ITEM 1. BUSINESS
CORPORATE ORGANIZATION AND STRUCTURE. First Financial Bancorporation (Registrant) is an Iowa business corporation organized on October 8, 1985, under the Iowa Business Corporation Act. The Registrant is a two-bank holding company engaged in the business of commercial banking through its wholly-owned subsidiaries, the First National Bank, Iowa City, Iowa (Iowa City Bank), and First National Bank, Cedar Rapids, Iowa (Cedar Rapids Bank). The Registrant formed the Cedar Rapids Bank on February 1, 1991. On February 8, 1991, the Company acquired approximately $45,000,000 of assets and liabilities of the Cedar Rapids, Iowa, branch office of the failed American Federal Savings Association from the Resolution Trust Corporation and began conducting commercial banking business on that date, at 200 First Street SW, Cedar Rapids, Iowa 52404. The Registrant has conducted no other activities. All operations of the Registrant are conducted within the state of Iowa.
Both banks are national banking associations incorporated and operating under the laws of the United States engaged in the commercial banking business, with trust powers, in Iowa City, Johnson County, Iowa, and Cedar Rapids, Linn County, Iowa. Both banks' services are offered to individuals, businesses, governmental units and institutional customers. The Iowa City Bank's primary market area is Iowa City, Coralville, North Liberty and surrounding areas. The Cedar Rapids Bank's primary market area is Cedar Rapids and surrounding areas. Both banks are actively engaged in many areas of commercial banking, including the acceptance of demand, savings and time deposits; making commercial, real estate, agricultural, consumer and credit card loans; maintaining night and safe deposit facilities; and performing collection, exchange, escrow and other banking services tailored for individual customers. The trust department within each bank administers estates, personal trusts, conservatorships, pension and profit sharing funds, and in connection therewith provides property management, brokerage services, investment advisory and custodial services for individuals, corporations and not-for-profit organizations. Each bank provides access for its customers to computer services for payroll accounting and for the numerical sorting of customer checks. Additionally, the Iowa City Bank provides data processing for both itself and for the Cedar Rapids Bank through the computer center located in the main facility in Iowa City.
The Iowa City Bank's primary geographic service area falls within a ten-mile radius of the center of Iowa City, Iowa, and consists of a population of approximately 100,000 people. The business community of Iowa City has a strong agricultural base, but is significantly more diversified with strong manufacturing and retail sectors, a growing regional 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 Cedar Rapids Bank's primary geographic service area falls within a fifteen-mile radius of the center of Cedar Rapids, Iowa, and consists of a population of approximately 179,000 people. The business community of Cedar Rapids is comprised of retail, manufacturing and financial businesses, and is especially competitive in terms of commercial banking services.
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 local market areas. By contrast, secondary competitors are often regional or even nationwide in character, and vary widely depending on the product line in question. In the case of deposits, secondary competitors 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, and in some cases, agencies of the federal government.
In the case of both banks, the largest local market share belongs to commercial banks; thrifts and credit unions also hold significant but smaller portions of the market. At the south end of the corridor, the Iowa City Bank has a significant share of the deposit and loan market, due in part to its 60+ year presence in the community. Conversely, the Cedar Rapids Bank, in existence for less than a decade, has a comparatively smaller share of the north corridor market. The Cedar Rapids and Iowa City markets do differ in the respect that the former, aside from being much larger in size, is dominated by several large non-local banks, while the over-whelming share of the latter market is held by locally-owned, independent financial institutions.
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ITEM 1. BUSINESS (continued)
CORPORATE ORGANIZATION AND STRUCTURE (continued)
In recent years, the banking environment of the entire corridor has been extremely 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.
These highly competitive local market trends are expected to continue in the foreseeable future, due in part to the demograpic characteristics which make the area such an attractive banking market, as well as to a regulatory environment which becoming generally less restrictive in terms of geographic expansion and branching.
With the exception of real estate lending activities during the period of March through October, neither bank's business is seasonal in nature and neither depends upon a single person or a few persons as the source of a material portion of its individual deposits or loans. The management of neither bank has reason to believe that the loss of the deposits or the loan activities of any single person, or of a few persons, would have a material adverse effect on either bank's operations or erode either's deposit base or loan portfolios.
Neither bank has experienced a material adverse effect on its business as a result of defaults of any specific industry concentrations and neither expects to experience any material effects in the future.
Neither Registrant nor either bank has undertaken any material activities during the last three years related to research and development.
As of December 31, 1996, the Iowa City Bank employed 204 persons consisting of 154 full-time employees and 50 part-time employees (the majority of which worked less than thirty hours per week). The Cedar Rapids Bank employed 27 persons consisting of 24 full-time employees and three part-time employees. As of December 31, 1996, the Registrant had one full-time employee who is a salaried corporate officer of the Company. The other corporate officer is a salaried officer of the Iowa City Bank. Neither corporate officer received additional compensation for serving as officer or director of the Registrant.
CAPITAL REQUIREMENTS
The Company is regulated by the Board of Governors of the Federal Reserve System while both subsidiary banks fall 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, 1996, 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.
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ITEM 1. BUSINESS (continued)
CAPITAL REQUIREMENTS(continued)
A comparison of each subsidiary bank's capital as of December 31, 1996, with minimum requirements is presented below: ACTUAL MINIMUM IOWA CITY BANK CEDAR RAPIDS BANK REQUIREMENTS -------------- ----------------- ------------ Total Risk-Based Capital 17.82% 12.68% 8% Tier I Risk-Based Capital 16.57% 11.76% 4% Leverage Ratio 11.08% 8.40% 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, 1996, both banking subsidiaries met the capital criteria required by the well-capitalized definition and substantially exceeded the regulatory minimum capital levels.
As of December 31, 1996 and 1995, 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 1996 1995 REQUIREMENTS -------- -------- ------------ Total Risk-Based Capital 18.75% 19.51% 8% Tier 1 Risk-Based Capital 17.50% 18.28% 4% Leverage Ratio 11.73% 11.46% 4%
The following consolidated statistical information reflects selected balances and operations of the Registrant and its subsidiaries for the periods indicated.
AVERAGE BALANCES AND INTEREST RATES AND INTEREST DIFFERENTIAL
The following tables show the major categories of assets, liabilities, and stockholders' equity, average balances during the period, interest earned or paid and average yield. (Yields on nontaxable securities are computed on a tax equivalent basis.) Changes in interest received and paid for the years ended December 31, 1996 and 1995, are analyzed showing the effects of changes in volume and rates:
AVERAGE BALANCES (Daily Average Basis) (In Thousands) Year Ended December 31, 1996 1995 1994 ASSETS --------- --------- --------- Taxable securities $ 87,414 $ 88,064 $ 104,549 Nontaxable securities 27,384 23,276 23,135 Federal funds sold 8,136 11,181 5,789 Loans, net of unearned income 310,956 294,649 277,101 --------- --------- --------- Total interest-earning assets $ 433,890 $ 417,620 $ 410,574 Less allowance for loan losses (3,625) (3,512) (3,215 Cash and due from banks l5,905 14,312 13,981 Property and equipment, net 12,357 11,693 10,646 Other assets 9,600 9,278 9,000 --------- --------- --------- Total assets $ 468,127 $ 449,391 $ 440,986 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-paying demand deposits $ 58,696 $ 58,357 $ 60,178 Savings deposits 102,185 89,436 88,948 Time deposits 189,227 188,135 178,581 Federal funds purchased and securities sold under agreements to repurchase 1,068 237 1,923 Federal Home Loan Bank advances 16,246 19,857 19,799 Other long-term borrowings -- 13 256 --------- -------- --------- Total interest-paying liabilities $ 367,422 $ 356,035 $ 349,685 Noninterest-paying demand deposits 44,692 42,331 42,688 Other liabilities 4,629 3,644 3,447 Stockholders' equity 51,384 47,381 45,166 --------- -------- --------- Total liabilities and stockholders' equity $ 468,127 $ 449,391 $ 440,986 ========= ========= =========
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ITEM 1. BUSINESS (continued)
INTEREST INCOME AND EXPENSE (In Thousands) Year Ended December 31, 1996 1995 1994 --------- -------- --------- INCOME Taxable securities $ 5,316 $ 5,251 $ 5,712 Nontaxable securities 2,188 2,044 2,033 Federal funds sold 430 658 222 Loans 26,376 24,843 22,292 --------- -------- --------- Total interest income $ 34,310 32,796 $ 30,259 ========= ========= =========
EXPENSE Interest-paying demand deposits $ 1,184 1,253 $ 1,270 Savings deposits 3,568 2,870 2,104 Time deposits 10,642 10,475 8,959 Federal funds purchased and securities sold under agreements to repurchase 60 14 90 Federal Home Loan Bank advances 995 1,199 1,184 Other long-term borrowings - - - - 17 --------- -------- --------- Total interest expense $ 16,449 15,811 $ 13,624 --------- -------- --------- Net interest income $ 17,861 16,985 $ 16,635 ========= ========= =========
Year Ended December 31, 1996 1995 1994 -------- -------- --------- INTEREST RATES AND INTEREST DIFFERENTIAL Average yields: Taxable securities 6.08% 5.96% 5.46% Nontaxable securities 7.99 8.62 8.79 Federal funds sold 5.29 5.88 3.83 Loans 8.48 8.43 8.04 Interest-paying demand deposits 2.02 2.15 2.11 Savings deposits 3.49 3.21 2.37 Time deposits 5.62 5.57 5.02 Federal funds purchased and securities sold under agreements to repurchase 5.62 5.91 4.68 Federal Home Loan Bank advances 6.12 6.04 5.98 Other long-term borrowings - - - - 6.64 Yield on average interest earning assets (1) 7.91 7.85 7.37 Yield on average interest-paying liabilities 4.48 4.44 3.90 Net interest yield (1) 3.43 3.41 3.47 Net interest margin (2) 4.12 4.07 4.05
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.
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ITEM 1. BUSINESS (continued)
CHANGE IN INTEREST INCOME AND EXPENSE
(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 300 (156) 144 Federal funds sold (167) ( 61) (228) Loans 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 Advances (220) 16 (204) -------- -------- -------- $ 333 $ 305 $ 638 -------- -------- -------- Net change in net interest income (1) $ 1,145 $ (269) $ 876 ======== ======== ========
(In Thousands of Dollars) Year Ended December 31, 1995 Change Change Due To Due To Total Volume Rates Change --------- -------- --------- Change in interest income: Taxable securities $ (953) $ 492 $ (461) Nontaxable securities (1) 51 (40) 11 Federal funds sold 277 159 436 Loans (1) 1,445 1,106 2,551 --------- -------- --------- $ 820 $ 1,717 $ 2,537 --------- -------- --------- Change in interest expense: Interest-paying demand deposits $ (40) $ 23 $ (17) Savings deposits 12 754 766 Time deposits 498 1,018 1,516 Federal funds purchased and securities sold under agreements to repurchase (95) 19 (76) Federal Home Loan Bank advances 3 12 15 Long-term debt (8) (9) (17) --------- -------- --------- $ 370 $ 1,817 $ 2,187 --------- -------- --------- Net change in net interest income (1) $ 450 $ (100) $ 350 ========= ======== =========
(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 1995 and 1996.
The rate/volume variances were allocated on a pro rata basis between rate and volume variances using absolute values.
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ITEM 1. BUSINESS (continued)
INVESTMENT SECURITIES
The following tables show the carrying values of investment securities as of December 31, 1996, 1995 and 1994, and the maturities and yields of the investment securities as of December 31, 1996: (In Thousands) December 31, 1996 1995 1994 -------- -------- -------- Carrying Values: U.S. Treasury securities $ 20,933 $ 32,027 $ 42,130 Obligations of other U.S. Government agencies and corporations 44,526 63,231 42,029 Obligations of states and political subdivisions 29,588 26,403 22,921 Marketable equity securities 475 - - - - Federal Reserve Bank stock 339 336 336 Federal Home Loan Bank stock 1,941 1,889 1,813 -------- -------- -------- $ 97,802 $123,886 $109,229 ======== ======== ========
December 31, 1996 Weighted Fair Average Value Yield (1) -------- --------- Type and maturity groupings: U.S. Treasury maturities: Within 1 year $ 8,521 6.01% From 1 to 5 years 12,412 5.93 -------- Total $ 20,933 -------- Obligations of other U.S. Government agencies and corporations maturities: Within 1 year $ 12,065 6.58% From 1 to 5 years 25,563 6.01 From 5 to 10 years 4,935 6.36 Over 10 years 1,963 6.49 -------- Total $ 44,526 -------- Obligations of states and political subdivisions maturities: Within 1 year $ 5,407 8.96% From 1 to 5 years 17,379 7.77 From 5 to 10 years 6,331 7.09 Over 10 years 471 7.85 -------- Total $ 29,588 -------- Marketable equity securities $ 475 4.71% Federal Reserve Bank stock 338 6.00 Federal Home Loan Bank stock 1,942 7.25 -------- Total $ 2,755 -------- Total $ 97,802 ========
(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 1996 based on fair value.
As of December 31, 1996, 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.
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ITEM 1. BUSINESS (continued)
LOANS (1)
The following table shows the composition of loans as of December 31, 1996, 1995, 1994, 1993 and 1992. (In Thousands) December 31, 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Commercial, financial and agricultural $ 32,361 $ 30,128 $ 31,800 $ 30,036 $ 29,422 Bankers' acceptances - - - - - - - - 1,975 Real estate, construction 16,440 10,914 16,590 13,662 8,145 Real estate, mortgage 230,534 206,869 194,261 159,349 148,178 Loans to individuals 49,386 43,572 50,123 49,571 37,666 All other 2,018 3,046 1,933 1,589 25 -------- -------- -------- -------- -------- TOTAL $330,739 294,529 $294,707 $254,207 $225,411 ======== ======== ======== ======== ========
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, 1996:
One To Over Non- Amount One Year Five Five Accrual Of Loans Or Less Years Years Loans -------- -------- -------- -------- -------- Commercial, financial and agricultural (2) $ 32,361 $ 22,609 $ 7,665 $ 2,039 $ 48 Real estate, construction (3) 16,440 4,751 9,672 2,017 - - Real estate, mortgage (4) 230,534 77,286 134,950 18,109 189 Loans to individuals (5) 49,386 21,092 27,271 701 322 All other (6) 2,018 1,870 148 - - - - -------- -------- -------- -------- -------- Total $330,739 $127,608 $179,706 $ 22,866 $ 559 ======== ======== ======== ======== ========
(1) Before deducting reserve for possible loan losses. (2) Approximately $15,548,000 or over 48% of these loans are adjustable rate loans. (3) Approximately $6,181,000 or nearly 38% of these loans are adjustable rate loans. (4) Approximately $129,775,000 or over 56% of these loans are adjustable rate loans. (5) Approximately $6,736,000 or nearly 14% of these loans are adjustable rate loans. (6) Approximately $601,000 or nearly 30% 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) 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- Nonaccrual loans $ 559 $ 270 $ 1,100 $ 1,274 $ 405 Accruing loans past due 90 days or more $ 381 $ 273 $ 60 $ 68 None Restructured loans $ 16 None None None None
As of December 31, 1996, 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
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ITEM 1. BUSINESS (continued)
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS (Continued)
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.
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 1996 1995 - -------------------------------------------------------------------------------- Impaired loans $ 559 $ 270 Impaired loans with related reserve for loan losses calculated under SFAS 114 559 164 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 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, 1996 1995 - -------------------------------------------------------------------------------- Average impaired loans $ 317 $ 682 Interest income recognized 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.
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ITEM 1. BUSINESS (continued)
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Registrant's loan loss experience for each of the years ended December 31, 1996, 1995, 1994, 1993, and 1992:
(In Thousands) Year Ended December 31, 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Balance of loan loss allowance at beginning of period $3,602 $3,354 $3,101 $3,006 $2,937 ------ ------ ------ ------ ------ Charge-offs: Commercial, financial and agricultural $ 31 $ 21 $ 3 $ 32 $ 105 Real estate mortgage 76 - - 4 53 25 Loans to individuals 370 254 249 148 127 ------ ------ ------ ------ ------ $ 477 $ 275 $ 256 $ 233 $ 257 ------ ------ ------ ------ ------ Recoveries: Commercial, financial and agricultural $ 13 $ 37 $ 34 $ 27 $ 102 Real estate, mortgage 4 5 6 87 43 Loans to individuals 55 115 44 59 61 ------ ------ ------ ------ ------ $ 72 $ 157 $ 84 $ 173 $ 206 ------ ------ ------ ------ ------ Net charge-offs $ 405 $ 118 $ 172 $ 60 $ 51 ------ ------ ------ ------ ------ Provision for loan losses (1) $ 591 $ 366 $ 425 $ 155 $ 120 ------ ------ ------ ------ ------
Balance of loan loss allowance at end of period $3,788 $3,602 $3,354 $3,101 $3,006 ====== ====== ====== ====== ====== Percentage of net charge- offs during period to average net loans outstanding .13% .04% .06% .03% .02% ====== ====== ====== ====== ======
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.
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ITEM 1. BUSINESS (continued)
SUMMARY OF LOAN LOSS EXPERIENCE (continued)
The December 31, 1996, 1995, 1994, 1993, and 1992 allowance for loan losses have been allocated as follows:
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, 1996, 1995, and 1994 and the composition of the certificates issued in excess of $100,000 as of December 31, 1996: (In Thousands) December 31, 1996 1995 1994 $ Rate $ Rate $ Rate --------- ---- --------- ---- ---------- ---- Average non- interest- paying deposits $ 44,692 - - % $ 42,331 - - % $ 42,688 - - % Average interest- paying demand deposits 58,696 2.02 58,357 2.15 60,178 2.11 Average savings deposits 102,185 3.49 89,436 3.21 88,948 2.37 Average time deposits 189,227 5.62 188,135 5.57 178,581 5.02 --------- --------- --------- $ 394,800 $ 378,259 $ 370,395 ========= ========= =========
Amount Rate ------- ---- Time certificates in amounts of $100,000 or more as of December 31, 1996 with maturity in: 3 months or less $ 6,487 5.44% 3 through 6 months 5,146 5.67 6 through 12 months 6,020 5.40 Over 12 months 8,765 6.42 ------- $26,418 =======
There were no material deposits by foreign investors.
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ITEM 1. BUSINESS (continued)
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, 1996, 1995 and 1994:
December 31, 1996 1995 1994 ------- ------- ------- Return on average total assets 1.26% 1.02% 1.03% Return on average stockholders' equity 11.51 9.65 10.10 Dividend payout percentage on average outstanding common shares 32.89 39.63 37.98 Average stockholders' equity to average total assets percentage 10.98 10.54 10.24
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 1996, 1995 and 1994.
(In Thousands of Dollars, Except for Interest Rate Percentage) -------------------------------- 1996 1995 1994 -------- -------- -------- Outstanding as of December 31 $ 3,146 $ 67 $ 3,200 Weighted average interest rate at year end 5.61% - - 6.50% Maximum month-end balance $ 9,700 $ 1,575 $12,200 Average month-end balance $ 2,217 $ 131 $ 2,935 Weighted average interest rate for the year 5.62% 5.91% 4.68%
FEDERAL HOME LOAN BANK ADVANCES
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 during 1996, 1995 and 1994. (In Thousands of Dollars, Except for Interest Rate Percentage) -------------------------------- 1996 1995 1994 -------- -------- -------- Outstanding as of December 31 $12,355 $17,469 $20,628 Weighted average interest rate at year end 6.01% 6.01% 5.92% Maximum month-end balance $17,264 $20,524 $20,856 Average month-end balance $16,126 $19,772 $19,870 Weighted average interest rate for the year 6.12% 6.04% 5.98%
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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, 1996.
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ITEM 2.
ITEM 2. PROPERTIES
The Registrant's office and the main office of the Iowa City Bank are located in the urban center of Iowa City, Iowa, at 204 East Washington Street in a two-story limestone building containing approximately 61,000 square feet. The Iowa City Bank and Cedar Rapids Bank own the fee simple title to all bank property. A separate urban center parking lot office is located in the same city block as the main office of the bank on a parcel of land 106 feet by 150 feet with five drive-up teller lanes and a one-story building with basement area containing approximately 746 square feet. The bank's Towncrest office facility is located at 1117 William Street, Iowa City, Iowa, approximately two miles east of the main office of the bank on a parcel of land 188 feet by 192 feet with two drive-up teller lanes and a one-story building with a basement area containing approximately 4,890 square feet. The bank's Coralville office facility is located at 505 10th Avenue, Coralville, Iowa, approximately three miles west of the main office of the bank on a parcel of land 150 feet by 200 feet with three drive-up teller lanes and a one-story building with basement area containing approximately 4,420 square feet. The bank's North Liberty office facility is located , at 580 West Cherry Street, North Liberty Iowa. The 4,300 square foot one level office building is constructed of drivet and brick and is situated on 4.05 acres of land. The bank's southwest side office is located at 2312 Mormon Trek Boulevard, Iowa City Iowa. This 4,300 square foot office is a one level building constructed of drivet and brick which is situated on a parcel of land measuring approximately 250 feet by 230 feet.
The Cedar Rapids Bank purchased the building, land, furniture and equipment located at 200 First Street SW, Cedar Rapids, Iowa, from the Resolution Trust Corporation in October of 1991. The two-story concrete block building with basement area rests on a parcel of land 169 feet by 140 feet and 90 feet by 140 feet. The basement area, first floor and second floor space contains approximately 4,200 square feet, 4,327 square feet and 4,200 square feet, respectively. A second office is located in the urban center of Cedar Rapids, located at 240 Third Avenue SE, Cedar Rapids, Iowa, approximately one-half mile from the main office building. Located on the ground floor, this office features three walk-up teller lanes and 2,682 square feet of space. 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 number of retail banking offices currently stands at eight: the Iowa City Bank has six; the Cedar Rapids Bank has two (see chart below).
================================================================================ FIRST FINANCIAL BANCORPORATION'S RETAIL BANKING LOCATIONS
FIRST NATIONAL BANK, IOWA CITY 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................1996 Coralville - 506 10th Avenue, Coralville, Iowa ............................1979 North Liberty - Highway 965 & West Cherry Street, North Liberty, Iowa .....1994
FIRST NATIONAL BANK, CEDAR RAPIDS Main Bank - 200 First Street SW, Cedar Rapids .............................1991 Downtown - 240 Third Avenue SE, in the Armstrong Centre, Cedar Rapids......1994
================================================================================
Under Iowa banking law, all off-premise automated teller machines (ATMs) maintained by any Iowa financial institution can be used by customers of any other institution. The Iowa City Bank maintains twenty-five ATMs within the Iowa City, Coralville and North Liberty area. There are eight ATMs located on bank premises with four ATMs located at the main bank office, and one each at the Southwest, North Liberty, Towncrest and Coralville offices as of December 31, 1996. Seventeen ATMs are located at fifteen off-bank premise locations. Customers possessing a bank debit card may make deposits, withdrawals, or transfers of funds from one account to another at any hour of the day or night, seven days a week at seven of the bank's on-premise ATMs and during regular banking hours at eight of the bank's on-premise ATMs, and on different schedules at the off-bank premises locations. The Cedar Rapids Bank maintains two ATMs on-premise which are accessible during regular banking hours.
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ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Neither the Registrant nor the banks are involved in any material legal proceedings, other than routine proceedings incidental to the operation of the banks. Such proceedings are not expected to result in any materially adverse effect on the operations or earnings of the banks. Neither the Registrant nor the banks 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 banks.
ITEM 4.
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 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Registrant's common stock is not listed on any exchange. Six brokerage firms maintained public trading markets for the Registrant's common stock in 1996. The common stock of the Registrant is not actively traded, but there are regularly quoted bid and asked prices. The Registrant has subscribed to a weekly publication which reports the high and low bid prices of the Registrant's common stock. These price quotes are supplied by the National Association of Securities Dealers(NASD) through the NASD OTC Bulletin Board(sm), its automated system for reporting non-NASDAQ Quotes and National Quotation Bureau's Pink Sheets(sm). The Registrant had approximately 872 shareholders of record at December 31, 1996.
The following table reflects the high and low stock bid prices for each quarter based upon information available to the Registrant: Bid Prices ------------------------------------------------ 1996 1995 ---------------------- ---------------------- High Low High Low --------- --------- --------- --------- First Quarter $ 26.50 $ 24.50 $ 25.25 $ 23.00 Second Quarter 27.50 25.00 25.00 23.00 Third Quarter 29.25 27.625 25.00 23.50 Fourth Quarter 30.00 29.25 25.00 23.50
The Registrant paid quarterly cash dividends in 1996 and 1995 aggregating $1,946,000 and $1,811,000, respectively, or $.83 per share in 1996 and $.76 per share in 1995.
The declaration and payment of dividends by the Registrant in the future and the amount of such dividends is dependent upon earnings, regulatory restrictions, the financial condition of the Registrant and the banks, and other factors as evaluated from time to time. Dividends from the banks to the Registrant will be the principal source of funds for the payment of dividends by the Registrant. The payment of dividends by the banks is restricted to what prudent and sound banking principles will permit, and the payment of dividends (i) is not permitted without the approval of the Comptroller of the Currency except to the extent of net profits of the current fiscal year and retained net profits of the two preceding fiscal years, and (ii) is not permitted if the payment of a dividend would reduce the capital of a bank below required levels. In order to maintain a ratio of total risk-based capital to risk-weighted assets which would meet the criteria required by the OCC well-capitalized definition, the retained earnings of the Iowa City Bank available for the payment of dividends to the Registrant would total approximately $19,000,000 at December 31, 1996.
The following table states the quarterly dividends paid per share: 1996 1995 ------ ------ First Quarter $ .195 $ .185 Second Quarter $ .195 $ .185 Third Quarter $ .220 $ .195 Fourth Quarter $ .220 $ .195 ------ ------ Total $ .830 $ .760 ====== ======
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ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (continued)
STOCK TRANSFER AGENT
The Company's stock transfer agent is 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.: Chief Financial Officer, P.O. Box 1880, Iowa City, Iowa, 52244-1880.
The Iowa Banking Act was amended effective January 1, 1991, to permit the acquisition of control of certain Iowa banks and Iowa-based bank holding companies by regional bank holding companies subject to newly enacted statutory criteria and the prior approval of the Iowa Superintendent of Banking (Superintendent). The new legislation changed but did not repeal the pre-existing Iowa law which permits the acquisition of Iowa banks by bank holding companies within limitations based upon the ratio of the aggregate amount of Iowa-based time and demand deposits of the controlled banks to the total of the time and demand deposits of all Iowa banks.
The new law permitted an Iowa-based bank holding company to exempt itself for a specified period of time from acquisition under the new law by a regional bank holding company if a resolution was adopted by its board of directors and filed with the Superintendent before January 1, 1991. On December 27, 1990, the board of directors adopted a resolution exempting the company under the new law for a period ending June 30, 1991, unless renewed as provided under the Iowa law. A certified copy of the resolution was filed with the Superintendent prior to January 1, 1991. Subsequent to January 1, 1991, renewals have been filed with the Superintendent, the latest extending the exemption from December 31, 1996, to December 31, 1997. The new law also prohibits a regional bank holding company from acquiring an Iowa-based bank holding company unless each of its subsidiary banks has been in existence and continuously operated as a bank for five or more years. In 1994, Congress enacted legislation which provides for interstate banking and branching effective July 1, 1997. It is unclear what, if any, impact this provision will have on the market for the Company's stock.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EARNINGS PERFORMANCE
Consolidated net income increased $1,346,000 or 29.5% to $5,916,000 for the year ended December 31, 1996, when compared to the $4,570,000 recorded in 1995 and the $4,563,000 recorded in 1994. 1996 earnings are the highest on record for the Company. 1995 performance was relatively flat in comparison to that of 1994, but much was accomplished to lay the foundation to enhance shareholder value and customer service in future years.
================================================================================ NET INCOME GRAPH The Company's net income for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 was $5,916,000, $4,570,000, $4,563,000, $5,055,000 and $4,914,000, respectively. ================================================================================
The primary factors which contributed to 1996's substantial increase in net income included the implementation of an organization-wide restructuring program, corresponding reductions in salary and fringe benefit expense associated with attrition and a voluntary severance program, which was a part of the restructuring, reductions in Federal Deposit Insurance Corporation (FDIC) insurance premiums, growth of the loan portfolios of the subsidiary banks, trust asset growth, and increased fee income.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NET INTEREST INCOME
For the year ended December 31, 1996, net interest income, on a fully tax equivalent basis, totaled $17,861,000 and represented an increase of $876,000 or 5.2% above the $16,985,000 of net interest income reported in 1995, which was $350,000 or 2.1% higher than the $16,635,000 recorded in 1994. Increased average earning asset balances, in particular loan growth, and an improved net interest margin accounted for the increase in net interest income. Average earning assets increased $16,270,000 or 3.9% in 1996, to $433,890,000, compared to an increase of $7,046,000 or 1.7% to $417,620,000 in 1995. The net interest margin, on a tax equivalent basis, increased from 4.07% in 1995 to 4.12% in 1996. Because net interest income is such a significant factor to the overall profitability of the Company, management has made a commitment to control interest rate risk by attempting to match the maturing balances, terms and rates, of assets and liabilities, to maintain positive rate spreads between loans and deposits and to maintain sufficient liquidity.
================================================================================ 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, 1996, 1995, 1994, 1993 and 1992 are presented in the table below. 1996 1995 1994 1993 1992 Yield on Average Earning Assets 7.91% 7.85% 7.37% 7.43% 8.17% Interest Expense to Average Earning Assets 3.48% 3.78% 3.32% 3.55% 4.34% Net Interest Margin 4.12% 4.07% 4.05% 3.88% 3.83% ================================================================================
DIVIDEND HISTORY
The Company paid cash dividends totaling $1,946,000 in 1996, $1,811,000 in 1995 and $1,733,000 in 1994. Cash dividends have increased $135,000 or 7.5% in 1996, $78,000 or 4.5% in 1995 and $104,000 or 6.4% in 1994. The dividend payout percentage for 1996, 1995 and 1994 was 32.89%, 39.63% and 37.98%, 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 allowance for loan losses is an estimate of the anticipated losses in the loan portfolio. The adequacy of the allowance for loan losses is determined based on historical loss experience, projected loan losses and other factors. As of December 31, 1996, the allowance for loan losses was $3,788,000, an increase of $186,000 or 5.2% over the 1995 year-end balance of $3,602,000. Nonaccrual loan balances decreased $830,000 or 75.5% to $270,000 in 1995 but increased $289,000 or 107% to $559,000 in 1996. Past due loan balances increased $213,000 or 355% to $273,000 in 1995 and $108,000 or 39.6% to $381,000 in 1996. Net charge-offs in 1996 totaled $405,000 compared to net charge-offs of $118,000 and $172,000 for 1995 and 1994, respectively. As of December 31, 1996, 1995 and 1994 the loan loss reserve balances were 1.15%, 1.22% and 1.14% of total outstanding loan balances, respectively. These ratios are comparable to those of other organizations of similar size and demographics.
For 1996, the provision for loan losses totaled $591,000 which increased $225,000 or 61.5% from the $366,000 recorded in 1995, which decreased $59,000 or 13.9% from the $425,000 recorded in 1994. The increase in 1996 is due to increased loan balances and in part to loan losses.
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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NONINTEREST INCOME
Noninterest income, for the year ended December 31, 1996, increased $788,000 or 12.6% to $7,024,000, compared to an increase of $537,000 or 9.4% to $6,236,000 in 1995 and a decrease of $225,000 or 3.8% to $5,699,000 in 1994. Noninterest income as a percentage of average total assets was 1.5% as of December 31, 1996, which is an increase over the 1.4% reported as of December 31, 1995, and is an increase over the 1.3% ratio reported for 1994.
================================================================================ NONINTEREST INCOME GRAPH A five year comparison of the major components of noninterest income is provided for the years 1996, 1995, 1994, 1993 and 1992. (Amounts In Thousands) 1996 1995 1994 1993 1992 Investment and OREO Gains, Net $( 160)$ - - $ - - $ - - $ 68 Service Charges on Deposit Accounts $1,825 $1,470 $1,327 $1,310 $1,305 Trust Department Fees $2,998 $2,763 $2,594 $2,416 $2,222 Other Service Charges and Fees $2,361 $2,003 $1,778 $2,198 $1,715 ================================================================================
A significant source of noninterest income in 1996 was trust fees. Trust fees increased $235,000 or 8.5% to $2,998,000 in 1996, compared to an increase of $169,000 or 6.5% to $2,763,000 in 1995 and an increase of $178,000 or 7.4% to $2,594,000 in 1994. Increased trust asset balances, as well as a greater overall number of trust accounts, was responsible for this improved level of earnings.
Other service charges, commissions and fees increased $358,000 or 17.9% to $2,361,000 in 1996 and increased $225,000 or 12.7% to $2,003,000 in 1995 but decreased $420,000 or 19.1% to $1,778,000 in 1994. The fluctuations in this revenue category are primarily due to secondary market loan fees which increased $91,000 or 19% to $571,000 in 1996, $58,000 or 13.7% to $480,000 in 1995 but decreased $604,000 or 58.9% to $422,000 in 1994. 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. Management is constantly reviewing additional 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 decreased $678,000 or 4.4% to $14,802,000 in 1996, compared to increases of $948,000 or 6.5% to $15,480,000 in 1995 and $1,491,000 or 11.4% to $14,532,000 in 1994. As a percentage of average total assets, noninterest expenses decreased to 3.2% in 1996, which compares favorably to the 3.4% level in 1995 and the 3.3% level in 1994.
================================================================================ NONINTEREST EXPENSE GRAPH A five year comparison of the major components of noninterest expense is provided for the years 1996, 1995, 1994, 1993 and 1992.
(Amounts in Thousands) 1996 1995 1994 1993 1992 Supplies and Postage and DP $2,377 $2,180 $1,770 $1,628 $1,486 Occupancy and Bank Premise $2,624 $2,726 $2,515 $2,212 $1,756 Other Expenses $3,105 $2,897 $3,176 $2,998 $2,802 Salaries and Employee Benefits $6,696 $7,677 $7,071 $6,203 $5,678 ================================================================================
Salaries and employee benefit expenses decreased $981,000 or 12.8% to $6,696,000 in 1996, increased $606,000 or 8.6% to $7,677,000 in 1995 and $868,000 or 14% to $7,071,000 in 1994. This reduction in expense in 1996 is 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 decreased from 244 as of December 31, 1994 to 221 as of December 31, 1995 to 205 as of December 31, 1996. 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. The balance of the increase in 1995 was due to normal salary adjustments and employee incentive awards. For 1994, increased staffing levels accounted for the majority of the increase in expense. The number of FTE employees increased by 10 employees due to the building of the Company's infrastructure.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NONINTEREST EXPENSES (continued)
Occupancy, furniture and equipment expenses decreased $102,000 or 3.7% to $2,624,000 in 1996 compared to increases of $211,000 or 8.4% to $2,726,000 in 1995 and $303,000 or 13.7% to $2,515,000 in 1994. Reduced depreciation expense accounted for the majority of the decrease in 1996. The increase reported in 1995 was due to the added operating costs of the two new Iowa City Bank offices (North Liberty and Southwest Iowa City). The renovation of the Iowa City Bank's main banking facility and opening of the Cedar Rapids Bank's Downtown office in 1994 contributed to this increase in expense.
Data processing expenses increased $127,000 or 11%, $229,000 or 24.7% and $176,000 or 23.5% to $1,282,000, $1,155,000 and $926,000, respectively for 1996, 1995 and 1994. These increases are due to increased credit card processing and electronic banking system expenses which are volume driven.
Other expenses totaled $3,105,000, $2,897,000 and $3,176,000 for the years ended December 31, 1996, 1995 and 1994, respectively. This reflects an increase of $208,000 or 7.2% in 1996, a decrease of $279,000 or 8.8% in 1995 and an increase of $178,000 or 5.9% in 1994. Included in this expense category is FDIC and SAIF insurance premium expense, which decreased $123,000 in 1996 to $362,000. Legislation was passed by Congress to recapitalize SAIF at the end of the third quarter of 1996. In that quarter, there was a one-time assessment on the deposits of the Cedar Rapids bank amounting to a pre-tax expense of $265,000. However, due to the reductions in 1996 assessment rates on the deposits of both banks, year-to-date insurance premium expense decreased. A decrease was also reported in other expenses in 1995 of $279,000 or 8.8% due to the lowering of the FDIC insurance premium assessment rate for the Iowa City Bank, from $.23 to $.04 per $100 in deposits, retroactive to June 1, 1995. As a result, the Company realized a reduction insurance premium expense of $339,000 or 41.1% to $485,000 for the year. In 1994, FDIC insurance expense increased $19,000 or 2.4% to $824,000 due to increased deposits and premium rates. Consulting and professional fees increased $123,000 or 21% in 1996 to $709,000, compared to an increase of $7,000 or 1.2% to $586,000 in 1995 and a $49,000 or 9.2% increase to $579,000 in 1994. Increased advertising and promotional expense accounted for the remaining increase for this category, reflecting an increase of $126,000 or 25.8% in 1996 to $615,0000. 1995 advertising and promotional expense reflected a $7,000 or 1.5% increase over the $482,000 recorded in 1994.
BALANCE SHEET ANALYSIS
TOTAL ASSETS: Total assets of the Company were $467,725,000 as of December 31, 1996, which represented an increase of $10,489,000 or 2.3% over total assets of $457,236,000 as of December 31, 1995, which was $22,775,000 or 5.2% over 1994 total assets of $434,461,000. Average total assets for 1996 were $468,127,000 which is an increase of $18,736,000 or 4.2% over 1995 average total assets of $449,391,000 which was a $8,405,000 or 1.9% increase over 1994 average total assets of $440,986,000. The funding for this asset growth was provided by average deposit growth of $16,541,000 or 4.4% to $394,800,000 in 1996 and $7,864,000 or 2.1% to $378,259,000 in 1995. In addition, average stockholders' equity balances increased $4,003,000 or 8.6% in 1996 and $2,215,000 or 4.9% in 1995, primarily through the retention of earnings. Average Federal Home Loan Bank (FHLB) advances decreased $3,611,000 or 18.4% in 1996, but increased $58,000 or .3% in 1995.
================================================================================ AVERAGE TOTAL ASSETS A five year comparison of the major components of average total consolidated assets for 1996, 1995, 1994, 1993 and 1992 are listed in the following table. (Amounts in Thousands) 1996 1995 1994 1993 1992 Federal Funds Sold $ 8,100 $ 11,200 $ 5,800 $ 16,600 $ 13,400 Other Assets $ 34,200 $ 35,300 $ 33,600 $ 33,200 $ 30,100 Investment Securities $114,800 $111,800 $127,700 $141,400 $146,700 Net Loans $311,000 $291,100 $273,900 $234,600 $208,800 ================================================================================
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FINANCIAL POSITION (continued)
INVESTMENTS: The Company's average investment portfolio balances for 1996 were $114,798,000, which increased $3,458,000 or 3.1% from 1995 average investments of $111,340,000. The increase in average investment portfolio balances is the result of maintaining lower average federal funds sold balances in 1996. Average federal funds sold balances were $8,136,000 in 1996, $3,045,000 or 27.2% below the 1995 average of $11,181,000. As of December 31, 1996, United States Treasury securities comprised 21.4% of the investment portfolio compared to 25.9% as of the end of 1995.
LOAN BALANCES: As of December 31, 1996, total loan balances increased $36,210,000 or 12.3% to $330,739,000 when compared to total loan balances of $294,529,000 as of December 31, 1995. Average loan balances increased by $16,307,000 or 5.5% in 1996 to $310,956,000, when compared to average loan balances of $294,649,000 for 1995. The Company experienced the majority of its loan growth in real estate loan balances due to construction activity and housing turnover in the local market area, as well as to refinancing stimulated by favorable interest rates. Real estate loan balances increased $29,191,000 or 13.8% to $246,974,000 as of December 31, 1996, when compared to the balance of $217,783,000 as of December 31, 1995.
================================================================================ AVERAGE TOTAL NET LOANS GRAPH Average total net loans for the years 1996, 1995, 1994, 1993 and 1992 were $330,739,000, $291,100,000, $273,900,000, $234,600,000 and $208,800,000, respectively. ================================================================================
DEPOSITS: Total deposits increased $10,352,000 or 2.7% to $395,407,000 in 1996 compared to total deposits of $385,055,000 as of December 31, 1995. Throughout 1996, total deposit balances averaged $394,800,000, an increase of $16,541,000 or 4.4% over the average total deposits balances of $378,259,000 in 1995. Average time-deposit balances increased $1,092,000 or .6% to $189,227,000 in 1996 and $9,554,000 or 5.3% to $188,135,000 in 1995. During 1996, average savings and money market account balances increased $12,749,000 or 14.3% to $102,185,000 as did noninterest-paying balances which increased $2,361,000 or 5.6% to $44,692,000. Given the decreasing interest rate environment, many deposit customers have preferred liquid savings and money market accounts.
================================================================================ AVERAGE TOTAL DEPOSITS GRAPH A five year comparison of the noninterest bearing and interest bearing balances of average total deposits for 1996, 1995, 1994, 1993 and 1992 are listed in the following table. (Amounts in Thousands) 1996 1995 1994 1993 1992 Noninterest Bearing $ 44,700 $ 42,300 $ 42,700 $ 40,300 $ 35,100 Interest Bearing $350,100 $336,000 $327,700 $322,800 $317,900 ================================================================================
CAPITAL RESOURCES AND COMMITMENTS: 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, 1996 and 1995, total stockholders' equity was $52,576,000 and $50,207,000, respectively. As of December 31, 1996 and 1995, the Company's Tier 1 capital percentage was 17.50% and 18.28% and its total risk adjusted capital percentage (Tier 1 capital plus Tier 2 capital) was 18.75% and 19.51%, respectively. All of these ratios substantially exceed the regulatory minimums of 4.00% and 8.00%. The Company's leverage capital ratio was 11.73% as of December 31, 1996, compared to 11.46% as of December 31, 1995, also considerably higher than the 4.00% floor. There are no plans, trends, events or uncertainties that are likely to have a material effect on liquidity or capital resources.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
CAPITAL RESOURCES AND COMMITMENTS (continued)
COMMITMENTS: No major capital expenditures were financed in 1996. Two major expenditures are projected for fiscal 1997: the purchase of West Branch State Bank and the establishment of a third Cedar Rapids office. In November, 1996, the Company entered into a stock purchase agreement to acquire 100% of the common stock of West Branch Bancorporation, Inc., a one bank holding company which owns 100% of the stock of the West Branch State Bank, West Branch, Iowa. This transaction is expected to occur in the first half of 1997. had closing taken place on December 31, 1996, the purchase price would have been approximately $7,500,000. The sellers will receive a partial cash payment with approximately 72% of the purchase price carried on unsecured promissory notes payable over a period of 2 to 3 years. As of December 31, 1996, the assets of West Branch State Bank totaled Approximately $40 million. Also, during the fourth quarter of 1996, the Cedar Rapids Bank entered into an agreement to purchase an existing building at 5012 Center Point Road in Cedar Rapids for the purpose of establishing a banking office during the first half of 1997. Both initiatives are subject to regualtory approval, and it is anticipated that both will be funded primarily through the sale of investment securities.
INTEREST RATE SENSITIVE ASSETS AND LIABILITIES AND LIQUIDITY
AVERAGE INTEREST-EARNING ASSETS: In 1996, average interest-earning assets (consisting primarily of loans and investment securities) totaled $433,890,000 and represented 92.7% of total average asset balances. This is an increase of $16,270,000 or 3.9% over 1995 average interest-earning asset balances of $417,620,000. The majority of this increase was in loans. Average loan balances increased $16,307,000 or 5.5% to $310,956,000 in 1996.
During 1995, there was a shift in balances between average interest-earning asset categories. Average investment security balances decreased $16,344,000 or 12.8% to $111,340,000 in 1995. The decrease in average investment balances was offset by a corresponding increase in average loan balances. Average loan balances increased $17,548,000 or 6.3% to $294,649,000 in 1995. Average federal funds sold balances increased to $11,181,000 in 1995, a $5,392,000 or 93.1% increase. The main funding source of 1995's asset growth was provided by increased average deposit balances.
AVERAGE INTEREST-PAYING LIABILITIES: Average interest-paying liabilities increased $11,387,000 or 3.2% in 1996 and $6,350,000 or 1.8% in 1995, to $367,422,000 and $356,035,000 respectively. Average savings deposit balances increased $12,749,000 or 14.3% in 1996 to $102,185,000 and average time deposit balances increased $9,554,000 or 5.3% in 1995 to $118,135,000, accounting for the majority of these increases.
INTEREST RATE RISK AND LIQUIDITY: Management has designated the Asset/Liability Management Committee (ALCO) to maintain adequate liquidity and to control interest rate risk. Liquidity management involves the ability of the Company to meet the withdrawal needs of its depositors, the credit and financing needs of its borrowers and the funding needs for capital expenditures. Liquidity can be achieved and maintained by matching maturing balances of interest-earning assets and interest-paying liabilities. The Company has several major funding sources which are sufficient to meet all of its current and future liquidity needs. These funding sources consist of selling federal funds sold, investment securities and loans, obtaining deposits, and borrowing from the FHLB. Alternative funding sources consist of repurchase agreements and federal funds purchased.
Over the past year, interest rates have generally declined for both interest-earning assets and interest-paying liabilities. This trend has had a positive impact on the Company's earnings because more interest-paying liabilities repriced than interest-earning assets. The decline in market rates has slowed and rates have actually increased slightly in the last quarter of 1996. Given the current rate environment, the Company will position itself to become less liability sensitive by offering higher rate longer term deposits and shortening the maturity terms of its loans and investments. Shifts in market interest rates subject the Company to interest rate risk, and managing it will continue to be of key importance in reducing the effect of changes in interest rates on net interest income. One method to reduce interest rate risk is to match asset and liability categories by maturity terms or repricing dates and interest rates. At December 31, 1996, the Company had $157,496,000 or 36.8% of
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
INTEREST RATE RISK AND LIQUIDITY (continued)
interest earning assets subject to repricing and/or maturity within the next twelve months as compared to $172,454,000 or 47.5% of interest-paying liabilities. This subjects the Company to interest rate risk on $14,958,000 of interest-earning assets over the next year if rates increase. The Company's net interest income would decrease if interest rates increase during the next year. This interest rate risk could be reduced by extending the maturities of deposits and liabilities and shortening the maturities of investments and loans.
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.
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Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS - --------------------
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See Notes to Financial Statements.
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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 City, Iowa, and First National Bank, Cedar Rapids, Iowa. Both subsidiary banks are engaged in many areas of commercial banking, including deposits, lending and a variety of customer services. The trust departments of the banks administer fiduciary accounts and provide the banks 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 subsidiaries, First National Bank, Iowa City, Iowa, and First National Bank, Cedar Rapids, Iowa, both of which are wholly owned. All material intercompany accounts and transactions have been eliminated in consolidation.
TRUST ASSETS: Trust accounts (other than cash deposits) held by the banks 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 banks.
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 SECURITIES: Debt 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 amortized cost of the specific securities sold. Pursuant to a FASB Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," the Company transferred at fair value $30,405,000 of investment securities from held to maturity to available for sale in December, 1995.
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 banks make 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.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
In accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 114, "Accounting for Creditors for Impairment of a Loan," 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 other wise 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.
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 do not provide any other post-employment benefits.
STOCK OPTIONS: Compensation expense for stock issued through stock options plans 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 the periods of service.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE: Earnings per common and common equivalent share are determined by dividing net income by the weighted average number of common and common equivalent shares outstanding during the year. Dilutive common stock equivalents related to the stock option plan were determined using the treasury stock method. Earnings per share and common equivalent share assuming full dilution are the same as earnings per common and common equivalent share.
FAIR VALUE OF FINANCIAL INSTRUMENTS: FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value. When quoted market prices are not available, fair values are based 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 independent 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.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
The following methods and assumptions were used by the banks in estimating the fair value of their 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.
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: The Company believes that the adoption of recently issued accounting standards will not have a material or significant effect on the financial statements.
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The Company transferred securities with an amortized cost of $29,804,000 and an unrealized gain of $601,000 from the held to maturity portfolio to the available for sale portfolio on December 31, 1995, based on management's reassessment of their previous designations of securities, giving consideration to liquidity needs, management of interest rate risk, and other factors.
The Company's wholly-owned subsidiary banks are required to pledge assets to secure repurchase agreements and public deposits as permitted or required by law. As of December 31, 1996, $25,680,000 of U. S. Treasury and Government agency securities were pledged against these deposits. For the years ended December 31, 1996, 1995 and 1994, there were no material net gains or losses from the sale of investment securities.
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Changes in the allowance for loan losses are as follows:
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The effective income tax rate is different than the statutory federal income tax rate as follows:
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTE 7. INCOME TAXES (continued)
Deferred income tax liabilities and assets arose from the following temporary differences:
The net change in the deferred income taxes is reflected in the financial statements as follows:
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTE 8. EMPLOYEE BENEFIT PLANS (continued)
The funded status of the plan is as follows:
The discount rate used to determine the actuarial present value of the projected benefit obligation as of December 31, 1996, 1995 and 1994, was 8.25%. The expected long-term rate of return on plan assets as of December 31, 1996, 1995 and 1994, 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 $256,000, $280,000 and $188,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Iowa City Bank has a salary continuation plan for several 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, 1996, 1995 and 1994, was $69,000, $75,000 and $118,000 respectively. The bank is carrying life insurance policies with face amounts totaling $925,000 to fund the salary continuation plan. The cash value of these policies was $445,000 at December 31, 1996.
In 1995, a new nonqualified retirement plan was adopted to provide a portion of the defined benefit pension plan benefits to the highly compensated employees of the banks. The pension plan expense associated with the nonqualified plan was $76,000 in 1996 and $73,000 in 1995.
At December 31, 1996, the Company had a stock option plan for certain officers and directors whereby 225,000 shares were reserved for grants. Stock option committees have granted options at prices equal to the fair market value of the stock on the dates of the grant. All options are for a term of five years 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 for the years ended December 31, 1995 and 1996, respectively, using the intrinsic value based method as prescribed by SFAS No. 123, reported net income and earnings per common and common equivalent share would have been as follows:
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTE 8. EMPLOYEE BENEFIT PLANS (continued)
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 module with the following weighted-average assumptions for grants in 1996 and 1995, respectively: dividend rate of 2.9% for both years; price volatility of 7.91% for both years; risk-free interest rates of 5.56% and 6.63% for 1996 and 1995; and expected lives of 3.5 years for both 1996 and 1995.
A summary of the Company's stock option plan is as follows:
Other pertininent information related to the options outstanding at December 31, 1996, is as follows:
NOTE 9. RELATED PARTY TRANSACTIONS - -------------------------------------------------------------------------------- Certain directors of the Company and the banks and companies with which they are affiliated, as well as certain principal officers of the Company and its affiliate banks, are customers of and have banking transactions with the banks 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, 1996 and 1995. P. 37 OF 49
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTE 9. RELATED PARTY TRANSACTIONS (continued) (Amounts in Thousands) Years Ended December 31, 1996 1995 - -------------------------------------------------------------------------------- Beginning balance $ 1,666 $ 2,545 Additions 233 138 Collections (1,123) (1,017) - -------------------------------------------------------------------------------- Ending Balance $ 776 $ 1,666 ======= =======
NOTE 10. REGULATORY CAPITAL REQUIREMENTS, RESTRICTIONS ON SUBSIDIARY DIVIDENDS, AND CASH RESTRICTIONS - -------------------------------------------------------------------------------- The Company and the banks 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, 1996, with the minimum regulatory requirements is presented below:
At December 31, 1996, both banking subsidiaries 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 by its subsidiaries. The banks are subject to certain statutory and regulatory restrictions on the amount they may pay in dividends. To maintain acceptable capital ratios in the subsidiary banks, certain of their retained earnings are 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 $19,000,000 as of December 31, 1996.
The banks are required to maintain reserve balances in cash or with the Federal Reserve Bank. Reserve balances totaled $888,000 and $585,000 at December 31, 1996 and 1995, respectively.
NOTE 12. COMMITMENTS AND CONTINGENCIES - -------------------------------------------------------------------------------- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The banks are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of their 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 banks' 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.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTE 12. COMMITMENTS AND CONTINGENCIES (continued)
The banks use the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments. A summary of the banks' commitments at December 31, 1996 and 1995, is as follows: (Amounts in Thousands) December 31, 1996 1995 - -------------------------------------------------------------------------------- Commitments to extend credit $49,358 $52,780 Standby letters of credit 4,398 3,667 - -------------------------------------------------------------------------------- $53,756 $56,447 ======= ======= 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 banks evaluate each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the banks 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 banks 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 banks deem necessary.
CONCENTRATIONS OF CREDIT RISK: Substantially all of the banks' loans, commitments to extend credit, and standby letters of credit have been granted to customers in the banks' 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 portion of the debtors' ability to honor their loans is dependent upon economic conditions in the Iowa City/Cedar Rapids area.
Investment securities of Iowa political subdivisions totaled $9,920,000 as of December 31, 1996. No individual municipality exceeded $750,000.
PURCHASE COMMITMENT: In November, 1996, the Company entered into an agreement to purchase West Branch Bancorporation, Inc., West Branch, Iowa, and its wholly-owned subsidiary, West branch State Bank for approximately $7,500,000. The transaction, which is subject to regulatory approval, is projected to be completed during the first half of 1997.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTE 13. 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, 1996 1995 - -------------------------------------------------------------------------------- Assets Cash $ 4,021 $ 622 Investment in subsidiaries Investment securities available for sale 47,674 49,163 (cost 1996 $789; 1995 $401) 887 421 Accrued interest receivable 18 10 Income taxes receivable 13 - - - -------------------------------------------------------------------------------- $52,613 $50,216 ======= ======= Liabilities and Stockholders' Equity Liabilities $ - - $ 1 Deferred income taxes 37 8 Stockholders' equity: Capital stock, common 2,914 2,979 Additional paid-in capital 2,606 4,095 Retained earnings 46,824 42,854 Unrealized gain on debt securities, net 232 279 - -------------------------------------------------------------------------------- $52,613 $50,216 ======= =======
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
STATEMENTS OF CASH FLOWS
NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS - --------------------------------------------------------------------------------
The carrying values and estimated fair values of the Company's financial instruments are as follows:
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.
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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 subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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 subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
//s//McGladrey & Pullen, LLP
Iowa City, Iowa February 7, 1997
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the Proxy Statement dated March 7, 1997, for the Annual Meeting of the Shareholders to be held on April 8, 1997, 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, 1996 - -------------------------------------------------------------------------------- FIRST FINANCIAL BANCORPORATION
Board of Directors Officers - ---------------------------------------------- ------------------------ Larry D. Ward, Chairman Robert M. Sierk Aliber Distinguished Professor, College of Law President & CEO The University of Iowa
Fritz L. Duda A. Russell Schmeiser Owner Executive Vice President Fritz Duda Company, Dallas, Texas & COO
Ralph J. Russell President & CEO Howard R. Green Company, Cedar Rapids, Iowa
A. Russell Schmeiser Executive Vice President & COO First Financial Bancorporation, Iowa City, Iowa
Robert M. Sierk President & CEO First National Bank, Iowa City, Iowa - -------------------------------------------------------------------------------- FIRST NATIONAL BANK, IOWA CITY, IOWA
Board of Directors Executive Officers - ------------------------------------------------ ------------------------ Larry D. Ward, Chairman Robert M. Sierk Aliber Distinguished Professor, College of Law President & CEO The University of Iowa
John R. Balmer William H. Burger Chief Executive Officer Senior Vice President Plumbers Supply Company, Iowa City, Iowa & Senior Trust Officer
Daniel W. Collins Lanny J. Benishek Henry B. Tippie Professor of Accounting Senior Vice President Department of Accounting & Senior Loan Officer The University of Iowa
A. Russell Schmeiser Kathrine L. Sigsbee Executive Vice President & COO Senior Vice President, First Financial Bancorpoartion, Iowa City, Iowa Retail
Richard J. Schwab Lorie E. Schweer Vice President & General Manager Senior Vice President, Information Technology Division Administration National Computer Systems, Inc., Iowa City, Iowa
Robert M. Sierk President & CEO First National Bank, Iowa City, Iowa
David J. Skorton, M.D. Vice President for Research The University of Iowa
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
FIRST NATIONAL BANK, IOWA CITY, IOWA (continued)
John P. Wall Farmer Johnson County, Iowa
Stephen H. Wolken, M.D. Partner Eye Physicians & Surgeons LLP, Iowa City, Iowa - -------------------------------------------------------------------------------- FIRST NATIONAL BANK, CEDAR RAPIDS, IOWA
Board of Directors Officers - ------------------------------------------------ ------------------------ Robert M. Sierk, Chairman Gary L. Bartlett President & CEO President & CEO First National Bank, Iowa City, Iowa
Gary L. Bartlett James P. Bell President & CEO Vice President & First National Bank, Cedar Rapids, Iowa Commercial Loan Officer
Wendy L. Dunn Frank E. Ceynar Interim Vice President for Academic Affairs Vice President and Interim Dean of the Faculty & Senior Trust Officer Coe College, Cedar Rapids, Iowa
Robert J. Latham Stacy L. Martin President Assistant Vice President Latham & Associates, Cedar Rapids, Iowa & Branch Manager
Ralph J. Russell Pamela A. Imerman President & CEO Assistant Vice President Howard R. Green Company, Cedar Rapids, Iowa & Consumer Loan Officer
A. Russell Schmeiser Katie Hiatt-Braasch Executive Vice President & COO Assistant Vice President First Financial Bancorporation, Iowa City, Iowa & Mortgage Loan Manager
Larry D. Ward Aliber Distinguished Professor, College of Law The University of Iowa
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the Proxy Statement dated March 7, 1997, for the Annual Meeting of the Shareholders to be held on April 8, 1997, 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the Proxy Statement dated March 7, 1997, for the Annual Meeting of the Shareholders to be held on April 8, 1997, 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the Proxy Statement dated March 7, 1997, for the Annual Meeting of the Shareholders to be held on April 8, 1997, under the caption "Interest of Management and Others in Certain Transactions" is incorporated into this Item 13 by this reference thereto.
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PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The fiscal 1996 and 1995 consolidated financial statements of First Financial Bancorporation, together with the report thereon of McGladrey & Pullen, LLP, dated February 7, 1997, are included on pages 18 to 42 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 47.
(b) Reports on Form 8-K
The Registrant filed on Form 8-K dated November 20, 1996 in connection with the announcement of the acquisition of West Branch Bancorporation, Inc.
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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 27, 1997 By \\s\\Robert M. Sierk -------------- -------------------------------------- Robert M. Sierk, President and Chief Executive Officer and Director
Date: March 27, 1997 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 27, 1997 By \\s\\Fritz L. Duda -------------- -------------------------------------- Fritz L. Duda, Director
Date: March 27, 1997 By \\s\\Ralph J. Russell -------------- -------------------------------------- Ralph J. Russell, Director
Date: March 27, 1997 By \\s\\Larry D. Ward -------------- -------------------------------------- Larry D. Ward, Director, Chairman of the Board
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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 amended and restated in its entirety on February 8, 1993. Pages 30-37 of Form 10-K dated March 26, 1993
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 earnings per common and 48 common equivalent share
21 Subsidiaries of the Registrant 49
(1)Directors, the named executive officers of the Registrant and the executive officers of the Iowa City and Cedar Rapids banks participate in this Plan.
(2)Certain named executive officers of the Registrant and certain executive officers of the Iowa City Bank participate in this Plan.
27** Financial Data Schedule as of December 31, 1996.
**Filed herewith.
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FIRST FINANCIAL BANCORPORATION AND SUBSIDIARIES (FIRST NATIONAL BANK, IOWA CITY, IOWA) (FIRST NATIONAL BANK, CEDAR RAPIDS, IOWA) EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Year Ended December 31, 1996 1995 1994 ----------- ----------- -----------
Shares of common stock, beginning 2,383,241 2,373,926 2,326,884 =========== =========== ===========
Shares of common stock, ending 2,331,412 2,383,241 2,373,926 =========== =========== =========== Computation of weighted average number of common and common equivalent shares:
Common shares outstanding at the beginning of the year 2,383,241 2,373,926 2,326,884
Weighted average number of shares issued 19,462 11,094 64,745
Weighted average of the common shares redeemed (50,175) (2,544) (21,899)
Weighted average of the common equivalent shares attributable to stock options granted, computed under the treasury stock method 10,120 10,417 14,589 ----------- ----------- ----------- Weighted average number of common and common equivalent shares 2,362,648 2,392,893 2,384,319 =========== =========== ===========
Net Income $ 5,916,000 4,570,000 $ 4,563,000 =========== =========== ===========
Earnings per common and common equivalent share: $ 2.50 $ 1.91 $ 1.91 =========== =========== ===========
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FIRST FINANCIAL BANCORPORATION
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21
Name Of Subsidiary Place of Incorporation - ------------------------------------ ----------------------------------- First National Bank, Iowa City, Iowa National Banking Association of the United States of America
First National Bank, Cedar Rapids, Iowa National Banking Association of the United States of America
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