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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 0-29814
FIRST BANCORP OF INDIANA, INC.
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(Exact name of registrant as specified in its charter)
Indiana 35-2061832
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2200 West Franklin Street, Evansville, Indiana 47712
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(Address of principal executive offices) (Zip Code)
(812) 423-3196
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changes since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 2,272,400 shares of common
stock, par value $0.01 per share, were outstanding as of April 30, 1999.
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FIRST BANCORP OF INDIANA, INC. AND SUBSIDIARY
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
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Page
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Part I Financial Information
Item 1. Consolidated Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial 6
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
Part II Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
Signatures
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FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
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MARCH 31, 1999 JUNE 30, 1998
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(Unaudited)
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ASSETS
Cash and due from banks $ 912,652 $ 926,974
Short-term interest-bearing deposits 25,641,531 10,442,095
Fed funds sold 1,025,000 320,000
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Total cash and cash equivalents 27,579,183 11,689,069
Interest-bearing deposits 1,981,000 2,279,000
Investment securities
Available for sale 3,367,889 4,375,672
Held to maturity 41,465,213 49,363,642
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Total investment securities 44,833,102 53,739,314
Loans 48,285,569 35,905,003
Allowance for loan losses (261,000) (250,000)
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Net loans 48,024,569 35,655,003
Premises and equipment 1,531,806 1,520,311
Federal Home Loan Bank stock 727,400 727,400
Other assets 4,549,910 3,353,715
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Total assets $ 129,226,970 $ 108,963,812
============== ==============
LIABILITIES
Deposits
Non-interest bearing $ 451,687 $ 197,161
Interest bearing 94,135,466 89,031,871
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Total deposits 94,587,153 89,229,032
Borrowings 0 3,645,000
Advances by borrowers for
taxes and insurance 612,410 355,841
Stock subscription escrow 17,333,245 0
Other liabilities 1,391,837 785,282
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Total liabilities 113,924,645 94,015,155
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EQUITY CAPITAL
Retained earnings--substantially
restricted 15,263,589 14,900,739
Accumulated other comprehensive income 38,736 47,918
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Total equity capital 15,302,325 14,948,657
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Total liabilities and equity capital $ 129,226,970 $ 108,963,812
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</TABLE>
See notes to unaudited consolidated financial statements
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FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
CONSOLIDATING OPERATIONS INFORMATION
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FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
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1999 1998 1999 1998
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(Unaudited) (Unaudited)
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INTEREST INCOME
Loans receivable $ 833,976 $ 669,714 $ 2,376,934 $ 1,974,108
Investment securities 790,382 1,095,195 2,424,435 3,179,462
Deposits with financial institutions 155,924 189,554 597,372 577,802
Federal funds sold 7,662 8,099 25,600 24,775
Other interest and dividend income 14,450 14,350 43,841 44,143
----------- ------------ ----------- ------------
Total interest income 1,802,394 1,976,912 5,468,182 5,800,290
----------- ------------ ----------- ------------
INTEREST EXPENSE
Deposits 1,069,327 1,190,789 3,306,073 3,368,951
Borrowings 44,120 86,179 148,040 295,776
Interest on stock subscription escrow 13,661 0 13,661 0
Other 14,425 10,501 38,210 27,133
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Total interest expense 1,141,533 1,287,469 3,505,984 3,691,860
----------- ------------ ----------- ------------
NET INTEREST INCOME 660,861 689,443 1,962,198 2,108,430
----------- ------------ ----------- ------------
Provision for Loan Losses 11,000 1,956 11,000 1,956
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NET INTEREST INCOME AFTER PROVISION 649,861 687,487 1,951,198 2,106,474
OTHER INCOME (LOSS)
Gain on disposal of branch office 0 0 0 261,024
Gain on disposal of deposits 0 0 0 138,528
Increase in cash surrender values
of life insurance 26,600 24,493 73,268 63,901
Other Income 50,294 37,860 159,612 88,242
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Total other income 76,894 62,353 232,880 551,695
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OTHER EXPENSE
Salaries and employee benefits 327,705 264,564 969,043 817,853
Net occupancy expense 48,814 54,838 135,424 134,009
Equipment expense 44,328 31,765 101,395 71,948
Deposit insurance expense 13,927 13,682 41,563 41,778
Data processing fees 30,030 26,833 82,831 73,521
Other expense 143,331 120,488 373,940 350,887
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Total other expense 608,135 512,170 1,704,196 1,489,996
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INCOME (LOSS) BEFORE INCOME TAX 118,620 237,670 479,882 1,168,173
Income tax expense (benefit) 21,821 69,574 117,032 393,991
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NET INCOME $ 96,799 $ 168,096 $ 362,850 $ 774,182
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</TABLE>
See notes to unaudited consolidated financial statements
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FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CAPITAL
(Unaudited)
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Accumulated
Other
Retained Comprehensive
Earnings Income Total
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Balances, June 30, 1998 $14,900,739 $ 47,918 $14,948,657
Comprehensive income
Net income 362,850 362,850
Other comprehensive income, net of tax--
unrealized gains on securities (9,182) (9,182)
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Comprehensive income 362,850 (9,182) 353,668
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Balances, March 31, 1999 $15,263,589 $ 38,736 $15,302,325
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</TABLE>
See notes to unaudited consolidated financial statements
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FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
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Nine Months Ended
March 31,
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1999 1998
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(Unaudited)
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NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES ($95,880) $ 1,032,125
Investing Activities
Net change in interest-bearing deposits 298,000 2,871,000
Proceeds from maturities of securities available for sale 999,253 2,636,625
Purchases of securities held to maturity (25,422,328) (27,737,198)
Proceeds from maturities of securities held to maturity 33,294,915 24,716,251
Net change in loans (12,380,566) (1,773,586)
Purchases of premises and equipment (106,215) (743,789)
Disposal of branch office and deposits (2,319,522)
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Net cash used by investing activities (3,316,941) (2,350,219)
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Financing Activities
Net change in
Non-interest bearing, interest-bearing demand
and savings deposits 7,354,673 (758,031)
Certificates of deposit (1,996,552) 10,896,100
Advances by borrows for taxes and insurance 256,569 242,951
Stock subscription escrow 17,333,245
Repayment of long-term debt (3,645,000) (3,000,000)
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Net cash provided by financing activities 19,302,935 7,381,020
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NET CHANGE IN CASH AND CASH EQUIVALENTS 15,890,114 6,062,926
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,689,069 7,763,172
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,579,183 $ 13,826,098
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ADDITIONAL CASH FLOW INFORMATION
Interest paid $ 2,994,628 $ 3,136,117
Income tax paid 105,000 333,400
</TABLE>
See notes to unaudited consolidated financial statements
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FIRST BANCORP OF INDIANA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
For purposes of this Form 10-Q, the financial statements and management's
discussion and analysis of financial condition and results of operations are
presented for the First Federal Savings Bank (the "Bank") since First Bancorp of
Indiana, Inc. (the "Company") was not active during any of the periods
presented. No pro forma effect has been given to the sale of the Company's
common stock in connection with the conversion of the Bank from a federally
chartered mutual savings bank to a stock savings bank (the "Conversion").
The accompanying consolidated financial statements of the Company have been
prepared in accordance with instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods. The results of operations for the
nine months ended March 31, 1999 are not necessarily indicative of the results
to be expected for the year ending June 30, 1999. The consolidated financial
statements and notes thereto should be read in conjunction with the audited
financial statements and notes thereto for the year ended June 30, 1998,
contained in the Company's prospectus dated February 11, 1999.
2. CONVERSION TO STOCK FORM OF OWNERSHIP
On September 16, 1998, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a federally chartered mutual savings bank to a
federally chartered capital stock savings bank. The conversion was accomplished
through the formation of the Company in November 1998, the adoption of a federal
stock charter, the sale of all of the Bank's stock to the Company on April 7,
1999 and the sale of the Company's stock to the public on April 7, 1999.
In connection with the Conversion, the Company issued 2,272,400 shares of
common stock for gross proceeds of $22.7 million. The aggregate purchase price
was determined by an independent appraisal. The Bank issued all its outstanding
capital stock to the Company in exchange for one-half of the net proceeds of the
offering. The Company accounted for the purchase in a manner similar to a
pooling of interests whereby assets and liabilities of the Bank maintain their
historical cost basis in the consolidated company.
3. EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Conversion, the Bank also established an Employee
Stock Ownership Plan ("ESOP") for the benefit of its employees. The Company
issued 87,400 shares of common stock to the ESOP in exchange for a 12 year note
in the amount of approximately $874,000. The
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Bank will make contributions in the amount necessary, when combined with any
dividends earned by the ESOP on unallocated shares, to make quarterly payments
of principal and interest on the note. As payments are made, the Company will
release shares from collateral. Released shares will be allocated to
participants over the term of the note.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
federal securities laws. These statements are not historical facts, rather they
are statements based on the Company's current expectations regarding its
business strategies and their intended results and its future performance.
Forward-looking statements are preceded by terms such as "expects,"
"believes,""anticipates," "intends," and similar expressions. Forward-looking
statements are not guarantees of future performance. Numerous risks and
uncertainties could cause or contribute to the Company's actual results,
performance and achievements to be materially different from those expressed or
implied by the forward-looking statements. Factors that may cause or contribute
to these differences include, without limitation, general economic conditions,
including changes in market interest rates and changes in monetary and fiscal
policies of the federal government; legislative and regulatory changes; the
Company's ability to remedy any computer malfunctions that may result from the
advent of the year 2000; and other factors disclosed periodically in the
Company's filings with the Securities and Exchange Commission. Because of the
risks and uncertainties inherent in forward-looking statements, readers are
cautioned not to place undue reliance on them, whether included in this report
or made elsewhere from time to time by the Company or on its behalf. The Company
assumes no obligation to update any forward-looking statements.
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the unaudited consolidated financial
statements and accompanying notes thereto.
FINANCIAL CONDITION
Total assets at March 31, 1999 were $129.2 million, an increase of $20.3
million from June 30, 1998. The increase is attributable primarily to short-term
interest-bearing deposits, which increased $15.2 million, an increase in net
loans of $12.4 million and an increase in other assets of $1.2 million partially
offset by a decrease of $8.9 million in investment securities. The increase in
total assets was primarily funded by stock subscription escrows of $17.3 million
being held in conjunction with the Conversion as of March 31, 1999, and a net
increase in deposits of $5.4 million, less a $3.6 million reduction in
borrowings.
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Short-term interest-bearing deposits increased as a result of funds
received in the Company's stock offering.
The increase in net loans receivable was primarily due to mortgage loan
originations of $12.4 million, net of sales of $3.8 million, and consumer loan
originations of $7.7 million, of which $7.5 million was originated by the
indirect consumer lending department, offset by scheduled amortization and
prepayments of $7.7 million. An additional $11,000 was added to the allowance
for loan losses in recognition of the increased risk inherent in the consumer
loan portfolio of $7.8 million, which had grown from $501,000 at June 30, 1998.
Originations for the consumer lending department represents less than a full
quarter of activity, as the department did not commence operations until late
January.
The increase in other assets resulted from $429,000 in conversion costs
incurred, an increase in receivables of $428,000 for drafts by automobile
dealers in anticipation of loans to be delivered and $188,000 in prepaid
interest to automobile dealers for closed loans.
The decrease in investment securities is a result of the Bank's business
strategy emphasis on increasing its mortgage loan, consumer loan and loan
servicing portfolios.
Total liabilities at March 31, 1999 were $113.9 million, an increase of
$19.9 million from June 30, 1998. The increase was primarily due to the $17.3
million being held in escrow for the Conversion. Also in connection with the
Conversion, deposits increased $5.4 million and deposit accounts pledged to
purchase Conversion stock totaled $7.5 million. Upon completion of the
Conversion, $6.2 million was transferred out of deposit accounts for the
purchase of Conversion stock and $1.7 million was refunded from the subscription
escrow account.
Nonperforming assets totaled $43,000 at March 31, 1999 and consisted of one
singly-family mortgage loan.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
1998
GENERAL. Net income for the three months ended March 31, 1999 decreased
$71,000 to $97,000 compared to $168,000 for the same three month period one year
ago. The decrease was primarily related to a decrease in net interest income and
an increase in other expenses. Net interest income decreased primarily as a
result of the impact of the continued low interest rate environment. Other
expenses increased as the Bank hired additional personnel and commenced its
indirect automobile lending program.
NET INTEREST INCOME. Net interest income was $661,000 for the three months
ended March 31, 1999 compared to $689,000 for the same period in 1998. Interest
income decreased $175,000 to $1.8 million due primarily to a $305,000 decrease
in interest income on investment securities, which was partially offset by an
increase of $164,000 in interest on loans. The reduced income on investment
securities was a result of a lower average balance, which was $51.3 million for
the three month period ended March 31, 1999 as compared to $65.0 million for the
same period last year, and a lower average yield, which was 6.16% for the three
months ended March 31, 1999
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compared to 6.74% for the three months ended March 31, 1998. The increased
income on loans was primarily due to increased volume. Interest expense for the
three months ended March 31, 1999 decreased $146,000 to $1.1 million from $1.3
million for the three months ended March 31, 1998 primarily due to lower deposit
and borrowing volumes.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $11,000
during the three months ended March 31, 1999 compared with $2,000 during the
same period last year. The increase in the allowance for loan losses reflected
the results of management's continued review of the loan portfolio. At March 31,
1999 the allowance for loan losses was $261,000, which equaled 607% of non-
performing loans.
NON-INTEREST INCOME. Non-interest income increased to $77,000 for the
three months ended March 31, 1999 as compared to $62,000 for the same period one
year ago. The increase was primarily attributable to higher fee income.
Subsequent to March 31, 1999, the Bank entered into an arrangement with another
financial institution under which the Bank will sell indirect automobile loans
on a flow basis for an origination fee of approximately 1.0 to 1.75% of the loan
amount. The Bank will sell all loans with servicing released and without
recourse.
NON-INTEREST EXPENSE. Total non-interest expense for the three months
ended March 31, 1999 was $608,000 compared to $512,000 for the same period in
1998. The increase was due to increased personnel costs and supply expenses in
connection with the addition of seven employees for the indirect consumer
lending department and higher ATM service charges.
INCOME TAXES. Income taxes for the three months ended March 31, 1999 were
$22,000, as compared to $70,000 for the same period one year ago. The lower
amount is a result of lower pretax income.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND
1998
GENERAL. Net income was $363,000 for the nine months ended March 31, 1999
as compared to $774,000 for the same period last year. The results of operations
for the nine months ended March 31, 1998 reflect a pre-tax gain of $400,000 on
the sale of a branch and its deposits.
NET INTEREST INCOME. Net interest income was $2.0 million for the nine
months ended March 31, 1999 as compared to $2.1 million for the same period in
1998. Total interest income decreased $332,000 to $5.5 million for the nine
months ended March 31, 1999 as compared to $5.8 million for the same period last
year. The $755,000 reduction in income on investment securities was primarily a
result of a lower average balance as the Company sought to replace investment
securities with higher yielding loans. This income reduction was partially
offset by increased income on loans of $403,000, which was primarily as a result
of increased loan volume. Interest expense decreased $186,000 to $3.5 million
for the nine months ended March 31, 1999 as compared to $3.7 million for the
same period in 1998. This decrease was primarily due to reduced borrowings and a
lower average cost of deposits.
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PROVISION FOR LOAN LOSSES. The provision for loan losses was $11,000
during the nine months ended March 31, 1999 compared with $2,000 during the same
period last year. The increase in the allowance for loan losses reflected the
results of management's continued review of the loan portfolio.
NON-INTEREST INCOME. Non-interest income was $233,000 for the nine month
period ended March 31, 1999 as compared to $552,000 for the same period in 1998.
Non-interest income for the nine month period ended March 31, 1998 included
$400,000 from the sale of a branch office and deposits. Excluding the effect of
this sale, non-interest income was $81,000 higher for the nine months ended
March 31, 1999 as compared to the same period a year ago. The increase was
mostly due to increased fee income.
NON-INTEREST EXPENSE. Non-interest expense was $1.7 million for the nine
months ended March 31, 1999 as compared to $1.5 million for the same period one
year ago. The increase was primarily attributable to an increase in salaries and
employee benefits of $151,000, resulting from additional staff, promotions and
general wage increases. During the current year, the Bank has added additional
personnel in the mortgage loan department, as well as adding an indirect
consumer lending department.
INCOME TAXES. Income taxes for the nine months ended March 31, 1999 were
$363,000 as compared to $774,000 for the same period one year ago. The lower
amount is a result of lower pretax income.
LIQUIDITY AND CAPITAL RESOURCES
Federal regulations require the Bank to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon economic
conditions and savings flows and is currently 4% of the average daily balance of
its net withdrawable savings deposits and short term borrowings. Liquid assets
for purposes of this ratio include cash and cash equivalents and investment
securities and agency-issued collateralized mortgage obligations generally
having maturities of less than five years. The Bank attempts to maintain levels
of liquidity in excess of those required by regulation. Maintaining levels of
liquidity acts, in part, to reduce the Bank's balance sheet exposure to interest
rate risk. At March 31, 1999, the Bank's liquidity ratio (liquid assets as a
percentage of net withdrawable savings deposits and short-term borrowings) was
26.4%.
The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Bank invests excess funds in overnight deposits
and other short-term interest-earning assets to provide liquidity to meet these
needs. At March 31, 1999, cash and cash equivalents totaled $27.6 million, or
21.3% of total assets. This amount included $17.3 million held in escrow for
subscriptions for the Company's common stock. At March 31, 1999, the Bank had
outstanding commitments to originate loans of $563,000. At the same time,
certificates of deposit which are scheduled to mature in one year or less
totaled $41.6 million. Based upon historical experience, management believes the
majority of maturing certificates of deposit will remain with the Bank. In
addition, management of the Bank believes that it can adjust the offering rates
of certificates of deposit to retain deposits in changing interest rate
environments. If a
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significant portion of these deposits are not retained by the Bank, the Bank
would be able to utilize Federal Home Loan Bank advances to fund deposit
withdrawals.
Management believes its ability to generate funds internally will satisfy
its liquidity requirements. If the Bank requires funds beyond its ability to
generate them internally, it has the ability to borrow funds from the Federal
Home Loan Bank. At March 31, 1999, the Bank had approximately $15.0 million
available to it under its borrowing arrangement with the Federal Home Loan Bank.
At March 31, 1999, the Bank had no advances from the Federal Home Loan Bank.
The Bank is required to maintain specific amounts of capital pursuant to
Office of Thrift Supervision ("OTS") regulations on capital standards. At March
31, 1999, the Bank exceeded its minimum capital requirements.
YEAR 2000 ISSUES
The Bank is a user of computers, computer software and equipment utilizing
embedded microprocessors that will be affected by the year 2000 issue. The year
2000 issue exists because many computer systems and applications use two-digit
date fields to designate a year. As the century date change occurs, date-
sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.
The Bank established a year 2000 committee in 1997 which is headed by the
Chief Operating Officer and includes all department heads. The committee has
developed and is currently implementing a comprehensive plan to make all
information and non-information technology assets year 2000 compliant. The
committee provides periodic reports to the Board of Directors in order to assist
the directors in their year 2000 readiness oversight role. The plan is comprised
of the following phases:
(1) Awareness - Educational initiatives on year 2000 issues and concerns.
This phase is ongoing, especially as it relates to informing customers
of the Bank's year 2000 preparedness.
(2) Assessment - Inventory of all technology assets and identification of
third-party vendors and service providers. The Bank has completed its
inventory of software and hardware that could potentially be effected
by the year 2000 issue.
(3) Renovation - Review of vendor and service providers responses to the
Bank's year 2000 inquiries and development of a follow-up plan and
timeline. This phase has been completed. None of the Bank's vendors or
service providers have indicated that they will be unable to make
their products year 2000 compliant on a timely basis.
(4) Validation - Testing all systems and third-party vendors for year 2000
compliance. The Bank is currently in this phase of its plan. A third-
party service bureau processes all customer transactions and has
indicated to the Bank that it has completed
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upgrades to its systems to be year 2000 compliant. The Bank has tested
the third party systems by reviewing and verifying the results of
proxy test transactions at six different test dates before and after
the year 2000 date change covering all of the applications used by the
Bank. The validation testing was completed before March 31, 1999.
Although the third-party service bureau does not anticipate any
significant interruptions in service, the third-party service bureau
has prepared a Y2K Business resumption Plan for January 1, 2000. Other
parties whose year 2000 compliance may effect the Bank include Fannie
Mae, the Federal Home Loan Bank-Indianapolis, brokerage firms, the
operator of the Bank's ATM network and the Bank's pension plan
administrator. These third parties have indicated their compliance or
intended compliance. Where it is possible to do so, the Bank has
scheduled testing with these third parties. Where testing is not
possible, the Bank will rely on certifications from vendors and
service providers. While reliance on certifications is less preferable
since it does not afford the Bank the opportunity to confirm year 2000
compliance, the Bank believes that failure of any certification to be
accurate would form the basis of a breach of warranty or similar claim
against the vendor providing the certification. Whether the Bank will
pursue a claim against any vendor that provides an inaccurate
certification will depend on the particular facts and circumstances of
the situation.
(5) Implementation - Replacement or repair of non-compliant technology. As
the Bank progresses through the validation phase, the Bank expects to
determine necessary remedial actions and provide for their
implementation. The Bank has already implemented a new year 2000
compliant computerized teller system and mortgage loan processing
system and has verified the year 2000 compliance of its computer
hardware and other equipment containing embedded microprocessors. The
Bank's plan provides for year 2000 readiness to be completed by mid-
1999.
The Bank estimates its total cost to replace computer equipment, software
programs or other equipment containing embedded microprocessors that were not
year 2000 compliant to be approximately $161,500. As of March 31, 1999,
approximately $157,000 of this amount has been incurred. System maintenance or
modification costs are being expensed as incurred, while the cost of new
hardware, software or other equipment is capitalized and amortized over their
estimated useful lives. The Bank does not separately track the internal costs
and time that its own employees spend on year 2000 issues. Such costs are
principally payroll costs.
Because the Bank is substantially dependent on its computer systems and the
computer systems of third parties, the failure of these systems to be year 2000
compliant could cause substantial disruption of the Bank's business and could
have a material adverse financial impact on the Bank. Failure to resolve year
2000 issues presents the following risks to the Bank, which the Bank believes
reflects its most reasonably likely worst-case scenario:
(1) The Bank could lose customers to other financial institutions,
resulting in a loss of revenue, if the Bank's third party service
bureau is unable to properly process customer transactions;
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(2) Governmental agencies, such as the Federal Home Loan Bank, and
correspondent banks could fail to provide funds to the Bank, which
could materially impair the Bank's liquidity and affect the Bank's
ability to fund loans and deposit withdrawals;
(3) Concern on the part of depositors that year 2000 issues could impair
access to their deposit account balances could result in the Bank
experiencing deposit outflows prior to December 31, 1999; and
(4) The Bank could incur increased personnel costs if additional staff is
required to perform functions that inoperative systems would have
otherwise performed.
Management believes that it is not possible to estimate the potential lost
revenue due to the year 2000 issue, as the extent and longevity of any potential
problem cannot be predicted. Because substantially all of the Bank's loan
portfolio consists of residential mortgage and consumer loans, management
believes that year 2000 issues will not impair the ability of the Bank's
borrowers to repay their debt.
There can be no assurances that the Bank's year 2000 plan will effectively
address the year 2000 issue, that the Bank's estimates of the timing and costs
of completing the plan will ultimately be accurate or that the impact of any
failure of the Bank or its third-party vendors and service providers to be year
2000 compliant will not have a material adverse effect on the Bank's business,
financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Bank does not maintain a trading account for any class of financial
instrument nor does it engage in hedging activities or purchase high-risk
derivative instruments. Furthermore, the Bank is not subject to foreign currency
exchange rate risk or commodity price risk.
The Bank uses interest rate sensitivity analysis to measure its interest
rate risk by computing changes in net portfolio value of its cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. Net portfolio value represents the
market value of portfolio equity and is equal to the market value of assets
minus the market value of liabilities, with adjustments made for off-balance
sheet items. This analysis assesses the risk of loss in market risk sensitive
instruments in the event of a sudden and sustained 100 to 400 basis point
increase or decrease in market interest rates with no effect given to any steps
that management might take to counter the effect of that interest rate movement.
Using data compiled by the OTS, the Bank receives a report that measures
interest rate risk by modeling the change in net portfolio value over a variety
of interest rate scenarios. This procedure for measuring interest rate risk was
developed by the OTS to replace the "gap" analysis, which is the difference
between interest-earning assets and interest-bearing liabilities that mature or
reprice within a specific time period.
The most recent interest rate sensitivity analysis the Bank received from
the OTS measured the Bank's interest rate risk at December 31, 1998. There were
no material changes in information
12
<PAGE>
in this analysis from the information disclosed in the Company's Prospectus
measuring the Bank's interest rate risk at September 30, 1998. Subsequent to
December 31, 1998, the Bank originated approximately $7.5 million in consumer
auto loans which generally have shorter durations than mortgage loans. Although
the Bank has not received the OTS interest rate sensitivity analysis for March
31, 1999, the Bank anticipates that the origination of consumer auto loans will
have a favorable impact on this analysis.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties in
which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business. In the opinion of management, after consultation with the Bank's legal
counsel, no significant loss is expected from any of such pending claims or
lawsuits. Except as described below, the Bank is not a party to any material
pending legal proceedings.
On January 8, 1999, Fidelity Federal Bancorp and its wholly owned
subsidiary, United Fidelity Bank, FSB, filed suit in Vanderburgh County Superior
Court (82D039901CP61) against the Bank in connection with the Bank's actions in
hiring new personnel for its consumer lending department, all of whom were
previously employed by United Fidelity Bank. The plaintiffs allege three counts
in their complaint. In the first count, the plaintiffs allege that the Bank
tortiously interfered with the plaintiff's contractual relationships with its
employees by intentionally inducing six persons to simultaneously break their
employment contracts and/or relationships with United Fidelity Bank. The
plaintiffs allege that the Bank's actions have effectively shut down the
consumer loan department of United Fidelity Bank and have caused damage to
United Fidelity Bank, including lost profits and damage to its reputation. In
the second count, the plaintiffs seek to impose a constructive trust on the
future profits generated by the Bank's consumer loan department in order to
avoid the unjust enrichment of the Bank. In the third count, the plaintiffs
allege that through the development of its consumer lending department United
Fidelity Bank had developed practices, policies, methods and procedures as well
as customer and prospective customer information which it considered proprietary
and confidential and that the Bank has misappropriated these trade secrets. The
complaint requests injunctive relief prohibiting the Bank from using the
information alleged to constitute trade secrets, unspecified monetary damages
and recovery of reasonable attorneys' fees and costs. As of the date of this
prospectus, the plaintiffs have not sought a temporary restraining order, a
preliminary injunction or any other interim relief. The Bank has answered the
plaintiffs' complaint and intends to vigorously defend the action. The parties
are currently conducting discovery. A trial date has tentatively been set for
December 6, 1999.
13
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
a. CHANGES IN SECURITIES. Not applicable.
b. USE OF PROCEEDS. On April 7, 1999, the Company completed an offering
of securities registered pursuant to the Securities Act of 1933, as
amended. In connection therewith:
1. The effective date of the registration Statement on Form S-1, as
amended (File No. 333-68793) was February 11, 1999.
2. The offering of securities was not underwritten. Capital
Resources, Inc. acted as marketing agent.
3. The class of securities registered was common stock, $0.01 par
value per share. The amount of such securities registered was
2,512,750 shares at an offering price of $10.00 per share. The
offering terminated on March 19, 1999 with the sale of 2,272,400
shares at a price of $10.00 per share.
4. The total offering expenses incurred by the Company were
$851,000, none of which were paid directly or indirectly to
directors or officers of the Company or their associates.
5. The net proceeds of the offering were $21.9 million of which
$874,000 was loaned to the Bank's employee stock ownership plan
to purchase stock in the offering. One-half of the net proceeds
were invested in the subsidiary bank and the remaining was
invested in short-term securities. These uses of proceeds do not
represent a material change in the use of proceeds described in
the Company's Prospectus dated February 11, 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ((S)249.308 OF THIS CHAPTER).
(a) Exhibits
3.1 Certificate of Incorporation of First Bancorp of Indiana,
Inc.*
3.2 Bylaws of First Bancorp of Indiana, Inc.*
27.0 Financial Data Schedule
__________________________
* Incorporated by reference from the Form S-1 (Registration
No. 333-68793, as amended, as filed on December 11, 1998.
(b) Reports on Form 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRST BANCORP OF INDIANA, INC.
Dated: May 14, 1999 By: /s/ Harold Duncan
----------------------------------
Harold Duncan
President, Chief Executive Officer
and Chairman of the Board
(principal executive officer)
Dated: May 14, 1999 By: /s/ Christopher A. Bengert
----------------------------------
Christopher A. Bengert
Treasurer
(principal financial and accounting officer)
16
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