-----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, JcKfloK5avz6vW1nKX9JmZGcF9/O+P2dE9LAnFSnU0hiHN0APGjm77L8FxHDBziN izK6w286McksuK/axnhzHw== 0000950005-99-000439.txt : 19990514 0000950005-99-000439.hdr.sgml : 19990514 ACCESSION NUMBER: 0000950005-99-000439 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 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: 99620247 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 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. ================================================================================ 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 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 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 FIRST FINANCIAL BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) Three Months Ended March 31
1999 1998 ---- ---- 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 ======== ========
3 FIRST FINANCIAL BANCORP AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (in thousands except share amounts) Three Months Ended March 31, 1998
Accumulated Common Common Other Stock Stock Comprehensive Retained Comprehensive Description Shares Amounts Income Earnings Income Total - ------------------------------------ ----------- ------------ --------------- --------- ---------------- ------------ 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 =========== ============ ========= ================ ============ See accompanying notes to consolidated financial statements.
4 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. (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:
Income Shares Per-Share Three months ended March 31, 1999 (numerator) (denominator) Amount -------------------------------------------------------- ------------------ ------------------- ---------- 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 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 ================== ===================
(3) Allowance for Loan Losses
3/31/99 12/31/98 ----------- --------- 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 =========== =========
6 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 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 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 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 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 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 The following table provides a detailed analysis of the net interest spread and net interest margin for the periods indicated:
------------------------------------ ------------------------------- -------------------------------- For the Quarter Ended For the Quarter Ended March 31, 1999 March 31, 1998 (in thousands) (in thousands) ------------------------------------ ------------------------------- ------------------------------ Average Income/ Average Income/ Balance Expenses Yield(1) Balance Expenses Yield(1) ------- -------- ------- ------- -------- -------- 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% ===== ==== ===== ===== ------------------------------------ ---------- ---------- --------- ---------- ----------- --------- (1) Yield for period annualized on actual number of days in period and based on a 365-day year. (2) Income on tax-exempt securities has not been adjusted to a tax equivalent basis. (3) Nonaccrual loans are included in the loan totals for each period; however, only collected interest on such loans is included in interest income.
Net interest income for the 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 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 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 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 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 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 EX-27 2 FINANCIAL DATA SCHEDULE
9 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. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 7,551 0 5,100 0 46,562 0 0 90,563 1,666 163,373 148,341 0 862 0 0 0 7,790 6,380 163,373 2,246 632 80 2,958 938 938 2,020 100 0 1,989 416 416 0 0 273 .20 .19 0 0 0 0 0 1,564 8 10 1,666 1,666 0 1,289
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