10-Q 1 a4701503.txt FIRST FINANCIAL BANCORP ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ____________ TO _______________ COMMISSION FILE NUMBER : 0-12499 FIRST FINANCIAL BANCORP (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 94-28222858 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 701 SOUTH HAM LANE, LODI, CALIFORNIA 95242 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (209) 367-2000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NA (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [ ] Yes [ X ] No As of August 9, 2004 there were 1,830,692 shares of Common Stock no par value, outstanding. ================================================================================ FIRST FINANCIAL BANCORP FORM 10-Q FOR THE QUARTER ENDED JUNE, 30 2004 TABLE OF CONTENTS

i ITEM 1. FINANCIAL STATEMENTS FIRST FINANCIAL BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands except share amounts)

See accompanying notes. 1 FIRST FINANCIAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands except per share amounts)

See accompanying notes. 2 FIRST FINANCIAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Unaudited) (in thousands except share amounts)

See accompanying notes. 3 FIRST FINANCIAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) SIX MONTHS ENDED JUNE 30,

See accompanying notes. 4 FIRST FINANCIAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2004 (Unaudited) (1) Summary of Significant Accounting Policies First Financial Bancorp (the "Company") operates principally as a bank holding company for its wholly owned subsidiary, Bank of Lodi, N.A. (the "Bank"). The Bank is the principal source of income for the Company. The Company also holds all of the capital stock of its other subsidiary, Western Auxiliary Corporation. All references herein to the "Company" include the Bank and all other subsidiaries, unless the context otherwise requires. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the consolidated financial statements reflect all normal recurring adjustments necessary for a fair presentation of the results for the interim periods. Certain amounts in the prior year have been reclassified to conform with the current presentation. These reclassifications have no effect on previously reported income. These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company's 2003 Annual Report on Form 10-K. Operating results for the six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. (2) Outstanding Shares and Earnings Per Share On March 25, 2004, the Board of Directors of the Company declared a 10% stock dividend payable as of May 14, 2004. All share and per share amounts have been adjusted to reflect the effect of the stock dividend. In addition, the December 31, 2003 number of shares outstanding was adjusted to properly reflect the stock dividend. Per share information is based on weighted average number of shares of common stock outstanding during each three-month and six month period. Basic earnings per share (EPS) is computed by dividing net income by the weighted average common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average common shares outstanding during the period plus potential common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The following tables provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation of the three and six month periods ended June 30, 2004 and 2003:

All share and per share data has been adjusted for the 10% stock dividend declared on March 25, 2004. (3) Allowance for Loan Losses The following summarizes changes in the allowance for loan losses for the six-month periods ended June 30, 2004 and 2003 and the twelve month period ended December 31, 2003:

(4) Stock Based Compensation Effective as of January 1, 2003, the Company adopted the fair value recognition provisions of FASB Statement No. 148, Accounting for Stock-Based Compensation (SFAS No. 148). Under the prospective method of adoption selected by the Company, stock-based employee compensation costs are recognized as awards are granted, modified or settled. Prior to January 1, 2003, these plans were accounted for under the intrinsic value method as prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees. Under the intrinsic value method, compensation expense was recognized on the date of grant only if the market price of the underlying stock exceeded the exercise price on that date. The following table presents the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period.

All share and per share data has been adjusted for the 10% stock dividend declared on March 25, 2004. 6 (5) Retirement Plans The Company has a supplemental retirement plan for directors and a supplemental executive retirement plan covering key executives. These plans are non-qualified defined benefit plans and are unsecured and unfunded. The Company has purchased insurance on the lives of the participants and intends to use the cash values of these policies to pay the retirement obligations. The following table sets forth the net periodic benefit cost recognized for the plans:

During the six months ended June 30, 2004, the Company contributed and paid out as benefits $12.5 thousand to participants under the plans. For the year ending December 31, 2004, the Company expects to contribute and pay out as benefits $27.5 thousand to participants under the plans. (6) Legal Proceedings On March 23, 2004, a lawsuit was filed naming First Financial Bancorp, Bank of Lodi, N.A. and certain named directors and officers of the Company. The suit was brought as a derivative action commenced by two shareholders on behalf of the Company. It alleges intentional and negligent breach of fiduciary duty, abuse of control, waste of corporate assets, unjust enrichment and imposition of constructive trust. The matter was tendered to the Company's carrier for its director and officer liability insurance, which accepted the tender of defense. The Boards of Directors of the Company and the Bank have appointed independent Special Litigation Committees composed of two new directors, one of whom is a retired San Joaquin County Judge, to evaluate the allegations of the Complaint and determine what action, if any, the Company and the Bank should take with respect to the action. If the allegations are proven, any recovery in the suit will benefit the Company. The Company is involved in various legal actions arising in the ordinary course of business. In the opinion of management, after consulting with legal counsel, the ultimate disposition of these matters will not have a material effect on the Company's financial position, results of operations, or liquidity. (7) Stock Repurchase Program In April 2002, the Board of Directors authorized a stock repurchase program approving the repurchase of up to $2 million of the Company's stock. Since the program's inception, 51,087 shares were repurchased at an average cost of $13.93 per share for a total of $712 thousand. Year-to-date, 8,891 shares were repurchased at an average cost of $17.77 per share for a total of $158 thousand. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Certain statements in this Quarterly Report on Form 10-Q include forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "safe harbor" created by those sections. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations, are generally identifiable by the use of words such as "believe," "expect," "intend," "anticipate," "estimate," "project," "assume," "plan," "predict," "forecast" or similar expressions. These forward-looking statements relate to, among other things, expectations of the business environment in which the Company operates, projections of future performance, potential future performance, potential future credit experience, perceived opportunities in the market, and statements regarding the Company's mission and vision. The Company's actual results, performance, and achievements may differ materially from the results, performance, and achievements expressed or implied in such forward-looking statements due to a wide range of risks and uncertainties. Such risks and uncertainties include, but are not limited to, the following factors: competitive pressure in the banking industry; changes in the interest rate environment; general economic conditions, either nationally or regionally becoming less favorable than expected and resulting in, among other things, a deterioration in credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment; monetary and fiscal policies of the U.S. Government; changes in real estate valuations; changes in business conditions; volatility of rate sensitive deposits; operational risks, including data processing system failures or fraud; asset/liability matching risks and liquidity risks; impact of litigation; the ability of management and directors to work together cooperatively and efficiently; civil disturbances or terrorist threats or acts or apprehension about the possible future occurrences of acts of this type; and changes in the securities markets. In addition, other events have increased the uncertainty related to the national and California economic outlook and could have an effect on the future operations of the Company or its customers, including borrowers. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the allowance for loan losses, other real estate owned, investments and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. The Company maintains an allowance for loan losses resulting from the inability of borrowers to make required loan payments. If the financial conditions of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company invests in debt and equity securities. If the Company believes these securities have experienced a decline in value that is other than temporary, an investment impairment charge is recorded. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment's carrying value, thereby requiring an impairment charge in the future. The following discussion addresses information pertaining to the financial condition and results of operations of the Company that may not be otherwise apparent from a review of the consolidated financial statements and related footnotes. It should be read in conjunction with those statements and notes found on pages 1 through 7, as well as other information presented throughout this report. 8 SUMMARY For the quarter ended June 30, 2004, the Company recorded net income of $678 thousand, representing an increase of $319 thousand or 88.9% over net income of $359 thousand for the same period in 2003. Diluted earnings per share for the second quarter of 2004 totaled $0.35, an 84% increase from the $0.19 per diluted share earnings for the second quarter in 2003. The increase resulted from an increase in net interest income of $476 thousand combined with a decrease in noninterest expense of $132 thousand, which was partially offset by an increase in the provision for income tax of $145 thousand, an increase in the provision for loan losses of $110 thousand and a decrease in noninterest income of $34 thousand. For the six month period ended June 30, 2004, the Company recorded net income totaling $1,245 thousand, representing an increase of $544 thousand or 77.6% over net income of $701 thousand for the same period in 2003. The increase resulted primarily from an increase in net interest income of $1,027 thousand combined with a decrease in noninterest income of $227 thousand and an increase in the provision for income tax of $243 thousand. Year to date diluted earnings per share for the first six months of 2004 totaled $0.65, an increase of 76% over the prior year per diluted share earnings, which totaled $0.37. Return on average equity for the three and six month periods ended June 30, 2004 totaled 13.07% and 12.12%, respectively, compared to 7.29% and 7.17% for the same periods in 2003. Return on average assets during the same periods totaled 0.83% and 0.77% in 2004 compared to 0.53% and 0.52% in 2003, respectively. Included in net income during the six month period ended June, 30, 2004 were gains on the sale of investment securities totaling $65 thousand. During the same period in 2003, gains on the sale of investment securities totaled $88 thousand, a reduction of $23 thousand from the prior year. Additionally, included in noninterest expense during 2004 are year-to-date costs totaling $195,000 associated with responding to the actions initiated by three dissident directors. CHANGES IN FINANCIAL CONDITION Consolidated total assets as of June 30, 2004 totaled $324 million, which represents an increase of $2,325 thousand, or 0.7% when compared to December 31, 2003. The increase in total assets was attributable primarily to a $5,178 thousand, or 36.7%, increase in short term borrowings, which was offset by a $3,408 thousand, or 1.2%, decrease in total deposits. Total gross loans increased $26,655 thousand, or 14.6% during the first six months of 2004. The loan growth was funded by a reduction of federal funds sold of $1,697 thousand, or 21.1%, a decrease of $17,055, or 18.9%, in the investment portfolio due to prepayments of mortgage-backed securities (including CMOs) of $11,700 thousand and proceeds from the sale of securities of $4,145 thousand and an increase of $5,178 thousand, or 36.7%, in short term borrowings. The net increase in gross loans is the result of increases of $21,822 thousand, or 27.0%, $4,295 thousand, or 14.1%, $875 thousand, or 5.5%, $635 thousand, or 2.0%, and $367 thousand, or 11.9%, in real estate loans, commercial loans, construction loans, SBA loans and loans held for sale, respectively, combined with decreases of $1,155 thousand, or 6.1%, and $184 thousand, or 8.1%, in agricultural and consumer loans, respectively. During the first six months of 2004, non-interest bearing deposits increased $1,618 thousand, or 3.4% and interest bearing deposits decreased $5,026 thousand, or 2.2%. The year-to-date deposit decrease consists of increases of $1,951 thousand, or 4.3%, $1,618 thousand, or 3.4%, and $1,990 thousand, or 3.5% in savings, non-interest bearing and NOW accounts combined with decreases of $3,157 thousand, or 5.7%, and $5,810 thousand, or 7.9%, in money market accounts and certificates of deposit, respectively. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses (the "allowance") is established through a provision for possible loan losses charged to expense. The allowance at June 30, 2004 decreased by $372 thousand, or 11.4%, when compared to December 31, 2003 as a result of a provision for $235 thousand combined with net charge-offs of $607 thousand. During the second quarter of 2004, the Company charged-off $587 thousand in loans, which were primarily related to nonperforming agricultural loans of a single borrower. During the first six months of 2004, nonperforming loans decreased by $2,030 thousand, to $1,850 thousand when compared to December 31, 2003. Management continues to actively work to resolve the nonperforming loans, the majority of which are secured by real estate that, in the opinion of management, are well collateralized. Management believes that the allowance at June 30, 2004 is adequate to absorb known and reasonably estimated loan losses. However, there can be no assurances that future economic events will not negatively impact the Bank's borrowers, thereby causing loan losses to exceed the current allowance. 9 The following tables depict activity in the allowance for loan losses and allocation of reserves for the six months ended June 30, 2004 and year ended December 31, 2003, respectively: ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES Six Months Year Ended Ended 6/30/04 12/31/03 ------- -------- Balance at beginning of period $ 3,262 3,057 Charge-offs: Commercial (598) (88) Consumer (26) (55) ------- -------- Total charge-offs (624) (143) Recoveries: Commercial 15 27 Consumer 2 9 ------- -------- Total recoveries 17 36 ------- -------- Net charge-offs (607) (107) Provision charged to operations 235 312 ------- -------- Balance at end of period $ 2,890 $ 3,262 ======= ======== ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES 6/30/04 6/30/04 12/31/03 12/31/03 LOAN CATEGORY AMOUNT % OF LOANS AMOUNT % OF LOANS -------- ---------- -------- ---------- Commercial and other real estate $ 2,038 90.94% $ 2,381 89.99% Real estate construction 809 8.06% 828 8.76% Installment and other 43 1.00% 53 1.25% -------- ---------- -------- ---------- $ 2,890 100.00% $ 3,262 100.00% ======== ========== ======== ========== INVESTMENTS Investment securities decreased $17,055 thousand, or 18.9%, from December 31, 2003 to June 30, 2004. This decrease resulted primarily from prepayments of mortgage-backed securities (including CMOs) totaling $11,700 thousand and sales of investment securities totaling $4,145 thousand. The Company realized gross gains totaling $65 thousand on the sale of investment securities during the first six months of 2004 which is a decrease of $23 thousand when compared to the same period of 2003. STOCKHOLDERS' EQUITY Consolidated stockholders' equity increased $557 thousand from December 31, 2003 to June 30, 2004. Consolidated stockholders' equity represented 6.33% and 6.20% of consolidated assets at June 30, 2004 and December 31, 2003, respectively. The increase in equity during the first six months of 2004 resulted primarily from net income of $1,245 thousand for the six months ended June 30, 2004 and a $591 thousand decrease resulting from the after-tax market value decrease in the available-for-sale investment securities portfolio. In April 2002, the Board of Directors authorized a stock repurchase program approving the repurchase of up to $2 million of the Company's stock. Originally scheduled to terminate on December 31, 2003, the repurchase program has been extended to December 31, 2004. During the first six months of 2004, 8,891 shares of stock were repurchased at an average cost of $17.77 per share totaling $158 thousand. The total risk-based capital ratio for the Company's wholly owned subsidiary, Bank of Lodi was 10.30% at June 30, 2004 compared to 10.68% at December 31, 2003. 10 CHANGES IN RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 2004 SUMMARY OF EARNINGS PERFORMANCE

Net income for the three months ended June 30, 2004 increased $319 thousand, or 88.9%, compared to the same period of 2003. Net interest income increased $476 thousand, or 16.6% as a result of a $43 thousand decrease in interest expense combined with a $433 thousand increase in interest income. The provision for loan losses totaled $165 thousand representing an increase of $110 thousand, or 200.0% when compared to the same period in 2003. Noninterest income decreased $34 thousand, or 3.1%, while noninterest expense decreased $132 thousand, or 3.9%. The provision for income taxes increased $145 thousand, or 100.0%. Net income for the six months ended June 30, 2004 increased $544 thousand, or 77.6%, compared to the same period of 2003. Net interest income increased $1,027 thousand, or 18.7% as a result of a $53 thousand increase in interest expense combined with a $1,080 thousand increase in interest income. The provision for loan losses totaled $235 thousand representing a decrease of $77 thousand, or 24.7% when compared to the first six months of 2003. Noninterest income decreased $227 thousand, or 10.0%, while noninterest expense increased $90 thousand, or 1.4%. The provision for income taxes increased $243 thousand, or 90.3%. The return on average equity for the three and six months ended June 30, 2004 was 13.07 and 12.12% compared to 7.29 and 7.17% for the same periods of 2003. 11 NET INTEREST INCOME The following table provides a detailed analysis of the net interest spread and net interest margin for the periods indicated:

(1) Yield for period annualized on actual number of days in period and based on a 365-day year. (2) Income on tax-exempt securities has not been adjusted to a tax equivalent basis. (3) Nonaccrual loans are included in the loan totals for each period; however, only collected interest on such loans is included in interest income. 13 Net interest income for the first six months of 2004 increased $1,027 thousand, or 18.7%, when compared to the same period of 2003. The increase is attributable to the effects of increases in volumes of earning assets and liabilities combined with the effects of changes in interest rates. The increase in volumes of average earning assets and liabilities resulted in an increase in net interest income totaling $1,019 thousand while interest rates resulted in an increase in net interest income totaling $8 thousand when comparing the first six months of 2004 to the same period last year. Average earning assets increased $68,089 thousand during the six month period ended June 30, 2004 as compared to the same period of 2003. Average loans increased $26,811 thousand and investment securities increased $46,524 thousand while federal funds sold decreased $5,246 thousand. The increase in the volume of average earning assets during the first six months of 2004 as compared to the same period of 2003 resulted in an increase in interest income totaling $1,620 thousand. However, interest rates on average earning assets declined 79 basis points (from 6.35% to 5.56%) when compared to the same period in 2003, resulting in a decrease in interest income totaling $540 thousand. Average liabilities increased $68,867 thousand during the six month period ended June 30, 2004 as compared to the same period last year. The increase consists of $23,891 thousand, $10,922 thousand, $8,025 thousand, $5,294 thousand and $4,828 thousand in money market accounts, non-interest bearing deposits, certificates of deposit, NOW and savings accounts, respectively. Other borrowings increased $15,907. The increase in average liabilities resulted in an increase in interest expense totaling $601 thousand. As a result of the declining interest rate environment, the cost of interest bearing liabilities decreased 24 basis points (from 1.17% to 0.93%) resulting in a reduction in interest expense totaling $548 thousand. Interest income is also affected by nonaccrual loan activity. Nonaccrual loans at June 30, 2004 and June 30, 2003 totaled $1,850 thousand and $2,350 thousand, respectively. Interest forgone on nonaccrual loans totaled approximately $82 thousand and $174 thousand for the three and six months ended June 30, 2004 compared to $106 thousand and $175 thousand for the same periods of 2003, respectively. PROVISION FOR LOAN LOSSES The provision for loan losses for the three and six months ended June 30, 2004 was $165 thousand and $235 thousand compared with $55 thousand and $312 thousand for the three and six months ended June 30, 2003, an increase of $110 thousand, or 200.0%, and a decrease of $77 thousand, or 24.7%. As of June 30, 2004 the allowance for loan losses was $2,890 thousand or 1.4% of total loans, which compares to the allowance for loan losses of $3,262 thousand or 1.8% of total loans as of December 31, 2003. See "Allowance for Loan Losses" contained herein. As of June 30, 2004, nonperforming loans totaled $1,850 thousand or 0.9% of total loans compared to $3,880 thousand or 2.1% at December 31, 2003. No assurance can be given that nonperforming loans will not increase or that the allowance for loan losses will be adequate to cover losses inherent in the loan portfolio. NONINTEREST INCOME Noninterest income for the three and six months ended June 30, 2004 decreased by $34 thousand, or 3.1%, and $227 thousand, or 10.0%, when compared to the same periods in 2003. The decreases are primarily the result of reductions in the gains realized on the sale of loans totaling $117 thousand and $279 thousand during the three and six months ended June 30, 2003. During the second quarter of 2004, the Company did not sell any investment securities. During the first six months of 2004, the Company realized gains on the sale of investment securities totaling $65 thousand compared to $88 thousand for the same period of 2003. In addition, the Company realized gains from the sale of other real estate totaling $0 thousand and $5 thousand during the first six months of 2004 and 2003, respectively. Income from the sale and servicing of loans totaled $311 thousand during the second quarter of 2004, which decreased by $121 thousand, or 28.0%, compared to the prior year quarter. During the first six months of 2004, income from the sale and servicing of loans totaled $565 thousand, a decrease of $302 thousand or 34.8% over the same period of 2003. The decreases in income from sale and servicing of loans are principally related to a decline in the Company's residential mortgage lending activity during 2004 when compared to 2003 resulting from an increase in mortgage lending rates. The income recognized on the cash surrender value of life insurance increased $33 thousand and $50 thousand, during the second quarter and year to date for 2004, respectively, when compared to the same periods in 2003. The income recognized from the increase in the cash surrender value of life insurance is exempt from income taxes. The tax effective yield of the increase in the cash surrender value of the life insurance totaled 8.5% during the second quarter of 2004 as compared to 7.1% during the second quarter of 2003. For the first six months of 2004, the tax effective yield totaled 8.1% as compared to 7.2% during the same period in 2003. 14 NONINTEREST EXPENSES Noninterest expenses decreased $132 thousand, or 3.9%, and increased $90 thousand, or 1.4%, when comparing the three and six month periods ended June 30, 2004 to the same periods of 2003. When comparing the second quarter of 2004 to 2003, personnel expense decreased $126 thousand, or 6.7% primarily as a result of reduced commissions due to the decline in residential mortgage lending activity. When comparing the six month periods ended June 30, 2004 to 2003, personnel expense increased $18 thousand or 0.5%. This increase is primarily due to general merit increases for existing personnel. When comparing the three and six month periods ended June 30, 2004, occupancy expense increased $103 thousand, or 41.0% and $166 thousand, or 32.8%, respectively. This is primarily the result of increased rent expense due to the addition of the Sacramento location and a Credit Administration office in Folsom. During the second quarter of 2004, equipment expense decreased $27 thousand, or 12.7%, when compared to the second quarter of 2003. Equipment expense during the first six months of 2004 decreased $59 thousand, or 13.5% when compared to 2003. Decraeses in both periods are due to a decrease in depreciation expense. For the three and six month periods ended June 30, 2004, other noninterest expense decreased $82 thousand, or 7.6% and $35 thousand, or 1.7%, respectively, when compared to the same periods of 2003. Included in other noninterest expense during the three and six month periods ended June 30, 2004 are costs totaling $129 thousand and $195 thousand associated with responding to the disruptive actions initiated by three dissident directors. Without these expenses, other noninterest expense would have decreased $211 thousand, or 19.6% and $230 thousand, or 11.4%, during the three and six month periods during 2004 when compared to the same period in 2003. INCOME TAXES In the three months ended June 30, 2004, taxes increased $145 thousand to $290 thousand from $145 thousand for the same period in 2003. The Company's effective tax rate for the three months ended June 30, 2004 was 30.0%, compared to 28.8% for the same period in 2003. For the first six months of 2004, the provision for income taxes totaled $512 thousand as compared to $269 thousand during the same period last year. For the first six months of 2004, the Company's effective tax rate was 29.1% as compared to 27.7% for the same period in 2003. OFF-BALANCE SHEET COMMITMENTS The following table shows the distribution of the Company's undisbursed loan commitments at the dates indicated. June 30, 2004 December 31, 2003 -------------------------------------------------------------------------------- Commitments to extend credit $ 52,071 49,643 ================================================================================ Standby letters of credit $ 158 488 ================================================================================ 15 LIQUIDITY AND CAPITAL RESOURCES One of the Company's goals is to provide adequate funds to meet changes in loan demand or any potential increase in the normal level of deposit withdrawals. This goal is accomplished primarily by generating cash from operating activities and maintaining sufficient short-term liquid assets. These sources, coupled with a stable deposit base and a strong reputation in the capital markets, allow the Company to fund earning assets and maintain the availability of funds. Management believes that the Company's traditional sources of maturing loans and investment securities, sales of loans held for sale, cash from operating activities and a strong base of core deposits are adequate to meet the Company's liquidity needs for normal operations. The Bank's liquidity is managed on a daily basis by maintaining cash, federal funds sold, and short-term investments at levels commensurate with the estimated requirements for loan demand and fluctuations in deposits. Loan demand and deposit fluctuations are affected by a number of factors, including economic conditions, seasonality of the borrowing and deposit bases, and the general level of interest rates. The Bank maintains two lines of credit with correspondent banks as a supplemental source of short-term liquidity in the event that saleable investment securities and loans or available new deposits are not adequate to meet liquidity needs. The Bank has also established reverse repurchase agreements with two brokerage firms, which allow for short-term borrowings that are secured by the Bank's investment securities. Furthermore, the Bank may also borrow on a short-term basis from the Federal Reserve in the event that other liquidity sources are not adequate. If the Company's traditional sources of liquidity were constrained, the Company would be forced to pursue avenues of funding not typically used by the Company and the Company's net interest margin could be impacted negatively. The Company does utilize, among other tools, maturity gap tables, interest rate shock scenarios and an active asset and liability management committee to analyze, manage and plan asset growth and to assist in managing the Company's net interest margin and overall level of liquidity. The Company's approach to providing adequate liquidity has been successful in the past and management does not anticipate any near- or long-term changes to its liquidity strategies. At June 30, 2004, liquidity was considered adequate, and funds available in the local deposit market and scheduled maturities of investments are considered sufficient to meet long-term liquidity needs. Compared to 2003 liquidity decreased in 2004 as a result of the growth in the loan portfolio and purchases of available-for-sale investment securities. ACTUAL --------------------- WELL CAPITALIZED MINIMUM CAPITAL CAPITAL RATIO RATIO REQUIREMENT REQUIREMENT ------- ----- ----------------- ----------- Leverage $ 22,813 7.0% 5.0% 4.0% Tier 1 Risk-Based $ 22,813 9.1% 6.0% 4.0% Total Risk-Based $ 25,703 10.3% 10.0% 8.0% 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK While there are several varieties of market risk, the market risk material to the Company and the Bank is interest rate risk. Within the context of interest rate risk, market risk is the risk of loss due to changes in market interest rates that have an adverse effect on net interest income, earnings, capital or the fair value of financial instruments. Exposure to this type of risk is a regular part of a financial institution's operations. The fundamental activities of making loans, purchasing investment securities, and accepting deposits inherently involve exposure to interest rate risk. The Company monitors the repricing differences between assets and liabilities on a regular basis and estimates exposure to net interest income, net income, and capital based upon assumed changes in the market yield curve. As of and for the six months ended June 30, 2004, there were no material changes in the market risk profile of the Company or the Bank as described in the Company's 2003 Form 10-K. ITEM 4. CONTROLS AND PROCEDURES The Company's management evaluated, with the participation of the Company's principal executive and principal financial officers, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of June 30, 2004. Based on their evaluation, the Company's principal executive and principal financial officers concluded that the Company's disclosure controls and procedures were effective as of June 30, 2004. There has been no change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company's fiscal quarter ended June 30, 2004, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On March 23, 2004, a lawsuit was filed naming First Financial Bancorp, Bank of Lodi, N.A. and certain named directors and officers of the Company. The suit was brought as a derivative action commenced by two shareholders on behalf of the Company. It alleges intentional and negligent breach of fiduciary duty, abuse of control, waste of corporate assets, unjust enrichment and imposition of constructive trust. The matter has been tendered to the Company's carrier for its director and officer liability insurance, which accepted the tender of defense. The Boards of Directors of the Company and the Bank have appointed independent Special Litigation Committees composed of two new directors, one of whom is a retired San Joaquin County Judge, to evaluate the allegations of the Complaint and determine what action, if any, the Company and the Bank should take with respect to the action. If the allegations are proven, any recovery in the suit will benefit the Company. The Company is involved in various legal actions arising in the ordinary course of business. In the opinion of management, after consulting with legal counsel, the ultimate disposition of these matters will not have a material effect on the Company's financial position, results of operations, or liquidity. 17 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES The table below sets forth the information with respect to purchases made by or on behalf of First Financial Bancorp or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company's common stock during the three months ended June 30, 2004.

(1) On April 4, 2002, the Company announced that the Board of Directors had approved a share repurchase program, pursuant to which up to $2 million of its common stock may be repurchased. The repurchase program is being effected from time to time, depending on market conditions and other factors, through open market purchases and privately negotiated transactions. The total remaining authorization under the repurchase program was $1,288 thousand as of June 30, 2004. Originally scheduled to terminate on December 31, 2003, the repurchase program has been extended to December 31, 2004. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION SHAREHOLDERS' PROPOSALS FOR 2004 ANNUAL MEETING; DISCRETIONARY VOTING Any proposal of a shareholder intended to be presented at the Company's 2004 Annual Meeting must be received by the Company a reasonable time before the Company begins to print and mail its proxy materials for the meeting for inclusion in the Proxy Statement and form of proxy for that meeting and must meet the requirements of the SEC's proxy rules. Any such proposal should be directed to the attention of the President, First Financial Bancorp, 701 South Ham Lane, Lodi, California 95242. The proxy holders may vote in their discretion all proxies solicited for the Company's 2004 Annual Meeting on any matter raised at that meeting of which the Company did not have notice by the close of business on the tenth (10th) day following the day on which the notice of the annual meeting date was mailed to shareholders. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS The exhibit list required by this item is incorporated by reference to the Index to Exhibits filed as part of this report. 18 (B) REPORTS ON FORM 8-K During the second quarter of 2004, the Company furnished a Current Report on 8-K dated April 9, 2004 (Items 7 and 9). During the second quarter of 2004, the Company furnished a Current Report on 8-K dated April 13, 2004 (Items 7 and 9). SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST FINANCIAL BANCORP By: Date: AUGUST 12, 2004 /S/ ALLEN R. CHRISTENSON ------------------------ Allen R. Christenson Executive Vice President Chief Financial Officer (Principal Accounting and Financial Officer) 19 INDEX TO EXHIBITS EXHIBIT DESCRIPTION ------- ----------- 31.1 Certification of Registrant's Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Registrant's Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Registrant's Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 32.2 Certification of Registrant's Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 20

FIRST FINANCIAL BANCORP /CA/ 10-Q