FIRST FINANCIAL BANCORPORATION
AND SUBSIDIARY
(FIRST NATIONAL BANK IOWA)
FORM 10-K
DECEMBER 31, 1997
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED).
For the transition period from ________________to ___________________.
Commission file number 0-14280.
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FIRST FINANCIAL BANCORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Iowa 42-1259867
- --------------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
204 East Washington Street
Iowa City, Iowa 52240
- --------------------------------------- ---------
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (319) 356-9000
--------------
Securities Registered Pursuant to Section 12(b) of the Act: None
---------
Securities Registered Pursuant to Section 12(g) of the Act:
$1.25 Par Value Common Stock
(Title of class)
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. Yes [X] 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 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]
While it is difficult to determine the number of shares owned by nonaffiliates
(within the meaning of such term under the applicable regulations of the
Securities and Exchange Commission), the Registrant estimates that the aggregate
market value of the Registrant's common stock held by nonaffiliates on March 31,
1998, (based upon reports of beneficial ownership that approximately 85.66% of
the shares are so owned by nonaffiliates and upon information communicated
informally to the Registrant by various purchasers and sellers that the sale
price for the common stock is generally $35.75 per share) was approximately
$108,826,000.
The number of shares outstanding of the Registrant's common stock as of
March 31, 1998.
Common Stock $1.25 Par Value - 3,553,717 Shares
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P. 1 of 48
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
1. Proxy Statement dated March 6, 1998, for the Annual Meeting of Shareholders
to be held on April 7, 1998, is incorporated by reference into Part III,
Items 10, 11, 12 and 13.
P. 2 of 48
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PART I
ITEM 1. BUSINESS
ORGANIZATIONAL STRUCTURE AND HISTORY
First Financial Bancorporation (hereinafter referred to as "the Company") is an
Iowa business corporation engaged in retail and commercial banking, trust and
asset management, and related lines of business through its wholly-owned
subsidiary, Firat National Bank Iowa (hereinafter referred to as "the Bank").
Both the Company and the Bank are based in Iowa City, Iowa. The Bank is a
national banking association which is chartered and incorporated in and which
operates under the laws of the United States. It has trust powers, and it is a
member of the Federal Reserve System, the Federal Deposit Insurance Corporation,
and the Federal Home Loan Bank System.
The Company was organized on October 8, 1985, under the Iowa Business
Corporation Act. On December 31, 1985, it became operational as a one-bank
holding company through the acquisition of First National Bank, Iowa City, Iowa,
an institution which was founded in 1932 and which, at the date of acquisition,
enjoyed a strong and positive presence in the community as well as a significant
share of the local banking market.
On February 1 1991, the Company became a multi-bank holding organization through
the chartering of a second subsidiary bank, First National Bank, Cedar Rapids,
Iowa. On February 8, 1991, this operating unit became a fully-functioning
commercial bank through the acquisition of certain assets, liabilities and the
Cedar Rapids branch office facility of the failed American Federal Savings
Association from the Resolution Trust Corporation. At the time of acquisition,
total assets stood approximately at $45 million, which represented a relatively
small share of the Cedar Rapids market.
In December 1994, First National Bank, Cedar Rapids opened a second banking
location in downtown Cedar Rapids.
In December 1994, First National Bank, Iowa City, established a fifth banking
location in North Liberty, Iowa and in January, 1995, it established a sixth
location in southwest Iowa City.
On November 1, 1996, the Company made application to the Comptroller of the
Currency to merge First National Bank, Iowa City, and First National Bank, Cedar
Rapids, into a single entity named First National Bank Iowa. Regulatory approval
was subsequently granted, and the merger wes consummated March 15, 1997.
During the fourth quarter of 1996, the Company entered into an agreement to
acquire West Branch Bancorp, Inc., West Branch, Iowa, and its wholly-owned
subsidiary, West Branch State Bank. This bank, which was founded in 1875, was
the only financial institution with a physical presence in the community.
Regulatory approval was granted for the transaction, which was completed on
April 8, 1997. At the time of the acquisition, the assets of West Branch State
Bank were approximately $40 million.
On September 9, 1997, a filing was made with the State of Iowa to dissolve West
Branch Bancorp, Inc.
In November 1997, First National Bank Iowa opened a ninth banking location, its
Center Point Road facility in Cedar Rapids.
In December 1997, after securing the required regulatory approval, the Company
merged West Branch State Bank into First National Bank Iowa.
Today, First National Bank Iowa is one of the largest community banking
organization in the state, with ten banking locations, $550 million in assets,
and in excess of $750 million in trust assets. Its organizational structure,
which is laid out along functional lines, consists of four major divisions:
Trust and Asset Management, Commercial Banking, Retail Banking, and
Administration. Each division is managed by a Senior Vice President, who in turn
is a member of the Bank's senior management team. This team is led by the
President and CEO; it also includes the area President for Cedar Rapids.
Direction and oversight is provided by a 13-member Board of Directors. In
addition, input and support are provided by a 7-member Advisory Board
representing the greater Cedar Rapids area.
The parent company of the Bank is managed by two executive officers: the
President and Chief Executive Officer, and the Executive Vice President and
Chief Operating Officer. It is governed by an 8-member Board of Directors.
MARKET AREA
The Company's primary market area consists of Johnson and Linn Counties in
east-central Iowa, known as the "Iowa City/Cedar Rapids Corridor." Although it
has a strong agricultural base, the general economic character and climate of
the Corridor is atypical of the rural Midwest. The economy is significantly more
diversified than that of the region in general; noteworthy features include
strong manufacturing and retail sectors, a growing regional transportation and
P. 3 of 48
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ITEM 1. BUSINESS (continued)
distribution industry, the presence of The University of Iowa and other seats of
post-secondary education, and a significant medical and health care
infrastructure.
The Corridor also benefits from the lower median age, higher income and
education levels, a higher rate of population growth, a greater population
turnover rate, and a stronger residential real estate market than the regional
norms, all of which are conducive to successful community banking. These general
conditions and trends are expected to continue in the future.
NATURE OF BUSINESS
Within the framework provided for by regulation, the Company's subsidiary bank
provides a comprehensive range of financial products and services. They fall
into four broad classifications which follow the divisional lines of the Bank's
organizational structure.
TRUST AND ASSET MANAGEMENT: The Bank's Trust and Asset Management division is
among the largest in the state, and represents a significant source of fee
income to the Company. Its services are comprehensive in scope, and geared
primarily toward fulfilling the needs of individuals, families, businesses, and
private and public sector entities which populate the Corridor. Primary
functions include the administration of estates, personal trusts,
conservatorships, and pension and profit sharing plans, as well as providing
property management, asset management, investment advisory and investment
management services. Retail brokerage products such as mutual funds, stocks,
bonds, and annuities are provided through First Financial Services, an affiliate
of Des Moines, Iowa-based Broker Dealer Financial Services, Inc., which
maintains an office in the Bank and utilizes its network of retail banking
offices as a primary distribution channel.
COMMERCIAL BANKING: The Commercial Banking division provides a wide range of
products to meet the needs of the private sector businesses and their
public-sector governmental counterparts in the Corridor. Deposit products
include commercial CDs and demand deposit, savings, money market and cash
management accounts. Core commercial credit products include conventional and
SBA-guaranteed loans for the acquisition, operation and expansion of businesses;
commercial real estate loans; indirect automobile financing and dealer
floorplanning; commercial lines and letters of credit; and MasterCard(R)
commercial credit program. Access to allied services such as pension and
employee benefit plans, 401(k) and Keogh plans, and business succession and
estate planning, are provided via referral to the Bank's Trust and Asset
Management division.
RETAIL BANKING: The Retail Banking division provides a wide range of deposits,
loans, and ancillary services designed to meet the needs of individuals and
families. Core deposit products consists of CDs, IRAs and checking, savings and
money market accounts, supported by a full complement of ancillary services
including ATM and debit cards, direct deposit, and 24-hour telephone banking.
Primary retail credit products include personal loans and lines of credit, auto
loans, Visa(R), MasterCard(R), Visa Gold(R), and gold MasterCard(R) credit
cards, fixed installment and revolving credit lines home equity loans, and home
improvement loans. Fixed and adjustable rate residental mortgage loans,
originated both for secondary market sale and for portfolio purposes, represent
an important line of business.
ADMINISTRATION: Although the primary mission of the Administration division is
to provide the necessary infrastructure and supporting mechanisms vital to the
ongoing operation of the Bank, it also provides several types of services which
are usually delivered indirectly to consumers through the three other divisions.
These include ATM services, merchant credit card processing, direct deposit,
wire and electronic funds transfers, and correspondent banking services.
DELIVERY SYSTEM
The foundation of the Company's delivery system is the subsidiary Bank's network
of conventional "brick-and-mortar" retail banking facilities. This network is
further supported by electronics and alternative means of responding to the
needs of the market.
The Bank currently has ten retail banking facilities: four in Iowa City, three
in Cedar Rapids, and one each in Coralville, North Liberty and West Branch. This
is one of the strongest physical delivery and distribution channels in the
market area. Beyond representing more Corridor banking locations than that of
any other financial institution, it also reflects the Bank's status as the only
institution with full-service, freestanding facilities at both ends of the
Corridor as well as in the majority of its largest communities.
p. 4 of 48
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ITEM 1. BUSINESS (continued)
This network is augmented by a series of automated teller machines (ATMs) and
electronic point-of-sale (POS) terminals, as well as TeleFirst(SM), a 24-hour
touchtone telephone banking service. Customers can also access their accounts
via ATM and debit cards on a statewide basis through the Shazam(R) network, and
nationwide throught the Cirrus(R), PLUS(R) and affiliated electronic funds
transfer and ATM networks.
Additional delivery and support mechanisms are provided via the banks'
membership in the National Automated Clearing House Association (NACHA) for the
processing of electronic ACH funds transfers, and the Federal Reserve FEDLINE(R)
system for the direct processing of electronic wire transfers.
Data processing requirements for core banking operations and for trust services
are provided via two in-house computer systems which are owned and operated by
the Bank. DP support for credit card, merchant processing, and retail brokerage
are provided by outside service bureaus.
Because the bank relies heavily on both in-house and nonproprietary data
processing hardware and software as an integral part of its delivery systems and
channels, the "Year 2000" issue is one of critical importance. Technology
experts believe that many data processing application systems could fail or
improperly perform as a result of erroneous calculations or data integrity
problems if they are unable to correctly process date information beyond the
turn of the century. The Bank has taken a proactive approach toward addressing
this issue, and is currenly in the process of assessing its information systems,
testing and validating in-house systems, and obtaining validation and
certification of outside systems in an effort to ensure that all potential
problem areas are identified and corrected in advance of the year 2000.
COMPETITION
The Company's primary competitors are other commercial banks, thrift
institutions such as savings banks and savings and loan associations, and credit
unions, all of which are represented by a physical presence in the Corridor.
Secondary competitors, which are far more numerous and not necessarily
represented by local facilities, vary widely depending on the product or service
in question and include non-traditional providers. In the case of deposits,
investments and asset management services, they include stockbrokers, money
market and mutual fund companies, insurance companies, and out-of-market
financial institutions. In the area of loans, they include mortgage brokers, the
financing arm of automobile manufacturers, nationwide credit card issuers, and
in some cases, agencies of the federal government.
On a Corridor-wide basis, the largest share of the market is held by commercial
banks. Thrifts and credit unions also hold significant but smaller portions of
the market. At the south end of the corridor, the Bank enjoys a significant
share of the deposit and lending market, due in large measure to its 60+ year
presence in the community. Conversely, the bank has a comparatively smaller
share of the north Corridor market, a situation which is attributable to the
fact that it is a relative newcomer. The Cedar Rapids and Iowa City ends of the
markets do differ in the respect that the former, aside from being much larger
in size in terms of total deposits and total loans, is dominated by the branches
of several large multi-state banking companies, while the over-whelming share of
the latter market is held by locally-owned, independent financial institutions.
The demographics which make the market so conducive to successful banking also
carry with them a downside which is manifested in the form of intense
competitive pressures.
In recent years, while the nationwide trend in banking has generally been one of
consolidation and a corresponding reduction in traditional competition, banking
in the Corridor has become increasingly competitive in nature, particularly in
terms of rate, price and new entrants to the market.
The greater Iowa City area is a case in point. The number of ATMs has tripled
since 1988. Three new financial institutions have entered the market and the
overall number of banking offices has increased by 30%, all within the past
three years. It's not unusual to find local deposit yields which are comparable
to those touted as "highest in the country" in nationwide surveys, and for
competitors to attempt to "buy" exisiting deposit and loan business from one
another primarily on the basis of rate and price rather than through utilization
of sound banking principles and underwriting practices.
In the Corridor as a whole, there are currently over 125 offices of banks,
thrifts, and credit unions. These highly competitive local market trends are
expected to continue in the foreseeable future.
p. 5 of 48
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ITEM 1. BUSINESS (continued)
COMPETITION(continued)
INDUSTRY TRENDS AND REGULATORY ISSUES
Although banking is still a highly regulated industry, particularly in terms of
the lines of business in which a bank may engage and in the geographic expansion
of its scope of business, the continuing trend in recent years has been one of
less restriction and an increasingly open and more competitive environment.
In Iowa, state banking regulations still place some limits on the branching
activities of commercial banks, both in terms of the number of offices and on
the geographic location of the offices. Legislation currently pending at the
state level would effectively eliminate the limit on the number of offices a
bank could establish in the community, but would leave other key restrictive
elements regarding branching unchanged.
Although state lawmakers chose to opt out of participation in the interstate
branching which was authorized by Congress in 1994, legislation which is
currently pending at the national level may supersede certain aspects of this
position, and may result in expanded banking powers as well.
The Financial Modernization Act (HR 10) currenly under consideration by Congress
would provide more of a competitive parity between bank and thrift holding
companies, and between nationally chartered banks and federally chartered
thrifts as well. Beyond providing the ability to enter into new banking-related
lines of business, the bill means that the banks would enjoy more liberal and
essentially unfettered in-state branching capabilities currently available to
federally-chartered thrift institutions.
The issue of competitive parity between banks and credit unions continues to be
one of importance. The banking industry has no quarrel with legitimate credit
unions; that is, those which serve the basic financial needs of members who have
a common bond or affiliation. However, in recent years, many credit unions have
pushed the definition of a common bond far beyond that which was envisioned by
law. This situation, combined with a highly favorable taxation status,
comparatively light regulation and oversight, and the ability to virtually
branch at will, has resulted in a phenomenal rate of growth on the part of many
large credit unions.
The dominant trends in the banking industry today are consolidation, especially
at the regional and national levels, and increased competition from
non-traditional financial services providers.
It is uncertain what, if any, impact these regulatory issues and industry trends
will have on the market for the Company's stock. However, management believes
that beyond presenting challenges, they will continue to help create and
environment which presents opportunities for the organization to grow and thrive
through its positioning as an independant community banking organization.
CAPITAL REQUIREMENTS
The Company is regulated by the Board of Governors of the Federal Reserve System
while the subsidiary bank is under the regulatory jurisdiction of the Office of
the Comptroller of the Currency (OCC). One of the functions of the OCC is to
evaluate capital adequacy maintained by each national bank. To determine the
capital adequacy of national banks, the OCC has established a risk-based capital
ratio derived from guidelines sensitive to the credit risk associated with
various bank activities. This risk-based capital ratio is intended to more
accurately assess capital adequacy than is a capital ratio which is based solely
on total assets of banks.
As of December 31, 1997, total risk-based capital was required to equal or
exceed 8% of risk-weighted assets. At least half of that 8% must consist of Tier
I-core capital (common stockholders' equity, noncumulative perpetual preferred
stock and minority interests in the equity accounts of consolidated
subsidiaries), and the remainder may be Tier II-supplementary capital (perpetual
debt, intermediate-term preferred stock, cumulative perpetual, long-term and
convertible preferred stock, and loan loss reserve up to a maximum of 1.25% of
risk-weighted assets.) Total risk-weighted assets are determined by weighting
the assets according to their risk characteristics. Certain off-balance sheet
items (such as stand-by letters of credit and firm loan commitments) are
multiplied by "credit conversion factors" to translate them into balance sheet
equivalents before assigning them risk weightings. Any bank having a capital
ratio less than the 8% minimum required level must, within 60 days, submit to
the OCC a plan describing the means and schedule by which the bank shall achieve
the applicable minimum capital ratios. The plan is considered acceptable unless
the bank is notified to the contrary by the OCC. A bank in compliance with an
acceptable plan to achieve the applicable minimum capital ratios will not be
deemed to be in violation.
p. 6 of 48
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ITEM 1. BUSINESS (continued)
A comparison of the Bank's capital as of December 31, 1997 with minimum
requirements is presented below:
MINIMUM
ACTUAL REQUIREMENTS
-------- ------------
Total Risk-Based Capital 14.42% 8%
Tier I Risk-Based Capital 13.17% 4%
Leverage Ratio 8.88% 4%
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
established rating categories for all FDIC insured institutions ranging from
"well capitalized" to "critically undercapitalized." The ratings combine capital
measures in addition to level of regulatory supervision received by an
individual financial institution. At December 31, 1997, the Bank met the capital
criteria required by the well-capitalized definition and substantially exceeded
the regulatory minimum capital levels.
As of December 31, 1997 and 1996, the Company's Tier I capital to risk-weighted
asset ratios, total capital risk-weighted asset ratios (Tier I capital plus Tier
II capital) and leverage capital ratios were as follows:
ACTUAL MINIMUM
1997 1996 REQUIREMENTS
-------- -------- ------------
Total Risk-Based Capital 17.23% 18.75% 8%
Tier 1 Risk-Based Capital 15.98% 17.50% 4%
Leverage Ratio 10.59% 11.73% 4%
The following consolidated statistical information reflects selected balances
and operations of the Registrant and its subsidiary for the periods indicated.
AVERAGE BALANCES AND INTEREST RATES AND INTEREST DIFFERENTIAL
The following tables show the average balance for the period for the major
categories of assets, liabilities, and stockholders' equity, average balances
during the period, interest earned or paid and average yields. (Yields on
nontaxable securities are computed on a tax equivalent basis.) Changes in
interest earned and paid for the years ended December 31, 1997 and 1996, are
analyzed showing the effects of changes in volume and rates:
AVERAGE BALANCES (Daily Average Basis) (In Thousands)
Year Ended December 31,
1997 1996 1995
ASSETS --------- --------- ---------
Taxable securities $ 73,800 $ 87,414 $ 88,064
Nontaxable securities 34,526 27,384 23,726
Federal funds sold 23,673 8,136 11,181
Loans, net of unearned income 348,511 310,956 294,649
--------- --------- ---------
Total interest-earning assets $ 480,510 $ 433,890 $ 417,620
Less allowance for loan losses (4,482) (3,625) (3,512)
Cash and due from banks 18,270 15,905 14,312
Property and equipment, net 12,353 12,357 11,693
Other assets 12,429 9,600 9,278
--------- --------- ---------
Total assets $ 519,080 $ 468,127 $ 449,391
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-paying demand deposits $ 62,019 $ 58,696 $ 58,357
Savings deposits 111,557 102,185 89,436
Time deposits 212,183 189,227 188,135
Federal funds purchased and
securities sold under agreements
to repurchase 3,701 1,068 237
Federal Home Loan Bank advances 14,818 16,246 19,857
Other long-term borrowings 4,090 - - 13
--------- --------- ---------
Total interest-paying liabilities $ 416,342 $ 367,422 $ 356,035
Noninterest-paying demand deposits 50,387 44,692 42,331
Other liabilities 5,051 4,629 3,644
Stockholders' equity 55,274 51,384 47,381
--------- --------- ---------
Total liabilities and stockholders' equity $ 519,080 $ 468,127 $ 449,391
========= ========= =========
P. 7 of 48
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ITEM 1. BUSINESS (continued)
NTEREST INCOME AND EXPENSE
(In Thousands)
Year Ended December 31,
1997 1996 1995
-------- -------- --------
INCOME
Taxable securities $ 4,496 $ 5,316 $ 5,251
Nontaxable securities 2,489 2,188 2,044
Federal funds sold 1,309 430 658
Loans 29,466 26,376 24,843
-------- -------- --------
Total interest income $ 37,760 $ 34,310 $ 32,796
======== ======== ========
EXPENSE
Interest-paying demand deposits $ 1,236 $ 1,184 $ 1,253
Savings deposits 3,945 3,568 2,870
Time deposits 12,190 10,642 10,475
Federal funds purchased and securities
sold under agreements to repurchase 189 60 14
Federal Home Loan Bank advances 910 995 1,199
Other long-term borrowings 260 - - - -
-------- -------- --------
Total interest expense $ 18,730 $ 16,449 $ 15,811
-------- -------- --------
Net interest income $ 19,030 $ 17,861 $ 16,985
======== ======== ========
Year Ended December 31,
1997 1996 1995
-------- -------- --------
INTEREST RATES AND INTEREST
DIFFERENTIAL
Average yields:
Taxable securities 6.24% 6.08% 5.96%
Nontaxable securities 6.86 7.99 8.62
Federal funds sold 5.53 5.29 5.88
Loans 8.45 8.48 8.43
Interest-paying demand deposits 1.99 2.02 2.15
Savings deposits 3.54 3.49 3.21
Time deposits 5.74 5.62 5.57
Federal funds purchased and securities
sold under agreements to repurchase 5.10 5.62 5.91
Federal Home Loan Bank advances 6.14 6.12 6.04
Other long-term borrowings 6.36 - - - -
Yield on average interest earning assets(1) 7.86 7.91 7.85
Yield on average interest-paying liabilities 4.59 4.48 4.44
Net interest yield (1) 3.27 3.43 3.41
Net interest margin (2) 3.96 4.12 4.07
Nonaccruing loans are not material and have been included in the average
loan balances for purposes of this computation.
(1) Net interest yield is the difference between the yield on average
interest-earning assets and the yield on average interest-paying
liabilities stated on a tax equivalent basis using a federal tax rate of
34% and a state tax rate of 5% for the three years presented.
(2) Net interest margin is net interest income, on a tax-equivalent basis,
divided by average interest earning assets.
P. 8 of 48
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ITEM 1. BUSINESS (continued)
CHANGE IN INTEREST INCOME AND EXPENSE
(In Thousands of Dollars)
Year Ended December 31, 1997
Change Change
Due To Due To Total
Volume Rates Change
--------- -------- --------
Change in interest income:
Taxable securities $ (941) $ 121 $ (820)
Nontaxable securities 596 (295) 301
Federal funds sold 858 21 879
Loans 3,183 ( 93) 3,090
-------- -------- --------
$ 3,696 $ (246) $ 3,450
-------- -------- --------
Change in interest expense:
Interest-paying demand deposits $ 69 $ ( 17) $ 52
Savings deposits 326 51 377
Time deposits 1,316 232 1,548
Federal funds purchased and securities
sold under agreements to repurchase 136 ( 7) 129
Federal Home Loan Advances ( 88) 3 ( 85)
Other long-term borrowings 260 - - 260
-------- -------- --------
$ 2,019 $ 262 $ 2,281
-------- -------- --------
Net change in net interest income (1) $ 1,677 $ (508) $ 1,169
======== ======== ========
(In Thousands of Dollars)
Year Ended December 31, 1996
Change Change
Due To Due To Total
Volume Rates Change
--------- -------- ---------
Change in interest income:
Taxable securities $ (40) $ 105 $ 65
Nontaxable securities (1) 300 (156) 144
Federal funds sold (167) (61) (228)
Loans (1) 1,385 148 1,533
--------- -------- ---------
$ 1,478 $ 36 $ 1,514
--------- -------- ---------
Change in interest expense:
Interest-paying demand deposits $ 7 $ (76) $ (69)
Savings deposits 433 265 698
Time deposits 66 101 167
Federal funds purchased and securities
sold under agreements to repurchase 47 (1) 46
Federal Home Loan Bank advances (220) 16 (204)
--------- -------- ---------
$ 333 $ 305 $ 638
--------- -------- ---------
Net change in net interest income (1) $ 1,145 $ (269) $ 876
========= ======== =========
(1) Loan fees included in interest income are not material. Interest on
non-taxable securities and loans is shown on a tax-equivalent basis using a
federal tax rate of 34% and a state tax rate of 5% for 1996 and 1997.
The rate/volume variances were allocated on a pro rata basis between rate and
volume variances using absolute values.
INVESTMENT SECURITIES
The following tables show the carrying values of investment securities as of
December 31, 1997, 1996 and 1995, and the maturities and yields of the
investment securities as of December 31, 1997:
(In Thousands)
December 31,
1997 1996 1995
-------- -------- --------
Carrying Values:
U.S. Treasury securities $ 21,521 $ 20,933 $ 32,027
Obligations of other U.S. Government
agencies and corporations 43,666 44,526 63,231
Obligations of states and
political subdivisions 39,603 29,588 26,403
Marketable equity securities 5,339 475 - -
Federal Reserve Bank stock 568 339 336
Federal Home Loan Bank stock 2,058 1,941 1,889
-------- -------- --------
$112,755 $ 97,802 $123,886
======== ======== ========
P. 9 of 48
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ITEM 1. BUSINESS (continued)
INVESTMENT SECURITIES (continued)
December 31, 1997
Weighted
Fair Average
Value Yield (1)
-------- ---------
Type and maturity groupings:
U.S. Treasury maturities:
Within 1 year $ 10,887 5.92%
From 1 to 5 years 10,634 6.22
--------
Total $ 21,521
--------
Obligations of other U.S. Government
agencies and corporations maturities:
Within 1 year $ 11,700 6.30%
From 1 to 5 years 29,020 6.45
From 5 to 10 years 2,946 6.32
--------
Total $ 43,666
--------
Obligations of states and political
subdivisions maturities:
Within 1 year $ 6,303 8.39%
From 1 to 5 years 16,843 7.15
From 5 to 10 years 15,971 7.06
Over 10 years 486 8.08
--------
Total $ 39,603
--------
Marketable equity securities $ 5,339 2.75%
Federal Reserve Bank stock 568 6.00
Federal Home Loan Bank stock 2,058 7.00
--------
Total $ 7,965
--------
Total $112,755
========
(1) The yields are computed on a tax-equivalent basis using a federal tax rate
of 34% and a state tax rate of 5% for 1997 based on fair value.
As of December 31, 1997, there were no investment securities of any issuer,
other than securities of the U.S. Government and U.S. Government agencies and
corporations, exceeding 10% of stockholders' equity.
LOANS (1)
The following table shows the composition of loans as of December 31, 1997,
1996, 1995, 1994 and 1993.
(In Thousands)
December 31,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Commercial, financial
and agricultural $ 38,349 $ 32,361 $ 30,128 $ 31,800 $ 30,036
Real estate, construction 19,009 16,440 10,914 16,590 13,662
Real estate, mortgage 252,271 230,534 206,869 194,261 159,349
Loans to individuals 52,638 49,386 43,572 50,123 49,571
All other 2,034 2,018 3,046 1,933 1,589
-------- -------- -------- -------- --------
TOTAL $364,301 330,739 $294,529 $294,707 $254,207
======== ======== ======== ======== ========
p. 10 of 48
<PAGE>
ITEM 1. BUSINESS (continued)
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table shows the scheduled distribution of future principal
repayment of loans (in thousands) as of December 31, 1997:
One To Over Non-
Amount One Year Five Five Accrual
Of Loans Or Less Years Years Loans
-------- -------- -------- -------- --------
Commercial, financial
and agricultural (2) $ 38,349 $ 25,464 $ 11,446 $ 1,334 $ 105
Real estate,
construction 19,009 3,276 11,496 4,237 - -
Real estate, mortgage (3) 252,271 71,722 163,245 17,158 653
Loans to individuals (4) 52,638 28,211 22,523 1,738 166
All other 2,034 301 1,443 290 - -
-------- -------- -------- -------- --------
Total $364,301 $128,974 $210,153 $ 24,751 $ 924
======== ======== ======== ======== ========
(1) Before deducting reserve for possible loan losses.
(2) Approximately $16,793,000 or nearly 44% of these loans are adjustable rate
loans.
(3) Approximately $140,309,000 or nearly 56% of these loans are adjustable rate
loans.
(4) Approximately $15,249,000 or nearly 29% of these loans are adjustable rate
loans.
(
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table summarizes the Registrant's nonaccrual, past due 90 days or
more and restructured loans as of December 31 for each of the years presented:
(In Thousands of Dollars)
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Nonaccrual loans $ 924 $ 559 $ 270 $ 1,100 $ 1,274
Accruing loans
past due 90
days or more $ 1,090 $ 381 $ 273 $ 60 68
Restructured
loans $ 11 16 None None None
As of December 31, 1997, total nonaccrual loans were comprised primarily of
loans collateralized by real estate. Nonaccrual of interest may occur on any
loan whenever one or more of the following criteria is evident: (a) there is
substantial deterioration in the financial position of the borrower; (b) the
full payment of interest and principal can no longer be reasonably expected; (c)
the principal or interest on the loan has been in default for a period of 90
days. In all cases, loans must be placed on nonaccrual or charged off at an
earlier date if collection of principal or interest is considered doubtful. All
interest accrued but not collected for loans that are placed on nonaccrual or
charged off is reversed to interest income. The interest on these loans is
accounted for on the cash basis or cost recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are reasonably assured of repayment
within a reasonable time frame and when the borrower has demonstrated payment
performance of cash or cash equivalents. Given the number of nonaccrual loans
and related underlying collateral, management does not anticipate any
significant impact to earnings.
The Registrant does not have a significant amount of loans which are past due
less than 90 days on which there are serious doubts as to the ability of the
borrowers to comply with the loan repayment terms. The Registrant has no
individual borrower or borrowers engaged in the same or similar industry
exceeding 10% of total loans. The Registrant has no other interest-bearing
assets, other than loans, that meet the nonaccrual, past due, restructured or
potential problem loan criteria. The Registrant has no foreign loans
outstanding.
The Company adopted Statement of Financial Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" in the second quarter of 1995. Under the new
standard, a loan is considered impaired, based on current information and
events, if it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Nonaccrual loans are the only impaired
loans.
p. 11 of 48
<PAGE>
ITEM 1. BUSINESS (continued)
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS (Continued)
A loan is considered restructured when the Company allows certain concessions to
a financially troubled debtor that would not normally be considered. There were
no material troubled debt restructuring loans for the reporting periods.
The measurement of impaired loans is generally based on the present value of
expected future cash flows discounted at the historical effective rate, except
that all collateral dependent loans are measured for impairment based on the
fair value of the collateral.
SFAS 114 does not apply to large groups of smaller balance homogeneous loans
that are collectively evaluated for impairment, except for those loans
restructured under troubled debt restructuring. Loans collectively evaluated for
impairment include certain smaller balance commercial loans, consumer loans,
residential real estate loans and credit card loans, and are not included in the
data that follows:
(In Thousands)
The following table summarizes As of December 31,
impaired loan information 1997 1996 1995
- --------------------------------------------------------------------------------
Impaired loans $ 924 $ 559 $ 270
Impaired loans with related reserve for
loan losses calculated under SFAS 114 924 559 164
Impaired loans with no related reserve for
loan losses calculated under SFAS 114 - - - - 106
Amount of reserve for loan losses allocated
to the impaired loan balance 162 88 43
The adoption of SFAS 114 did not result in additional provisions for loan losses
primarily because the majority of impaired loan valuations continue to be based
on the fair market value of collateral and because the existing provision
evaluations methods had included impaired loans as defined by SFAS 114.
Impairment losses are included in the provision for loan losses.
(In Thousands)
For the Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Average impaired loans $ 509 $ 317 $ 682
Interest income recognized 20 62 59
- --------------------------------------------------------------------------------
Interest payments on impaired loans are typically applied to principal unless
future collectability of the recorded loan balance is expected, in which case
interest income is recognized on a cash basis.
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Registrant's loan loss experience for each of
the years ended December 31, 1997, 1996, 1995, 1994, and 1993:
(In Thousands)
Year Ended December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Balance of loan loss allowance
at beginning of period $3,788 $3,602 $3,354 $3,101 $3,006
------ ------ ------ ------ ------
Charge-offs:
Commercial, financial and
agricultural $ 262 $ 31 $ 21 $ 3 $ 32
Real estate mortgage 47 76 - - 4 53
Loans to individuals 500 370 254 249 148
------ ------ ------ ------ ------
$ 809 $ 477 $ 275 $ 256 $ 233
------ ------ ------ ------ ------
Recoveries:
Commercial, financial and
agricultural $ 38 $ 13 $ 37 $ 34 $ 27
Real estate, mortgage 215 4 5 6 87
Loans to individuals 93 55 115 44 59
------ ------ ------ ------ ------
$ 351 $ 72 $ 157 $ 84 $ 173
------ ------ ------ ------ ------
Net charge-offs $ 458 $ 405 $ 118 $ 172 $ 60
------ ------ ------ ------ ------
Provision for loan losses (1) $ 588 $ 591 $ 366 $ 425 $ 155
------ ------ ------ ------ ------
Balance of loan loss allowance
at end of period $4,589 $3,788 $3,602 $3,354 $3,101
====== ====== ====== ====== ======
P. 12 of 48
<PAGE>
ITEM 1. BUSINESS (continued)
SUMMARY OF LOAN LOSS EXPERIENCE (continued)
Percentage of net charge-offs
during period to average net
loans outstanding .13% .13% .04% .06% .03%
====== ====== ====== ====== ======
1) Management regularly reviews the loan portfolio and determines a provision
for loan losses based upon the impact of economic conditions on the borrower's
ability to repay, past collection experience, the risk characteristics of the
loan portfolio and such other factors which deserve current recognition.
The December 31, 1997, 1996, 1995, 1994, and 1993 allowance for loan losses
have been allocated as follows:
<TABLE>
<CAPTION>
(In Thousands Except Percentages)
As of December 31
1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ (-) %(-) $ (1) %(2) $ (1) %(2) $ (1) %(2) $ (1) %(2)
------- --- ------ --- ------ --- ------ --- ------ ---
December 31 balance applicable to:
Allocated:
Commercial, financial and
agricultural $ 1,535 11 $ 807 10 $ 490 10 $1,013 11 $ 973 12
Real estate 2,120 74 2,572 75 2,781 74 1,696 71 1,462 68
Installment loans to indivduals 934 15 409 15 256 15 579 17 430 19
Unallocated - - - - - - - - 75 1 66 1 236 1
------- --- ------ --- ------ --- ------ --- ------ ---
$ 4,589 100 $3,788 100 $3,602 100 $3,354 100 $3,101 100
------- --- ------ --- ------ --- ------ --- ------ ---
(1) Allocation of allowance amount by category.
(2) Percent of outstanding loan balances in each category.
</TABLE>
Management regularly reviews the loan portfolio and does not expect any unusual
material amount to be charged-off during the next year that would be
significantly different than the above years.
DEPOSITS
The following tables show the average deposit balances and rates paid on such
deposits for the years ended December 31, 1997, 1996, and 1995 and the
composition of the certificates issued in excess of $100,000 as of December 31,
1997:
(In Thousands)
December 31,
1997 1996 1995
$ Rate $ Rate $ Rate
--------- ---- --------- ---- ---------- ----
Average non-
interest-
paying
deposits $ 50,387 - - % $ 44,692 - - % $ 42,331 - - %
Average
interest-
paying
demand
deposits 62,019 1.99 58,696 2.02 58,357 2.15
Average
savings
deposits 111,557 3.54 102,185 3.49 89,436 3.21
Average time
deposits 212,183 5.74 189,227 5.62 188,135 5.57
--------- --------- ---------
$ 436,146 $ 394,800 $ 378,259
========= ========= =========
P. 13 of 48
<PAGE>
ITEM 1. BUSINESS (continued)
DEPOSITS (continued)
Amount Rate
------- ----
Time certificates in amounts of $100,000 or more
as of December 31, 1997 with maturity in:
3 months or less $ 9,045 5.56%
3 through 12 months 12,314 5.69
1 year through 3 years 8,915 6.57
Over 3 years 100 6.25
-------
$30,374
=======
There were no material deposits by foreign investors.
RETURN ON STOCKHOLDERS' EQUITY AND ASSETS
The following table presents the return on average stockholders' equity and
average assets, dividend payout percentage and stockholders' equity to assets
percentage for the years ended December 31, 1997, 1996 and 1995:
December 31,
1997 1996 1995
------- ------- -------
Return on average total assets 1.29% 1.26% 1.02%
Return on average stockholders' equity 12.09 11.51 9.65
Dividend payout percentage on average
outstanding common shares 34.16 32.89 39.63
Average stockholders' equity to
average total assets percentage 10.65 10.98 10.54
SHORT-TERM BORROWINGS
The following table shows outstanding balances, weighted average interest rates
at year end, maximum month-end balances, average month-end balances and weighted
average interest rates of securities sold under agreements to repurchase and
other short-term borrowings during 1997, 1996 and 1995.
(In Thousands of Dollars, Except
for Interest Rate Percentage)
--------------------------------
1997 1996 1995
--------- --------- ---------
Outstanding as of December 31 $10,028 $ 3,146 $ 67
Weighted average interest rate at year end 5.10% 5.61% - -
Maximum month-end balance $10,028 $ 9,700 $ 1,575
Average month-end balance $ 3,894 $ 2,217 $ 131
Weighted average interest rate for the year 5.10% 5.62% 5.91%
FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
The following table shows outstanding balances, weighted average interest rates
at year end, maximum month-end balances, average month-end balances and weighted
average interest rates of Federal Home Loan Bank advances and other borrowings
during 1997, 1996 and 1995.
(In Thousands of Dollars, Except
for Interest Rate Percentage)
--------------------------------
1997 1996 1995
--------- --------- ---------
Outstanding as of December 31 $18,188 $12,355 $17,469
Weighted average interest rate at year end 6.22% 6.01% 6.01%
Maximum month-end balance $22,379 $17,264 $20,524
Average month-end balance $18,628 $16,126 $19,772
Weighted average interest rate for the year 6.19% 6.12% 6.04%
P. 14 of 48
<PAGE>
ITEM 1. BUSINESS (continued)
INTEREST RATE SENSITIVITY AND LIQUIDITY ANALYSIS
The following table summarizes the repricing dates of the Registrant's earning
assets and interest-paying liabilities as of December 31, 1997.
<TABLE>
December 31, 1997
----------------------------------------------------------
Months
-------------------
After three After one
Within through through Non-
(Dollars in Thousands) three twelve five years sensitive Total
- -------------------------------------------------------------------------------------------------------
Earning assets
<S> <C> <C> <C> <C> <C>
Federal funds sold $ 27,925 $ - - $ - - $ - - $ 27,925
Investment securities available for sale 6,972 24,616 56,497 24,670 112,755
Loans 51,897 71,657 216,414 24,333 364,301(2)
- -------------------------------------------------------------------------------------------------------
Total earning assets 86,794 96,273 272,911 49,003 504,981
- -------------------------------------------------------------------------------------------------------
Interest-paying liabilities
Deposits 93,168(1) 95,041 90,030 121,332(1) 399,571(3)
Federal funds purchased and securities
sold under agreement to repurchase 10,028 - - - - - - 10,028
Other borrowings 5,380 2,908 9,850 50 18,188
- -------------------------------------------------------------------------------------------------------
Total interest-paying liabilities 108,576 97,949 99,880 121,382 427,787
- -------------------------------------------------------------------------------------------------------
Net noninterest-paying liabilities
Noninterest paying deposits net
of cash and due from banks - - - - - - 37,795 37,795
Other assets, liabilities and equity net - - - - - - 39,399 39,399
- -------------------------------------------------------------------------------------------------------
Total noninterest paying liabilities - - - - - - 77,194 77,194
- -------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ (21,782) $ (1,676) $173,031 $(149,573) $ - -
- -------------------------------------------------------------------------------------------------------
Cumulative Gap $(21,782) $(23,458) $149,573 - -
- -------------------------------------------------------------------------------------------------------
Cumulative percentage of interest sensitive
assets to interest sensitive liabilities 80% 89% 149%
- -------------------------------------------------------------------------------------------------------
<FN>
(1) Based on an historical analysis of NOW, SuperNow, Savings and Money Market
account balances, a percentage of these deposit balances has been determined to
be sensitive to changes in interest rates. Respectively, approximately 30%, 50%,
30% and 25% of these deposit balances were determined to be interest rate
sensitive. As such, these percentages of interest rate sensitive deposit
balances were classified in the first column titled "Within three months". The
remainder of the balances were classified as noninterest rate sensitive deposit
balances and placed in the last column titled "non-sensitive".
(2) Of the $364,301,000 of total loans, $191,950,000 have fixed rates, while
$172,351,000 have variable rates.
(3) Certificates of deposit comprise $230,835,000 of total interest-paying
deposits, while interest-paying demand deposits and savings deposit
balances accounted for $168,736,000 of this total.
</FN>
</TABLE>
P. 15 of 48
<PAGE>
ITEM 2. PROPERTIES
The Registrant's office and the main office of the First National Bank Iowa is
located in Iowa City, Iowa.
The number of retail banking offices currently stands at ten. Four Iowa City
locations, one North Liberty location, one Coralville location, one West Branch
location and three Cedar Rapids locations(see chart below).
================================================================================
FIRST FINANCIAL BANCORPORATION'S RETAIL BANKING LOCATIONS
IOWA CITY LOCATIONS Established
Main Bank - 204 East Washington Street, Downtown Iowa City ................1932
Drive-In - 21 South Linn Street, Downtown Iowa City.......................1962
Towncrest - 1117 William Street, Iowa City's East Side ....................1968
Southwest - 2312 Mormon Trek Boulevard, Southwest Iowa City................1995
NORTH LIBERTY LOCATIONS
North Liberty - 580 West Cherry Street, North Liberty, Iowa ................1994
CORALVILLE LOCATIONS
Coralville - 506 10th Avenue, Coralville, Iowa .............................1979
WEST BRANCH LOCATIONS
West Branch Banking Center - 127 West Main Street, West Branch, Iowa 52317..1997
CEDAR RAPIDS LOCATIONS
Main Bank - 200 First Street SW, Cedar Rapids ..............................1991
*Downtown - 240 Third Avenue SE, in the Armstrong Centre, Cedar Rapids......1994
Center Point Road - 5012 Center Point Road NE, Cedar Rapids, Iowa 52402.....1997
================================================================================
*This space is being rented for a five-year period from December 1, 1994, to
December 1, 1999, with three five-year options to renew. During the first five
years, annual rent is $37,206 through December 1, 1996, $39,840 through December
1, 1998, and $40,068 to December 1, 1999. The Company has free and clear title
to the remaining branch locations.
ITEM 3. LEGAL PROCEEDINGS
Neither the Registrant nor the Bank are involved in any material legal
proceedings, other than routine proceedings incidental to the operation of the
Bank. Such proceedings are not expected to result in any materially adverse
effect on the operations or earnings of the Bank. Neither the Registrant nor
the Bank are involved in any proceedings to which any director, principal
officer, or affiliate of such persons, or persons who own of record or
beneficially 5% or more of the outstanding shares of the registrant, or any
associate of the foregoing persons, is a party adverse to the Registrant or the
Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is not listed on any exchange. Eight brokerage firms
maintained public trading markets for the Company's common stock in 1997. The
stock is not actively traded, but there are regularly quoted bid and asked
prices from these eight brokerage firms. In the period from January 1, 1997,
through December 31, 1997, stock fair market value ranged from $20.17 to $29.13
per share, compared to $16.83 to $20.17 in 1996. The Company had approximately
860 shareholders of record at December 31, 1997.
The following table reflects the high and low fair market value of the stock bid
prices for each quarter based upon information available to the Registrant:
Fair Market Value of Stock
------------------------------------------------
1997 1996
---------------------- ----------------------
High Low High Low
--------- --------- --------- ---------
First Quarter $ 21.67 $ 20.17 $ 18.00 $ 16.83
Second Quarter 23.00 21.67 18.83 18.00
Third Quarter 25.00 23.00 20.17 18.83
Fourth Quarter 29.13 25.00 20.17 20.17
P. 16 of 48
<PAGE>
DIVIDENDS
The Company paid aggregate cash dividends of $2,283,000 or $.65 per share in
1997, $1,946,000 or $.55 per share in 1996, and $1,811,000 or $.51 per share in
1995.
In addition to cash dividends, the Company paid a special stock dividend
effected in the form of a 3-for-2 stock dividend on July 18, 1997, payable to
shareholders of record as of July 1, 1997. An additional 1,165,022 shares of
common stock were issued to shareholders, and 56 fractional shares were
redeemed.
The decision to pay dividends in the future rests within the dicretion of the
Board of Directors and will remain subject to, among other considerations,
certain regulatory restrictions imposed upon the payment of dividends by the
subsidiary Bank, which will in turn be based upon the subsidiary Bank's future
earnings, capital requirements, and financial condition.
The following table states the quarterly dividends paid per share:
1997 1996
------ ------
First Quarter $.1467 $.1300
Second Quarter $.1467 $.1300
Third Quarter $.1700 $.1467
Fourth Quarter $.1900 $.1467
------ ------
Total $.6534 $.5534
====== ======
STOCK TRANSFER AGENT
The function of stock transfer agent for the Company is provided by UMB Bank,
N.A., Kansas City, MO.
Shareholders who need assistance or have questions regarding the issuance of
dividend checks and statements, the registration of stock, and similar matters
may contact UMB Bank by writing to: UMB Bank, Attn.: First Financial
Bancorporation Shareholder Relations, P.O. Box 410064, Kansas City, Missouri,
64141-0064 or by telephoning the UMB Bank Shareholder Relations Division at
(816) 860-7786.
FORM 10-K INFORMATION
A copy of the Company's 1O-K, filed with the Securities and Exchange Commission,
is available without charge to any shareholder. Requests should be directed to:
First Financial Bancorporation, Attn.: A. Russell Schmeiser, Executive Vice
President & COO, P.O. Box 1880, Iowa City, Iowa, 52244-1880.
P. 17 of 48
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Consolidated Five Year Statistical Summary
(In Thousands of Dollars, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
==========================================================================================================
YEAR-END TOTALS
Assets $ 550,053 $ 467,725 $ 457,236 $ 434,461 $ 434,081
Investment Securities Available for Sale 112,755 97,802 123,886 78,621 97,655
Investment Securities Held to Maturity - - - - - - 30,608 36,856
Federal Funds Sold 27,925 - - 3,225 600 17,525
Loans, Gross 364,301 330,739 294,529 294,707 254,207
Deposits 458,815 395,407 385,055 362,263 363,580
Federal Home Loan Bank Advances 12,735 12,355 17,469 20,628 18,283
Stockholders' Equity 57,580 52,576 50,207 45,245 43,993
===========================================================================================================
EARNINGS
Total Interest Income $ 36,708 $ 33,268 $ 31,742 $ 29,205 $ 28,236
Total Interest Expense 18,730 16,449 15,811 13,624 14,057
Provision for Loan Losses 588 591 366 425 155
Noninterest Income 8,385 7,024 6,236 5,699 5,924
Noninterest Expense 16,183 14,802 15,480 14,532 13,041
Applicable Income Taxes 2,909 2,534 1,751 1,760 1,852
Net Income 6,683 5,916 4,570 4,563 5,055
===========================================================================================================
PER SHARE DATA*
Earnings Per Share
Basic $ 1.91 $ 1.68 $ 1.28 $ 1.28 $ 1.45
Diluted $ 1.90 $ 1.67 $ 1.27 $ 1.27 $ 1.43
Cash Dividends $ .65 $ .55 $ .51 $ .49 $ .47
Dividend Payout Percentage on Average
Outstanding Common Shares 34.16% 32.89% 39.63% 37.98% 32.23%
Book Value as of December 31 $ 16.50 $ 15.03 $ 14.04 $ 12.71 $ 12.60
===========================================================================================================
PERFORMANCE & CAPITAL MEASURES
Return on Average Total Assets 1.29% 1.26% 1.02% 1.03% 1.19%
Return on Average Stockholders' Equity 12.09% 11.51% 9.65% 10.10% 12.07%
Percentage of Average Stockholders
Equity to Average Total Assets 10.65% 10.98% 10.54% 10.24% 9.84%
==========================================================================================================
</TABLE>
*All per share data has been retroactively restated to reflect the 3-for-2 stock
split in 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FOWARD LOOKING STATEMENTS
The discussion following and elsewhere in this report contains certain forward
looking statements with respect to the financial condition, the results of
operations and business of the Company. These statements involve certain risks
and uncertainties which are often inherent in the ongoing operation of a
financial institution such as the Company's subsidiary Bank.
For example, a financial institution may accept deposits at fixed interest
rates, at different times and for different terms, and lend funds at fixed
interest rates, at different times and at different terms. In doing so, it
accepts the risk that its cost of funds may rise while the use of those funds
may be at a fixed rate. Similarly, although market rates of interest may
decline, the financial institution may have committed, by virtue of the term of
deposit, to pay what essentially becomes an above-market rate.
Loans, and the reserve for loan losses, carry the risk that borrowers will not
repay all funds in a timely manner, as well as the risk of total loss. The
collateral pledged as security for loans may or may not have the value which has
been attributed to it. The loan loss reserve, while believed to be adequate, may
prove inadequate if on or more large-balance borrowers, or numerous mid-balance
borrowers, or a combination of both, experience financial difficulty for a
variety of reasons. These reasons may relate to the financial circumstances of
an individual borrower, or may be caused by negative economic circumstances at
the local, regional, national, or international level which are beyond the
control of the borrowers or lender.
Because the business of banking is of a highly regulated nature, the decisions
of governmental entities can have a major effect on operating results.
All of these uncertanties, as well as others, are present in the operations of a
financial institution, and stockholders are cautioned that management's view of
the future, which serves as a basis for both the ongoing operation of the
Company and the forward looking statements included in this report, may prove to
be other than anticipated.
P. 18 of 48
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
EARNINGS PERFORMANCE
Consolidated net income increased $767,000 or 13% to $6,683,000 for the
year ended December 31, 1997, when compared to the $5,916,000 recorded in 1996.
1996 net income had increased by $1,346,000 or 29.5% over 1995 net income of
$4,570,000. 1997 earnings are the highest on record for the Company, surpassing
1996's record earnings year.
================================================================================
NET INCOME GRAPH
The Company's net income for the years ended December 31, 1997, 1996, 1995, 1994
and 1993 was $6,683,000, $5,916,000, $4,570,000, $4,563,000 and $5,055,000,
respectively.
================================================================================
NET INTEREST INCOME
For the year ended December 31, 1997, net interest income, on a fully tax
equivalent basis, totaled $19,030,000 and represented an increase of $1,169,000
or 6.5% above the $17,861,000 of net interest income reported in 1996, which was
$876,000 or 5.2% higher than the $16,985,000 recorded in 1995. Increased average
earning asset balances, in particular loan growth through acquisition, accounted
for the increase in net interest income. Average earning assets increased
$56,493,000 or 13% in 1997, to $490,383,000, compared to an increase of
$16,270,000 or 3.9% to $433,890,000 in 1996. As of December 31, 1997, the net
interest margin was 3.96%, a decreased of .16% or 3.9% when compared to the
4.12% reported as of December 31, 1996. This decrease was due to the acquired
assets and liabilities of West Branch State Bank and competition for loan and
deposit balances. It is anticipated that the current level of competitive
pressures will continue in the foreseeable future, as financial and nonfinancial
compete for core deposits and loans in the local markets. This competition will
continue to negatively impact the net interest margin, forcing financial
institutions to seek non-traditional funding sources and alternative sources of
noninterest income.
================================================================================
NET INTEREST INCOME GRAPH
The yield on average earning assets, the interest cost of funds for assets and
the resulting net interest income, as a percentage of average earning assets,
for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 are presented
in the table below.
1997 1996 1995 1994 1993
---------------------------------------
Yield on Average Earning Assets 7.86% 7.91% 7.85% 7.37% 7.43%
Interest Expense to Average
Earning Assets 3.90% 3.48% 3.78% 3.32% 3.55%
Net Interest Margin 3.96% 4.12% 4.07% 4.05% 3.88%
================================================================================
DIVIDEND HISTORY
The Company paid cash dividends totaling $2,283,000 in 1997, $1,946,000 in 1996
and $1,877,000 in 1995. Cash dividends have increased $337,000 or 17.3% in 1997,
$135,000 or 7.5% in 1996 and $78,000 or 4.5% in 1995. The dividend payout
percentage for 1997, 1996 and 1995 was 34.16%, 32.89% and 39.63%, respectively.
This pay-out percentage is indicative of the Company's efforts to shares its'
profits and provide an acceptable return to its shareholders.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is determined based on historical
loss experience, projected loan losses and other factors. The allowance for loan
losses is an estimate of the anticipated losses in the loan portfolio. As of
December 31, 1997, the allowance for loan losses was $4,589,000, an increase of
$801,000 or 21.1% over the 1996 year-end balance of $3,788,000. Included in this
increase was the acquired reserve for loan losses of the West Branch State Bank
which totaled $671,000 as of April 1997. Net charge-offs in 1997 totaled
$458,000 compared to net charge-offs of $405,000 and $108,000 for 1996 and 1995,
respectively. The majority of these loan charge-offs were consumer and credit
card. As of December 31, 1997, 1996 and 1995 the loan loss reserve balances were
1.26%, 1.15% and 1.22% of total outstanding loan balances, respectively.
For 1997, the provision for loan losses totaled $588,000 which decreased
$3,000 or .5% from the $591,000 recorded in 1996, which increased $225,000 or
61.5% from the $366,000 recorded in 1995.
There are no trends or uncertainties which management expects to materially
impact the adequacy of the allowance for loan losses or provision expense in the
foreseeable future.
P. 19 of 48
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
NONINTEREST INCOME
Noninterest income, excluding security gains and losses, for the year ended
December 31, 1997, increased $806,000 or 11.2% to $7,990,000, compared to an
increase of $948,000 or 15.4% to $7,184,000 in 1996 and a increase of $537,000
or 9.4% to $6,236,000 in 1995. Noninterest income, excluding security gains and
losses, as a percentage of total assets was 1.51% as of December 31, 1997, which
is a decrease from the 1.53% for the year ended December 31, 1996, and an
increase over the 1.39% reported for 1995.
================================================================================
NONINTEREST INCOME GRAPH
A five year comparison of the major components of noninterest income is provided
for the years 1997, 1996, 1995, 1994 and 1993.
(Amounts In Thousands)
1997 1996 1995 1994 1993
----------------------------------
Investment and OREO Gains, Net $ 395 $ (160)$ - - $ - - $ - -
Service Charges on Deposit Accounts $2,058 $1,825 $1,470 $1,327 $1,310
Trust Department Fees $3,289 $2,998 $2,763 $2,594 $2,416
Other Service Charges and Fees $2,643 $2,361 $2,003 $1,778 $2,198
================================================================================
A significant source of noninterest income in 1997 was trust fees. Trust fees
increased $291,000 or 9.7% to $3,289,000 in 1997, compared to an increase of
$235,000 in 1996 and an increase of $169,000 in 1995. Increased trust asset
balances, number of trust accounts combined with rising stock market were
responsible for this improved level of earnings.
Other service charges, commissions and fees increased $282,000 or 11.9% to
$2,643,000 in 1997, $358,000 or 17.9% to $2,361,000 in 1996 and $225,000 or
12.7% to $2,003,000 in 1995. Secondary market mortgage loan fees are a direct
function of the volume of loans originated for sale in the secondary market,
which is driven by changes in market interest rates. Also contributing to the
increase in 1997, is merchant program fees, which increased $185,000 or 30.1% to
$800,000 as a result of increased transaction volume. Management is constantly
reviewing alternative products and services to offer to the general public and
to cross-sell to existing customers to provide additional sources of noninterest
income.
NONINTEREST EXPENSES
Noninterest expenses increased $1,381,000 or 9.3% to $16,183,000 in 1997,
compared to a decrease of $678,000 or 4.4% in 1996 and an increase of $948,000
or 6.5% to $15,480,000 in 1995. As a percentage of average total assets,
noninterest expenses decreased to 3.1% in 1997, which compares favorably to
1996's 3.2% and 1995's 3.4%.
================================================================================
NONINTEREST EXPENSE GRAPH
A five year comparison of the major components of noninterest expense is
provided for the years 1997, 1996, 1995, 1994 and 1993.
(Amounts in Thousands)
1997 1996 1995 1994 1993
-----------------------------------------
Supplies and Postage and DP $2,558 $2,377 $2,180 $1,770 $1,628
Occupancy and Bank Premise $2,755 $2,624 $2,726 $2,515 $2,212
Other Expenses $3,112 $3,105 $2,897 $3,176 $2,998
Salaries and Employee Benefits $7,758 $6,696 $7,677 $7,071 $6,203
================================================================================
Salaries and employee benefit expenses increased $1,062,000 or 15.9% to
$7,758,000 in 1997, decreased $981,000 or 12.8% to $6,696,000 in 1996 and
increased $606,000 or 8.6% to $7,677,000 in 1995. The increase in expense in
1997 is due to the added staff of the West Branch State Bank, the staffing of a
new branch in Cedar Rapids and normal salary adjustments. The reduction in
expense in 1996 was the result of staff reductions associated with attrition and
the Voluntary Severance Program (VSP) initiated in 1995. In the past three
years, the number of full-time equivalent (FTE) employees has varied from 221 as
of December 31, 1995 to 205 as of December 31, 1996 to 239 as of December 31,
1997. As part of the Company's restructuring initiative, the VSP was offered to
employees in 1995, resulting in $354,000 of severance benefits being expensed in
the fourth quarter of 1995.
p. 20 of 48
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
NONINTEREST EXPENSES (continued)
Occupancy, furniture and equipment expenses were $2,755,000 as of December 31,
1997, an increase of $131,000 or 5% when compared to 1996 totals. 1996 expenses
totaled $2,624,000 and decreased $102,000 or 3.7% to the $2,726,000 recorded in
1995. The increase reported in 1997 was due to the acquisition of West Branch
State Bank and the new Cedar Rapids branch. Reduced depreciation expense
accounted for the majority of the decrease in 1996.
Data processing expenses increased $279,000 or 21.8%, $127,000 or 11% and
$229,000 or 24.7% to $1,561,000, $1,282,000 and $1,155,000 respectively for
1997, 1996 and 1995. These increases are due to increased merchant programming
expenses, credit card processing and electronic banking system expenses which
are volume driven.
Other expenses totaled $3,112,000, $3,105,000 and $2,897,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. A special SAIF recapitalization
assessment had a negative impact in 1996, while a retroactive reduction in the
FDIC premium assessment rate had a positive impact on 1995.
Consulting and professional fees increased $58,000 or 8.2% to $767,000 in 1997,
compared to an increase of $123,000 or 21% in 1996 to $709,000, and an increase
of $7,000 or 1.2% to $586,000 in 1995. Increased advertising and promotional
expense accounted for the remaining increase for this category, reflecting an
increase of $107,000 or 17.4% in 1997 to $722,0000, compared to an increase of
$126,000 or 25.8% in 1996 to $615,000.
BALANCE SHEET ANALYSIS
TOTAL ASSETS: Total assets of the Company were $550,053,000 as of December 31,
1997, which represented an increase of $82,328,000 ( $39,354,000 of which
represented the assets of West Branch State Bank at the time of acquisition) or
17.6% over total assets of $467,725,000 as of December 31, 1996.
Average total assets for 1997 were $519,080,000 which is an increase of
$50,953,000 or 10.9% over 1996 average total assets of $468,127,000 which was a
$18,736,000 or 4.2% increase over 1995 average total assets of $449,391,000. The
funding for this asset growth was provided by average deposit growth of
$41,346,000 or 10.5% to $436,146,000 in 1997 and $16,541,000 or 4.4% to
$394,800,000 in 1996. In addition, average stockholders' equity balances
increased $3,890,000 or 7.6% in 1997 and $4,003,000 or 8.4% in 1996, primarily
through the retention of earnings. Notes payable, issued for the acquisition of
West Branch Bancorp, Inc. averaged $4,090,000 for the year and provided another
source of funds for asset growth.
================================================================================
AVERAGE TOTAL ASSETS
A five year comparison of the major components of average total consolidated
assets for 1997, 1996, 1995, 1994 and 1993 are listed in the following table.
(Amounts in Thousands)
1997 1996 1995 1994 1993
----------------------------------------------------
Federal Funds Sold $ 23,700 $ 8,100 $ 11,200 $ 5,800 $ 16,600
Other Assets $ 43,100 $ 37,900 $ 35,300 $ 33,600 $ 33,200
Investment Securities $108,300 $114,800 $111,800 $127,700 $141,400
Net Loans $344,000 $307,300 $291,100 $273,900 $234,600
================================================================================
INVESTMENTS: The Company's average investment portfolio balances for 1997 were
$108,326,000, which decreased $6,472,000 or 5.6% from 1996 average investments
of $114,798,000. Average federal funds sold balances were $23,673,000 in 1997,
$15,537,000 or 191% more than 1996's average balance of $8,136,000. The
increase in federal fund sold balances was due to increases in short-term
deposit balances and future liquidity needs. As of December 31, 1997, United
States Treasury securities comprised 19.1% of the investment portfolio compared
to 21.4% as of the end of 1996.
P. 21 of 48
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
FINANCIAL POSITION (continued)
LOAN BALANCES: As of December 31, 1997, total loan balances increased
$33,562,000 or 10.1% to $364,301,000 when compared to total loan balances of
$330,739,000 as of December 31, 1996.
Average loan balances increased by $37,555,000 or 12.1% in 1997 to $348,511,000,
when compared to average loan balances of $310,956,000 for 1996. The Company
experienced the majority of its 1997 loan growth from the acquisition of West
Branch State Bank and from increased real estate loan volume caused by
construction activity and housing turnover in the local market. Real estate loan
balances increased $53,079,000 or 21.5% to $300,053,000 as of December 31, 1997,
when compared to the balance of $246,974,000 as of December 31, 1996.
================================================================================
AVERAGE TOTAL NET LOANS GRAPH Average total net loans for the years 1997, 1996,
1995, 1994 and 1993 were $349,700,000, $307,300,000, $291,100,000, $273,900,000
and $234,600,000, respectively.
================================================================================
DEPOSITS: Total deposits increased $63,408,000 or 16% to $458,815,000 in 1997
compared to total deposits of $395,407,000 as of December 31, 1996. Throughout
1997, average deposit balances totaled $444,052,000, an increase of $49,252,000
or 12.5% over the average total deposit balances of $394,800,000 in 1996.
Approximately $32,789,000 of 1997's deposit growth came from the acquisition of
West Branch State Bank.
================================================================================
AVERAGE TOTAL DEPOSITS GRAPH
A five year comparison of the noninterest bearing and interest bearing balances
of average total deposits for 1997, 1996, 1995, 1994 and 1993 are listed in the
following table.
(Amounts in Thousands)
1997 1996 1995 1994 1993
----------------------------------------------------
Noninterest Bearing $ 50,400 $ 44,700 $ 42,400 $ 42,700 $ 40,300
Interest Bearing $385,700 $350,100 $335,900 $327,700 $322,800
================================================================================
LIQUIDITY AND CAPITAL RESOURCES: On an unconsolidated basis, First Financial
Bancorporation (the holding company) had cash balances of $10,742,000 as of
December 31, 1997. In 1997, the holding company received dividends of
$15,329,000 from its subsidiary Bank and used those funds to provide a partial
payment of $2,100,000 on the acquisition of West Branch Bancorp, Inc., make net
purchases of marketable equity securities of $4,950,000, pay dividends to its
stockholders of $2,283,000 and increase its cash position by $6,721,000.
The Company's subsidiary Bank is subject to certain regulatory limitations
relative to its ability to pay dividends to the holding company. Management
believes that the holding company will not be adversely affected by these
dividend regulations and that projected dividends from the subsidiary Bank will
be sufficient to meet the holding company's liquidity needs and pay consistent
dividends.
The soundness, safety, and stability of a financial institution is very
important to customers and shareholders when establishing a business
relationship or when purchasing stock of a financial institution. Management
realizes that this is essential for the Company's continued growth and
profitability. As such, management places great emphasis in maintaining a strong
capital position. A strong capital position is beneficial to the Company,
enabling it to withstand significant long-term adverse economic conditions and
to take advantage of opportunities for future development and profitability. As
of December 31, 1997 and 1996, total stockholders' equity was $57,580,000 and
$52,576,000, respectively. As of December 31, 1997 and 1996, the Company's Tier
1 capital percentage was 15.98% and 17.50% and its total risk adjusted capital
percentage (Tier 1 capital plus Tier 2 capital) was 17.23% and 18.75%,
respectively. All of these ratios substantially exceed the regulatory minimums
of 4.00% and 8.00%. The Company's leverage capital ratio was 10.59% as of
December 31, 1997, compared to 11.73% as of December 31, 1996, also considerably
higher than the 4.00% floor. As of December 31, 1997, the lower capital
percentages are primarily due to the acquisition of West Branch Bancorp, Inc in
1997 and do not represent a trend or uncertainty that is likely to have a
material effect on liquidy and capital resources.
On a consolidated basis, 1997 net cash flows from operations provided $6,525,000
and another $37,501,000 was provided by net increases in deposits and repurchase
agreements. These cash flows were invested in net loans of $12,273,000 and
federal funds sold of $26,225,000. In addition, the Company acquired
approximately $41,800,000 of assets offset by deposits, notes payable and other
liabilities totalling $39,600,000 in conjunction with the acquisition of West
Branch Bancorp, Inc.
p. 22 of 48
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
FINANCIAL POSITION (continued)
At December 31, 1997, the Company had total outstanding loan commitments of
approximately $9,450,000 and a total of $64,805,000 of loan commitments and
unfunded or unused lines of credit. Management believes that its liquidity
levels are appropriate and that it has borrowing capacity from the Federal Home
Loan Bank and other sources.
INTEREST RATE SENSITIVE ASSETS AND LIABILITIES AND LIQUIDITY
AVERAGE INTEREST-EARNING ASSETS: In 1997, average interest-earning assets
(consisting primarily of loans and investment securities) totaled $490,383,000
and represented 92.5% of total average asset balances. This is an increase of
$56,493,000 or 13% over 1996 average interest-earning asset balances of
$433,890,000. The majority of this increase was in loans. Average loan balances
increased $43,431,000 or 14% to $354,387,000 in 1997.
AVERAGE INTEREST-PAYING LIABILITIES: Average interest-paying liabilities
increased $44,830,000 or 12.2% in 1997 and $11,387,000 or 3.2% in 1996, to
$412,252,000 and $367,422,000, respectively. Average savings deposit balances
increased $10,427,000 or 10.2% to $112,612,000 in 1997 and $12,749,000 or 14.3%
in 1996. Average time deposit balances increased $28,873,000 or 15.3% to
$218,000,000 in 1997 and $1,092,000 or .6% to $189,227,000 in 1996. The 1997
increase includes the acquisition of West Branch State Bank.
MATERIAL UNCERTAINTIES: The Company continues to challange all systems and
vendors in reaching a complaince standard with the Year 2000 issue. It has
utilized diligence in selecting partners which provide information systems
support for hardware applications and operating systems software. As a matter of
policy, the Company reviews any potential partners' financial condition in the
selection process for software and hardware for its critical systems. This
process is repeated annually in evaluating partners' ability to provide
continued quality and support. At the present time, all major system vendors
have conducted comprehensive testing of their systems with regard to the Year
2000 issue and have communicated these results to the Company. Based on these
policies, procedures and actions, the Company has determined that a majority of
its systems will be compliant with Year 2000 standards before the end of 1998.
The Company has incurred, and expects to incur, internal staff costs as well as
consulting and other expenses related to the assessment and testing of its
systems. Capital expenditures for hardware purchases will be incurred in the
normal course of business which will also prepare the systems for the Year 2000.
These costs are not expected to significantly impact liquidity or future
earnings of the Company. Management expects to complete its Year 2000 plan
during 1998, and the remainder of the costs to be incurred are not expected to
be significant to the financial position of the Company.
EFFECTS OF INFLATION: Although it has not been an important factor in recent
years, the rate of inflation can have a significant impact on the balance sheet
and income statement of the Company. In addition to the establishment of ALCO,
management has instituted effective cost and purchasing controls and has
established ongoing mechanisms for adjusting product and service pricing to
minimize the potential impact of inflation.
RECENTLY-ISSUED ACCOUNTING STANDARDS: The adoption of recently-issued accounting
standards is not expected to have a material effect on the Company's financial
statements.
P. 23 OF 48
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK EXPOSURE: The Company's primary market risk exposure is to changes
in interest rates. The Company's asset/liability management, or its management
of interest rate risk, is focused primarily on evaluating and managing net
interest income given various risk criteria. Factors beyond the Company's
control, such as market interest rates and competition, may also have an impact
on the Company's interest income and interest expense. In the absence of other
factors, the Company's overall yield on interest-earning assets will increase as
will its cost of funds in its interest-bearing liabilities when market rates
increase over an extended period of time. Conversely, the Company's yields and
cost of funds will decrease when market rates decline. The Company is able to
manage these swings to some extent by attempting to control the maturity or rate
adjustments of its interest-earning assets and interest-bearing liabilities over
given periods of time.
In order to effectively manage market risk exposure and insure adequate
liquidity, the Company, at the level of its subsidiary Bank, has established a
standing Asset Liability Management Committee (ALCO). Under the auspices of
ALCO, the Company has undertaken an analysis of the potential market risk of
both increased and decreased levels of interest rates projected into both the
immediate and longer-term future.
Based on the following data, net interest income should decline with
instantaneous increases in interest rates while net interest income should
increase with instantaneous declines in interest rates. Generally during periods
of increasing interest rates, the Company's interest rate sensitive liabilities
would reprice faster than its interest rate sensitive assets causing a decline
in the Company's interest rate spread and margin. This would result from an
increase in the Company's cost of funds that would not be immediately offset by
an increase in its yield on earning assets. An increase in the cost of funds
would have a negative effect on the Company's net interest income without
equivalent increase in the yield on earning assets. In times of decreasing
interesr rates, fixed rate assets could increase in value and the lag in
repricing of interest rate sensitive assets could be expected to minimize the
potential effects of decreases in market interest rates to net interest income.
The Company has an asset/liability management program in place which is designed
to mitigate interest rate sensitivity. The program emphasizes the origination of
adjustable rate loans, which are held in portfolio, the investment of excess
cash in short or intermediate term interest earning assets, and the solicitation
of regular savings and transaction deposit accounts which are less sensitive to
changes in interest rates and can be repriced rapidly. The table presented on
the next page provides quantitative information with respect to interest
sensitive assets and liabilities.
<TABLE>
<CAPTION>
Market Risk Analysis at December 31, 1997 Dollar Amounts Expressed in Thousands
(Expected Maturity Date, Year Ended December 31, 1997)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1999 2000 2001 2002 Thereafter Total Fair Value
======================================================================================================================
ASSETS
Fixed Rate Loans:
Balance $ 51,929 $ 32,589 $ 26,629 $ 30,105 $ 27,773 $ 22,655 $191,950 $198,123
Average interest rate 8.53% 8.46% 8.52% 8.47% 8.33% 8.11% 8.44%
Variable Rate Loans:
Balance 71,627 42,934 38,229 6,292 11,591 1,678 172,351 172,351
Average interest rate 8.67% 8.60% 8.19% 7.92% 8.19% 7.41% 8.48%
Investments:
Balance 56,815 20,861 13,373 18,033 4,410 27,386 140,680 140,680
Average interest rate 6.32% 6.50% 6.70% 6.59% 6.97% 6.04% 6.38%
LIABILITIES
Liquid deposits:
Balance 168,736 - - - - - - - - - - 168,736 168,736
Average interest rate 2.90% - - - - - - - - - - 2.90%
Fixed-rate time deposits:
Balance 134,727 54,390 29,034 3,888 2,671 47 224,757 222,728
Average interest rate 5.72% 6.16% 6.06% 5.49% 5.73% 6.38% 5.87%
Variable-rate time deposts:
Balance 572 5,432 74 - - - - - - 6,078 6,078
Average interest rate 4.55% 6.00% 3.85% - - - - - - 5.85%
FHLB advances and notes payable
Balance 8,288 6,544 2,500 756 50 50 18,188 18,245
Average interest rate 5.91% 6.31% 6.12% 6.50% 6.45% 6.60% 6.11%
====================================================================================================================
</TABLE>
P. 24 OF 48
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
- --------------------
CONSOLIDATED BALANCE SHEETS
FIRST FINANCIAL BANCORPORATION
(Amounts In Thousands)
December 31, 1997 1996
- --------------------------------------------------------------------------------
ASSETS
Cash and due from banks (Note 11) $ 21,449 $ 20,949
Available for sale securities (amortized cost 1997
$110,891; 1996 $97,431) (Note 2) 112,755 97,802
Federal funds sold 27,925 - -
Loans, net (Notes 3, 6 and 10) 359,712 326,951
Bank premises and equipment, net (Note 4) 12,885 12,082
Accrued interest receivable 3,730 3,179
Intangible assets 2,775 624
Prepaid pension cost (Note 8) 3,718 3,240
Other assets 5,104 2,898
- --------------------------------------------------------------------------------
$ 550,053 $ 467,725
========= =========
LIABILITIES
Noninterest-bearing deposits $ 59,244 $ 47,603
Interest-bearing deposits 399,571 347,804
--------- -------
Total deposits (Note 5) $ 458,815 $ 395,407
Federal funds purchased and securities sold under
agreements to repurchase 10,028 3,146
Federal Home Loan Bank advances (Note 6) 12,735 12,355
Notes Payable 5,453 - -
Accrued interest payable 2,153 1,516
Accounts payable and other accrued expenses 2,617 2,503
Current and deferred income taxes (Note 7) 672 222
-------------------------------------------------------------------------------
$ 492,473 $ 415,149
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Notes 8 and 11)
Capital stock, common, $1.25 par value; authorized
5,000,000 shares; (Issued 1997 3,488,680 shares;
1996 3,497,118 shares) $ 4,361 $ 2,914
Additional paid-in capital 2,284 2,606
Retained earnings 49,766 46,824
Unrealized gains on debt securities, net 1,169 232
- --------------------------------------------------------------------------------
$ 57,580 $ 52,576
- --------------------------------------------------------------------------------
$ 550,053 $ 467,725
========= =========
See Notes to Financial Statements.
P. 25 of 48
<PAGE>
<TABLE>
<CAPTION>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------
FIRST FINANCIAL BANCORPORATION
(Amounts in Thousands, Except Per Share Data)
<S> <C> <C> <C>
Years Ended December 31, 1997 1996 1995
=======================================================================================================
INTEREST INCOME:
Interest and fees on loans $ 29,182 $ 26,037 $ 24,449
Interest on investment securities:
Taxable 4,496 5,316 5,251
Non-taxable 1,721 1,485 1,384
Interest on federal funds sold 1,309 430 658
- -------------------------------------------------------------------------------------------------
Total interest income $ 36,708 $ 33,268 $ 31,742
- -------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits $ 17,371 $ 15,394 $ 14,598
Interest on federal funds purchased and securities
sold under agreements to repurchase 189 60 14
Interest on Federal Home Loan Bank advances 910 995 1,199
Interest on other borrowings 260 - - - -
- -------------------------------------------------------------------------------------------------
Total interest expense $ 18,730 $ 16,449 $ 15,811
- -------------------------------------------------------------------------------------------------
Net interest income $ 17,978 $ 16,819 $ 15,931
Provision for loan losses (Note 3) 588 591 366
- -------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses $ 17,390 $ 16,228 $ 15,565
- -------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Trust fees $ 3,289 $ 2,998 $ 2,763
Services charges and fees on deposit accounts 2,058 1,825 1,470
Other service charges, commissions and fees 2,643 2,361 2,003
Investment (losses), net (Note 2) 395 (160) - -
- -------------------------------------------------------------------------------------------------
Total noninterest income $ 8,385 $ 7,024 $ 6,236
- -------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Salaries and employee benefits (Note 8) $ 7,758 $ 6,696 $ 7,677
Occupancy, furniture and equipment 2,755 2,624 2,726
Data processing 1,561 1,282 1,155
Office supplies and postage 997 1,095 1,025
Other expenses 3,112 3,105 2,897
- -------------------------------------------------------------------------------------------------
Total noninterest expenses $ 16,183 $ 14,802 $ 15,480
- -------------------------------------------------------------------------------------------------
Income before income taxes $ 9,592 $ 8,450 $ 6,321
Federal and state income taxes (Note 7) 2,909 2,534 1,751
- -------------------------------------------------------------------------------------------------
Net income $ 6,683 $ 5,916 $ 4,570
======== ======== ========
Earnings per share:
Basic $ 1.91 $ 1.68 $ 1.28
Diluted $ 1.90 $ 1.67 $ 1.27
See Notes to Financial Statements.
</TABLE>
P. 26 of 48
<PAGE>
<TABLE>
<CAPTION>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FIRST FINANCIAL BANCORPORATION
(Amounts in Thousands of Dollars, Except Per Share Data)
Common Stock Additional Unrealized Gains
Years Ended December 31, $1.25 Par Value Paid-in Retained (Losses) on Debt
1997,1996 and 1995 Number Amount Capital Earnings Securities, Net Total
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 2,374 $ 2,967 $ 3,928 $ 40,095 $(1,745) $ 45,245
Net income - - - - - - 4,570 - - 4,570
Cash dividends ($.51 per share) - - - - - - (1,811) - - (1,811)
Stock options exercised for
18,131 shares (Note 8) 12 15 233 - - - - 248
Redemption of 4,158 shares
of common stock (3) (3) (66) - - - - (69)
Unrealized (losses) on debt securities,
net of deferred tax effect - - - - - - - - (2,024) (2,024)
===================================================================================================================
BALANCE, DECEMBER 31, 1995 2,383 $ 2,979 $ 4,095 $ 42,854 $ 279 $ 50,207
Net income - - - - - - 5,916 - - 5,916
Cash dividends ($.55 per share) - - - - - - (1,946) - - (1,946)
Stock options exercised for
12,087 shares (Note 8) 21 26 345 - - - - 371
Redemption of 109,544 shares
of common stock (73) (91) (1,834) - - - - (1,925)
Unrealized gains on debt securities
net of deferred tax effect - - - - - - - - (47) (47)
===================================================================================================================
BALANCE, DECEMBER 31, 1996 3,497 $ 2,914 $ 2,606 $ 46,824 $ 232 $ 52,576
Net income - - - - - - 6,683 - - 6,683
3-for-2 stock split effected in the
formof a stock divident - - 1,456 - - (1,456) - - - -
Cash dividends ($.65 per share) - - - - - - (2,283) - - (2,283)
Stock options exercised for
25,800 shares (Note 8) 26 22 320 - - - - 342
Redemption of 34,182 shares
of common stock (34) (31) (642) - - - - (673)
Unrealized (losses) on debt securities,
net of deferred tax effect - - - - - - - - - - 937
===================================================================================================================
BALANCE, DECEMBER 31, 1997 3,489 $ 4,361 $ 2,284 $ 49,766 $ 1,169 $57,580
===== ======= ======= ======== ======== ========
</TABLE>
See Notes to Financial Statements.
P. 27 of 48
<PAGE>
<TABLE>
<CAPTION>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST FINANCIAL BANCORPORATION
(Amounts In Thousands)
<S> <C> <C> <C>
Years Ended December 31, 1997 1996 1995
============================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 6,683 $ 5,916 $ 4,570
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,084 1,116 1,246
Amortization 274 155 166
Provision for loan losses 588 591 366
Deferred income taxes - - 93 139
Amortization on investment securities 167 140 28
(Increase) decrease in accrued interest receivable (61) 188 (192)
(Increase) decrease in other assets (2,574) (239) (2,251)
Increase (decrease) in accrued interest and other liabilities 384 (351) 1,406
Change in accrued income taxes (20) 309 (94)
---------- --------- ---------
Net cash provided by operating activities $ 6,525 $ 7,918 $ 5,384
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
Maturities $ 29,769 $ 21,038 $ 38,063
Sales 19,973 26,747 - -
Purchases (48,692) (21,914) (46,511)
Purchases of held to maturity securities - - - - (3,009)
Federal funds sold, net (26,225) 3,225 (2,625)
Net increase (decrease) in loan balances outstanding (12,273) (36,615) 60
Purchase of bank premises and equipment (1,614) (710) (2,822)
Purchase of stock of West Branch Bancorp, Inc. net of
cash received (Note 9) (1,155) - - - -
---------- --------- ---------
Net cash (used in) investing activities $ (40,217) $ (8,229) $(16,844)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit balances $ 30,619 $ 10,352 $ 22,792
Federal funds purchased and securities sold under
agreements to repurchase 6,882 3,146 (3,200)
Repayment of note principal - - - - (161)
Federal Home Loan Bank advances (620) (5,114) (3,159)
Other borrowings - - (67) 67
Dividends paid (2,283) (1,946) (1,811)
Stock options exercised 342 371 248
Common stock redeemed (748) (1,925) (69)
---------- --------- ---------
Net cash provided by financing activities $ 34,192 $ 4,817 $ 14,707
---------- --------- ---------
Increase in cash and due from banks $ 500 $ 4,506 $ 3,247
CASH AND DUE FROM BANKS
Beginning balance 20,949 16,443 13,196
--------- -------- --------
Ending balance $ 21,449 $ 20,949 $ 16,443
========= ======== ========
Supplemental Disclosures (Note 12)
============================================================================================================
See Notes to Financial Statements.
</TABLE>
P. 28 of 48
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
NATURE OF BUSINESS: The Company is a bank holding company which owns 100% of the
outstanding common stock of First National Bank Iowa ("the Bank"). The Bank is
engaged in many areas of commercial banking, including deposits, lending and a
variety of customer services. The Trust and Asset Management division of the
Bank administers fiduciary and agency accounts and provides the Bank with a
significant source of fee income.
ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of the Company and its subsidiary, First National Bank
Iowa, which is wholly-owned. All material intercompany accounts and transactions
have been eliminated in consolidation.
TRUST ASSETS: Trust accounts (other than cash deposits) held by the Bank in a
fiduciary or agency capacity for its customers are not included in the
accompanying financial statements because such items are not assets of the Bank.
PRESENTATION OF CASH FLOWS: For purposes of reporting cash flows, cash and due
from banks includes cash on hand and amounts due from banks. Cash flows from
deposits, federal funds purchased, federal funds sold and loan balances are
treated as net increases or decreases.
INVESTMENTS IN DEBT AND EQUITY SECURITIES: Securities available for sale are
accounted for at fair value and the unrealized holding gains or losses are
presented as a separate component of stockholders' equity, net of their deferred
income tax effect. Gains and losses on sale of investment securities are based
on the cost or amortized cost of the specific securities sold.
LOANS: Loans are stated at the amount of unpaid principal, reduced by the
allowance for loan losses. The allowance for loan losses is established through
a provision for loan losses charged to expense. Loans are charged against the
allowance when management believes the collectibility of principal is unlikely.
The allowance for possible loan losses is maintained at a level considered
adequate to provide for losses that can be reasonably anticipated. The Bank
makes continuous credit reviews of the loan portfolios and will consider current
economic conditions, historical loan loss experience, review of specific problem
loans, and other factors in determining the adequacy of the allowance.
Loans are considered impaired when, based on all current information and events,
it is probable that the Bank will not be able to collect all amounts due. The
portion of allowance for loan losses applicable to impaired loans has been
computed based on the present value of the estimated future cash flows of
interest and principal discounted at the loan's effective interest rate or on
the fair value of the collateral for collateral dependent loans. The entire
change in present value of expected cash flows of impaired loans is reported as
bad debt expense in the same manner in which impairment initially was recognized
or as a reduction in the amount of bad debt expense that otherwise would be
reported. Interest income on impaired loans is recognized on the cash basis.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amount is amortized as an adjustment of the related
yield of the loans. The deferred amounts are amortized over the estimated life
of the loans, anticipating prepayments.
BANK PREMISES AND EQUIPMENT: Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed primarily by the
straight-line method over estimated useful lives of 15-39 years for buildings
and 3-15 years for furniture and equipment.
INTANGIBLE ASSETS: Intangible assets consist primarily of goodwill which
represents the excess of cost over fair value of net assets acquired in business
combinations accounted for under the purchase method. Goodwill is amortized on a
straight-line basis over 15 years. The carrying value of goodwill is reviewed
periodically for impairment. Goodwill totaled $2,304,000, net of accumulated
amortization of $122,000, as of December 31, 1997.
P. 29 of 48
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
INCOME TAXES: Deferred income taxes are provided under the liability method
whereby deferred tax assets are recognized for deductible temporary differences
and net operating loss and tax credit carryforwards and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
basis. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
EMPLOYEE BENEFIT PLANS: Annual expense of the Company's defined benefit pension
plan includes service cost (measured by the projected unit credit method),
interest on the projected benefit obligation, actual return on plan assets and
other amortization and deferral amounts specified by FASB Statement No. 87.
Deferred benefits under a salary continuation plan are charged to expense during
the period the respective employee attains full eligibility. The Banks does not
provide any other post-employment benefits.
Compensation expense for stock issued through a stock option plan is accounted
for using the intrinsic value based method of accounting prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Under this method,
compensation is measured as the difference between the estimated market value of
the stock at the date of award less the amount required to be paid for the
stock. The difference, if any, is charged to expense over periods of service.
EARNINGS PER COMMON SHARE: In July 1997, the Board of Directors approved a
three-for-two stock split effected in the form of a stock dividend and an
additional 1,165,022 shares of common stock were issued to stockholders. As a
result, fractional shares of stock totaling 56 shares were redeemed. Information
with respect to the common stock outstanding, earnings per common share and
other stock information has been retroactively adjusted to give effect to the
stock split.
The FASB has issued Statement No. 128, Earnings Per Share, which supercedes APB
Opinion No. 15. Statement No. 128 requires the presentation of earnings per
share by all entities that have common stock or potential common stock, such as
options, warrants and convertible securities outstanding that trade in a public
market. Basic per-share amounts are computed by dividing net income (the
numerator) by the weighted-average number of common shares outstanding (the
denominator). Diluted per-share amounts assume the conversion, exercise or
issuance of all potential common stock unless the effect is to reduce the loss
or increase the income per common share from continuing operations. Statement
No. 128 has been applied for annual and interim periods ending after December
15, 1997, and earnings per share for prior periods have been retroactively
restated, which had no effect on reported earnings per share. Following is a
reconciliation of the denominator:
================================================================================
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Weighted Average number of shares 3,496,634 3,528,792 3,573,713
Potential number of dilutive shares 30,112 18,470 16,306
Total shares to compute -------------------------------
diuluted earnings per share 3,526,746 3,547,262 3,590,019
================================================================================
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair values are based on quoted market
prices or, if not available, on estimates using present value or other
techniques. These assumptions are significantly affected by the assumptions
used, including the discount rates and estimates of future cash flows. In this
regard, fair value estimates cannot be substantiated by comparison to
independant markets and, in many cases, could not be realized in an immediate
settlement. Some financial instruments and all-nonfinancial instruments are
excluded from the disclosures. The aggregate fair value amounts presented do not
represent the underlying value of the Company. The following methods and
assumptions were used by the Bank in estimating the fair value of its financial
instruments:
CASH AND DUE FROM BANKS: Cash and due from banks represent short-term
instruments and fair value is equal to the carrying amounts of the accounts.
INVESTMENT SECURITIES: Investment securities are valued based upon quoted market
prices.
P. 30 of 48
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS:(continued)
LOANS: For variable-rate loans, fair values are based on carrying values. The
fair values for other loans are estimated based upon discounted cash flows,
using current interest rates for similar loans to borrowers with similar credit.
The carrying value of accrued interest approximates fair value.
DEPOSITS: The fair value of demand deposits and variable rate money market and
fixed-term deposits is the carrying value of the deposits. Fair values for fixed
rate certificates is based upon discounted cash flows at current interest rates.
The carrying value of accrued interest payable approximates its current value.
OTHER BORROWINGS: For other borrowings, fair value is based upon discounted cash
flows using the Banks' current incremental borrowing rates for similar borrowing
arrangements.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: Off-balance-sheet instruments are
valued based upon the current fee structure for outstanding letters of credit,
which is not significant. Unfunded loan commitments are not valued since the
loans are generally priced at market at the time of funding.
RECENTLY ISSUED ACCOUNTING STANDARDS: SFAS No. 130, "Reporting Comprehensive
Income," establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. The Statement requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Statement does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement. The Statement requires that an enterprise:
a) classify items of other comprehensive income by their nature in a financial
statement; and b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial position. It is not expected that this
Statement will materially affect the presentation of the Company's comprehensive
income.
<TABLE>
NOTE 2. INVESTMENT SECURITIES
- -------------------------------------------------------------------------------------------------------
The amortized cost and fair value of debt securities available for sale are as follows:
(Amounts in Thousands)
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains (Losses) Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 21,410 $ 113 $ (2) $ 21,521
U.S. Government agencies and corporations 43,570 191 (95) 43,666
States and political subdivisions 39,058 583 (38) 39,603
Other debt securities 2,626 - - - - 2,626
Marketable equity securities 4,227 1,124 (12) 5,339
- -------------------------------------------------------------------------------------------------------
Total $ 110,891 $ 2,011 $ (147) $ 112,755
========= ======== ======== =========
December 31, 1996
- -------------------------------------------------------------------------------------------------------
U.S. Treasury $ 20,886 $ 59 $ (12) $ 20,933
U.S. Government agencies and corporations 44,511 206 (191) 44,526
States and political subdivisions 29,367 330 (109) 29,588
Other debt securities 2,280 - - - - 2,755
Marketable equity securities 387 88 - - 475
- -------------------------------------------------------------------------------------------------------
Total $ 97,431 $ 683 $ (715) $ 97,802
========= ======== ======== =========
</TABLE>
P. 31 of 48
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTE 2. INVESTMENT SECURITIES (continued)
<TABLE>
<CAPTION>
The contractual maturity distribution of investment securities is summarized as follows:
(Amounts in Thousands)
Amortized Fair
December 31, 1997 Cost Value
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 23,554 $ 23,628
Due after one year through five years 30,916 31,255
Due after five years through ten years 15,961 16,220
Due after ten years 469 485
Mortgage-backed securities 33,138 33,202
Other 2,626 2,626
- --------------------------------------------------------------------------------------------
Total $ 106,664 $107,416
======== ========
</TABLE>
The Company's wholly-owned subsidiary Bank is required to pledge assets to
secure repurchase agreements and public deposits as permitted or required by
law. As of December 31, 1997, $29,847,000 of U. S. Treasury and Government
agency securities were pledged against these deposits. For the years ended
December 31, 1997, 1996 and 1995, net gains or losses from the sale of
investment securities were as follows:
<TABLE>
(Amounts in Thousands)
Years ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross gains $ 403 $ 30 $ - -
Gross (losses) (8) (190) - -
- ----------------------------------------------------------------------------------------
Net gains (losses) $ 395 $ (160) $ - -
======== ========= ========
</TABLE>
NOTE 3. LOANS
- --------------------------------------------------------------------------------
The composition of loans is as follows:
(Amounts in Thousands)
As of December 31, 1997 1996
- --------------------------------------------------------------------------------
Commercial, financial and agricultural $ 38,349 $ 32,361
Real estate, construction 19,009 16,440
Real estate, mortgage 252,271 230,534
Loans to individuals 52,638 49,386
All others 2,034 2,018
--------- ---------
$ 364,301 $ 330,739
Less allowance for loan losses (4,589) (3,788)
--------- ---------
Net loans $ 359,712 $ 326,951
========= =========
Changes in the allowance for loan losses are as follows:
(Amounts In Thousands)
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Balance, beginning $ 3,788 $ 3,602 $ 3,354
Allowance related to acquired bank 671 - - - -
Provision charged to operating income 588 591 366
Recoveries 351 72 157
Loans charged off (809) (477) (275)
------- ------- -------
Balance, ending $ 4,589 $ 3,788 $ 3,602
======= ======= =======
P. 32 of 48
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Information for impaired loans as of and for the year ended December 31, 1997,
is as follows:
(Amounts in Thousands)
1997 1996
- --------------------------------------------------------------------------------
Loan receivable for which there is a related
allowance for credit losses $ 924 $ 559
Loan receivable for which there is no related
allowance for credit losses - - - -
- --------------------------------------------------------------------------------
Total impaired loans $ 924 $ 559
======= ======
Related allowance for credit losses $ 162 $ 88
Average balance (based on month-end balances) 509 317
Interest income recognized 20 62
NOTE 4. BANK PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
Bank premises and equipment are as follows:
(Amounts in Thousands)
As of December 31, 1997 1996
- --------------------------------------------------------------------------------
Land $ 1,927 $ 1,881
Buildings 12,408 11,212
Furniture and equipment 7,071 6,118
- --------------------------------------------------------------------------------
$ 21,406 $ 19,211
Accumulated depreciation (8,521) (7,129)
- --------------------------------------------------------------------------------
$ 12,885 $ 12,082
======== ========
NOTE 5. DEPOSITS
- --------------------------------------------------------------------------------
A summary of deposits is as follows:
(Amounts in Thousands)
As of December 31, 1997 1996
- --------------------------------------------------------------------------------
Demand $ 59,244 $ 47,603
Interest-bearing transaction accounts 63,038 56,762
Savings 105,697 100,738
Time deposits of less than $100,000 200,462 163,886
Time deposits of $100,000 or more 30,374 26,418
- --------------------------------------------------------------------------------
$458,815 $395,407
======== ========
NOTE 6. FEDERAL HOME LOAN BANK ADVANCES AND NOTE PAYABLE
- --------------------------------------------------------------------------------
The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB). As of
December 31, 1997, the Bank held $2,058,000 of FHLB stock. Advances from the
FHLB are collateralized by 1-4 unit residential mortgages equal to 150% of total
outstanding notes. A summary of FHLB advances as of December 31, 1997, is as
follows:
(Amounts In Thousands)
Amount Due Weighted Average Rate
- --------------------------------------------------------------------------------
1 to 3 months $ 3,568 5.90%
4 to 6 months 2,269 5.40
7 to 12 months 638 6.20
1 to 5 years 6,260 6.16
- --------------------------------------------------------------------------------
$ 12,735 5.95%
========== ====
Notes Payable to individuals totaled $5,453,000 as of December 31, 1997. The
notes bear interest at 6.50%, are unsecured, and are due as follows:
Due in 1998 Due in 1999 Due in 2000 Due in 2001
- --------------------------------------------------------------------------------
Amounts maturing in thousands $ 1,812 $ 1,811 $ 1,074 $ 756
- --------------------------------------------------------------------------------
P. 33 of 48
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
<TABLE>
<CAPTION>
NOTE 7. INCOME TAXES
- --------------------------------------------------------------------------------
The provision for income tax expense is made up of the following components:
(Amounts in Thousands)
<S> <C> <C> <C>
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Current:
Federal $2,422 $2,023 $1,308
State 487 418 304
Deferred - - 93 139
- --------------------------------------------------------------------------------
$2,909 $2,534 $1,751
====== ====== ======
</TABLE>
The effective income tax rate is different than the statutory federal income tax
rate as follows:
(Amounts in Thousands)
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Income tax at a statutory rate of 34% $3,262 $2,882 $2,149
Tax exempt interest, net of related
disallowed interest expense (641) (659) (668)
State income taxes, net of federal benefit 321 276 201
Other (33) 35 69
- --------------------------------------------------------------------------------
$2,909 $2,534 $1,751
====== ====== ======
Deferred income tax liabilities and assets arose from the following temporary
differences:
(Amounts in Thousands)
As of December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Deferred income tax assets:
Allowance for loan losses 1,225 1,037 941
Deferred compensation 233 264 287
Certain accrued expenses 121 125 109
Other 20 - - - -
- --------------------------------------------------------------------------------
$1,599 $1,426 $1,337
------ ------ ------
Deferred income tax liabilities:
Debt securities available for sale $ 695 $ 138 $ 166
Property and equipment 272 274 263
Pension plan asset 1,170 1,001 870
Net deferred loan fees 73 55 35
Other - - 93 71
- --------------------------------------------------------------------------------
$2,210 $1,561 $1,405
------ ------ ------
Net deferred income tax liability $ (611) $ (135) $ (68)
====== ====== ======
The net change in the deferred income taxes is reflected in the financial
statements as follows:
(Amounts in Thousands)
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Statement of income $ - - $ 93 $ 139
Statement of stockholders' equity 557 (26) 1,204
Adjustments due to business combination (81) - - - -
- --------------------------------------------------------------------------------
$ 476 $ 67 $ 1,343
====== ======== =======
P. 34 of 48
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTE 8. EMPLOYEE BENEFIT PLANS
- --------------------------------------------------------------------------------
The Company sponsors a non-contributory defined benefit pension plan for
substantially all employees hired prior to March 1, 1995. Pension benefits vest
after five years of service and are based on years of service and average final
salary. The Company's funding policy is to make contributions based upon an
acturarially-determined cost method; however, no contributions to the plan were
required for 1997, 1996 and 1995. The following items are the components of the
net pension credit:
(Amounts in Thousands)
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Service cost-benefits earned during the year $ 90 $ 104 $ 90
Interest cost on projected benefit obligation 172 230 199
Actual return on plan assets (1,693) (1,025) (1,475)
Net amortization and deferral 1,003 323 889
- --------------------------------------------------------------------------------
Net pension (credit) $ (428) $ (368) $ (297)
====== ====== =======
The funded status of the plan is as follows:
<TABLE>
(Amounts in Thousands)
<S> <C> <C> <C>
As of December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Actuarial present value of benefits for service rendered to date:
Accumulated benefits based on salaries to date, including vested
benefits 1997 $1,693; 1996 $1,691; 1995 $2,082 $(1,721) $(1,727) $(2,122)
Effect of projected compensation increases (562) (794) (514)
- ------------------------------------------------------------------------------------------------
Projected benefit obligation $(2,283) $(2,521) $(2,636)
Fair value of plan assets, invested in equities and bonds 8,915 7,423 8,152
- ------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation $ 6,632 $ 4,902 $ 5,516
Unrecognized net asset being recognized over 18.7 years (721) (829) (936)
Unrecognized net gain on assets and projected benefit obligation (2,193) (845) (1,720)
- ------------------------------------------------------------------------------------------------
Prepaid pension cost $ 3,718 $ 3,228 $ 2,860
======= ======= =======
</TABLE>
The discount rate used to determine the actuarial present value of the projected
benefit obligation as of December 31, 1997, 1996 and 1995, was 8.25%. The
expected long-term rate of return on plan assets as of December 31, 1997, 1996
and 1995, used in determining net pension expense was 7.50%. The assumed rate of
increase in future compensation levels was 4.50%.
The Company maintains a defined contribution 401(k) plan covering all employees
fulfilling minimum age and service requirements. Employee contributions to the
plan are optional. Employer contributions are made to the plan equal to 1% of
the employee's salary plus a percentage of employee contributions. The expense
for this plan was $282,000, $256,000 and $280,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
The Bank has a salary continuation plan for certain employees which provides for
annual payments of various amounts upon the employee's retirement or death. The
Bank is providing for these benefits by charges to operating expense during the
period the respective employee attains full eligibility. The amount charged to
operating expenses during the years ended December 31, 1997, 1996 and 1995, was
$57,000, $69,000 and $75,000 respectively. The Bank carries life insurance
policies with face amounts totaling $875,000 to fund the salary continuation
plan. The cash value of these policies was $485,000 at December 31, 1997.
A nonqualified retirement plan provides a portion of the pension plan benefits
to the highly compensated employees of the Bank. The pension plan expense
associated with the nonqualified plan totaled $76,000, $76,000, and $73,000 for
the years ended December 31, 1997, 1996, and 1995.
The Company has a stock option plan for certain officers and directors whereby
the Board of Directors authorizes options for shares that may be granted. As of
December 31, 1997, 133,450 shares were reserved for future grants. A stock
option committee has granted options at prices equal to the fair value of the
stock on the dates of the grants. All options are for a term of five yers and
become exercisable in full or in part within one year of the date granted.
Grants under this plan are accounted for following Accounting Principles Board
(APB) Opinion No. 25 and related Interpretations. No compensation expense has
been charged to expense using the intrinsic value based method as prescribed by
APB No. 25. Had compensation expense been determined based on the grant date
fair values of the awards, as prescribed by SFAS No. 123, reported net income
and basic earnings per common share would have been as follows:
P. 35 of 48
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTE 8. EMPLOYEE BENEFIT PLANS (continued)
<TABLE>
<S> <C> <C> <C>
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------
Pro forma net income (in thousands) $ 6,645 $ 5,902 $ 4,563
Pro forma earnings per share:
Basic $ 1.90 $ 1.67 $ 1.27
Diluted $ 1.88 $ 1,66 $ 1.26
- --------------------------------------------------------------------------------------
</TABLE>
The pro forma effects of applying SFAS No. 123 are not indicative of future
amounts since, among other reasons, the pro forma requirements of SFAS No. 123
have been applied only to options granted after December 31, 1994.
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1997, 1996 and 1995, respectively: dividend rate of
2.9% for all three years; price volatility of 7.91% for all years; risk-free
interest rates of 6.50%, 5,56% and 6.63% for 1997, 1996 and 1995; and expected
lives of 3.5 years for all years.
A summary of the Company's stock option plan is as follows:
Weighted Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Outstanding at Janurary 1, 1995 135,431 $ 13.86
Granted 34,650 16.31
Exercised (18,131) 11.89
Forfeited (15,000) 15.49
- --------------------------------------------------------------------------------
Outstanding at December 31, 1995 136,950 14.56
Granted 22,050 18.51
Exercised (31,800) 11.67
Canceled (11,025) 16.92
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 116,175 15.87
Granted 53,100 21.75
Exercised (25,800) 20.67
Canceled (1,650) 14.34
- --------------------------------------------------------------------------------
Outstanding at December 31, 1997 141,825 18.57
======= ======
1997 1996 1995
- --------------------------------------------------------------------------------
Number of options exercisable, end of year 78,600 91,425 94,500
Weighted-average fair value per option of
options granted during the year $ 2.73 $ 2.72 $ 2.75
- --------------------------------------------------------------------------------
Other pertininent information related to the options outstanding at December 31,
1997, is as follows:
Number Remaining Number
Exercise Price Outstanding Contractual Life Exercisable
- --------------------------------------------------------------------------------
$14.00...............................2,100..........1 Month............2,100
$14.17..............................13,350..........1 Month...........13,350
$17.00..............................25,200.........13 Months..........24,450
$16.75...............................9,450.........25 Months...........9,450
$16.08..............................17,625.........30 Months..........16,125
$17.00..............................10,500.........37 Months..........10,500
$20.17..............................10,500.........47 Months...........2,625
$20.83..............................11,550.........49 Months.............- -
$22.00..............................17,700.........39 Months.............- -
$22.00..............................22,800.........51 Months.............- -
$22.33...............................1,050.........53 Months.............- -
- --------------------------------------------------------------------------------
Total..............................141,825............................78,600
======= ======
P. 36 OF 48
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTE 9. ACQUISITION OF A BUSINESS
- --------------------------------------------------------------------------------
Effective April 8, 1997, the Company acquired for cash and notes payable all of
the outstanding shares of West Branch Bancorp, Inc., which held 100% of the
common stock of West Branch State Bank. The total acquisition cost was
$7,604,038. The excess of the acquisition cost over fair value of the net assets
acquired was $2,405,690 and is being amortized over fifteen years by the
straight-line method. The acquisition was accounted for as a purchase and the
results of operations since the date of acquisition is included in the Company's
statement of income.
Unaudited proforma net income for 1997, 1996, and 1995, as though West Branch
Bancorp, Inc. had been acquired as of January 1, 1995 is not significantly
different than reported net income of the Company after consideration of
goodwill amortization and interest on borrowed funds.
NOTE 10. RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
Certain directors of the Company and the Bank and companies with which they are
affiliated, as well as certain principal officers of the Company and its
affiliate Bank, are customers of and have banking transactions with the Bank in
the ordinary course of business. In the case of loans and extensions of credit,
indebtedness has been incurred on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons. The following is an analysis of the changes
in the loans to related parties during the years ended December 31, 1997 and
1996.
(Amounts in Thousands)
Years Ended December 31, 1997 1996
- --------------------------------------------------------------------------------
Beginning balance $ 776 $ 1,666
Additions 1,515 233
Collections (364) (1,123)
- --------------------------------------------------------------------------------
Ending Balance $ 1,927 $ 776
======= =======
NOTE 11. REGULATORY CAPITAL REQUIREMENTS, RESTRICTIONS ON SUBSIDIARY
DIVIDENDS, AND CASH RESTRICTIONS
- --------------------------------------------------------------------------------
The Company and the Bank are required to maintain minimum amounts of capital to
total risk-weighted assets, as defined by the banking regulators. A comparison
of the Banks' capital as of December 31, 1997, with the minimum regulatory
requirements is presented below:
Actual Minimum Regulatory
Capital Requirement
- --------------------------------------------------------------------------------
Total Risk-Based Capital 14.42% 8.00%
Tier I Risk-Based Capital 13.17% 4.00%
Leverage Ratio 8.88% 4.00%
- --------------------------------------------------------------------------------
At December 31, 1997, the Bank met the capital criteria required by the "well
capitalized" definition. The ability of the Company to pay dividends to its
stockholders is dependent upon dividends paid to it by its subsidiary Bank. The
Bank is subject to certain statutory and regulatory restrictions on the amount
it may pay in dividends. To maintain acceptable capital ratios in the subsidiary
Bank, certain of its retained earnings is not available for the payment of
dividends. To maintain the minimum of total risk-based capital to risk-weighted
assets to qualify as "well capitalized," retained earnings which could be
available for the payment of dividends to the Company totaled approximately
$15,000,000 as of December 31, 1997.
The Bank is required to maintain reserve balances in cash or with the Federal
Reserve Bank. Reserve balances totaled $859,000 and $888,000 at December 31,
1997 and 1996, respectively.
P. 37 OF 48
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
<TABLE>
<CAPTION>
NOTE 12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- ------------------------------------------------------------------------------------------------
(Amounts in Thousands, Except Per Share Data)
<S> <C> <C> <C>
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Cash payments for:
Interest paid to depositors, on note payable, on federal
funds purchased and securities sold under agreements to
repurchase, and other borrowings $18,093 $16,486 $15,541
Income taxes 2,331 1,867 1,474
Noncash transactions:
Net unrealized gains (losses) on debt securities 1,494 (73) 3,228
Deferred income taxes on unrealized gains (losses) on
debt securities 557 (26) 1,204
Investment securities transferred from held to maturity portfolio
to available for sale portfolio, at fair value - - - - 33,616
Acquisition of certain assets and liabilities from West Branch
Bancorp, Inc.:
Assets acquired:
Cash and cash equivalents $ 996 - - - -
Federal funds sold 1,700 - - - -
Investment securities 14,690 - - - -
Loans 21,076 - - - -
Goodwill 2,406 - - - -
Other assets 893
--------------------------
$ 41,760 - - - -
Liabilities assumed
Deposits (32,789) - - - -
Notes payable to sellers (5,543) - - - -
Federal Home Loan Bank advances (1,000) - - - -
Other liabilities (367) - - - -
--------------------------
Cash purchase price $ 2,151 - - - -
- ------------------------------------------------------------------------------------------------
</TABLE>
NOTE 13. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Bank is a party to
financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the consolidated balance sheet. The Bank'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 amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments. A summary of the Bank's commitments
at December 31, 1997 and 1996, is as follows:
<TABLE>
(Amounts in Thousands)
December 31, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $64,805 $49,538
Standby letters of credit 4,625 4,398
- --------------------------------------------------------------------------------
$69,070 $53,756
======= =======
</TABLE>
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. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the party. Collateral held
varies, but may include accounts receivable, crops, livestock, inventory,
property and equipment, residential real estate and income-producing commercial
properties. Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held varies as
specified above and is required in instances which the Bank deems necessary.
CONCENTRATIONS OF CREDIT RISK: Substantially all of the Bank's loans,
commitments to extend credit, and standby letters of credit have been granted to
customers in the Bank's market area. Investments in securities issued by state
and political subdivisions involve diverse governmental entities. The
concentrations of credit by type of loan are set forth in Note 3. Standby
letters of credit were granted primarily to commercial borrowers. A substantial
P. 38 OF 48
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
CONCENTRATIONS OF CREDIT RISK:(continued)
portion of the debtors' ability to honor their loans is dependent upon economic
conditions in the Iowa City/Cedar Rapids and surrounding area. Investment
securities of Iowa political subdivisions totaled $14,785,000 as of December 31,
1997. No individual municipality exceeded $750,000.
Year 2000 Plans: Information technology experts believe that many data
processing application systems could fail or improperly perform as a result of
erroneous calculations or data integrity problems if they are unable to process
date information beyond December 31, 1999; an issue known as Year 2000. The
Company is heavily dependent upon computer processing and has addressed this
issue through the implementation of a plan which entails identification, review
and validation of all critical systems and vendors. The Company anticipates that
this process will be essentially completed during 1998, and management
anticipates that the associated expenses will not be material to the financial
statements of the Company.
NOTE 14. PARENT COMPANY ONLY FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
The following is condensed financial information of First Financial
Bancorporation (parent company only):
BALANCE SHEETS
(Amounts in Thousands)
December 31, 1997 1996
- --------------------------------------------------------------------------------
Assets
Cash $10,742 $ 4,021
Investment in subsidiaries
Investment securities available for sale 47,148 47,674
(cost 1997 $4,627; 1996 $789) 5,744 887
Accrued interest receivable 26 18
Other assets 38 - -
Income taxes receivable - - 13
- --------------------------------------------------------------------------------
$63,698 $52,613
======= =======
Liabilities and Stockholders' Equity
Liabilities:
Income Taxes Payable $ 15 $ - -
Other Liabilities 233 37
Deferred income taxes 417 - -
Notes Payable 5,453 - -
Stockholders' equity:
Capital stock, common 4,361 2,914
Additional paid-in capital 2,284 2,606
Retained earnings 49,766 46,824
Unrealized gain on debt securities, net 1,169 232
- --------------------------------------------------------------------------------
$63,698 $52,613
======= =======
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
(Amounts in Thousands)
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income, dividends received from subsidiary $15,329 $ 7,433 $ 2,252
Interest income 91 31 28
Gain on sale of equity securities 332 - - - -
Operating expenses 425 116 54
Interest expense on notes payable 260 - - - -
- ------------------------------------------------------------------------------------------------
Income before income taxes and equity in subsidiary's
undistributed income $15,067 $ 7,348 $ 2,226
Income taxes (credits) (89) (24) (10)
- ------------------------------------------------------------------------------------------------
$15,156 $ 7,372 $ 2,236
Equity in subsidiary's undistributed income (8,473) (1,456) 2,334
- ------------------------------------------------------------------------------------------------
Net Income $ 6,683 $ 5,916 $ 4,570
======= ======= =======
</TABLE>
P. 39 of 48
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Amounts in Thousands)
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 6,683 $ 5,916 $ 4,570
Noncash items included in net income:
Undistributed earnings of subsidiaries 8,473 1,456 (2,334)
Changes in account with subsidiaries 8 (13) (1)
(Increase) in accrued interest receivable (8) (8) (10)
Other (287) (1) 1
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities $14,889 $ 7,350 $ 2,226
------- ------- -------
Cash flows (used in) investing activities:
Acquisition of subsidiary $(2,151) - - - -
Available for sale securities - purchases (4,950) $ (388) $ (401)
Available for sale securities - sales 1,549 - - - -
------- ------- -------
Cash flows (used in) financing activities:
Stock options exercised $ 342 $ 308 $ 216
Common stock redeemed (675) (1,925) (69)
Dividends paid (2,283) (1,946) (1,811)
- ------------------------------------------------------------------------------------------------
Net cash (used in) financing activities $(2,616) $(3,563) $(1,664)
------- ------- -------
Increase in cash $ 6,721 $ 3,399 $ 161
Cash balance:
Beginning 4,021 622 461
- ------------------------------------------------------------------------------------------------
Ending $10,742 $ 4,021 $ 622
======= ======= =======
</TABLE>
NOTE 15: FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
As of December 31, 1997 As of December 31, 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------
Cash and due from banks $ 21,449 $ 21,449 $ 20,949 $ 20,949
Federal funds sold 27,925 27,925 - - - -
Available for sale securities 112,755 112,755 97,802 97,802
Loans:
Variable rate 172,351 172,351 149,538 160,452
Fixed rate 191,950 198,123 181,201 170,287
Accrued interest receivable 3,730 3,730 3,179 3,179
Deposits:
Non interest-bearing 59,244 59,244 47,603 47,603
Interest bearing:
Variable rate 174,814 174,814 172,454 172,454
Fixed rate 224,757 222,728 175,350 178,062
Federal Home Loan Bank advances
and notes payable 18,188 18,245 12,355 12,344
Accrued interest payable 2,153 2,153 1,516 1,516
Off-Balance-Sheet Instruments Face Amount Fair Value Face Amount Fair Value
- -------------------------------------------------------------------------------
Loan commitments $ 64,805 $ - - $ 49,358 $ - -
Letters of credit 4,265 - - 4,398 - -
- -------------------------------------------------------------------------------
The Registrant does not meet the requirements of item 302 of Regulation SK and
therefore has not included the supplemental financial information required by
that item.
P. 40 of 48
<PAGE>
INDEPENDENT AUDITOR'S REPORT
- ----------------------------
To the Board of Directors
First Financial Bancorporation
Iowa City, Iowa
We have audited the accompanying consolidated balance sheets of First
Financial Bancorporation and subsidiary as of December 31, 1997 and 1996, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 Bancorporation and subsidiary as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
//s//McGladrey & Pullen, LLP
Iowa City, Iowa
February 17, 1998
P. 41 of 48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the Proxy Statement dated March 6, 1998, for the
Annual Meeting of the Shareholders to be held on April 7, 1998, under the
captions "Nominees for Election as Directors" and "Executive Compensation" and
"Compensation of Directors" is incorporated into this Item 10 by this reference
thereto, except that the Board Compensation Committee Report on Executive
Compensation and Performance Table set forth in said Proxy Statement are not
incorporated herein.
DIRECTORS AND OFFICERS As of December 31, 1997
- --------------------------------------------------------------------------------
FIRST FINANCIAL BANCORPORATION
Board of Directors Officers
- ---------------------------------------------- ------------------------
Larry D. Ward, Chairman Robert M. Sierk
Aliber Distinguished Professor, College of Law President & Chief Executive
The University of Iowa, Iowa City, Iowa Officer
John. R. Balmer A. Russell Schmeiser
Chief Executive Officer Executive Vice President &
Plumbers Supply Company, Iowa City, Iowa Chief Operating Officer
Fritz L. Duda
Owner
Fritz Duda Company, Dallas, Texas
Rober J. Latham
President
Latham & Associates, Inc., Cedar Rapids, Iowa
Ralph J. Russell
President & Chief Executive Office
Howard R. Green Company, Cedar Rapids, Iowa
A. Russell Schmeiser
Executive Vice President & Chief Operating Officer
First Financial Bancorporation, Iowa City, Iowa
Robert M. Sierk
President & Chief Executive Officer
First National Bank Iowa, Iowa City, Iowa
Stephen H. Wolken, M.D.
Partner
Eye Physicians & Surgeons, LLP, Iowa City, Iowa
- --------------------------------------------------------------------------------
FIRST NATIONAL BANK IOWA
Board of Directors Executive Officers
- ------------------------------------------------ ------------------------
Larry D. Ward, Chairman Robert M. Sierk
Aliber Distinguished Professor, College of Law President & Chief Executive
The University of Iowa, Iowa City, Iowa Officer
John R. Balmer Gary L. Bartlett
Chief Executive Officer President, Cedar Rapids
Plumbers Supply Company, Iowa City, Iowa Region
Gary L. Bartlett Lanny J. Benishek
President, Cedar Rapids Region Senior Vice President &
First National Bank Iowa, Iowa City, Iowa Senior Loan Officer
Daniel W. Collins William H. Burger
Henry B. Tippie Professor of Accounting Senior Vice President &
College of Business Administration Senior Trust Officer
The University of Iowa, Iowa City, Iowa
Wendy L. Dunn Lorie E. Schweer
Professor of Pyschology & Director of Assessment Senior Vice President,
& Planning Administration
Coe College, Cedar Rapids, Iowa
Robert J. Latham Kathrine L. Sigsbee
President Senior Vice President,
Latham & Associates, Inc., Cedar Rapids, Iowa Retail Banking
p. 42 of 48
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Ralph J. Russell
President and CEO
Howard R. Green Company, Cedar Rapids, Iowa
A. Russell Schmeiser
Executive Vice President & COO
First Financial Bancorpoartion, Iowa City, Iowa
Richard J. Schwab
Vice President & General Manager
Information Technology Division
National Computer Systems, Inc., Iowa City, Iowa
Robert M. Sierk
President & CEO
First National Bank Iowa, Iowa City, Iowa
David J. Skorton, M.D.
Vice President for Research
The University of Iowa, Iowa City, Iowa
John P. Wall
Farmer
Iowa City, Iowa
Stephen H. Wolken, M.D.
Partner
Eye Physicians & Surgeons, LLP, Iowa City, Iowa
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the Proxy Statement dated March 6, 1998, for the
Annual Meeting of the Shareholders to be held on April 7, 1998, under the
caption "Executive Compensation" and "Compensation of Directors" is incorporated
into this Item 11 by this reference thereto, except that the Board Compensation
Committee Report on Executive Compensation and Performance Table set forth in
said Proxy Statement are not incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the Proxy Statement dated March 6, 1998, for the
Annual Meeting of the Shareholders to be held on April 7, 1998, under the
captions "Voting Securities and Principal Holders Thereof," "Security Ownership
of Directors and Officers," and "Nominees for Election as Directors" are
incorporated into this Item 12 by this reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the Proxy Statement dated March 6, 1998, for the
Annual Meeting of the Shareholders to be held on April 7, 1998, under the
caption "Interest of Management and Others in Certain Transactions" is
incorporated into this Item 13 by this reference thereto.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The fiscal 1997 and 1996 consolidated financial statements of First
Financial Bancorporation, together with the report thereon of
McGladrey & Pullen, LLP, dated February 17, 1998, are included on pages
25 to 41 in Item 8 of this report.
(2) Financial Statements Schedules
All schedules are omitted because they are not applicable or not
required or because the required information is included in the
consolidated financial statements or notes thereof.
(3) See Exhibit Index on page 45.
(b) Reports on Form 8-K
The Registrant did not file a Form 8-K during the last three calendar months of
1997.
(c) See pages 46 and 47 of 47.
(d) None.
P. 43 of 48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 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.
First Financial Bancorporation by:
Date: March 25, 1998 By \\s\\Robert M. Sierk
-------------- --------------------------------------
Robert M. Sierk, President and
Chief Executive Officer and Director
Date: March 25, 1998 By \\s\\A. Russell Schmeiser
-------------- --------------------------------------
A. Russell Schmeiser, Executive Vice President and
Chief Operating Officer and Director
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: March 25, 1998 By \\s\\John R. Balmer
-------------- --------------------------------------
John R. Balmer, Director
Date: March 25, 1998 By \\s\\Robert J. Latham
-------------- --------------------------------------
Robert J. Latham, Director
Date: March 25, 1998 By \\s\\Ralph J. Russell
-------------- --------------------------------------
Ralph J. Russell, Director
Date: March 25, 1998 By \\s\\Larry D. Ward
-------------- --------------------------------------
Larry D. Ward, Director, Chairman of the Board
Date: March 25, 1998 By \\s\\Stephen H. Wolken, M.D.
-------------- --------------------------------------
Stephen H. Wolken, M.D., Director
P. 44 of 48
<PAGE>
EXHIBIT INDEX
The following exhibits are filed herewith or incorporated by reference.
(Documents indicated by an * are incorporated herein by reference.)
Page No. Of
Exhibit No. Description of Exhibits Form 10-K
3a Composite Restatement of Articles of Incorporation for *
First Financial Bancorporation as of May 5, 1988,
Exhibit I to Form 10-Q dated August 12, 1988, for the
quarter ended June 30, 1988.
3b Composite Restatement of the Corporate Bylaws of *
First Financial Bancorporation as of June 21, 1988,
Exhibit II to Form 10-Q dated August 12, 1988, for the
quarter ended June 30, 1988.
4 Instruments defining the rights of security holders, *
including indentures. See "Description of the Common
Stock of the Holding Company" at page 30 of Amendment
No. 1 to the Registration Statement Form S-4 filed
under Registration Number 33-893 dated November 12,
1985.
10a Purchase and Assumption Agreement between the Cedar *
Rapids Bank and RTC. Pages 7-97 of Current Report Form
8-K dated February 20, 1991.
10b Indemnity Agreement between the Cedar Rapids Bank and *
RTC. Pages 98-121 of Current Report Form 8-K dated
February 20, 1991.
10c Continuing Guaranty to the RTC given by the Registrant. *
Pages 122-130 of Current Report Form 8-K dated
February 20, 1991.
10d (1) First Financial Bancorporation Stock Option Plan. *
As adopted by the shareholders on April 8, 1997, 1,559,247
shares voted for the adoption of the Plan, 141,989 shares
voted against and 4090 shares abstained. Total outstanding
voting shares as of the record date of February 28, 1997
was 2,336,894. This Plan was filed as an Exhibit on pages
16 to 23 of Registrant's March 7, 1997 Proxy Statement,and
is incorporated herein by reference.
10e (2) Salary Continuation Plan for executive officers of *
the Iowa City Bank. As amended and restated in its
entirety on January 12, 1993. Pages 38-43 of Form 10-K
dated March 26, 1993.
11 Statement re computation of basic and diluted earnings
per share 46
21 Subsidiary of the Registrant 47
(1)Directors, the named executive officers of the
Registrant and the executive officers of First National
Bank Iowa participate in this Plan.
(2)Certain named executive officers of the Registrant and
certain executive officers of First National Bank Iowa
participate in this Plan.
23a Consent of Independent Certified Public Accountants dated
March 30, 1998 filed with this Form 10-K dated March 31,1998. 48
27** Financial Data Schedule as of December 31, 1997.
**Filed herewith.
P. 45 of 48
<PAGE>
FIRST FINANCIAL BANCORPORATION
AND SUBSIDIARY
(FIRST NATIONAL BANK IOWA)
EXHIBIT 11
STATEMENT RE COMPUTATION OF BASIC AND DILUTED
EARNINGS PER SHARE
Year Ended December 31,
1997 1996 1995
----------- ----------- -----------
Shares of common stock, beginning 3,497,118 3,574,862 3,560,889
=========== =========== ===========
Shares of common stock, ending 3,488,680 3,497,118 3,574,862
=========== =========== ===========
Computation of weighted average
number of basic and diluted shares:
Basic shares outstanding at the
beginning of the year 3,497,118 3,574,862 3,560,889
Weighted average number of basic
shares issued 23,032 29,193 16,640
Weighted average number of basic
shares redeemed (23,516) (75,263) (3,816)
----------- ----------- -----------
Weighted average number of shares used
to compute basic earnings per share 3,496,634 3,528,792 3,573,713
Potential number of diluted shares
related to stock option plan 30,112 18,470 16,306
----------- ----------- -----------
Weighted average number of shares used
to compute diluted earnings per
share 3,526,746 3,547,262 3,590,019
=========== =========== ===========
Net Income $ 6,683,000 $ 5,916,000 $ 4,570,000
=========== =========== ===========
Basic earnings per share $ 1.91 $ 1.68 $ 1.28
=========== =========== ===========
Diluted earnings per share $ 1.90 $ 1.67 $ 1.27
=========== =========== ===========
P. 46 of 48
<PAGE>
FIRST FINANCIAL BANCORPORATION
SUBSIDIARY OF THE REGISTRANT
EXHIBIT 21
Name Of Subsidiary Place of Incorporation
- ------------------------------------ -----------------------------------
First National Bank Iowa National Banking Association of the
United States of America
P. 47 of 48
<PAGE>
FIRST FINANCIAL BANCORPORATION
EXHIBIT 23(a) - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
First Financial Bancorporation
Iowa City, Iowa
We consent to the incorporation by reference or our report dated February 17,
1998, with respect to the consolidated financial statements of First Financial
Bancorporation and subsidiary included in the Annual Report on Form 10-K of
First Financial Bancorporation for the year ended December 31, 1997 in
Registrant Statement No. 333-34427 on Form S-8 filed August 27, 1997.
//s//McGladrey & Pullen, LLP
McGLADREY & PULLEN, LLP
Iowa City, Iowa
March 30, 1998
P. 48 of 48
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 21,449
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 27,925
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 112,755
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 364,301
<ALLOWANCE> 4,589
<TOTAL-ASSETS> 550,053
<DEPOSITS> 458,815
<SHORT-TERM> 10,028
<LIABILITIES-OTHER> 5,442
<LONG-TERM> 12,735
0
0
<COMMON> 4,361
<OTHER-SE> 53,219
<TOTAL-LIABILITIES-AND-EQUITY> 550,053
<INTEREST-LOAN> 29,182
<INTEREST-INVEST> 6,217
<INTEREST-OTHER> 1,309
<INTEREST-TOTAL> 36,708
<INTEREST-DEPOSIT> 17,371
<INTEREST-EXPENSE> 18,730
<INTEREST-INCOME-NET> 17,978
<LOAN-LOSSES> 588
<SECURITIES-GAINS> 395
<EXPENSE-OTHER> 16,183
<INCOME-PRETAX> 9,592
<INCOME-PRE-EXTRAORDINARY> 9,592
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,683
<EPS-PRIMARY> 1.91
<EPS-DILUTED> 1.90
<YIELD-ACTUAL> 7.86
<LOANS-NON> 924
<LOANS-PAST> 1,090
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,788
<CHARGE-OFFS> 809
<RECOVERIES> 351
<ALLOWANCE-CLOSE> 4,589
<ALLOWANCE-DOMESTIC> 4,589
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
