-----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, I/eme8K87lbCiGukkToHSnoyMISbZv5sbGPRcbpiFU5qItEV6c+YXxAS0f0Ahwtr 74TYsB3nsOYBLa/PGV2gNw== 0000929624-00-000478.txt : 20000331 0000929624-00-000478.hdr.sgml : 20000331 ACCESSION NUMBER: 0000929624-00-000478 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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-K405 SEC ACT: SEC FILE NUMBER: 000-12499 FILM NUMBER: 587314 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-K405 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 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) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of March 20, 2000, there were 1,445,034 shares of Common Stock, no par value, outstanding. The aggregate market value of the Common Stock held by non- affiliates of the registrant was approximately $15,083,000 (based on the $10.44 average of bid and ask prices per share on March 21, 2000). Documents Incorporated by Reference Part of Form 10-K into which ----------------------------------- ---------------------------- Incorporated ------------ Proxy Statement for the Annual Meeting of Shareholders to be held on April 25, 2000. Part III, Items 10, 11, 12, 13 ================================================================================ 1 FIRST FINANCIAL BANCORP 1999 FORM 10-K TABLE OF CONTENTS PART 1 - ---- ITEM 1. BUSINESS......................................................... 3 General.......................................................... 3 The Bank......................................................... 3 Bank Services.................................................... 3 Sources of Business.............................................. 4 Competition...................................................... 4 Employees........................................................ 4 Supervision and Regulation....................................... 5 The Company................................................. 5 The Bank.................................................... 6 Officers.................................................... 6 Recent Legislation and Regulations Affecting Banking........ 7 ITEM 2. PROPERTIES....................................................... 9 ITEM 3. LEGAL PROCEEDINGS................................................ 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 11 Part II - ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................................ 11 ITEM 6. SELECTED FINANCIAL DATA.......................................... 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................... 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 29 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................ 29 PART III - -------- ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 29 ITEM 11 EXECUTIVE COMPENSATION........................................... 29 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 29 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 29 PART IV - ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.. 30 Signatures................................................................ 57 Index to Exhibits......................................................... 58
2 PART I ITEM 1. BUSINESS General: - ------- First Financial Bancorp (the "Company") was incorporated under the laws of the State of California on May 13, 1982, and operates principally as a bank holding company for its wholly owned subsidiary, Bank of Lodi, N.A. (the "Bank"). The Company is registered under the Bank Holding Company Act of 1956, as amended. The Bank is the principal source of income for the Company. The Bank owns the office building where the Bank's Lodi Branch and administrative offices are located, and the Company owns the land upon which the Bank's Woodbridge Branch is located. The Company receives income from the Bank under the lease associated with the Woodbridge property. The Company also holds all of the capital stock of Western Auxiliary Corporation (WAC), a California Corporation which functions as trustee on deeds of trust securing mortgage loans originated by the Bank. All references herein to the "Company" include the Bank and WAC, unless the context otherwise requires. The Bank: - -------- The Bank was organized on May 13, 1982 as a national banking association. The application to organize the Bank was accepted for filing by the Comptroller of the Currency (the "OCC") on September 8, 1981, and preliminary approval to organize was granted on March 27, 1982. On July 18, 1983 the Bank received from the OCC a Certificate of Authority to Commence the Business of Banking. Subsequently, the Bank opened branch offices in Woodbridge and Lockeford, California. Effective February 22, 1997, the Bank acquired the Galt, Plymouth and San Andreas offices of Wells Fargo Bank. A loan production office in Folsom, California was opened in January, 1998, and was approved to operate as a full- service branch in July, 1999. In addition, a full-service branch was opened in Elk Grove, California in August, 1998. The Bank's headquarters is located at 701 South Ham Lane, Lodi, California. Branch offices are located in Woodbridge, Lockeford, Galt, Plymouth, San Andreas, Elk Grove and Folsom, California. The Bank's primary service area, from which the Bank attracts 75% of its business, is the city of Lodi and the surrounding area. This area is estimated to have a population approaching 70,000 persons, with a median annual family income of approximately $30,000. The area includes residential developments, neighborhood shopping centers, business and professional offices and manufacturing and agricultural concerns. Bank Services: - ------------- The Bank offers a wide range of commercial banking services to individuals and business concerns located in and around its primary service area. These services include personal and business checking and savings accounts (including interest- bearing negotiable order of withdrawal ("NOW") accounts and/or accounts combining checking and savings accounts with automatic transfers), and time certificates of deposit. The Bank also offers extended banking hours at its drive-through window, night depository and bank-by-mail services, and travelers' checks (issued by an independent entity). Each branch location has a 24 hour ATM machine, and the Bank has 24 hour telephone banking and bill paying services. The Bank issues MasterCard credit cards and acts as a merchant depository for cardholder drafts under both VISA and MasterCard. In addition, it provides note and collection services and direct deposit of social security and other government checks. During 1998, the Bank entered into an agreement with Investment Centers of America to offer stocks, bonds, mutual funds, annuities and insurance products through offices located on-site at Bank branches. The first Investment Centers of America office was established at the Lodi branch location, and additional offices are planned for Elk Grove and Folsom. The Bank engages in a full complement of lending activities, including commercial, Small Business Administration (SBA), residential mortgage, consumer/installment, and short-term real estate loans, with particular emphasis on short and medium-term obligations. Commercial lending activities are directed principally toward businesses whose demand for funds falls within the Bank's lending limit, such as small to medium-sized professional firms, retail and wholesale outlets and manufacturing and agricultural concerns. Consumer lending is oriented primarily to the needs of the Bank's customers, with an emphasis on automobile financing and leasing. Consumer loans also include loans for boats, home improvements, debt consolidation, and other personal needs. Real estate loans include short-term "swing" loans and construction loans. Residential mortgages are generally sold into the secondary market for these loans. SBA loans are made available to small to medium-sized businesses. The Bank generates noninterest income through premiums received on the sale of guaranteed portions of SBA loans and the resulting on-going servicing income on its SBA portfolio. 3 Sources of Business: - -------------------- Management seeks to obtain sufficient market penetration through the full range of services described above and through the personal solicitation of the Bank's officers, directors and shareholders. All officers are responsible for making regular calls on potential customers to solicit business and on existing customers to obtain referrals. Promotional efforts are directed toward individuals and small to medium-sized businesses. The Bank's customers are able in their dealings with the Bank to be served by bankers who have commercial loan experience, lending authority, and the time to serve their banking needs quickly and competently. Bankers are assigned to customers and not transferred from office to office as in many major chain or regional banks. In order to expedite decisions on lending transactions, the Bank's loan committee meets on a regular basis and is available where immediate authorization is important to the customer. The risk of non-payment (or deferred payment) of loans is inherent in commercial banking. Furthermore, the Bank's marketing focus on small to medium-sized businesses may involve certain lending risks not inherent in loans to larger companies. Smaller companies generally have shorter operating histories, less sophisticated internal record keeping and financial planning capabilities, and greater debt-to-equity ratios. Management of the Bank carefully evaluates all loan applicants and attempts to minimize its credit risk through the use of thorough loan application and approval procedures. Consistent with the need to maintain liquidity, management of the Bank seeks to invest the largest portion of the Bank's assets in loans of the types described above. Loans are generally limited to less than 75% of deposits and capital funds. The Bank's surplus funds are invested in the investment portfolio, made up of both taxable and non-taxable debt securities of the U.S. government, U.S. government agencies, states, and municipalities. On a day to day basis, surplus funds are invested in federal funds and other short-term money market instruments. Competition: - ----------- The banking business in California generally, and in the northern portion of central California where the Bank is located, is highly competitive with respect to both loans and deposits and is dominated by a relatively small number of major banks with branch office networks and other operating affiliations throughout the State. The Bank competes for deposits and loans with these banks, as well as with savings and loan associations, thrift and loan associations, credit unions, mortgage companies, insurance companies and other lending institutions. Among the advantages certain of these institutions have over the Bank are their ability (i) to finance extensive advertising campaigns, (ii) to allocate a substantial portion of their investment assets in securities with higher yields (not available to the Bank if its investments are to be diversified) and (iii) to make funds available for loans in geographic regions with the greatest demand. In competing for deposits, the Bank is subject to the same regulations with respect to interest rate limitations on time deposits as other depository institutions. See "Supervision and Regulation" below. Many of the major commercial banks operating in the Bank's service area offer certain services, such as international banking and trust services, which are not offered directly by the Bank, and such banks, by virtue of their greater capitalization, have substantially higher lending limits than the Bank. In addition, other entities, both public and private, seeking to raise capital through the issuance and sale of debt and equity securities compete with the Bank for the acquisition of funds for deposit. In order to compete with other financial institutions in its primary service area, the Bank relies principally on local promotional activities, personal contacts by its officers, directors, employees and shareholders, extended hours and specialized services. The Bank's promotional activities emphasize the advantages of dealing with a locally-owned and headquartered institution sensitive to the particular needs of the community. The Bank also assists customers in obtaining loans in excess of the Bank's lending limit or services not offered by the Bank by arranging such loans or services in participation with or through its correspondent banks. The State Bank Parity Act, effective January 1, 1996, eliminated certain existing disparities between California state chartered banks and national banking associations, such as the Bank, by authorizing the California Commissioner of Financial Institutions (the "Commissioner") to address such disparities through a streamlined rule-making process. Employees: - --------- As of December 31, 1999, the Company employed 101 full-time equivalent employees, including four executive officers. Management believes that the Company's relationship with its employees is good. 4 Supervision and Regulation The Company - ----------- The common stock of the Company is subject to the registration requirements of the Securities Act of 1933, as amended, and the qualification requirements of the California Corporate Securities Law of 1968, as amended. The Company is also subject to the periodic reporting requirements of Section 13(d) of the Securities Exchange Act of 1934, as amended, which include, but are not limited to, annual, quarterly and other current reports with the Securities and Exchange Commission. The Company is a bank holding company registered under the Bank Holding Company Act of 1956 (the "Act") and is subject to supervision by the Board of Governors of the Federal Reserve System (the "Board"). As a bank holding company, the Company must file with the Board quarterly reports, annual reports, and such other additional information as the Board may require pursuant to the Act. The Board may also make examinations of the Company and its subsidiaries. The Act requires prior approval of the Board for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares, or substantially all the assets, of any bank, or for a merger or consolidation by a bank holding company with any other bank holding company. The Act also prohibits the acquisition by a bank holding company or any of its subsidiaries of voting shares, or substantially all the assets, of any bank located in a state other than the state in which the operations of the bank holding company's banking subsidiaries are principally conducted, unless the statutes of the state in which the bank to be acquired is located expressly authorize such acquisition. With certain limited exceptions, a bank holding company is prohibited from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or furnishing services to, or performing services for, its authorized subsidiaries. A bank holding company may, however, engage in or acquire an interest in a company that engages in activities that the Board has determined to be so closely related to banking or to managing or controlling banks as to be properly incident thereto. In making such a determination, the Board is required to consider whether the performance of such activities reasonably can be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, which outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Board is also empowered to differentiate between activities commenced de novo and activities commenced by the acquisition, in whole or in part, of a going concern. Additional statutory provisions prohibit a bank holding company and any subsidiary banks from engaging in certain tie-in arrangements in connection with the extension of credit, sale or lease of property or furnishing of services. Thus, a subsidiary bank may not extend credit, lease or sell property, or furnish any services, or fix or vary the consideration for any of the foregoing on the condition that: (i) the customer must obtain or provide some additional credit, property or service from or to such bank other than a loan, discount, deposit or trust service; or (ii) the customer must obtain or provide some additional credit, property or service from or to the company or any other subsidiary of the company; or (iii) the customer may not obtain some other credit, property to service from competitors, except reasonable requirements to assure soundness of the credit extended. These anti-tying restrictions also apply to bank holding companies and their non-bank subsidiaries as if they were banks. The Company's ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law. The Bank is a legal entity separate and distinct from the Company, and is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Company. See Note 14(c) to the financial statements for further information regarding the payment of cash dividends by the Company and the Bank. The Company is a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Company and its subsidiaries are subject to examination by, and may be required to file reports with, the Commissioner. Regulations have not yet been proposed or adopted to implement the Commissioner's powers under this statute. The Bank: - -------- The Bank, as a national banking association whose deposit accounts are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum legal limits and the Bank is subject to regulation, supervision, and regular examination by the OCC. The Bank is a member of the Federal Reserve System, and, as such, is subject to certain provisions of the Federal Reserve Act and regulations issued by the Board. The Bank is also subject to applicable provisions of California law, insofar as they are not in conflict with, or preempted by, federal law. The regulations of these various agencies govern most aspects of the Bank's business, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends and location of branch offices. 5 Officers: - -------- Leon Zimmerman, age 57, is President and Chief Executive Officer of the Bank and of the Company; Robert H. Daneke, age 46, is Executive Vice President and Chief Credit Officer of the Bank and of the Company; Allen R. Christenson, age 42, is Senior Vice-President, Chief Financial Officer and Secretary of the Bank and of the Company and; Lance Gallagher, age 55, is Senior Vice President and Operations Administrator of the Bank and the Company. Mr. Zimmerman joined the Company in April, 1990. He was promoted from Executive Vice President and Chief Credit Officer of Bank of Lodi to President and CEO in August of 1994. Mr. Zimmerman became President and CEO of the Company effective August 1995. He lives in Lodi with his wife and has resided and worked in the San Joaquin-Sacramento Valley since 1960, serving in various banking capacities since 1962. Mr. Zimmerman serves on many community boards and committees, including the Lodi Police Chaplaincy Association, San Joaquin County Education Foundation, Chamber of Commerce - Economic Development Task Force & Agribusiness Committees, LEED - Sacramento Steering Committee and Lodi Grape Festival and Harvest Fair. He is an active member of Rotary, Sutter Club, Independent Order of Odd Fellows and several other community groups. Mr. Daneke joined the Company in December, 1999 bringing on board 22 years of banking experience. Prior to joining the Company, Mr. Daneke was employed at Clovis Community Bank for the past eight years and was promoted to Senior Vice President/Senior Credit Officer in 1997. In addition, his career has included: seven years with the Correspondent Bank Division of Community Bank in Redwood City and seven years with Bank of America Technology Banking Group. Mr. Daneke holds a B.B.A. Degree in Finance from the University of Iowa. He is also a graduate of Pacific Coast Banking School at the University of Washington and the California Intermediate Banking School at the University of San Diego. He has been President and Chairman of the Board for the Clovis District Chamber of Commerce and has served on the Board of Directors for both the Clovis Kiwanis Club and the Sequoia Council of Boy Scouts of America. Mr. Daneke has recently purchased a home in the Lodi area where he will reside with his wife and two children. Mr. Christenson joined the Company in August, 1999. Prior to joining the Company, Mr. Christenson was Senior Vice President and Chief Financial Officer of River City Bank, located in Sacramento, California (1994-1999). Prior to joining River City Bank, Mr. Christenson was Senior Vice President and Chief Financial Officer of CapitolBank Sacramento which was acquired by another Bank (1993-1994). Prior to joining CapitolBank Sacramento, Mr. Christenson was in public accounting for over eight years, specializing in financial audits and consulting within the financial services industry. Mr. Christenson is a Certified Public Accountant and has a Bachelors degree from California State University, Sacramento. He resides in South Sacramento with his wife and five children. He is a life-long resident of the greater Sacramento area and continues to serve in various community and civic organizations. Mr. Gallagher joined the Bank in February, 1991. He was promoted from Vice President of Compliance to Senior Vice President and Operations Administrator in January, 1997. As a graduate of the American Bankers Associations Graduate School of Compliance, he is responsible for the Bank's regulatory compliance program in addition to Bank operations and item processing. Prior to joining the Company, Mr. Gallagher was with Wells Fargo Bank for 22 years in various customer service, operations, and human resource capacities of increasing responsibility. He lives in San Joaquin County with his wife and has four boys and a grandson. Mr. Gallagher is a banking instructor for The American Institute of Banking and Delta Community College, serves as a member of the Colleges Banking Advisory Board, a member of the Heald College Employer Advisory Committee, and is the Initiation Coaching Program Director with U. S. Hockey Pacific District. Recent Legislation and Regulations Affecting Banking: - ---------------------------------------------------- From time to time, new laws are enacted which increase the cost of doing business, limit permissible activities, or affect the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of bank holding companies, banks and other financial institutions are frequently made in Congress, in the California legislature and before various bank holding company and bank regulatory agencies. The likelihood of any major changes and the impact such changes might have are impossible to predict. Certain significant recently proposed or enacted laws and regulations are discussed below. Interstate Banking. Since 1986, California has permitted California banks and bank holding companies to be acquired by banking organizations based in other states on a "reciprocal" basis (i.e., provided the other state's laws permit California banking organizations to acquire banking organizations in that state on substantially the same terms and conditions applicable to local banking organizations). Since October 2, 1995, California law implementing certain provisions of prior federal law have (1) permitted interstate merger transactions; (2) prohibited interstate branching through the acquisition of a branch business unit located in California without acquisition of the whole unit of the California bank; and (3) prohibited interstate branching through 6 de novo establishment of California branch offices. Initial entry into California by an out-of-state institution must be accomplished by acquisition of or merger with an existing whole bank which has been in existence for at least five years. Capital Requirements. Federal regulation imposes upon all FDIC-insured financial institutions a variable system of risk-based capital guidelines designed to make capital requirements sensitive to differences in risk profiles among banking organizations, to take into account off-balance sheet exposures and to aid in making the definition of bank capital uniform internationally. Under the OCC's risk-based capital guidelines, the Bank is required to maintain capital equal to at least 8 percent of its assets, weighted by risk. Assets and off-balance sheet items are categorized by the guidelines according to risk, and certain assets considered to present less risk than others permit maintenance of capital below the 8 percent level. The guidelines established two categories of qualifying capital: Tier 1 capital comprising core capital elements, and Tier 2 comprising supplementary capital requirements. At least one-half of the required capital must be maintained in the form of Tier 1 capital. For the Bank, Tier 1 capital includes only common stockholders' equity and retained earnings, but qualifying perpetual preferred stock would also be included without limit if the Bank were to issue such stock. Tier 2 capital includes, among other items, limited life (and in the case of banks, cumulative) preferred stock, mandatory convertible securities, subordinated debt and a limited amount of the allowance for loan and lease losses. The guidelines also require all insured institutions to maintain a minimum leverage ratio of 3 percent Tier 1 capital to total assets (the "leverage ratio"). The OCC emphasizes that the leverage ratio constitutes a minimum requirement for the most well-run banking organizations. All other banking organizations are required to maintain a minimum leverage ratio ranging generally from 4 to 5 percent. The Bank's required minimum leverage ratio is 4 percent. The federal banking agencies during 1996 issued a joint agency policy statement regarding the management of interest-rate risk exposure (interest rate risk is the risk that changes in market interest rates might adversely affect a bank's financial condition) with the goal of ensuring that institutions with high levels of interest-rate risk have sufficient capital to cover their exposures. This policy statement reflected the agencies' decision at that time not to promulgate a standardized measure and explicit capital charge for interest rate risk, in the expectation that industry techniques for measurement of such risk will evolve. However, the Federal Financial Institutions Examination Council ("FFIEC") on December 13, 1996, approved an updated Uniform Financial Rating System ("UFIRS"). In addition to the five components traditionally included in the so- called "CAMEL" rating system which has been used by bank examiners for a number of years to classify and evaluate the soundness of financial institutions (including capital adequacy, asset quality, management, earnings and liquidity), UFIRS includes for all bank regulatory examinations conducted on or after January 1, 1997, a new rating for a sixth category identified as sensitivity to market risk. Ratings in this category are intended to reflect the degree to which changes in interest rates, foreign exchange rates, commodity prices or equity prices may adversely affect an institution's earnings and capital. The rating system henceforth will be identified as the "CAMELS" system. As of December 31, 1999, the Bank's total risk-based capital ratio was approximately 10.51 percent and its leverage ratio was approximately 7.82 percent. The Bank does not presently expect that compliance with the risk-based capital guidelines or minimum leverage requirements will have a materially adverse effect on its business in the reasonably foreseeable future. Nor does the Bank expect that its sensitivity to market risk will adversely affect its overall CAMELS rating as compared with its previous CAMEL ratings by bank examiners. Deposit Insurance Assessments. In 1995, the FDIC, pursuant to Congressional mandate, reduced bank deposit insurance assessment rates to a range from $0 to $.27 per $100 of deposits, dependent upon a bank's risk. The FDIC has continued these reduced assessment rates through 1999. Based upon the above risk-based assessment rate schedule, the Bank's current capital ratios, the Bank's current level of deposits, and assuming no further change in the assessment rate applicable to the Bank during 1999, the Bank estimates that its annual noninterest expense attributed to the regular assessment schedule will not increase during 1999. Prompt Corrective Action. Prompt Corrective Action Regulations (the "PCA Regulations") of the federal bank regulatory agencies established five capital categories in descending order (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized), assignment to which depends upon the institution's total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio. Institutions classified in one of the three undercapitalized categories are subject to certain mandatory and discretionary supervisory actions, which include increased monitoring and review, implementation of capital restoration plans, asset growth restrictions, limitations upon expansion and new business activities, requirements to augment capital, restrictions upon deposit gathering and interest rates, replacement of senior executive officers and directors, and requiring divestiture or sale of the institution. The Bank has been classified as a well-capitalized bank since adoption of the PCA Regulations. 7 Community Reinvestment Act. Community Reinvestment Act ("CRA") regulations effective as of July 1, 1995 evaluate banks' lending to low and moderate income individuals and businesses across a four-point scale from "outstanding" to "substantial noncompliance," and are a factor in regulatory review of applications to merge, establish new branches or form bank holding companies. In addition, any bank rated in "substantial noncompliance" with the CRA regulations may be subject to enforcement proceedings. The Bank has a current rating of "satisfactory" CRA compliance. Safety and Soundness Standards. Federal bank regulatory agency safety and soundness standards for insured financial institutions establish standards for (1) internal controls, information systems and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; and (6) compensation, fees and benefits. In addition, the standards prohibit the payment of compensation which is excessive or which could lead to material financial loss. If an agency determines that an institution fails to meet any standard established by the guidelines, the agency may require the financial institution to submit to the agency an acceptable plan to achieve compliance with the standard. Agencies may elect to initiate enforcement action in certain cases where failure to meet one or more of the standards could threaten the safe and sound operation of the institution. The Bank has not been and does not expect to be required to submit a safety and soundness compliance plan because of a failure to meet any of the safety and soundness standards. Permitted Activities. In recent years, the Federal banking agencies, especially the OCC and the Board, have taken steps to increase the types of activities in which national banks and bank holding companies can engage, and to make it easier to engage in such activities. On November 20, 1996, the OCC issued final regulations permitting national banks to engage in a wider range of activities through subsidiaries. "Eligible institutions" (those national banks that are well capitalized, have a high overall rating and a satisfactory CRA rating, and are not subject to an enforcement order) may engage in activities related to banking through operating subsidiaries after going through a new expedited application process. In addition, the new regulations include a provision whereby a national bank may apply to the OCC to engage in an activity through a subsidiary in which the bank itself may not engage. Although the Bank in not currently intending to enter into any new type of business, this OCC regulation could be advantageous to the Bank if the Bank determines to expand its operations in the future, depending on the extent to which the OCC permits national banks to engage in new lines of business and whether the Bank qualifies as an "eligible institution" at the time of making application. Monetary Policies. Banking is a business in which profitability depends on rate differentials. In general, the differences between the interest rate received by a bank on loans extended to its customers and securities held in that bank's investment portfolio and the interest rate paid on its deposits and its other borrowings constitute the major portion of the bank's earnings. To the extent that a bank is not able to compensate for increases in the cost of deposits and other borrowings with greater income from loans, securities and fees, the net earnings of that bank will be reduced. The interest rates paid and received by any bank are highly sensitive to many factors which are beyond the control of that bank, including the influence of domestic and foreign economic conditions. See Item 7 herein, Management's Discussion and Analysis of Financial Condition and Results of Operations. The earnings and growth of a bank are also affected by the monetary and fiscal policy of the United States Government and its agencies, particularly the Board. These agencies can and do implement national monetary policy, which is used in part to curb inflation and combat recession. Among the instruments of monetary policy used by these agencies are open market transactions in United States Government securities, changes in the discount rates of member bank borrowings, and changes in reserve requirements. The actions of the Board have had a significant effect on banks' lending, investments and deposits, and such actions are expected to continue to have a substantial effect in the future. However, the nature and timing of any further changes in such policies and their impact on banks cannot be predicted. Financial Services Modernization Legislation. On November 12, 1999 President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the "Modernization Act"). The Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricts the affiliation of Federal Reserve Member banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. In addition, the Modernization Act also expressly preempts any state law restricting the establishment of financial affiliations, primarily related to insurance. The law establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a Financial Holding Company. "Financial activitities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. In order for the Company to take advantage of the ability provided by the Modernization Act to affiliate with other financial service providers, it must become a "Financial Holding Company." To do so, the Company would file a declaration with the Federal Reserve, electing to engage in activities permissible for Financial Holding Companies and certifying that it is eligible to do so because its insured depository institution subsidiary (the Bank) is well-capitalized and well-managed. In addition, the Federal Reserve must also determine that an insured depository institution subsidiary has at least a "satisfactory" rating under the Community Reinvestment Act. [The Company currently meets the requirements for Financial Holding Company status.] The Company will continue to monitor its strategic business plan to determine whether, based on market conditions and other factors, the Company wishes to utilize any of its expanded powers provided in the Modernization Act. Under the Modernization Act, securities firms and insurance companies that elect to become Financial Holding Companies may acquire banks and other financial institutions. The Company does not believe that the Modernization Act will have a material adverse effect on its operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that the Company and the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources that the Company and the Bank. Proposed Legislation and Regulation. Certain legislative and regulatory proposals that could affect the Bank and the banking business in general are pending or may be introduced before the United States Congress, the California State Legislature and Federal and state government agencies. The United States Congress is considering numerous bills that could reform banking laws substantially. It is not known whether any of these current legislative proposals will be enacted and what effect such legislation would have on the structure, regulation and competitive relationships of financial institutions. It is likely, however, that many of these proposals would subject the Bank to increased regulation, disclosure and reporting requirements and would increase competition to the Bank and its cost of doing business. 8 In addition to pending legislative changes, the various banking regulatory agencies frequently propose rules and regulations to implement and enforce already existing legislation. It cannot be predicted whether or in what form any such rules or regulations will be enacted or the effect that such rules and regulations may have on the Bank's business. The above description of the business of the Bank should be read in conjunction with Item 7 herein, Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 2. PROPERTIES The Bank owns a 0.861 acre lot located at the corner of Ham Lane and Tokay Street, Lodi, California. A 34,000 square foot, tri-level commercial building for the main branch and administrative offices of the Company and the Bank was constructed on the lot. The Company and the Bank use approximately 75% of the leasable space in the building and the remaining area is either leased or available for lease as office space to other tenants. The construction of this building in 1991 has enabled the Bank to better serve its customers with more teller windows, four drive-through lanes and expanded safe deposit box capacity. The Company owns a 10,000 square foot lot located on Lower Sacramento Road in the unincorporated San Joaquin County community of Woodbridge, California. The entire parcel has been leased to the Bank on a long term basis at market rates. The Bank has constructed, furnished and equipped a 1,437 square foot branch office on the parcel and commenced operations of the Woodbridge Branch on December 15, 1986. The Bank assumed a long-term ground lease on 1.7 acres of land at 19000 North Highway 88, Lockeford, California. The building previously occupying the Lodi site at 701 South Ham Lane was moved to Lockeford, California, and has become the permanent branch office of the Bank at that location. A temporary 1,000 square foot office had been used by the Bank at the Lockeford location. The permanent office was opened on April 1, 1991. The temporary office, along with a portion of the permanent building, are leased by the Bank to two tenants. On February 22, 1997, the Bank acquired the Galt, Plymouth and San Andreas branches of Wells Fargo Bank. The transaction included the assumption of the 6,000 square foot branch building lease in Galt with a remaining term of two years, and the purchase of the branch building and land for the Plymouth and San Andreas offices. The Plymouth and San Andreas offices are approximately 1,200 and 5,500 square feet, respectively. In November, 1998, upon expiration of the Galt lease, the Galt branch was relocated to a new 3,000 square foot leased facility one block west of the old location. The new Galt location is leased under a five year lease with three successive five-year renewal options. In January, 1998, the Bank opened a 1,220 square foot loan production office in Folsom, California. The office was leased for one year with a one year renewal option which has been exercised by the Bank. In July, 1999 the Bank received approval to operate the Folsom office as a full-service branch. In December 1999, the lease was extended for one year to allow the Bank time identify a permanent location within the Folsom community. In August, 1998, the Bank opened a 4,830 square foot full service branch in Elk Grove, California. The office is leased under a three year lease with two successive three-year renewal options. ITEM 3. LEGAL PROCEEDINGS Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for the common stock of the Company. The Company's common stock is traded in the over-the-counter market and is not presently listed on a national exchange or reported by the NASDAQ Stock Market. Trading of the stock has been limited and has been principally contained within the Company's general service area. As of March 1, 2000, there were 1,033 shareholders of record of the Company's common stock. Set forth below is the range of high and low bid prices for the common stock during 1999 and 1998. 1999 1998 Bid Price of Common Shares High Low High Low First Quarter $12.25 11.00 13.25 13.00 Second Quarter 12.50 11.00 14.50 13.63 Third Quarter 12.50 10.63 14.63 13.25 Fourth Quarter 11.00 9.12 13.38 12.00 The foregoing prices are based on trades of which Company is aware and reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions. ITEM 6. SELECTED FINANCIAL DATA
(in thousands except per share amounts) Consolidated Statement of Income 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------- Interest Income $ 12,526 11,508 10,592 8,045 8,089 Interest Expense 3,699 4,028 3,785 3,254 3,138 Net Interest Income 8,827 7,480 6,807 4,791 4,951 Provision for Loan Losses 1,051 250 (60) 310 115 Noninterest Income 2,461 1,878 1,423 1,067 940 Noninterest Expense 8,803 7,712 6,796 4,654 4,534 Net Income $ 1,159 1,052 1,015 640 843 Per Share Data - -------------------------------------------------------------------------------------------------- Basic Earnings $ .83 .76 .74 .48 .63 Diluted Earnings .80 .72 .71 .47 .62 Cash Dividends Declared $ .20 .20 .20 .20 .15 Consolidated Balance Sheet Data - -------------------------------------------------------------------------------------------------- Federal Funds Sold $ 100 4,800 4,900 1,100 3,300 Investment Securities 36,096 45,647 61,917 36,913 36,945 Loans, net of loss reserve and deferred fees 109,594 91,078 62,228 52,672 50,524 Total Assets 176,334 164,400 147,850 104,913 103,972 Total Deposits 156,161 149,544 133,891 92,207 89,216 Other Borrowings 4,300 - - - 2,585 Total Stockholders' Equity $ 14,521 13,857 12,861 11,889 11,564
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this Annual Report on Form 10-K 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 33 through 55, as well as other information presented throughout this report. Summary of Earnings Performance - -------------------------------------------------------------------------------- For the Year Ended December 31: ------------------------------------------ 1999 1998 1997 Earnings (in thousands) $ 1,159 1,052 1,015 - -------------------------------------------------------------------------------- Basic earnings per share $ .83 .76 .74 Diluted earnings per share $ .80 .72 .71 Return on average assets 0.69% 0.68% 0.75% Return on average equity 8.19% 7.90% 8.18% Dividend payout ratio 24.19% 26.26% 26.86% - -------------------------------------------------------------------------------- Average equity to average assets 8.40% 8.64% 9.12% - -------------------------------------------------------------------------------- Basic earnings per share in 1999 were $.83, compared to $.76 and $.74 in 1998 and 1997, respectively. During 1999, the Company benefited from a 21.1% increase in gross loans which resulted in an increase in net interest income. Net interest income was also impacted by the shift in earning assets combined with a general decline in rates. As a result of the increase in loans, the Company did increase the provision for loan losses. Furthermore, the Company experienced a 31% increase in noninterest income and a 14% increase in noninterest expense during the year. Included in noninterest income is a $287,000 gain resulting from stock received from an insurance company which converted from a mutual to a stock based company during 1999. The Company purchased a policy from the insurance company and the stock was received as part of the demutualization. Earnings of the Company continue to be negatively impacted by the amortization of the premium associated with the acquisition of three branches from Wells Fargo Bank on February 22, 1997. Additionally, the Company incurred $152,000 in one time expenses during 1999 in preparation for the year 2000 date change. During 1998, loans and deposits increased 45% and 12%, respectively from 1997. In addition the company experienced record levels of mortgage loan origination and sales volumes. Deposits grew in connection with business development efforts in both 1998 and 1997 as well as the acquisition of three branches from Wells Fargo Bank on February 22, 1997. The acquisition increased deposits by $34 million as of the closing date of the transaction. 11 Branch Expansion and Acquisitions In August, 1998, the Bank opened a full-service branch in the Elk Grove, California market. The Elk Grove office is approximately 30 miles North of the Bank's corporate headquarters in Lodi, California and it effectively expands the Bank's trade area into South Sacramento County. In January, 1998, the Bank opened a loan production office in the growing market of Folsom, California. The location was converted to a full-service branch in July, 1999. The Folsom office is approximately 45 miles Northeast of the Bank's corporate headquarter's in Lodi, California and effectively expanded the Bank's trade area into the greater Sacramento area. On February 22, 1997, the Bank completed the acquisition of the Galt, Plymouth, and San Andreas, California, branches of Wells Fargo Bank. The Bank purchased the premises and equipment of the Plymouth and San Andreas branches and assumed the building lease for the Galt branch. The Bank also purchased the furniture and equipment of all three branches and paid a premium for the deposits of each branch. The total cost of acquiring the branches, including payments to Wells Fargo Bank as well as other direct costs associated with the purchase, was $2.86 million. The transaction was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated first to identifiable tangible assets based upon those assets' fair value and then to identifiable intangible assets based upon the assets' fair value. The excess of the purchase price over identifiable tangible and intangible assets was allocated to goodwill. Allocations to identifiable tangible assets, identifiable intangible assets, and goodwill were $856 thousand, $1.98 million, and $24 thousand, respectively. Deposits totaling $34 million were acquired in the transaction. 12 Net Interest Income The following table provides a detailed analysis of net interest spread and net interest margin for the years ended December 31, 1999, 1998, and 1997, respectively:
- ------------------------------------------------------------------------------------------------------------------------------------ For the Year Ended For the Year Ended For the Year Ended December 31, 1999 December 31, 1998 December 31, 1997 (Dollar amounts (Dollar amounts (Dollar amounts in thousands) in thousands) in thousands) ------------------------------------------------------------------------------------------------------- Average Income/ Average Income/ Average Income/ Balance Expenses Yield Balance Expenses Yield Balance Expense Yield ------- -------- ----- ------- -------- ----- ------- ------- ----- Earning Assets: Investment securities (1) $ 41,050 2,413 5.88% 53,370 3,431 6.43% 53,580 3,519 6.57% Federal funds sold 4,150 202 4.86% 6,780 348 5.13% 8,400 461 5.49% Loans (2) 101,120 9,911 9.80% 73,720 7,729 10.48% 58,600 6,612 11.28% -------- ------ ---- ------- ------ ----- ------- ------- ----- $146,320 12,526 8.56% 133,870 11,508 8.60% 120,580 10,592 8.78% ======== ====== ==== ======= ====== ===== ======= ======= ===== Liabilities: Noninterest bearing deposits $ 19,830 - - 17,080 - - 13,470 - - Savings, money market, & NOW deposits 82,110 1,358 1.65% 76,600 1,652 2.16% 67,520 1,660 2.46% Time deposits 50,690 2,330 4.60% 46,800 2,376 5.08% 41,550 2,125 5.11% Other borrowings 170 11 6.25% - - - - - - -------- ------ ---- ------- ------ ----- ------- ------ ----- Total Liabilities $152,800 3,699 2.42% 140,480 4,028 2.87% 122,540 3,785 3.09% ======== ====== ==== ======= ====== ===== ======= ====== ===== Net Spread 6.14% 5.73% 5.69% ==== ===== =====
- ------------------------------------------------------------------------------------------------------------------------------------ Earning Income Earning Income Earning Income Assets (Expense) Yield Assets (Expenses) Yield Assets (Expense) Yield ------ --------- ----- ------ ---------- ----- ------ --------- ----- Yield on average earning assets $146,320 12,526 8.56% 133,870 11,508 8.60% 120,580 10,592 8.78% Cost of funds for average earning assets 146,320 (3,699) 2.53% 133,870 (4,028) 3.01% 120,580 (3,785) (3.13%) -------- ------ ---- ------- ----- ----- ------- ------ ----- Net Interest Margin $146,320 8,827 6.03% 133,870 7,480 5.59% 120,580 6,807 5.65% ======== ====== ==== ======= ===== ===== ======= ====== ===== - ------------------------------------------------------------------------------------------------------------------------------------
(1) Income on tax-exempt securities has not been adjusted to a tax equivalent basis. (2) Nonaccrual loans are included in the loan totals for each year. Net interest income increased by 18% in 1999 after increasing by 10% in 1998. The increase in 1999 was the result of a 9.3% increase in average earning assets combined with an 8.6% increase in average deposits in addition to a decrease in overall deposit costs. The increase in 1998 was also the result of both growth in earning assets and deposits as well as decreased earning asset yields and decreased deposit costs. Average earning assets increased by 9% in 1999 compared to 1998 and 11% in 1998 compared to 1997. The increase in average earning assets was driven by growth in average deposits during both years. Average deposits increased by 9% in 1999 compared to 1998 and 15% in 1998 compared to 1997. The mix of earning assets in 1999 changed as a result of year-over-year loan growth of 21% compared to 45% in 1998. Average loans in 1999 increased 37% compared to 1998. The increase absorbed the liquidity created by the growth in deposits during 1999 and offset the impact of falling interest rates in all asset categories. The loan growth also increased the average loan-to-deposit ratio to 66% in 1999 compared to 52% in 1998. Average investments decreased 23% in 1999 as compared to 1998 as a result of the increase in loans. Average investments were nearly unchanged in 1998 compared to 1997. 13 Net interest margin increased by 44 basis points in 1999 after declining by 6 basis points in 1998. This increase in 1999 was the result of several key items: . The impact on average earning asset yields of declining interest rates was overcome by the growth in loans that had higher yields than investments and federal funds sold. While the yields on federal funds and investments declined by 27 and 55 basis points, respectively, earning asset yields decreased by 4 basis points. . The general decline in interest rates helped to bring down the cost of average NOW, money market, savings and certificates of deposit by 17, 90, 60, and 48 basis points, respectively. . The mix of noninterest bearing deposits increased to 13% of average deposits in 1999 from 12% in 1998. Net interest margin declined by 6 basis points in 1998 after increasing by 50 basis points in 1997. Excluding the impact of interest from the recovery of loan losses in 1997, net interest margin would have increased by 31 basis points in 1998. This adjusted increase in 1998 was the result of several key items: . The impact on average earning asset yields of declining interest rates was overcome by the growth in loans that had higher yields than investments and federal funds sold. While the yields on federal funds and investments declined by 36 and 14 basis points, respectively, earning asset yields decreased by 18 basis points. . The general decline in interest rates helped to bring down the cost of average NOW, savings and certificates of deposit by 32, 26, and 3 basis points, respectively. . The mix of noninterest bearing deposits increased to 12% of average deposits in 1998 from 11% in 1997. The following table presents the monetary impact of the aforementioned changes in earning asset and deposit volumes, yields and mix for the two years ended December 31, 1999 and 1998.
1999 compared to 1998 1998 compared to 1997 (in thousands) (in thousands) Change due to: Change due to: Interest Income: Volume Rate Mix Total Volume Rate Mix Total -------- ----- ----- ------- ------ ----- ----- ------ ---------------------------------------------------------------- Investment securities $ (987) (43) 12 (1,018) 391 (79) (400) (88) Federal funds sold (135) (18) 7 (146) 51 (30) (134) (113) Loans 2,873 (504) (187) 2,182 735 (470) 852 1,117 ------ ---- ---- ------ ----- ---- ---- ----- Total interest income $1,751 (565) (168) 1,018 1,177 (579) 318 916 ====== ==== ==== ====== ===== ==== ==== ===== Interest Expense: Savings, money market, & NOW accounts $ 117 (384) (27) (294) 243 (206) (45) (8) Time deposits 197 (224) (19) (46) 311 (15) (45) 251 Other borrowings 11 - - 11 - - - - ------ ---- ---- ------ ----- ---- ---- ----- Total interest expense $ 325 (608) (46) (329) 554 (221) (90) 243 ====== ==== ==== ====== ===== ==== ==== ===== Net interest income $1,426 43 (122) 1,347 623 (358) 408 673 ====== ==== ==== ====== ===== ==== ==== ===== - ---------------------------------------------------------------------------------------------
The volume, rate, and mix variances for net interest income in 1999 compared to 1998 indicate that the 37% increase in average loans was offset by a negative mix variance combined with a decrease in rates. During 1999, average earning assets increased 9%. Average loans, the primary component of earning assets, comprised 69% and 55% of total earning assets during 1999 and 1998, respectively. Average investment securities and federal funds sold decreased 23% and 39%, respectively. While average deposits increased 9% during 1999, the average rate paid on deposit accounts declined 16% resulting in a reduction in total interest expense. The volume, rate, and mix variances for net interest income in 1998 compared to 1997 indicate that a negative rate variance driven by falling interest rates was offset by a positive mix variance driven by a 26% increase in average loans. That left the net increase in net interest income approximately equal to the positive volume variance from the 11% growth in average earning assets. The net interest income rate variance is significantly impacted by $445 thousand in 1997 resulting from interest income recognized in connection with the recovery of loans which had been previously charged off. Excluding the recovered interest 14 from 1997, the rate variance would have been a positive $87 thousand despite falling earning asset yields. The benefit from declining deposit rates more than offsets declines in interest income that resulted from falling earning asset yields. Allowance for Loan Losses The following table reconciles the beginning and ending allowance for loan losses for the previous five years. Reconciling activity is broken down into the three principal items that impact the reserve: (1) reductions from charge- offs; (2) increases from recoveries; and (3) increases or decreases from positive or negative provisions for loan losses.
- -------------------------------------------------------------------------------------------------------------- (in thousands) 1999 1998 1997 1996 1995 Balance at beginning of period $1,564 1,313 1,207 959 1,127 Charge-offs: Commercial 90 67 249 237 357 Real estate - 25 - - 30 Consumer 20 40 41 97 95 ------ ----- ----- ----- ----- Total Charge-offs 110 132 290 334 482 Recoveries: Commercial 68 112 434 260 174 Real estate - - - - - Consumer 7 21 22 12 25 ------ ----- ----- ----- ----- Total Recoveries 75 133 456 272 199 ------ ----- ----- ----- ----- Net charge-offs (35) (1) (166) 62 283 Additions charged to operations 1,051 250 ( 60) 310 115 ------ ----- ----- ----- ----- Balance at end of period $2,580 1,564 1,313 1,207 959 ====== ===== ===== ===== ===== Ratio of net charge-offs to average loans outstanding (.03%) (.001%) (.28%) 0.11% 0.50% ====== ===== ===== ===== ===== - --------------------------------------------------------------------------------------------------------------
Footnote 1(g) to the consolidated financial statement discusses the factors used in determining the provision for loan losses and the adequacy of the allowance for loan losses. Charge-off activity declined by 17% in 1999 compared to 1998, and 54% in 1998 compared to 1997, while recoveries declined by 44% and 71%, respectively, during the same period. The decline in charge-offs is consistent with the asset quality statistics discussed below in the Asset Quality section. The Bank has not modified or significantly excepted its underwriting standards despite growing competition within the industry. The loan loss provision for 1999 totaled $1,051,000 and represents an increase of $801,000 (320%) over 1998. The reason for the increase is attributable primarily to two factors; the primary factor being the continued year-over-year increase in the loan portfolio. Secondly, during the fourth quarter of 1999, the Company became aware of the deteriorating condition in the credit quality of a few specific loans. As a result, the provision for loan losses totaled $650,000 during the fourth quarter of 1999. The loan loss provision for 1998 increased $310,000 relative to 1997. The increase was attributable to two factors; loan growth in 1998 and recoveries during 1997. With year-over-year increase in the loan portfolio totaling 45%, a larger provision was deemed necessary as a result of the significant growth in lending volume and the losses inherent in that volume. In addition, the 1997 provision was negative as a result of the significant recoveries that effectively amplified the year-to-year change in the provision with respect to both 1998 and 1996. The declining charge-offs and larger recoveries during 1997 increased the loan loss reserve by more than management believed was necessary to provide for loss potential in the loan portfolio. Accordingly, a negative provision resulted from the reversal of a portion of the reserve. The loan loss provision for 1996 exceeded the provision for 1995 by 170%. Although net charge-offs declined from 1995 to 1996, management determined that the loan loss provision of $310 thousand was necessary to provide for the loss potential with respect to a specific group of loan relationships that exhibited increased credit risk at that time. 15 Noninterest Income Noninterest income increased by 31% and 32% in 1999 and 1998, respectively. The primary components of noninterest income consist of: service charges, SBA and mortgage income, and other noninterest income. The following table summarizes the significant elements of service charge, SBA, mortgage and Farmer Mac revenue for the three years ending 1999, 1998, and 1997:
- ------------------------------------------------------------------------------------------------------------------------- (in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Periodic deposit account charges $ 407 352 307 Returned item charges 463 344 332 Ancillary services charges 98 82 70 Other service charges 110 68 57 --------------------------------------- Total service charge revenue 1,078 846 766 ======================================= Gain on sale of SBA loans 177 191 217 SBA loan servicing revenue 207 226 199 --------------------------------------- Total SBA revenue 384 417 416 Gain on sale of mortgage loans 133 243 77 Mortgage loan servicing revenue 122 92 53 --------------------------------------- Total mortgage revenue 255 335 130 Farmer Mac origination, sale and servicing 42 32 29 --------------------------------------- Total loan origination, sale and servicing revenue $ 681 784 575 - -------------------------------------------------------------------------------------------------------------------------
Service charge revenue increased by 27% in 1999 compared to 1998 and 10% in 1998 compared to 1997. The growth in service charge income for 1999 was driven by deposit growth combined with changes to the fee structure of certain deposit products. While average deposits grew 9% in 1999, noninterest-bearing demand deposits and NOW accounts increased 16% and 11%, respectively. The growth in service charge income for 1998 was driven by average deposit growth of 15%. SBA and mortgage revenue declined 8% and 24%, respectively, during 1999 and 1998 while Farmer Mac revenue increased 31% during 1999 as compared to 1998. During 1999, the Company experienced increased competition in the SBA origination market, the result of which was a decline in production and relating gains on the sale of SBA loans. Additionally, the mortgage department experienced a decline in sales volume and the related margins on mortgage loans sold. Revenue from SBA loan sales during 1998 was nearly comparable to the record level set in 1997, when SBA loan sales revenue increased by 33% over 1996. While SBA loan originations increased in 1998 relative to 1997, the production cycle for many of these loans extended relative to 1997, and fewer loans were sold. Partially disbursed SBA loans at December 31, 1998 were $6.4 million compared to $1.1 million at December 31, 1997. The 33% increase in 1997 was the result of both increases in the volume of loans originated and sold as well as a general increase in the loan sale premiums realized in the secondary market for SBA loan sales. During 1996, a new incentive compensation program was put into place. The program was designed to provide incentives for increasing levels of production. As production increased, the SBA servicing portfolio increased and resulted in the 13% and 9% increases in SBA servicing revenue for 1998 and 1997, respectively. Revenue from mortgage loan sales reached a new record in 1998, surpassing the previous record by 216%. Mortgage operations were reorganized in 1994, and part of the annual increases since that time are the result of the relationships that have been developed with builders, realtors, and title companies. In addition to reorganized operations, housing activity in the Bank's trade area continued to improve in 1998, building on the improvements in 1997. The Bank continues to package home construction and mortgage take-out loans in a competitive manner and has successfully marketed this product in the new trade areas that were opened as a result of the acquisition of branches from Wells Fargo Bank in early 1997 (see "Branch Acquisition" above). Finally, declining mortgage rates during 1998 and 1997 had a favorable impact on mortgage loan refinance volumes. The Bank began to participate in the Federal Agricultural Mortgage Corporation ("Farmer Mac") lending program in late 1994, whereby qualifying mortgage loans on agricultural property are originated and sold. 16 During 1998, the Company purchased single-premium life insurance policies written on the lives of certain officers and the directors of the Company and the Bank. During 1999, one of the insurance companies converted from a mutual to a stock based company, which process is referred to as "demutualization." As a result of the demutualization, policyholders of the insurance company received shares of common stock of the insurance company. The number of shares of stock received by policyholders was based upon the cash surrender value of the individual policies. The Company received and subsequently sold the stock in December, 1999. The gain recognized upon the receipt of the stock totaled $287,000. Noninterest Expenses Noninterest expenses increased by 14% in 1999 compared to 1998 and 13% in 1998 compared to 1997. Several events had a significant impact on year-to-year comparability. During 1999, the primary events related to expenses associated with the year 2000 date change. In 1998 and 1997, the Company expanded its branch network, opening two new branches in 1998 and purchasing three branches from Wells Fargo in 1997. Noninterest expense is broken down into four primary categories each of which is discussed in this section. Salaries and Employee Benefits - ------------------------------ The following table provides the detail for each major segment of salaries and employee benefits together with relevant statistical data:
------------------------------------------------------------------------------------------------------------------ (in thousands except full time equivalents) 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------ Regular payroll, contract labor, and overtime $2,970 $2,641 2,298 Incentive compensation and profit sharing 407 339 335 Payroll taxes and employment benefits 655 576 459 ------------------------------------- Total Salaries and Employee Benefits $4,032 $3,556 3,092 ===================================== Number of full-time equivalent employees 104 95 82 ------------------------------------- Regular payroll per full-time equivalent employee 28.49 27.80 28.02 ------------------------------------- Incentive compensation to regular payroll 13.7% 12.8% 14.6% ------------------------------------- Payroll taxes and benefits per full-time equivalent employee 6.28 6.06 5.60 ------------------------------------------------------------------------------------------------------------------
The number of full-time equivalent employees increased 9% in 1999 compared to 1998 and 16% in 1998 compared to 1997. Regular payroll, contract labor and overtime increased 12% in 1999 compared to 1998 and 15% in 1998 compared to 1997. Total salaries and benefits expense increased by 13% in 1999 compared to 1998 and 15% in 1998 compared to 1997. The average regular payroll per full- time equivalent employee increased 2% in 1999 compared to 1998 and decreased 1% in 1998 compared to 1997. Incentive compensation includes bonus awards under the Incentive Compensation Plan, contributions to the Employee Stock Ownership Plan and matching contributions to the 401(k) Stock Ownership Plan. The Incentive Compensation Plan pays bonuses to officers based upon the actual results of departmental and Bank-wide performance in comparison to predetermined targets. Contributions to the Employee Stock Ownership Plan are made at the discretion of the board of directors based upon profitability. Matching contributions to the 401(k) Stock Ownership Plan are made at the rate of 50% of the first 4% of compensation contributed by employees. Payroll taxes and employee benefits per full-time equivalent increased 4% in 1999 as compared to 1998 and 8% as compared to 1997. The increases are related primarily to a 28% increase in the Company's contribution to the Employee Stock Ownership Plan combined with general increases in the cost of medical and other related insurance benefits, education and training expenses and supplemental compensation accruals made pursuant to the agreements summarized in Footnote 9 to the 1999 Consolidated Financial Statements. The increase to the Company's Employee Stock Ownership Plan comes as a result of the increased number of employees becoming eligible for participation in the plan. 17 Occupancy Expense - ----------------- The following table provides the detail for each major segment of occupancy expense:
------------------------------------------------------------------------------------------------------------------- (in thousands except square footage and cost per sq. ft.) 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------- Depreciation $ 366 289 265 Property taxes, insurance, and utilities 230 220 204 Property maintenance 124 144 154 Net rental expense (income) 90 62 (30) -------------------------------------- Total Occupancy $ 810 715 593 ====================================== Square footage of occupied and unoccupied space 42,945 42,945 40,725 -------------------------------------- Occupancy cost per square foot $ 18.86 $ 16.65 14.56 -------------------------------------- Locations 8 8 6 -------------------------------------------------------------------------------------------------------------------
Occupancy expenses increased by 13% in 1999 compared to 1998 and 21% in 1998 compared to 1997. The primary reason for the increases in 1999 and 1998 are the expansion into new offices opened in 1998. In January 1998 the Company opened a loan production office in Folsom, California and the August 1998 opening of a full service branch in Elk Grove, California. The Folsom office was converted to a full service branch in July, 1999. In addition, the Galt branch was relocated in November, 1998. While the new rental expense in Galt is lower than it would have been absent a relocation, it is higher per month than it was in 1997. With respect to the three branches acquired from Wells Fargo Bank in 1997, 1998 includes two additional months of occupancy expenses compared to 1997. Equipment Expense - ----------------- The following table provides the detail for each major segment of equipment expense:
-------------------------------------------------------------------------------------------------------- (in thousands) 1999 1998 1997 -------------------------------------------------------------------------------------------------------- Depreciation $ 488 406 318 Maintenance 188 104 136 Rental expense 11 26 1 ------------------------------ Total Equipment $ 687 536 455 --------------------------------------------------------------------------------------------------------
Equipment expense increased by 28% in 1999 compared to 1998 and increased by 18% in 1998 compared to 1997. The increase in 1999 is primarily attributable to investments made in the Company's computer hardware and software systems. Additionally, the 1999 expense reflects an entire year's deprecation expense for equipment placed in service at the two new branches in 1998. The increase in 1998 was driven by two additional months of costs in 1998 for the three branches acquired from Wells Fargo Bank in 1997 and the loan production office and full service branch opened in the communities of Folsom and Elk Grove California, respectively, in January and August of 1998, respectively. The Galt branch was also relocated in November, 1998, and some equipment was replaced. 18 Other Noninterest Expense - ------------------------- Other noninterest expenses increased by 13% in 1999 compared to 1998 and 9% in 1998 compared to 1997. The following table provides the detail for each major segment of other noninterest expense:
------------------------------------------------------------------------------------------------------ (in thousands) 1999 1998 1997 ------------------------------------------------------------------------------------------------------ Third party data processing $ 821 719 642 Professional fees 554 423 401 Marketing 323 213 120 Intangible amortization 282 372 479 Telephone and postage 271 217 182 Office supplies 193 176 142 Director fees and retirement 158 223 150 Printing 109 145 117 Other real estate owned losses and holding costs (8) (12) 94 Business development 78 57 55 Regulatory assessments 85 51 53 Year 2000 date change 152 - - Other 256 321 221 ---------------------------- Total Other Noninterest Expense $3,274 2,905 2,656 ------------------------------------------------------------------------------------------------------
Professional fees increased during 1999 as a result of the Company increasing its use of third parties in the development and implementation of specific strategic initiatives. The two primary initiatives included enhancing the Company's use of technology and opportunities to increase noninterest income. During 1998 the Company substantially enhanced its marketing efforts to include the hiring of a full time marketing director in September, 1998. As a result of the increased focus on marketing, marketing expenses increased 52% in 1999 as compared to 1998. Furthermore, during 1999 the size of the Board of Directors was reduced and reduction were made to the number of meetings, the result of which was to reduce the amount paid to directors for services rendered on behalf of the Company. The remainder of the increases are driven primarily by volume related costs. Average loans and deposit volumes increased by 37% and 9% during 1999, respectively. The amortization of the core deposit and goodwill intangible assets purchased in the acquisition of the Wells Fargo Branches in 1997 declined 24% in 1999 as compared to 1998 and 22% in 1998 as compared to 1997. The Bank is using an accelerated method of amortization for these assets over an eight year period. Accordingly, the amortization expense is expected to continue to decline over the remaining amortization period. During 1999 the Company expensed $152,000 in one time costs associated with the Year 2000 date change. Additional expense was incurred by the Company as part of the Year 2000 date change. Such additional expense relate to the allocation of human resources and other capital expenditures. Approximately 3% out of the 9% increase in 1998 compared to 1997 is the result of the new branches in 1998 and the inclusion of the three branches acquired in 1997 for twelve months in 1998 compared to 10 months for 1997. The remainder of the increase is driven primarily by volume related costs. Average loans and deposit volumes increased by 26% and 15%, respectively. Income Taxes The provision for income taxes as a percentage of pretax income for 1999, 1998, and 1997 was 19%, 25%, and 32%, respectively. The effective rate is lower than the combined marginal rate for state and federal taxes due primarily to the level of tax exempt income relative to total pre-tax income combined with a decrease in the tax asset valuation allowance. Tax exempt income increased in 1999 compared to 1998 and 1998 compared to 1997 due to an investment of $8.7 million and $4.2 million, respectively in the cash surrender value of life insurance as discussed below under Balance Sheet Review. The tax asset valuation allowance declined $85,000 and $45,000 in 1999 and 1998, respectively. Footnote 13 to the Consolidated Financial Statements contains a detailed presentation of the income tax provision and the related current and deferred tax assets and liabilities. 19 Balance Sheet Review The following table presents average balance sheets for the years ended December 31, 1999, 1998 and 1997.
- -------------------------------------------------------------------------------------------------------------------- For the Year Ended For the Year Ended For the Year Ended December 31, 1999 December 31, 1998 December 31, 1997 (in thousands) (in thousands) (in thousands) -------------------------------------------------------------- Amount Percent Amount Percent Amount Percent --------- -------- -------- --------- -------- --------- - -------------------------------------------------------------------------------------------------------------------- Assets: Cash & Due from banks $ 7,488 4.45% 6,701 4.32% 5,362 3.94% Federal funds sold 4,150 2.47% 6,780 4.37% 8,400 6.17% Investment securities 41,050 24.39% 53,370 34.42% 53,580 39.36% Loans (net of allowance for loan losses and 98,760 58.69% 71,752 46.29% 56,744 41.68% deferred income) Premises and equipment, net 6,863 4.08% 7,188 4.64% 7,227 5.31% Other assets 9,969 5.92% 9,220 5.96% 4,830 3.54% -------- ------ ------- ------ ------- ------ Total Assets $168,280 100.00% 155,011 100.00% 136,143 100.00% ======== ====== ======= ====== ======= ====== Liabilities & Stockholders' Equity: Deposits $152,630 90.70% 140,480 90.63% 122,540 90.00% Note payable - - - - - - Other liabilities 1,507 .90% 1,215 .78% 1,193 .88% Stockholders' equity 14,143 8.40% 13,316 8.59% 12,410 9.12% -------- ------ ------- ------ ------- ------ Total Liabilities & Stockholders' Equity $168,280 100.00% 155,011 100.00% 136,143 100.00% ======== ====== ======= ====== ======= ====== - --------------------------------------------------------------------------------------------------------------------
Average total assets increased by 9% in 1999 compared to 1998 and 14% in 1998 compared to 1997. Year-end asset totals at December 31, 1999 reached $176.3 million and represented an increase of 7% over December 31, 1998. The increase in 1999 and 1998 is a function of deposit growth throughout the Bank's branch network, as average deposits increased by 9% and 15%, respectively. During 1999 average gross loans increased 39%. This increase was funded by the growth in deposits combined with a 16% reduction in fed funds sold and investment securities. During 1998 average gross loans increased 26% which was funded by the increase in deposits. Other assets at December 31, 1999 increased 71% as compared to December 31, 1998. The increase is primarily attributable to an increase in the cash surrender value of life insurance of $8,674,000 and $4,274,000 at December 31, 1999 and 1998, respectively. 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 deferred 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. 20 Investment Securities The following table presents the investment portfolio at December 31, 1999, 1998 and 1997 by security type, maturity, and yield:
- -------------------------------------------------------------------------------------------------------------------------------- Book Value at December 31 (in thousands): 1999 1998 1997 --------------------- ------------------ ------------------ Amount Yield(a) Amount Yield(a) Amount Yield(a) --------- ---------- ------- --------- ------- --------- - -------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Securities: Within 1 year $ - - 1,000 5.87% 2,995 5.94% After 1 year, within 5 years - - - - 1,000 5.87% After 5 years, within 10 years - - - - - - After 10 years - - - - - - ------------------------------------------------------------ Total U.S. Treasury - - 1,000 5.87% 3,995 5.92% U.S. Agency Securities: Within 1 year $ 1,044 6.67% 1,512 5.68% 2,101 7.06% After 1 year, within 5 years 12,622 6.40% 13,482 6.50% 13,997 6.46% After 5 years, within 10 years 1,500 7.18% 3,000 6.93% 9,986 7.07% After 10 years 1,500 6.85% 1,500 6.85% 4,993 7.63% ------------------------------------------------------------ Total U.S. Agency $16,666 6.53% 19,494 6.53% 31,077 6.88% Collateralized Mortgage Obligations: Within 1 year $ 57 3.37% - - - - After 1 year, within 5 years 5,477 6.52% - - 225 6.08% After 5 years, within 10 years 961 6.87% 153 5.51% 277 6.27% After 10 years 132 8.17% 304 8.34% 534 6.57% ------------------------------------------------------------ Total Collateralized Mortgage Obligations $ 6,627 6.58% 457 7.39% 1,036 6.38% Municipal Securities: Within 1 year $ 1,053 6.66% 1,196 6.20% 688 6.67% After 1 year, within 5 years 2,445 7.17% 2,439 7.08% 3,118 6.94% After 5 years, within 10 years 2,444 6.08% - - 530 7.60% After 10 years 6,245 5.69% - - - - ------------------------------------------------------------ Total Municipals $12,187 6.15% 3,635 6.79% 4,336 6.98% Other Debt Securities: Within 1 year $ 10 7.57% 93 8.50% 22 7.86% After 1 year, within 5 years 938 7.32% 113 6.83% 2,748 7.41% After 5 years, within 10 years - - - - 7 9.73% After 10 years - - 2,509 7.28% 972 7.67% ------------------------------------------------------------ Total Other Debt Securities $ 948 7.32% 2,813 7.36% 3,749 7.48% Money Market Mutual Fund - - 17,602 4.83% 17,200 6.12% Federal Agency Stock 126 6.00% 126 6.00% 126 6.00% Unrealized Holding (Loss) / Gain (458) - 520 - 398 - ------------------------------------------------------------ Total $36,096 6.43% 45,647 5.93% 61,917 6.59% - --------------------------------------------------------------------------------------------------------------------------------
(a) The yields on tax-exempt obligations have not been computed on a tax- equivalent basis. The investment portfolio at December 31, 1999 and 1998 declined by 21% and 26%, respectively, compared to the prior year-end totals. The decline in the portfolio during 1999 and 1998 funded increases in loan volume. With the exception of the sale of money market mutual fund shares, the decline in the portfolio during 1999 and 1998 came solely from maturities and calls. The general decline in interest rates during 1999 and 1998 led to the call of several agency securities that were purchased subsequent to the acquisition of the Wells Fargo Branches in 1997. Maturities and calls during 1999 and 1998 were approximately $9.2 million and $20.9 million, respectively. 21 Loans The following table summarizes gross loans and the components thereof as of December 31, for each of the last five years:
- ----------------------------------------------------------------------------------------------- Outstanding at December 31 (in thousands): 1999 1998 1997 1996 1995 -------- ------ ------ ------ ------ - ----------------------------------------------------------------------------------------------- Commercial $ 95,509 77,956 53,684 45,322 41,538 Real estate construction 13,919 11,743 6,900 5,802 7,549 Installment and other 3,301 3,463 3,525 3,155 2,757 -------- ------ ------ ------ ------ $112,729 93,162 64,109 54,279 51,844 ======== ====== ====== ====== ====== - -----------------------------------------------------------------------------------------------
Gross loans outstanding as of December 31, 1999 and 1998 exceeded the comparable prior year-end totals by 21% and 45%, respectively. Improving economic conditions combined with increased business development efforts were the foundation for the growth in both years. With the acquisition of the Wells Fargo Branches in 1997, the Company entered into new market areas which substantially enhanced their marketing capabilities. The most significant segment of the loan portfolio is commercial loans, which represented 85% and 84% of the total portfolio at December 31, 1999 and 1998, respectively. Commercial loans include agricultural loans, working capital loans to businesses in a number of industries, and loans to finance commercial real estate. Agricultural loans represented approximately 15% and 14% of the commercial loan portfolio at December 31, 1999 and 1998, respectively. Agricultural loans are diversified throughout a number of agricultural business segments, including dairy, orchards, row crops, vineyards, cattle and contract harvesting. Agricultural lending risks are generally related to the potential for volatility of agricultural commodity prices. Commodity prices are affected by government programs to subsidize certain commodities, weather, and overall supply and demand in wholesale and consumer markets. Excluding agricultural loans, the remaining portfolio is principally dependent upon the health of the local economy and related to the real estate market. The maturity and repricing characteristics of the loan portfolio at December 31, 1999 are as follows:
- ------------------------------------------------------------------------------------------- Due: (1) Fixed Rate Floating Rate Total ---------- ------------- ------- In 1 year or less $ 8,634 13,350 21,984 After 1 year through 5 years 12,743 9,537 22,280 After 5 years 13,049 55,416 68,465 ------- ------ ------- Total Loans $34,426 78,303 112,729 ======= ====== ======= - -------------------------------------------------------------------------------------------
(1) Scheduled repayments are reported in the maturity category in which the payment is due. Approximately 36% of the loan portfolio carries a fixed rate of interest as of December 31, 1999, while approximately 86% of the portfolio matures within five years. 22 Deposits The following table summarizes average deposit balances and rates for the years ended December 31, 1999, 1998, and 1997:
- ------------------------------------------------------------------------------------------------------------------------------ (in thousands) For the Year Ended For the Year Ended For the Year Ended December 31, 1999 December 31, 1998 December 31, 1997 Average Average Average Average Average Average Type Amount Rate Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------------------------------------ Demand - non-interest bearing $ 19,830 N/A 17,080 N/A 13,470 N/A NOW accounts 37,985 1.14% 34,311 1.31% 27,520 1.68% Money market accounts 17,028 2.23% 16,829 3.13% 17,870 3.09% Savings 27,097 2.06% 25,460 2.66% 22,130 2.92% Time deposits 50,690 4.49% 46,800 5.08% 41,550 5.11% --------- ---- ------- ---- ------- ---- Total Deposits $ 152,630 2.42% 140,480 2.87% 122,540 3.09% ========= ==== ======= ==== ======= ==== - ------------------------------------------------------------------------------------------------------------------------------
Average deposits increased by approximately 9% and 15% in 1999 and 1998, respectively. Due to a declining rate environment, the average rate declined by 45 basis points when comparing 1999 to 1998 and 22 basis points when comparing 1998 to 1997. The deposit growth in 1999 and 1998 came from account growth at all branches throughout the Bank's network. The growth was the result of business development efforts in the lending area as well as a continued influx of "large" bank customers that have grown tired of merger activity among large institutions. The reduced rates on the deposit portfolio in 1999 and 1998 are a function of changes in mix, pricing, and the general level of interest rates. The mix of deposits has become more cost efficient over the past three years. The mix of noninterest bearing deposits was 13%, 12%, and 11% for 1999, 1998, and 1997, respectively. Certificates of deposit contain regular and individual retirement account balances and deposits received under the State of California Time Certificate of Deposit Program. There are no brokered certificates of deposit in the portfolio. At December 31, 1999 the Company had $3 million in deposits with the State of California under the Time Certificate of Deposit Program. It is the intent of the Company to increase total deposits under this program to approximately $7 million. The Certificates with the State of California have maturities of one year or less and are collateralized by loans or investment securities. The deposit program provides the Company with an additional source of funds at a relatively low cost. The deposits are used to fund loans and investments. Certificates of $100,000 or more represent approximately 38% of the certificate of deposit portfolio at December 31, 1999. Excluding the Certificates of Deposit with the State of California, certificates of $100,000 or more represent approximately 34% of the certificate of deposit portfolio at December 31, 1999. The following table summarizes the maturities of those certificates of $100,000 or more:
- ----------------------------------------------------------------------- (in thousands) 1999 --------------- Three months or less $13,760 Four months to six months 2,571 Seven months to twelve months 1,952 Over twelve months 725 ------- Total time deposits of $100,000 or more $19,008 ======= - -----------------------------------------------------------------------
23 Asset Quality The following table contains asset quality information with respect to the loan portfolio and other real estate owned:
- ------------------------------------------------------------------------------------------------------------------------ Asset Quality Statistics at December 31 (in thousands except multiples and percentages) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ Nonaccrual loans $2,303 248 340 898 987 Accruing loans past due more than 90 days 374 191 65 52 118 ------ ----- ----- ----- ----- Total nonperforming loans $2,677 439 405 950 1,105 ====== ===== ===== ===== ===== Allowance for loan losses $2,580 1,564 1,313 1,207 959 Allowance for loan losses to nonperforming loans 96% 356% 324% 127% 87% Total loan portfolio delinquency 3.32% 1.40% 1.09% 2.14% 2.57% Allowance for loan losses to total gross loans 2.29% 1.69% 2.05% 2.22% 1.85% Other real estate owned $ 129 129 159 400 357 - ------------------------------------------------------------------------------------------------------------------------
The Company's nonaccrual policy is discussed in note 1(c) to the consolidated financial statements. Interest income recorded on these nonaccrual loans was approximately $138,000 $2,000, $8,000, $7,000, and $13,000 in 1999, 1998, 1997, 1996, and 1995, respectively. Interest income foregone or reversed on these loans was approximately $76,000, $43,000, $45,000, $149,000, and $161,000 in 1999, 1998, 1997, 1996, and 1995, respectively. At December 31, 1999, there were no individually material or a material amount of loans in the aggregate for which management had serious doubts as to the borrower's ability to comply with present loan repayment terms and which may result in the subsequent reporting of such loans as nonaccrual. Nonperforming loans increased by $2.2 million in 1999 after having increased $34 thousand in 1998 which followed declines in 1997 and 1996. Portfolio delinquency also increased to 3.32% after having increased to 1.40% in 1998 following a decline in 1997 and 1996. The dollar amount of the allowance for loan losses has increased in each of the last four years. During 1999, the allowance increased as a result of three factors; growth, expansion into new market areas and declining credit quality of a few borrowers. During 1999, average gross loans increased 37% compared to the prior year. The growth in 1999 included expansion into markets within Northern and Central California to include commercial, agricultural and real estate loans. Furthermore, during the fourth quarter of 1999, the Company experienced a decline in the credit quality in loans to four individual borrowers. The loans to two of the borrowers, which were placed on nonaccrual during the fourth quarter of 1999, totaled $1.9 million and represent 1.69% of gross loans at December 31, 1999. The loans to the other two borrowers totaled $2.2 million, represent 1.95% of gross loans and were not delinquent with regard to principal or interest at December 31, 1999. The following table summarizes the allocation of the allowance for loan losses at December 31, for each of the last five years:
- ----------------------------------------------------------------------------------------------------------------------- (in thousands December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995 ------------------ ------------------ ------------------ ------------------ ----------------- except percentages Loan Category Amount % Amount % Amount % Amount % Amount % ------ Loans ------ Loans ------ Loans ------ Loans ------ Loans ------ ------ ----- ----- ----- Commercial $ 698 63.37% 240 63.16% 309 60.95% 490 91.42% 295 84.29% Real estate 402 36.48% 129 33.95% 192 37.87% 45 8.40% 38 10.86% Consumer 2 0.15% 11 2.89% 6 1.18% 1 0.19% 17 4.86% Unallocated 1,478 N/A 1,184 N/A 806 N/A 671 N/A 609 N/A ------ ------ ----- ------ ----- ------ ----- ------ --- ------ $2,580 100.00% 1,564 100.00% 1,313 100.00% 1,207 100.00% 959 100.00% ====== ====== ===== ====== ===== ====== ===== ====== === ====== - -----------------------------------------------------------------------------------------------------------------------
Please also see "Allowance for Loan Losses". 24 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. As described in "Asset Liability Management," 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. The following tables summarize the expected maturity, principal repayment and fair value of the financial instruments that are sensitive to changes in interest rates as of December 31, 1999 and 1998. See further discussion regarding interest rate risk under "Asset Liability Management." As of December 31, 1999:
- ------------------------------------------------------------------------------------------------------------------------- Expected Maturity / Principal Repayment Total Fair In Thousands 2000 2001 2002 2003 2004 Thereafter Balance Value - ------------------------------------------------------------------------------------------------------------------------- Interest-Sensitive Assets: Federal funds sold $ 100 - - - - - 100 100 Fixed rate investments (1) 3,818 6,092 5,223 3,889 853 15,389 35,264 35,264 Floating rate investments (1) 136 110 91 76 62 357 832 832 Fixed rate loans (2) 8,634 2,746 4,478 3,839 1,680 13,049 34,426 34,894 Floating rate loans (2) 13,350 935 1,904 4,188 2,510 55,416 78,303 78,303 Interest-Sensitive Liabilities: NOW account deposits (3) 15,783 2,631 2,631 2,631 2,631 13,151 39,458 39,458 Money market deposits (3) 6,701 1,117 1,117 1,117 1,117 5,583 16,752 16,752 Savings deposits (3) 11,623 1,937 1,937 1,937 1,937 9,686 29,057 29,057 Certificates of deposit 46,864 782 363 240 69 - 49,789 49,676 Short term borrowings 4,300 - - - - - 4,300 4,300 Interest-Sensitive Off-Balance Sheet Items: Loans serviced for others - - - - - - 95,749 957 Commitments to lend - - - - - - 24,418 244 Standby letters of credit - - - - - - 892 1 - -------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998:
- ------------------------------------------------------------------------------------------------------------------------- Expected Maturity / Principal Repayment Total Fair In Thousands 1999 2000 2001 2002 2003 Thereafter Balance Value - ------------------------------------------------------------------------------------------------------------------------- Interest-Sensitive Assets: Federal funds sold $ 4,800 - - - - - 4,800 4,800 Fixed rate investments (1) 3,346 1,982 4,554 5,233 1,585 9,315 26,015 26,015 Floating rate investments (1) 18,102 - - 91 - 1,439 19,632 19,632 Fixed rate loans (2) 13,039 3,333 5,066 6,628 5,840 9,705 43,611 44,481 Floating rate loans (2) 18,294 4,862 1,633 3,700 5,721 15,341 49,551 49,551 Interest-Sensitive Liabilities: NOW account deposits (3) 14,472 2,412 2,412 2,412 2,412 12,061 36,181 36,181 Money market deposits (3) 7,793 1,299 1,299 1,299 1,299 6,493 19,482 19,482 Savings deposits (3) 10,395 1,732 1,732 1,732 1,732 8,664 25,987 25,987 Certificates of deposit 45,799 2,234 371 615 340 - 49,359 49,447 Interest-Sensitive Off-Balance Sheet Items: Loans serviced for others - - - - - - 66,903 670 Commitments to lend - - - - - - 21,290 213 Standby letters of credit - - - - - - 156 2 - -------------------------------------------------------------------------------------------------------------------------
(1) Expected maturities for investment securities are based upon anticipated prepayments as evidenced by historical prepayment patterns. (2) Expected maturities for loans are based upon contractual maturity dates. (3) NOW, money market and savings deposits do not carry contractual maturity dates; therefore, the expected maturities reflect estimates applied in evaluating the Company's interest rate risk. The actual maturities of NOW, money market, and savings deposits could vary substantially if future prepayments differ from the Company's historical experience. The majority of the loan growth during 1999 was in the area of floating rate commercial loans. In addition, during 1999, the Company invested a significant portion of its short term investments (i.e., fed funds and money market mutual funds) in longer term fixed rate agency and municipal securities with average maturities in excess of five years. The purchase of the 25 longer term investments provided the Company with an increase in interest income while providing interest rate protection in the event of a declining interest rate environment. Asset Liability Management The primary goal of the Company's asset and liability management system is to maximize net interest margin within reasonable risk parameters with respect to the maturity and pricing structure of assets and liabilities. 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. The following tables summarize the repricing intervals for the balance sheet at December 31, 1999 and 1998: As of December 31, 1999:
- -------------------------------------------------------------------------------------------------------------------------------- By Repricing Interval - -------------------------------------------------------------------------------------------------------------------------------- (in thousands) Within After three After six After one After five Noninterest Total three months, months, year, within years bearing funds months within six within one five years year - -------------------------------------------------------------------------------------------------------------------------------- Assets Federal funds sold $ 100 -- -- -- -- -- 100 Investment securities 57 226 9,948 13,622 12,243 -- 36,096 Loans 52,569 3,319 10,423 30,518 15,900 -- 112,729 Noninterest earning assets and allowance for loan losses -- -- -- -- -- 27,409 27,409 -------------------------------------------------------------------------------------------- Total Assets $ 52,726 3,545 20,371 44,140 28,143 27,409 176,334 ============================================================================================ Liabilities and Stockholders' Equity Savings, money market & NOW deposits $ 85,267 -- -- -- -- -- 85,267 Time deposits 30,979 8,606 8,750 1,454 -- -- 49,789 Other liabilities and stockholders' equity -- -- -- -- -- 41,278 41,278 -------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 116,246 8,606 8,750 1,454 -- 41,278 176,334 ============================================================================================ Interest Rate Sensitivity Gap $ (63,520) (5,061) 11,621 42,686 28,143 (13,869) -- ============================================================================================ Cumulative Interest Rate Sensitivity Gap $ (63,520) (68,581) (56,960) (14,274) 13,869 -- -- ============================================================================================ - --------------------------------------------------------------------------------------------------------------------------------
26 As of December 31, 1998
- -------------------------------------------------------------------------------------------------------------------------------- By Repricing Interval - -------------------------------------------------------------------------------------------------------------------------------- (in thousands) Within After three After six After one After five Noninterest Total three months, months, year, within years bearing funds months within six within one five years months year - -------------------------------------------------------------------------------------------------------------------------------- Assets Federal funds sold $ 4,800 -- -- -- -- -- 4,800 Investment securities 19,225 148 4,126 16,473 5,675 -- 45,647 Loans 51,324 3,881 3,369 22,285 12,303 -- 93,162 Noninterest earning assets and allowance for loan losses -- -- -- -- -- 20,791 20,791 ------------------------------------------------------------------------------------------- Total Assets $ 75,349 4,029 7,495 38,758 17,978 20,791 164,400 =========================================================================================== Liabilities and Stockholders' Equity Savings, money market & NOW deposits $ 81,650 -- -- -- -- -- 81,650 Time deposits 25,573 10,097 10,129 3,560 -- -- 49,359 Other liabilities and stockholders' equity -- -- -- -- -- 33,391 33,391 ------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 107,223 10,097 10,129 3,560 -- 33,391 164,400 =========================================================================================== Interest Rate Sensitivity Gap $ (31,874) (6,068) (2,634) 35,198 17,978 (12,600) -- =========================================================================================== Cumulative Interest Rate Sensitivity Gap $ (31,874) (37,942) (40,576) (5,378) (12,600) -- -- =========================================================================================== - --------------------------------------------------------------------------------------------------------------------------------
The interest rate gaps reported in the table arise when assets are funded with liabilities having different repricing intervals. Since these gaps are actively managed and change daily as adjustments are made in interest rate forecasts and market outlook, positions at the end of any period may not be reflective of the Company's interest rate sensitivity in subsequent periods. Active management dictates that longer-term economic views are balanced against prospects for short-term interest rate changes in all repricing intervals. For purposes of the above analysis, repricing of fixed-rate instruments is based upon the contractual maturity of the applicable instruments. In addition, repricing of assets and liabilities is assumed in the first available repricing period. Actual payment patterns may differ from contractual payment patterns, and it has been management's experience that repricing does not always correlate directly with market changes in the yield curve. Fluctuations in interest rates can also impact the market value of assets and liabilities either favorably or adversely depending upon the nature of the rate fluctuations as well as the maturity and repricing structure of the underlying financial instruments. To the extent that financial instruments are held to contractual maturity, market value fluctuations related to interest rate changes are realized only to the extent that future net interest margin is either higher or lower than comparable market rates for the period. To the extent that liquidity management dictates the need to liquidate certain assets prior to contractual maturity, changes in market value from fluctuating interest rates will be realized in income to the extent of any gain or loss incurred upon the liquidation of the related assets. 27 Liquidity The Company's primary source of liquidity is dividends from the Bank. The Company's primary uses of liquidity are associated with dividiend payments made to shareholders and operating expenses. Liquidity is managed on a daily basis by maintaining cash, federal funds sold, and short-term investments at levels commensurate with the estimated requirements for loan demand and fluctuations in deposits. Loan demand and deposit fluctuations are affected by a number of factors, including economic conditions, seasonality of the borrowing and deposit bases, and the general level of interest rates. The Bank maintains two lines of credit with correspondent banks as a supplemental source of short-term liquidity in the event that saleable investment securities and loans or available new deposits are not adequate to meet liquidity needs. The Bank has also established reverse repurchase agreements with two brokerage firms which allow for short term borrowings that are secured by the Bank's investment securities. Furthermore, the Bank may also borrow on a short-term basis from the Federal Reserve in the event that other liquidity sources are not adequate. At December 31, 1999 liquidity was considered adequate, and funds available in the local deposit market and scheduled maturities of investments are considered sufficient to meet long-term liquidity needs. Compared to 1998 liquidity declined in 1999 as a result of the growth in loans. The growth was adequately funded by investment portfolio maturities and deposit portfolio growth. Capital Resources Consolidated capital increased by $664 thousand or 5%, during 1999. The increase was due primarily to net income of $1.16 million. Capital was further increased by $359 thousand as a result of capital paid in upon exercise of stock options which was offset by $286 thousand in capital used to pay dividends and a $568 thousand increase in the net unrealized loss on available for sale securities. The consolidated capital to assets ratio declined by 20 basis points, to 8.23% from 8.43%, due to the growth in assets related to the growth in deposits. The Bank's total risk-based and leverage capital ratios were 10.51% and 7.82%, respectively, at December 31, 1999 compared to 11.2% and 7.4%, respectively, at December 31, 1998. The decline in the total risk-based ratio reflects the additional leverage created by the growth in deposits as well as increased lending which moves assets from lower risk-weight categories to the higher risk- weight categories of loans. The total risk-based and leverage capital ratios at December 31, 1999, are in excess of the required regulatory minimums of 10% and 5%, respectively, for well-capitalized institutions. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14(a) herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable PART III ITEMS 10, 11, 12 and 13. The information required by these items is contained in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 25, 2000, and is incorporated herein by reference. The definitive Proxy Statement will be filed with the Commission within 120 days after the close of the Company's fiscal year pursuant to Regulation 14A of the Securities Exchange Act of 1934. 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements and Schedules Page Reference Independent Auditors' Report 33 Consolidated Balance Sheets as of December 31, 1999 and 1998 34 Consolidated Statements of Income Years Ended 1999, 1998, and 1997 35 Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income Years Ended 1999, 1998, and 1997 36 Consolidated Statements of Cash Flows Years Ended 1999, 1998, and 1997 37 Notes to Consolidated Financial Statements 38 (b) Reports on Form 8-K No reports were filed on Form 8-K during the last quarter of the period covered by this report. (c) 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 Annual Report on Form 10-K for the year ended December 31, 1998, is hereby incorporated by reference. 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. 29 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. 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. 30 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 1(j) and 14 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. 23 Consent of KPMG LLP, independent auditors. 27 Financial Data Schedule. (d) Financial Statement Schedules No financial statement schedules are included in this report on the basis that they are either inapplicable or the information required to be set forth therein is contained in the financial statements included in this report. ______________________________ * Management contract or compensatory plan or arrangement 31 Independent Auditors' Report The Board of Directors First Financial Bancorp: We have audited the accompanying consolidated balance sheets of First Financial Bancorp and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Financial Bancorp and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP Sacramento, California February 23, 2000 32 FIRST FINANCIAL BANCORP AND SUBSIDIARIES Consolidated Balance Sheets (in thousands except share amounts) December 31, 1999 and 1998
Assets 1999 1998 - ---------------------------------------------------------------------------------------------------------------- Cash and due from banks $ 9,309 7,329 Federal funds sold 100 4,800 Investment securities available-for-sale, at fair value 36,096 45,647 Loans, net of deferred loan fees and allowance for loan losses of $3,136 and $2,084 in 1999 and 1998, respectively 109,594 91,078 Premises and equipment, net 7,096 7,261 Accrued interest receivable 1,487 1,353 Other Assets 12,652 6,932 - ---------------------------------------------------------------------------------------------------------------- $176,334 164,400 ================================================================================================================ Liabilities and Stockholders' Equity - ---------------------------------------------------------------------------------------------------------------- Liabilities: Deposits: Noninterest bearing $ 21,054 18,535 Interest bearing 135,107 131,009 - ---------------------------------------------------------------------------------------------------------------- Total deposits 156,161 149,544 Accrued interest payable 304 389 Short term borrowings 4,300 - Other liabilities 1,048 610 - ---------------------------------------------------------------------------------------------------------------- Total liabilities 161,813 150,543 Stockholders' equity: Common stock - no par value; authorized 9,000,000 shares, issued and outstanding in 1999, 1,433,734 shares; in 1998, 1,349,292 shares 8,433 7,584 Retained earnings 6,354 5,971 Accumulated other comprehensive (loss) income (266) 302 - ---------------------------------------------------------------------------------------------------------------- Total stockholders' equity 14,521 13,857 - ---------------------------------------------------------------------------------------------------------------- Commitments and contingencies $176,334 164,400 ================================================================================================================
See accompanying notes to consolidated financial statements. 33 FIRST FINANCIAL BANCORP AND SUBSIDIARIES Consolidated Statements of Income (in thousands except per share amounts) Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 - ----------------------------------------------------------------------------------------------------- Interest income: Loans, including fees $ 9,911 7,729 6,612 Interest on investment securities available for sale: Taxable 2,145 3,191 3,252 Exempt from Federal taxes 268 240 150 Interest on investment securities held to maturity: Exempt from Federal taxes - - 117 Federal funds sold 202 348 461 - ----------------------------------------------------------------------------------------------------- Total interest income 12,526 11,508 10,592 Interest expense: Deposit accounts 3,688 4,028 3,785 Other borrowings 11 - - - ----------------------------------------------------------------------------------------------------- Total interest expense 3,699 4,028 3,785 Net interest income 8,827 7,480 6,807 Provision for loan losses 1,051 250 (60) - ----------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 7,776 7,230 6,867 Noninterest income: Service charges 1,078 846 766 Gain on stock issued in insurance company demutualization 287 - - Gain on sale of loans 310 434 294 Premiums and fees from SBA and mortgage operations 371 350 281 Other 415 248 82 - ----------------------------------------------------------------------------------------------------- Total noninterest income 2,461 1,878 1,423 Noninterest expense: Salaries and employee benefits 4,032 3,556 3,092 Occupancy 810 715 593 Equipment 687 536 455 Other 3,274 2,905 2,656 - ----------------------------------------------------------------------------------------------------- Total noninterest expense 8,803 7,712 6,796 - ----------------------------------------------------------------------------------------------------- Income before provision for income taxes 1,434 1,396 1,494 Provision for income taxes 275 344 479 - ----------------------------------------------------------------------------------------------------- Net income $ 1,159 1,052 1,015 ===================================================================================================== Earnings per share: - ----------------------------------------------------------------------------------------------------- Basic $ .83 .76 .74 ===================================================================================================== Diluted $ .80 .72 .71 ===================================================================================================== Dividends per share $ .20 .20 .20 =====================================================================================================
See accompanying notes to consolidated financial statements. 34 FIRST FINANCIAL BANCORP AND SUBSIDIARIES Statements of Stockholders' Equity and Comprehensive Income (in thousands except share amounts) Years Ended December 31, 1999, 1998 and 1997
Accumulated Common Common Other Stock Stock Comprehensive Retained Comprehensive Description Shares Amounts Income Earnings (Loss) Income Total - ------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1996 1,308,950 $7,324 4,438 127 11,889 Comprehensive income: Net income $1,015 1,015 1,015 ------ Other comprehensive income: Unrealized holding gains arising during the current period, net of tax 91 effect of $92 ------ Total other comprehensive income 91 91 91 ------ Comprehensive income $1,106 ====== Options exercised 23,892 131 131 Cash dividend declared (265) (265) -------------------- -------------------------------- Balance at December 31, 1997 1,332,842 7,455 5,188 218 12,861 Comprehensive income: Net income $1,052 1,052 1,052 ------ Other comprehensive income: Unrealized holding gains arising during the current period, net of tax effect of $39 84 ------ Total other comprehensive income 84 84 84 ------ Comprehensive income $1,136 ====== Options exercised 16,450 129 129 Cash dividend declared (269) (269) -------------------- -------------------------------- Balance at December 31, 1998 1,349,292 7,584 5,971 302 13,857 Comprehensive income: Net income $1,159 1,159 1,159 ------ Other comprehensive loss: Unrealized holding loss arising during the current period, net of tax benefit of $410 (568) ------ Total other comprehensive loss (568) (568) (568) ------ Comprehensive income $ 640 ====== Options exercised 43,582 359 359 Stock dividend 40,860 490 (490) Cash issued in lieu of stock dividend (7) (7) Cash dividend (279) (279) -------------------- -------------------------------- Balance at December 31, 1999 1,433,734 $8,433 6,354 (266) 14,521 ==================== ================================
See accompanying notes to consolidated financial statements. 35 FIRST FINANCIAL BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 1,159 1,052 1,015 Adjustments to reconcile net income to net cash flows provided by operating activities: Decrease (increase) in loans held for resale 1,712 (377) (1,024) Gain on sale of loans (310) (434) (294) Increase (decrease) in deferred loan income 36 (49) 168 Provision for other real estate owned losses - (16) 60 Depreciation and amortization 1,126 1,071 1,066 Provision for loan losses 1,051 250 (60) Provision for deferred taxes (689) (52) (28) (Increase) decrease in accrued interest receivable (134) 120 (413) (Decrease) increase in accrued interest payable (85) (40) 105 Increase in cash surrender value of life insurance (206) (149) - Increase in other assets (503) (145) (492) Increase (decrease) in other liabilities 438 (59) 176 - ----------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 3,595 1,172 279 Cash flows from investing activities: Proceeds from maturity of held-to-maturity securities - 540 70 Proceeds from maturity of available-for-sale securities 9,180 20,317 19,230 Proceeds from sale of available-for-sale securities 43,054 8,500 28,077 Purchases of available-for-sale securities (43,666) (12,964) (72,201) Increase in loans made to customers (21,006) (28,240) (7,928) Proceeds from the sale of other real estate 11 45 285 Purchases of bank premises, equipment and intangible assets (684) (712) 3,127) Purchase of cash surrender value life insurance (4,194) (4,125) - - ----------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (17,305) (16,639) (35,594) Cash flows from financing activities: Net increase in deposits 6,617 15,653 41,684 Increase in other borrowings 4,300 - - Proceeds received upon exercise of stock options 359 129 131 Dividends paid (286) (269) (265) - ----------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 10,990 15,513 41,550 - ----------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (2,720) 46 6,235 Cash and cash equivalents at beginning of year 12,129 12,083 5,848 - ----------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 9,409 12,129 12,083 ================================================================================================================= Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest $ 3,784 4,068 3,680 Income taxes $ 663 677 476
See accompanying notes to consolidated financial statements. 36 FIRST FINANCIAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 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 are descriptions of the significant accounting and reporting policies: (a) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries for all periods presented. All material intercompany accounts and transactions have been eliminated in consolidation. (b) Investment Securities The Company designates a security as held-to-maturity or available-for-sale when a security is purchased. The selected designation is based upon investment objectives, operational needs, intent and ability to hold. The Company does not engage in trading activity. Held-to-maturity securities are carried at cost, adjusted for accretion of discounts and amortization of premiums. Available-for-sale securities are recorded at fair value with unrealized holding gains and losses, net of the related tax effect reported as a separate component of stockholders' equity until realized. Effective October 1, 1998, all held-to-maturity securities with an amortized cost of $1,174,000, were transferred to the available-for-sale category when Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities was adopted. For the year ended December 31, 1997, there were no transfers between classifications. To the extent that the fair value of a security is below cost and the decline is other than temporary, a new cost basis is established using the current market value, and the resulting loss is charged to earnings. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-for-sale security as an adjustment to yield using the effective interest method. Gains and losses realized upon disposition of securities are recorded as a component of noninterest income on the trade date, based upon the net proceeds and the adjusted carrying value of the securities using the specific identification method. (c) Loans Loans are stated at principal balances outstanding, net of deferred origination fees, costs and loan sale premiums. A loan is considered impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the "contractual terms" of the loan agreement, including scheduled interest payments. For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the restructuring agreement. An impaired loan is measured based upon the present value of future cash flows discounted at the loan's effective rate, the loan's observable market price, or the fair value of collateral if the loan is collateral dependent. Interest on impaired loans is recognized on a cash basis. Large groups of small balance, homogenous loans are collectively evaluated for impairment. If the measurement of the impaired loan is less than the recorded investment in the loan, an impairment is recognized by increasing the allowance for loan losses. Loans held for sale are carried at the lower of aggregate cost or market. Interest on loans is accrued daily. Nonaccrual loans are loans on which the accrual of interest ceases when the collection of principal or interest is determined to be doubtful by management. It is the general policy of the Bank to discontinue the accrual of interest when principal or interest payments are delinquent 90 days or more unless the loan is well secured and in the process of collection. When a loan is placed on non-accrual status, accrued and unpaid interest is reversed against current period interest income. Interest accruals are resumed when such loans are 37 brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. (d) Loan Origination Fees and Costs Loan origination fees, net of certain direct origination costs, are deferred and amortized as a yield adjustment over the life of the related loans using the interest method, which results in a constant rate of return. Loan commitment fees are also deferred. Commitment fees are recognized over the life of the resulting loans if the commitments are funded or at the expiration of the commitments if the commitments expire unexercised. Origination fees and costs related to loans held for sale are deferred and recognized as a component of gain or loss when the related loans are sold. (e) Gain or Loss on Sale of Loans and Servicing Rights Transfers and servicing of financial assets and extinguishments of liabilities are accounted for and reported based on consistent application of a financial-components approach that focuses on control. Transfers of financial assets that are sales are distinguished from transfers that are secured borrowings. Servicing assets and other retained interests in transferred assets are measured by allocating the previous carrying amount of the transferred assets between the assets sold, if any and retained interests, if any, based on their relative fair value at the date of transfer. Liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets are to be initially measured at fair value. Servicing assets and liabilities are to be subsequently amortized in proportion to and over the period of estimated net servicing income or loss and assessed for asset impairment or increased obligation based on fair value. The Bank recognizes a gain and a related asset for the fair value of the rights to service loans for others when loans are sold. The fair value of the servicing assets is estimated based upon the present value of the estimated expected future cash flows. The Bank measures the impairment of the servicing asset based on the difference between the carrying amount of the servicing asset and its current fair value. As of December 31, 1999 and 1998, there was no impairment in mortgage servicing asset. A sale is recognized when the transaction closes and the proceeds are other than beneficial interest in the assets sold. A gain or loss is recognized to the extent that the sales proceeds and the fair value of the servicing asset exceed or are less than the book value of the loan. Additionally, the fair value of servicing rights is considered in the determination of the gain or loss. When servicing rights are sold, a gain or loss is recognized at the closing date to the extent that the sales proceeds, less costs to complete the sale, exceed or are less than the carrying value of the servicing rights held. (f) Allowance for Loan Losses The allowance for loan losses is established through a provision charged to expense. Loans are charged off against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Recoveries of amounts previously charged off are added back to the allowance. The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans, standby letters of credit, overdrafts and commitments to extend credit based on evaluations of collectibility and prior loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, commitments, and current and anticipated economic conditions that may affect the borrowers' ability to pay. While management uses these evaluations to recognize the provision for loan losses, future provisions may be necessary based on changes in the factors used in the evaluations. The allowance for loan losses is also subject to review by the Comptroller of the Currency, the Bank's principal regulator. (g) Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives are as follows: Building 35 years Improvements, furniture, and equipment 3 to 10 years Expenditures for repairs and maintenance are charged to operations as incurred; significant betterments are capitalized. Interest expense attributable to construction-in-progress is capitalized. 38 (h) Intangible Assets Goodwill, representing the excess of purchase price over the fair value of net assets acquired, results from branch acquisitions made by the Bank. Goodwill is being amortized on an accelerated basis over eight years. Core deposit intangibles are amortized on an accelerated basis over eight years. Intangible assets are reviewed on a periodic basis for other than temporary impairment. If such impairment is indicated, recoverability of the asset is assessed based upon expected undiscounted net cash flows. Intangible assets totaled $900,000 and $1,182,000 at December 31, 1999 and 1998, respectively and are included in Other Assets. (i) Other Real Estate Owned Other real estate owned (OREO) consists of property acquired through foreclosure and is recorded at the time of foreclosure at its fair market value. Thereafter, it is carried at the lower of cost or fair market value less estimated completion and selling costs. If at foreclosure, the loan balance is greater than the fair market value of the property acquired, the excess is charged against the allowance for loan losses. Subsequent operating expenses or income, changes in carrying value, and gains or losses on disposition of OREO are reflected in other noninterest expense. Fair market value is generally determined based upon independent appraisals. Revenue recognition on the disposition of OREO is dependent upon the transaction meeting certain criteria relating to the nature of the property sold and the terms of the sale. Under certain circumstances, revenue recognition may be deferred until these criteria are met. (j) Earnings Per Share Basic earnings per share (EPS) includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity. On June 18, 1999, the Company effected a three percent stock dividend payable to stockholders of record as of June 4, 1999. All share, per share, Common Stock and stock option amounts herein have been restated to reflect the effects of the stock dividend. (k) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income tax expense is allocated to each entity of the Company based upon analyses of the tax consequences of each company on a stand alone basis. (l) Statements of Cash Flows For purposes of the statements of cash flows, cash, non-interest bearing deposits in other banks and federal funds sold, which generally have maturities of one day, are considered to be cash equivalents. (m) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (n) Stock Based Compensation The Company accounts for its stock option plan using the intrinsic value method. Compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. (o) Reclassifications Certain amounts in prior years' presentations have been reclassified to conform with the current presentation. These reclassifications have no effect on previously reported income. 39 (2) Restricted Cash Balances The Bank is required to maintain certain daily reserve balances in accordance with Federal Reserve Board requirements. Aggregate reserves of $2,340,000 and $1,855,000 were maintained to satisfy these requirements at December 31, 1999 and 1998, respectively. (3) Investment Securities Investment securities at December 31, 1999 and 1998 consisted of the following:
December 31, 1999 Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------------ Available for Sale ------------------ U.S. Agency securities $16,666,000 17,000 239,000 16,442,000 Municipal securities 12,187,000 52,000 229,000 12,010,000 Collateralized mortgage obligations 6,627,000 5,000 62,000 6,570,000 Other debt securities 948,000 - - 948,000 Investment in Federal Agency stock 126,000 - - 126,000 ------------------------------------------------------------------------------------------------------------------ Total $36,554,000 74,000 532,000 36,096,000 ==================================================================================================================
December 31, 1999 Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------------ Available for Sale ------------------ U.S. Treasury securities $ 1,000,000 3,000 - 1,003,000 U.S. Agency securities 19,494,000 311,000 7,000 19,798,000 Municipal securities 3,635,000 175,000 - 3,810,000 Collateralized mortgage obligations 457,000 5,000 4,000 458,000 Other debt securities 2,813,000 37,000 - 2,850,000 Money market mutual fund 17,602,000 - - 17,602,000 Investment in Federal Agency stock 126,000 - - 126,000 ------------------------------------------------------------------------------------------------------------------ Total $45,127,000 531,000 11,000 45,647,000 ==================================================================================================================
Investment securities totaling $8,555,000 and $4,559,000 were pledged as collateral to secure Local Agency Deposits as well as treasury, tax and loan accounts with the Federal Reserve at December 31, 1999 and 1998, respectively. In addition, investment securities totaling $5,942,000 were pledged to secure deposits with the California State Treasurer at December 31, 1999. Proceeds from the sale of Available for Sale securities during 1999, 1998 and 1997 were $43,054,000, $8,500,000 and $28,077,000 respectively, and represented the sale of money market mutual fund shares at book value. Accordingly, no gain or loss was realized. Federal Agency stock dividends paid to the Company were $7,000, in 1999, 1998 and 1997. 40 The amortized cost and estimated fair value of debt securities at December 31, 1999, by contractual maturity, or expected maturity where applicable, are shown below. Expected maturities will differ from contractual maturities because certain securities provide the issuer with the right to call or prepay obligations with or without call or prepayment penalties. December 31, 1999 Amortized Market Cost Value ------------------------------------------------------------------------- Due in one year or less $ 2,164,000 2,184,000 Due after one year through five years 21,482,000 21,333,000 Due after five years through 10 years 4,905,000 4,797,000 Due after 10 years 7,877,000 7,656,000 ------------------------------------------------------------------------- $36,428,000 35,970,000 ========================================================================= (4) Loans The Bank grants commercial, installment, real estate construction and other real estate loans to customers primarily in the trade areas served by its branches. Generally, the loans are secured by real estate or other assets. Although the Bank has a diversified loan portfolio, a significant portion of its debtors' ability to honor their contract is dependent upon the condition of the local real estate markets in which the loans are made. Outstanding loans consisted of the following at December 31: 1999 1998 -------------------------------------------------------------------------- Commercial $ 89,089,000 73,195,000 Real estate construction 13,919,000 11,743,000 Other real estate 6,420,000 4,761,000 Installment and other 3,301,000 3,463,000 -------------------------------------------------------------------------- 112,729,000 93,162,000 Deferred loan fees and loan sale premiums (556,000) (520,000) Allowance for loan losses (2,580,000) (1,564,000) -------------------------------------------------------------------------- $109,594,000 91,078,000 ========================================================================== Included in total loans are loans held for sale of $1,217,000 and $2,619,000 for 1999 and 1998, respectively. SBA and mortgage loans serviced by the Bank totaled $95,749,000, $66,903,000 and $45,939,000 in 1999, 1998, and 1997, respectively. Changes in the allowance for loan losses were as follows: 1999 1998 1997 ------------------------------------------------------------------------- Balance, beginning of year $1,564,000 1,313,000 1,207,000 Loans charged off (110,000) (132,000) (290,000) Recoveries 75,000 133,000 456,000 Provision charged to operations 1,051,000 250,000 (60,000) ------------------------------------------------------------------------- Balance, end of year $2,580,000 1,564,000 1,313,000 ========================================================================= Nonaccrual loans totaled $2,303,000, $248,000, and $340,000 at December 31, 1999, 1998 and 1997, respectively. Interest income which would have been recorded on nonaccrual loans was $76,000, $43,000 and $45,000, in 1999, 1998, and 1997, respectively. Impaired loans are loans for which it is probable that the Bank will not be able to collect all amounts due. At December 31, 1999 and 1998, the Bank had outstanding balances of $2,303,000 and $248,000 in impaired loans which had valuation allowances of $327,000 in 1999 and $32,000 in 1998. The average outstanding balances of impaired loans for the years ended December 31, 1999, 1998 and 1997 were $805,000, $535,000 and $1,150,000 respectively, on which $76,000, $40,000 and $47,000, respectively, was recognized as interest income. At December 31, 1999 and 1998, the collateral value method was used to measure impairment for all loans classified as impaired. Impaired loans at December 31, 1999 and 1998 consisted solely of commercial loans. 41 (5) Premises and Equipment Premises and equipment consisted of the following at December 31: 1999 1998 ------------------------------------------------------------------------- Land $ 874,000 874,000 Building 5,705,000 5,705,000 Leasehold improvements 1,613,000 1,477,000 Furniture and equipment 3,618,000 3,069,000 ------------------------------------------------------------------------- 11,809,000 11,125,000 ------------------------------------------------------------------------- Accumulated depreciation and amortization (4,713,000) (3,864,000) ------------------------------------------------------------------------- $ 7,096,000 7,261,000 ========================================================================= The Bank leases a portion of its building to unrelated parties under operating leases which expire in various years. The minimum future rentals to be received on noncancelable leases as of December 31, 1999 are summarized as follows: Year Ending December 31, ------------------------------------------------------------------------- 2000 $ 48,000 2001 1,000 ------------------------------------------------------------------------- Total minimum future rentals $ 49,000 ========================================================================= (6) Other Assets Other assets includes the cash surrender value of life insurance totaling $8,674,000 and $4,274,000 at December 31, 1999 and 1998, respectively. 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, for which the Bank is the beneficiary, 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 deferred 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. Other real estate owned is also included in other assets and was $129,000 at December 31, 1999 and 1998. During 1997, other real estate owned of $170,000 was acquired through foreclosure as settlement for loans. There were no such acquisitions during 1999 or 1998. These amounts represent noncash transactions, and accordingly, have been excluded from the Consolidated Statements of Cash Flows. (7) Deposits The following is a summary of deposits at December 31: 1999 1998 -------------------------------------------------------------------------- Demand $ 21,105,000 18,535,000 NOW and Super NOW Accounts 39,458,000 36,181,000 Money Market 16,752,000 19,482,000 Savings 29,057,000 25,987,000 Time, $100,000 and over 19,008,000 14,965,000 Other Time 30,781,000 34,394,000 -------------------------------------------------------------------------- $156,161,000 149,544,000 ========================================================================== Interest paid on time deposits in denominations of $100,000 or more was $765,000, $737,000 and $620,000 in 1999, 1998 and 1997, respectively. 42 At December 31, 1999, the aggregate maturities for time deposits is as follows: -------------------------------------------------------------------------- 2000 $48,335,000 2001 782,000 2002 363,000 2003 240,000 2004 69,000 -------------------------------------------------------------------------- Total $49,789,000 ========================================================================== (8) Operating Leases The Bank has noncancelable operating leases with unrelated parties for office space and equipment. The lease payments for future years are as follows: Year Ending December 31, Lease Payments -------------------------------------------------------------------------- 2000 $108,000 2001 67,000 2002 52,000 2003 52,000 2004 44,000 -------------------------------------------------------------------------- $323,000 ========================================================================== Total rental expense for operating leases was $101,000, $114,000 and $32,000 in 1999, 1998 and 1997 respectively. (9) Supplemental Compensation Agreements Effective April 3, 1999 the Company and the Bank entered into nonqualified supplemental compensation agreements with all of the directors and certain executive officers for the provision of death, disability and post- employment/retirement benefits. The agreement with directors includes elective provisions for service as a director emeritus following termination of service as a member of the Bank's 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 Company will accrue for the compensation based on anticipated years of service and the vesting schedule provided in the agreements. The executive officer agreements are defined contribution agreements whereby the benefit accruals under the plan are the amount by which, if any, the increase in cash surrender value of the related insurance policies exceeds a predetermined profitability index. At December 31, 1999 and 1998, accrued compensation under both plans was $160,000 and $72,000, respectively. The Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits." SFAS No. 132 does not change the measurement or recognition of expenses under the supplemental compensation agreements. (10) Financial Instruments with Off-Balance Sheet Risk In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. 43 At December 31, 1999 and 1998, financial instruments whose contract amounts represent credit risk are as follows: 1999 1998 ------------------------------------------------------------------------- Commitments to extend credit $24,418,000 21,290,000 ========================================================================= Standby letters of credit $ 892,000 156,000 ========================================================================= Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates, other termination clauses and may require payment of a fee. Many of the commitments are expected to expire without being drawn upon and accordingly, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. Upon extension of credit, the amount of collateral obtained, if any, is based on management's credit evaluation of the counter-party. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing or other real estate. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral obtained, if any, is varied. (11) Other Noninterest Income During 1998, the Company purchased single-premium life insurance policies written on the lives of certain officers and the directors of the Company and the Bank. During 1999, one of the insurance companies converted from a mutual to a stock based company, which process is referred to as "demutualization." As a result of the demutualization, policyholders of the insurance company received shares of common stock of the insurance company. The number of shares of stock received by policyholders was based upon the cash surrender value of the individual policies. The Company received and subsequently sold the shares in December, 1999. The gain recognized upon the receipt of the stock totaled $287,000. (12) Other Noninterest Expense Other noninterest expense for the years 1999, 1998 and 1997 included the following significant items: 1999 1998 1997 ------------------------------------------------------------------------- Third party data processing expense $ 821,000 719,000 642,000 Professional fees 554,000 423,000 401,000 Marketing 323,000 213,000 120,000 Intangible amortization 282,000 372,000 479,000 Telephone and postage 271,000 217,000 182,000 Supplies 193,000 176,000 142,000 Directors' fees and retirement 158,000 223,000 150,000 Printing 109,000 145,000 117,000 Other 563,000 417,000 423,000 ------------------------------------------------------------------------- Total $3,274,000 2,905,000 2,656,000 ========================================================================= 44 (13) Income Taxes The provision for income taxes for the years 1999, 1998 and 1997 consisted of the following:
1999 Federal State Total -------------------------------------------------------------------------------------------------------------------- Current $ 716,000 232,000 948,000 Deferred, net (608,000) (65,000) (673,000) -------------------------------------------------------------------------------------------------------------------- Income tax expense $ 108,000 167,000 275,000 ==================================================================================================================== 1998 -------------------------------------------------------------------------------------------------------------------- Current $ 252,000 144,000 396,000 Deferred, net (12,000) (40,000) (52,000) -------------------------------------------------------------------------------------------------------------------- Income tax expense $ 240,000 104,000 344,000 ==================================================================================================================== 1997 -------------------------------------------------------------------------------------------------------------------- Current $ 312,000 195,000 507,000 Deferred, net 16,000 (44,000) (28,000) -------------------------------------------------------------------------------------------------------------------- Income tax expense $ 328,000 151,000 479,000 ====================================================================================================================
Income taxes payable of $51,000 are included in other liabilities at December 31, 1999. Income taxes receivable of $117,000 are included in other assets at December 31, 1998. The provision for income taxes differs from amounts computed by applying the statutory Federal income tax rate to operating income before income taxes. The reasons for these differences are as follows:
1999 1998 1997 Amount Rate Amount Rate Amount Rate ---------------------------------------------------------------------------------------------------- Federal income tax expense, at statutory income tax rates $ 488,000 34% 475,000 34% 508,000 34% State franchise tax expense, net of federal income tax benefits 103,000 7% 100,000 7% 107,000 7% Tax-free interest income (157,000) (11%) (136,000) (10%) (147,000) (10%) Change in the beginning of the year deferred tax asset valuation allowance (85,000) (6%) (45,000) (3%) 32,000 2% Other (74,000) (5%) (50,000) (3%) (21,000) (1%) ---------------------------------------------------------------------------------------------------- $ 275,000 19% 344,000 25% 479,000 32% ====================================================================================================
45 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1998 are presented below.
Deferred tax assets: 1999 1998 ------------------------------------------------------------------------------------------- Allowance for loan losses $ 946,000 553,000 Allowance for losses on other real estate owned 14,000 14,000 Interest on nonaccrual loans 121,000 60,000 Deferred loan income 169,000 145,000 Accumulated Amortization 326,000 260,000 Unrealized loss on available-for-sale securities, net 192,000 - Deferred compensation 107,000 74,000 Alternative minimum tax credit carryforwards - 2,000 Other 110,000 26,000 ------------------------------------------------------------------------------------------- Total gross deferred tax assets 1,985,000 1,134,000 Less valuation allowance (35,000) (120,000) ------------------------------------------------------------------------------------------- Deferred tax assets, net of allowance 1,950,000 1,014,000 ------------------------------------------------------------------------------------------- Deferred tax liabilities: Accumulated depreciation (59,000) (103,000) Deferred loan origination costs (267,000) (173,000) Unrealized gain on available-for-sale securities, net - (218,000) Other (122,000) (101,000) ------------------------------------------------------------------------------------------- Total gross deferred tax liabilities (448,000) (595,000) ------------------------------------------------------------------------------------------- Net deferred tax asset $1,502,000 419,000 ===========================================================================================
The valuation allowance for deferred tax assets decreased by $85,000 and $45,000 for the years ended December 31, 1999 and 1998, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 1999 and 1998. 46 (14) Stockholders' Equity (a) Stock Options In December 1982, the Board of Directors adopted the First Financial Bancorp 1982 Stock Incentive Plan. A total of 257,500 shares of the Company's common stock were reserved for issuance under the Plan. Options were granted at an exercise price not less than the fair market value of the stock at the date of grant and became exercisable over varying periods of time and expired 10 years from such date. In February 1991, the Board of Directors adopted the First Financial Bancorp 1991 Employee Stock Option Plan and Director Stock Option Plan. The maximum number of shares issuable under the Employee Stock Option Plan is 183,855. The maximum number of shares issuable under the Director Stock Option Plan was 56,650. Options are granted at an exercise price of at least 100% and 85% of the fair market value of the stock on the date of grant for the Employee Stock Option Plan and the Director Stock Option Plan, respectively. The 1991 Plans replaced the 1982 Plan; however, this does not adversely affect any stock options outstanding under the 1982 Plan. In February 1997, the Board of Directors adopted the First Financial Bancorp 1997 Stock Option Plan. The maximum number of shares issuable under the Plan is 405,003 less any shares reserved for issuance pursuant to the 1991 Plans. Options are granted at an exercise price of at least 100% and 85% of the fair market value of the stock on the date of grant for employee stock options and director stock options, respectively. The options issued in 1999 and 1997 were not issued at less than 100% of market value. The 1997 Plan replaces the 1991 Plans; however, this does not adversely affect any stock options outstanding under the 1991 Plans. Stock option plan activities are summarized as follows: Options Outstanding Exercise Price Options Per Share ------------------------------------------------------------- Balance, December 31, 1996 201,545 $5.58 - 8.32 ============================================================= Options granted 78,795 $9.71 - 12.14 ============================================================= Options exercised (24,609) $5.58 - 8.32 ============================================================= Options expired (32,659) $6.60 - 9.71 ============================================================= Balance, December 31, 1997 223,072 $5.58 - 12.14 ============================================================= Options exercised (16,944) $5.58 - 6.60 ============================================================= Options expired (18,051) $6.55 - 12.14 ============================================================= Balance, December 31, 1998 188,077 $5.58 - 12.14 ============================================================= Options granted 33,900 $9.94 - 12.00 ============================================================= Options exercised (44,562) $5.58 - 8.33 ============================================================= Options expired (24,013) $5.58 - 12.14 ============================================================= Balance, December 31, 1999 153,402 $5.58 - 12.00 ============================================================= At December 31, 1999 and 1998, the weighted-average remaining contractual life of all outstanding options was 5.50 years and 5.16 years, respectively. The number of options exercisable was 117,424, 142,700 and 123,775 and the weighted-average exercise price of those options was $7.11, $7.20 and $7.22 at December 31, 1999, 1998 and 1997, respectively. There were no stock options granted during 1998. The per share weighted- average fair value of stock options granted during 1999 and 1997 was $3.12 and $3.03, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Sholes option-pricing model with the following weighted-average assumptions used for grants as of December 31, 1999 and 1997, respectively: dividend yield of 0.00% and 2.18%; expected volatility of 18.4% and 18.4%; risk-free interest rate of 6.19% and 6.20%; and an expected life of five years in each of the years. 47 No compensation cost has been recognized for its stock options in the accompanying consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options, the Company's net income would have been reduced to the pro forma amounts indicated below for the period ended December 31: 1999 1998 1997 ---------------------------------------------------------------------- Net Income As reported $1,159,000 1,052,000 $1,015,000 Pro forma 1,138,000 1,022,000 985,000 Basic Net Income Per Share As reported .83 .76 .74 Pro forma .81 .74 .72 Diluted Net Income Per Share As reported .80 .72 .71 Pro forma .78 .70 .69 Pro forma net income reflects only options granted after 1994. Therefore, the full impact of calculating compensation cost for stock options using the fair value method is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of five years and compensation cost for options granted prior to January 1, 1995 is not considered. (b) Employee Stock Ownership Plan Effective January 1, 1992, the Bank established the Bank of Lodi Employee Stock Ownership Plan. The plan covers all employees, age 21 or older, beginning with the first plan year in which the employee completes at least 1,000 hours of service. The Bank's annual contributions to the plan are made in cash and are at the discretion of the Board of Directors based upon a review of the Bank's profitability. Contributions for 1999, 1998 and 1997 totaled approximately $149,000, $116,000 and $98,000, respectively. Contributions to the plan are invested primarily in the Common Stock of First Financial Bancorp and are allocated to participants on the basis of salary in the year of allocation. Benefits become 20% vested after the third year of credited service, with an additional 20% vesting each year thereafter until 100% vested after seven years. As of December 31, 1999, the plan owned 48,000 shares of Company Common Stock. Of that amount, 3,500 shares were unallocated to participants at December 31, 1999. (c) Dividends and Dividend Restrictions On January 20, 2000, the Company's Board of Directors declared a cash dividend of five cents per share payable on February 25, 2000, to shareholders of record on February 11, 2000. The Company's principal source of funds for dividend payments is dividends received from the Bank. Under applicable Federal laws, permission to pay a dividend must be granted to a bank by the Comptroller of the Currency if the total dividend payment of any national banking association in any calendar year exceeds the net profits of that year, as defined, combined with net profits for the two preceding years. At December 31, 1999, there were Bank retained earnings of $2,739,000 free of this condition. 48 (d) Weighted Average Shares Outstanding Basic and diluted earnings per share for the years ended December 31, 1999, 1998, and 1997 were computed as follows:
Income Shares Per-Share 1999 (numerator) (denominator) Amount ------------------------------------------------------------------------------------------------- Basic earnings per share $1,159,000 1,401,670 $.83 Effect of dilutive securities - 50,732 - ------------------------- Diluted earnings per share $1,159,000 1,452,402 $.80 ========================= Income Shares Per-Share 1998 (numerator) (denominator) Amount ------------------------------------------------------------------------------------------------- Basic earnings per share $1,052,000 1,381,428 $.76 Effect of dilutive securities - 86,761 - ------------------------- Diluted earnings per share $1,052,000 1,468,189 $.72 ========================= Income Shares Per-Share 1997 (numerator) (denominator) Amount ------------------------------------------------------------------------------------------------- Basic earnings per share $1,015,000 1,363,100 $.74 Effect of dilutive securities - 70,738 - -------------------------- Diluted earnings per share $1,015,000 1,433,838 $.71 ==========================
(15) Related Party Transactions During the normal course of business, the Bank enters into transactions with related parties, including directors, officers, and affiliates. These transactions include borrowings from the Bank with substantially the same terms, including rates and collateral, as loans to unrelated parties. At December 31, 1999 and 1998, respectively, such borrowings totaled $1,177,000 and $1,018,000, respectively. Deposits of related parties held by the Bank totaled $363,000 and $671,000 at December 31, 1999 and 1998, respectively. The following is an analysis of activity with respect to the aggregate dollar amount of loans made by the Bank to directors, officers and affiliates for the years ended December 31: 1999 1998 --------------------------------------------------------------------------- Balance, beginning of year $ 1,018,000 922,000 Loans funded 1,232,000 738,000 Principal repayments (1,073,000) (642,000) --------------------------------------------------------------------------- Balance, end of year $ 1,177,000 1,018,000 =========================================================================== 49 (16) Parent Company Financial Information This information should be read in conjunction with the other notes to the consolidated financial statements. The following presents summary balance sheets as of December 31, 1999 and 1998, and statements of income, and cash flows information for the years ended December 31, 1999, 1998, and 1997.
Balance Sheets: - ------------------------------------------------------------------------------------------------------- Assets 1999 1998 - ------------------------------------------------------------------------------------------------------- Cash in bank $ 76,000 121,000 Investment securities available-for-sale, at fair value 6,000 5,000 Premises and equipment, net 63,000 64,000 Investment in wholly-owned subsidiaries 14,005,000 13,521,000 Other assets 371,000 146,000 - ------------------------------------------------------------------------------------------------------- $14,521,000 13,857,000 ======================================================================================================= Liabilities and Stockholders' Equity - ------------------------------------------------------------------------------------------------------- Stockholders' equity Common stock 8,433,000 7,584,000 Retained earnings 6,354,000 5,971,000 Accumulated other comprehensive (loss) income (266,000) 302,000 - ------------------------------------------------------------------------------------------------------- Total stockholders' equity 14,521,000 13,857,000 - ------------------------------------------------------------------------------------------------------- $14,521,000 13,857,000 =======================================================================================================
Statements of Income: 1999 1998 1997 - ------------------------------------------------------------------------------------------------------ Rent from subsidiary $ 6,000 5,000 6,000 Interest from unrelated parties - - 2,000 Other expenses (218,000) (316,000) (215,000) Equity in income of subsidiaries 1,252,000 1,154,000 1,100,000 Income tax benefit 119,000 209,000 122,000 - ------------------------------------------------------------------------------------------------------ Net income $ 1,159,000 1,052,000 1,015,000 ======================================================================================================
Statements of Cash Flows: 1999 1998 1997 - ------------------------------------------------------------------------------------------------------ Net Income $1,159,000 1,052,000 1,015,000 Adjustments to reconcile net income to net cash flows provided by (used in) operating activities: Depreciation and amortization 1,000 2,000 2,000 Provision for deferred taxes (29,000) 27,000 (36,000) Decrease in other liabilities - (4,000) (23,000) (Increase) decrease in other assets (196,000) (66,000) (15,000) Increase in equity of subsidiaries (1,052,000) (879,000) (774,000) - ------------------------------------------------------------------------------------------------------ Net cash (used in) provided by operating activities (117,000) 132,000 169,000 Cash flows from investing activities: Purchases of available-for-sale securities (1,000) - - Proceeds from sale of available-for-sale securities - - 75,000 Investment in subsidiary - (10,000) - - ------------------------------------------------------------------------------------------------------ Net cash (used in) provided by investing activities (1,000) (10,000) 75,000 Cash flows from financing activities: Proceeds received upon exercise of stock options 359,000 129,000 131,000 Dividends paid (286,000) (269,000) (265,000) - ------------------------------------------------------------------------------------------------------ Net cash used by financing activities 73,000 (140,000) (134,000) - ------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash (45,000) (18,000) 110,000 - ------------------------------------------------------------------------------------------------------ Cash at beginning of year 121,000 139,000 29,000 - ------------------------------------------------------------------------------------------------------ Cash at end of year $ 76,000 121,000 139,000 ======================================================================================================
50 (17) Lines of Credit The Bank has two unsecured lines of credit with correspondent banks totaling $7,000,000 which renew annually. At December 31, 1999 the Bank had outstanding borrowings under these lines totaling $4,300,000. During 1999, the maximum amount outstanding was $4,300,000, the average balance outstanding was $176,000 and the weighted average interest rate was 6.25%. At December 31, 1998 no amounts were outstanding under these lines of credit. (18) Regulatory Matters The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by regulators, that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measure of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below). First, a bank must meet a minimum Total Risk-Based Capital to risk-weighted assets ratio of 8%. Risk-based capital and asset guidelines vary from Tier I capital guidelines by redefining the components of capital, categorizing assets into different classes, and including certain off-balance sheet items in the calculation of the capital ratio. The effect of the risk-based capital guidelines is that banks with high exposure will be required to raise additional capital while institutions with low risk exposure could, with the concurrency of regulatory authorities, be permitted to operate with lower capital ratios. In addition, a bank must meet minimum Tier I Capital to average assets ratio. Management believes, as of December 31, 1999, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1999, the most recent notification, the Federal Deposit Insurance Corporation (FDIC) categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized, the Bank must meet the minimum ratios as set forth below. There are no conditions or events since that notification that management believes have changed the Bank's category. 51 The Bank's actual capital amounts and ratios as of December 31, 1999 are as follows:
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio - ----------------------------------------------------------------------------------------------------------------------- Total Risk-based capital (to Risk weighted assets) $14,937,000 10.51% *$11,366,000 *8.0% *$14,208,000 *10.0% Tier I Capital (to Risk Weighted assets) $13,161,000 9.26% *$ 5,683,000 *4.0% *$ 8,525,000 * 6.0% Tier I Capital (to Average Assets) $13,161,000 7.82% *$ 6,731,000 *4.0% *$ 8,414,000 * 5.0%
The Bank's actual capital amounts and ratios as of December 31, 1998 are as follows:
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio - ----------------------------------------------------------------------------------------------------------------------- Total Risk-based capital (to Risk weighted assets) $13,084,000 11.17% *$9,371,000 *8.0% *$11,714,000 *10.0% Tier I Capital (to Risk Weighted assets) $11,620,000 9.92% *$4,685,000 *4.0% *$ 7,028,000 * 6.0% Tier I Capital (to Average Assets) $11,620,000 7.35% *$6,324,000 *4.0% *$ 7,905,000 * 5.0%
(19) Fair Values of Financial Instruments The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance -------------------------- sheet for cash and due from banks and federal funds sold are a reasonable estimate of fair value. Investment securities: Fair values for investment securities are based on ---------------------- quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. (See note 3). Loans: For variable-rate loans that reprice frequently and with no ------ significant change in credit risk, fair values are based on carrying values. The fair values for fixed-rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Commitments to extend credit and standby letters of credit: The fair value ----------------------------------------------------------- of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the counter parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based upon fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counter parties at the reporting date. Deposit liabilities: The fair values disclosed for demand deposits (e.g., -------------------- interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits. * = Greater than 52 Short term borrowings: The discounted value of contractual cash flows ---------------------- at market interest rates for short term borrowings with similar terms and remaining maturities are used to estimate the fair value of existing short term borrowings. Limitations: Fair value estimates are made at a specific point in time, ------------ based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax assets, premises, and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. The estimated fair values of the Company's financial instruments at December 31, are approximately as follows:
1999 Carrying Fair Amount Value --------------------------------------------------------------------------------------- Financial assets: Cash and due from banks and federal funds sold $ 9,409,000 9,409,000 Investment securities 36,096,000 36,096,000 Loans, net $109,594,000 110,061,000 Financial liabilities: Deposits: Demand $ 21,105,000 21,105,000 Now and Super Now accounts 39,458,000 39,458,000 Money Market 16,752,000 16,752,000 Savings 29,057,000 29,057,000 Time 49,789,000 49,676,000 ------------ ------------ Total deposits $156,161,000 156,048,000 Short term borrowings $ 4,300,000 4,300,000
Contract Carrying Fair Amount Amount Value ------------------------------------------------------------------------------------------- Unrecognized financial instruments: Commitments to extend credit $ 24,418,000 - 244,180 Standby letters of credit 892,000 - 1,000
53
1998 Carrying Fair Amount Value ------------------------------------------------------------------------------------------- Financial assets: Cash and due from banks and federal funds sold $ 12,129,000 12,129,000 Investment securities 45,647,000 45,647,000 Loans, net $ 91,078,000 91,948,000 Financial liabilities: Deposits: Demand $ 18,535,000 18,535,000 Now and Super Now accounts 36,181,000 36,181,000 Money Market 19,482,000 19,482,000 Savings 25,987,000 25,987,000 Time 49,359,000 49,447,000 ------------ ----------- Total deposits $149,544,000 149,632,000
Contract Carrying Fair Amount Amount Value ------------------------------------------------------------------------------------------- Unrecognized financial instruments: Commitments to extend credit $ 21,290,000 - 213,000 Standby letters of credit 156,000 - 2,000
(20) Legal Proceedings The bank is involved in various legal actions arising in the ordinary course of business. In the opinion of management, after consulting with legal counsel, the ultimate disposition of these matters will not have a material effect on the Bank's financial condition, results of operations, or liquidity. (21) Derivative Financial Instruments As of December 31, 1999 and 1998, the Company has no off-balance sheet derivatives. The Company held $6,627,000 and $457,000 in collateralized mortgage obligations and $0 and $500,000 in structured notes as of December 31, 1999 and 1998 respectively. These investments are held in the available for sale portfolio. (22) Western Auxiliary Corporation On June 9, 1998 the Company incorporated Western Auxiliary Corporation (WAC). The Company capitalized WAC as a wholly-owned subsidiary during the quarter ended September 30, 1998 with an initial capitalization of $10,000. WAC earns fee income by acting as trustee on the Bank's trust deed transactions and receives the necessary operational resources under an intercompany services agreement between WAC and the Bank. 54 (23) Quarterly Financial Information (Unaudited)
------------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data and price range of common stock) March 31, June 30, September 30, December 31, ------------------------------------------------------------------------------------------------------------------------------- 1999 ---- Interest income $ 2,958 2,976 3,226 3,366 Net interest income 2,020 2,065 2,322 2,420 Provision for loan losses 100 101 200 650 Noninterest income 485 480 563 933 Noninterest expense 1,989 2,188 2,274 2,352 Income before taxes 416 256 411 351 Net income 273 178 335 373 Basic earnings per share .18 .13 .24 .28 Diluted earnings per share .17 .12 .22 .29 Dividends paid per share .05 .05 .05 .05 Price range, common stock 12.25-11.00 12.50-11.00 12.50-10.63 11.00-9.12 ------------------------------------------------------------------------------------------------------------------------------- 1998 ---- Interest income $ 2,749 2,739 2,914 3,106 Net interest income 1,784 1,678 1,865 2,153 Provision for loan losses 30 30 60 130 Noninterest income 416 439 490 533 Noninterest expense 1,834 1,851 1,909 2,118 Income before taxes 336 236 386 438 Net income 230 181 300 341 Basic earnings per share .15 .13 .22 .26 Diluted earnings per share .14 .12 .20 .26 Dividends paid per share .05 .05 .05 .05 Price range, common stock 13.25-13.00 14.50-13.63 14.63-13.25 13.38-12.00 -------------------------------------------------------------------------------------------------------------------------------
The loan loss provision for 1999 totaled $1,051,000 and represents an increase of $801,000 (320%) over 1998. The reason for the increase is attributable primarily to two factors; the primary factor being the continued year-over-year increase in the loan portfolio. Secondly, during the fourth quarter of 1999, the Company became aware of the deteriorating condition in the credit quality of a few specific loans. As a result, the provision for loan losses totaled $650,000 during the fourth quarter of 1999. See Note 11 for information regarding the increase in noninterest income during the fourth quarter of 1999. 55 SIGNATURES Pursuant to the requirements of Section 13 of 15(d) 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, on the 30th day of March, 2000. FIRST FINANCIAL BANCORP /s/ LEON J. ZIMMERMAN ----------------------- Leon J. Zimmerman President and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Capacity Date -------- ---- /s/ BENJAMIN R. GOEHRING Director and Chairman of the Board March 30, 2000 - ------------------------------- Benjamin R. Goehring /s/ WELDON D. SCHUMACHER Director and Vice Chairman of the Board March 30, 2000 - ------------------------------- Weldon D. Schumacher /s/ BOZANT KATZAKIAN Director March 30, 2000 - ------------------------------- Bozant Katzakian /s/ ANGELO J. ANAGNOS Director March 30, 2000 - ------------------------------- Angelo J. Anagnos /s/ STEVE M. COLDANI Director March 30, 2000 - ------------------------------- Steve M. Coldani /s/ DAVID M. PHILIPP Director March 30, 2000 - ------------------------------- Michael D. Ramsey /s/ LEON J. ZIMMERMAN Director, President and March 30, 2000 - ------------------------------- Leon J. Zimmerman Chief Executive Officer (Principal Executive Officer) /s/ ALLEN R. CHRISTENSON Senior Vice President, March 30, 2000 - ------------------------------- Allen R. Christenson Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)
56 INDEX TO EXHIBITS Exhibit Page ------- ---- 23 Consent of Expert 59 27 Financial Data Schedule (electronic submission only) 57
EX-23 2 CONSENT OF EXPERTS EXHIBIT 23 - CONSENT OF EXPERTS The Board of Directors First Financial Bancorp: We consent to incorporation by reference in the registration statements dated April 23, 1991 on Form S-8 of First Financial Bancorp and dated June 12, 1997 on Form S-8 of First Financial Bancorp of our report dated February 23, 2000, relating to the consolidated balance sheets of First Financial Bancorp and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of income, stockholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999, which report appears in the December 31, 1999 annual report on Form 10-K of First Financial Bancorp. /s/ KPMG LLP Sacramento, California March 30, 2000 EX-27 3 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS DATED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 9,309 0 100 0 36,096 0 0 109,594 2,580 176,334 156,161 4,300 1,352 0 0 0 8,433 6,088 176,334 9,911 2,413 202 12,526 3,688 3,699 8,827 35 0 8,803 1,434 0 0 0 1,159 0.83 0.80 6.03 2,303 374 0 0 1,564 110 75 2,580 2,580 0 1,475
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