter. The decline resulted from a significant decline in the volume of SBA loan sales. SBA loan sales income for the quarter was $4 thousand compared to $103 thousand in the prior year. The decline appears to be a matter of timing as opposed to a real decline in volume. The pipeline of SBA loans in process is currently larger than in the prior year, and SBA loan sales volume for the third and fourth quarter is expected to be significantly higher than the second quarter. Income from the origination and sale of mortgage loans increased by $60 thousand, or 100%, over the prior year quarter. The increased mortgage income is attributable to declining interest rates, improving economic conditions, and business development efforts in the mortgage and construction lending area. Noninterest Expenses Noninterest expenses increased by $165 thousand, or 10%, compared to the prior year quarter. Approximately $114 thousand of the increase represented costs associated with a strategic growth initiative that was discontinued by the Company in May, 1998. Excluding those costs, noninterest expenses increased by 3%. Salaries and benefit expenses increased by $33 thousand, or 4%. A portion of the increase is related to a new loan production office in Folsom, California that was opened earlier in 1998. Staffing was also increased by three full-time equivalents in the mortgage department as a result of the 10 increase in origination volume. Occupancy expense increased by $16 thousand, or 11%. The increase in occupancy expenses is principally the result of the new loan production office in Folsom, California. These costs were partially offset by increased rental income resulting from increased occupancy at Bank of Lodi's main office building in Lodi. Other noninterest expenses increased by $100 thousand, or 16%. Approximately $60 thousand of the increase was related to the strategic costs that were discussed earlier in this paragraph. Excluding those costs, other noninterest expense increased by 6.3% due to increased processing costs and other costs related to the growth in deposits as well as business development efforts. Changes in Results of Operation - Six Months ended June 30, 1998
Summary of Earnings Performance - ----------------------------------------------------- -------------------------------------------------- For the six months ended June 30: -------------------------------------------------- 1998 1997 ---- ---- Earnings (in thousands) $ 411 546 ---------------------------------------------------- ------------------------- ------------------------ Basic earnings per share $ .31 .42 Diluted earnings per share $ .30 .41 Return on average assets 0.55% .86% Return on average equity 6.31% 9.12% Dividend payout ratio 33.33% 24.39% ---------------------------------------------------- ------------------------- ------------------------ "Cash" earnings (in thousands) (1) $ 519 $ 687 Diluted "cash" earnings per share .36 .50 "Cash" return on average assets 0.69% 1.08% "Cash" return on average equity 7.97% 11.50% ---------------------------------------------------- ------------------------- ------------------------ Operating "cash" earnings (in thousands) (2) $ 626 687 Diluted operating "cash" earnings per share .44 .50 Operating "cash" return on average assets 0.83% 1.08% Operating "cash" return on average equity 9.61% 11.50% - ----------------------------------------------------- ------------------------- ------------------------ Average equity to average assets 8.69% 9.52% - ----------------------------------------------------- ------------------------- ------------------------ (1) "Cash" earnings 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" earnings, 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. (2) Operating "Cash" earnings is computed by excluding the after-tax impact of significant elements of revenue or costs that obscure the operating results of core operations. Adjustments for the six months ended June 30, 1998 have been made to exclude from net income the preliminary costs of a strategic growth initiative for which the company ceased further pursuit in May, 1998.
Operating "Cash" earnings for the six months ended June 30, 1998 declined by $61 thousand, or 8.9% compared to the prior year period. Operating "Cash" earnings for the prior year period included a significant contribution to performance that was realized when several loans that had been charged off in prior periods were paid in full. The repayment of these loans resulted in the recognition of $445 thousand in recovered interest income and a negative provision for loan losses of $80 thousand. Excluding the after-tax impact of the recovered interest from operating "cash" earnings for the prior year, current year operating "cash" earnings were $197 thousand, or 46% higher, than the prior year period. Excluding the prior year recovery of interest income, net interest income for the current period increased by 18%, or $518 thousand, over the prior year period. Noninterest income increased by 23%, or $161 thousand, while noninterest expenses increased by 5%, or $179 thousand, before the costs associated with the strategic growth initiative discussed in footnote two of the above table. 11 Net Interest Income Excluding the prior year recovery of interest, net interest income increased by $518 thousand, or 18%, relative to the prior year period. Net interest margin increased to 5.33% for the quarter compared to 5.23% in the prior year period, exclusive of the prior year recovery of interest. Interest income increased by $761 thousand, or 16%, excluding the prior year recovery of interest, while interest expense increased by $241 thousand, or 13%. The yield on average earning assets for the six months ended June 30, 1998 was 8.45% compared to 8.39% in the prior year period, exclusive of the prior year recovery of interest. The increase in interest income was the result of growth in average earning assets combined with the six basis point increase in earning asset yields. The yield on average deposits for the six months ended June 30, 1998 was 3.00% compared to 3.14% in the prior year period. The increase in interest expense reflects growth in average deposits, although favorable changes in the mix of deposits offset a portion of the gross increase in interest expense related to the increase in deposits. Average earning assets for the six months ended June 30, 1998 increased by $17.5 million, or 15.4%, compared to the prior year period. A portion of the increase in average earning assets relative to the prior year period is attributable to the acquisition of three branches from Wells Fargo Bank on February 22, 1997. Deposits totaling $34 million were acquired with these branches and are only reflected in four out of the six months used to compute the average in the prior year. Excluding the impact of the initial acquisition of the branches, average earning assets would have increased by $6.2 million, or 5.2%. The gross earning asset growth would have been $19.6 million, or 17.3%, without the investment in life insurance contracts discussed above under Changes in Financial Condition--Other Assets. Although the insurance contracts have a cash surrender value that increases based upon an annual earnings rate, the contracts are accounted for as other assets, and the earnings are recorded as a component of other noninterest income. Loan yields increased by 8 basis points, while average loans increased by $10.6 million, or 19.2%, over the prior year period. The increase in average loans outstanding increased loans as a percentage of earning assets to 50% compared to 49% in the prior year period. The increased mix of earning assets offset the effect of declines in investment portfolio yields. 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 six months ended June 30, 1998 increased by $21.6 million, or 18.8%, compared to the prior year period. A portion of the increase in average deposits relative to the prior year period is attributable to the acquisition of three branches from Wells Fargo Bank on February 22, 1997. Deposits totaling $34 million were acquired with these branches and are only reflected in four out of the six months used to compute the average in the prior year. Excluding the impact of the initial acquisition of the branches, average deposits would have increased by $10.3 million, or 8.2%. The mix of deposits shifted away from higher cost certificates of deposit to noninterest bearing and lower yielding interest bearing demand deposit accounts. Average certificates of deposit were 33% of average deposits compared to 35% in the prior year quarter. The impact of the changed deposit mix offset $57 thousand of the gross increase in interest expense that resulted from the increase in deposits. In addition, reductions in the interest rates paid on transaction accounts offset an additional $41 thousand in interest expense. Provision for Loan Losses The provision for loan losses increased by $120 thousand compared to the negative $60 thousand recorded in the prior year period. The principal reason for the increase is the significant recoveries in the prior year period that led to the negative provision for that period. Total recoveries of loans charged off in previous years added $456 thousand to the allowance for loan losses during the prior year period compared to $43 thousand in the current year. Management's analysis of the allowance for loan losses as of March 31, 1997 indicated an overfunded condition, and $80 thousand of the reserve was credited to the provision for loan losses. Noninterest Income Noninterest income increased by $161 thousand, or 23%, over the prior year period. Service charge income increased by $62 thousand, or 16%, as a result of both the acquisition of three branches from Wells Fargo Bank on February 22, 1997 and increases in deposit accounts bankwide. Other noninterest income was $67 thousand compared to $27 thousand in the prior year due to $55 thousand in income from the investment in insurance contracts discussed above under Other Assets. 12 Income from the sale and servicing of loans increased by $59 thousand, or 21%, compared to the prior year period. The increase was dampened by a decline in SBA loan sales income. SBA loan sales income for the period declined by $68 thousand, or 57%, compared to the prior year period. The decline appears to be a matter of timing as opposed to a real decline in volume. The pipeline of SBA loans in process is currently larger than in the prior year, and SBA loan sales volume for the third and fourth quarter is expected to be significantly higher than the first half of the year. Income from the origination and sale of mortgage loans increased by $91 thousand, or 350%, over the prior year period. The increased mortgage income is attributable to declining interest rates, improving economic conditions, and business development efforts in the mortgage and construction lending area. Noninterest Expenses Noninterest expenses increased by $362 thousand, or 11%, compared to the prior year quarter. Approximately $184 thousand of the increase represents costs associated with a strategic growth initiative that was discontinued by the Company in May, 1998. Excluding those costs, noninterest expenses increased by 5.4%. Salaries and benefit expenses increased by $191 thousand, or 12%. A significant portion of the increase is attributable to the acquisition of three branches from Wells Fargo Bank on February 22, 1997. Some of the increase was also related to a new loan production office in Folsom, California that was opened earlier in 1998. Mortgage department staffing was also increased by three full-time equivalents relative to the prior year as a result of the increase in volumes. Occupancy expense increased by $46 thousand, or 17%. The increase in occupancy expenses is principally the result of three additional branch locations and the new loan production office in Folsom, California. These costs were partially offset by increased rental income resulting from increased occupancy at Bank of Lodi's main office building in Lodi. Other noninterest expenses increased by $66 thousand, or 5%. Approximately $72 thousand of this increase was related to the strategic costs that were discussed earlier in this paragraph. Excluding those costs, other noninterest expense declined by $5 thousand as reductions in intangible amortization offset increases related to the expanded branch network and account transaction volumes. 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 and six months ended June 30, 1998 are not necessarily indicative of the results which may be expected for the year ended December 31, 1998. The unaudited consolidated financial statements presented herein should be read in conjunction with the consolidated financial statements and notes included in the 1997 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. At and for the three and six months ended June 30, 1998, there were no material changes in the market risk profile of the Company or the Bank as described in the Company's 1997 Form 10-K. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable. 13 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 Investment Services On April 17, 1998, the Bank entered into an agreement with Investment Centers of America, Inc. (ICA) whereby ICA would provide stock, bond, mutual fund, annuity, and insurance services on-site at certain Bank branches. Under the agreement, ICA provides an investment representative and rents office space from the Bank, while the Bank pays for certain marketing and administrative costs related. The lease agreement is for a five year period, and the lease payment is based upon the transaction volume of the ICA office. ICA opened a sales office at the Bank's Lodi branch in May 1998. Elk Grove Branch On June 15, 1998, the Bank received approval from Office of the Comptroller of the Currency for a new branch in Elk Grove, California. The Bank has leased approximately 4,800 feet in the Elk Park Village shopping center in Elk Grove and is improving the space for use as a full service branch, including an ICA financial services sales office. The Bank expects to open the branch during the quarter ended September 30, 1998. Western Auxiliary Corporation On June 9, 1998 the Company incorporated Western Auxiliary Corporation (WAC). The Company expects to capitalize WAC as a wholly-owned subsidiary during the quarter ended September 30, 1998 with an initial capitalization of $10,000. WAC will earn fee income by acting as trustee on the Bank's trust deed transactions and will receive the necessary operational resources under an intercompany services agreement between the WAC, the Company, and the Bank. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number 11 Statement re computation of earnings per share is incorporated herein by reference to footnote 2 to the consolidated financial statements included in this report. 27 Financial Data Schedule. (b) Reports on Form 8-K On July 31, 1998 the Company filed a Current Report on Form 8-K regarding earnings for the quarter ended June 30, 1998 and the declaration of a cash dividend of $.05 per share payable August 28, 1998 to shareholders of record on August 14, 1998. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST FINANCIAL BANCORP Date August 7, 1998 /s/ David M. Philipp -------------- ---------------------------- David M. Philipp Executive Vice-President Chief Financial Officer Corporate Secretary EX-27 2 FINANCIAL DATA SCHEDULE
9 THE SCHEDULE CONTAINS SUMMARY FNANCIAL INFORMATION EXTRACTED FROM THE JUNE 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 3-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 8,167 0 3,500 0 54,800 1,705 1,759 69,823 1,358 152,057 138,212 0 644 0 0 0 7,559 5,642 152,057 1,776 878 85 2,739 1,061 1,061 1,678 30 0 1,851 236 0 0 0 181 .14 .13 5.17 302 411 0 0 1,340 37 25 1,358 1,358 0 950
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