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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-68793
PROSPECTUS
FIRST BANCORP OF INDIANA, INC.
(PROPOSED HOLDING COMPANY FOR FIRST FEDERAL SAVINGS BANK)
2,185,000 SHARES OF COMMON STOCK
================================================================================
First Federal Savings Bank of Evansville, Indiana is converting from the mutual
form to the stock form of organization. As part of the conversion, First
Federal will become wholly owned by First Bancorp of Indiana, Inc. The
conversion will not go forward if First Federal's members do not approve the
conversion or if First Bancorp does not sell at least the minimum number of
shares.
================================================================================
OFFERING SUMMARY
Price Per Share: $10.00
Proposed trading symbol: Nasdaq - FBEI
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MINIMUM MAXIMUM
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<S> <C> <C>
Number of shares........................... 1,615,000 2,185,000
Gross offering proceeds.................... $16,150,000 $21,850,000
Estimated offering expenses................ $ 671,000 $ 736,000
Estimated net proceeds..................... $15,479,000 $21,114,000
Estimated net proceeds per share........... $ 9.58 $ 9.66
</TABLE>
With the approval of the Office of Thrift Supervision, First Bancorp may
increase the maximum number of shares by up to 15% to 2,512,750 shares.
Capital Resources, Inc. will use its best efforts to assist First Bancorp
in selling at least the minimum number of shares but does not guarantee
that this number will be sold. Capital Resources is not obligated to
purchase any shares in this offering.
The offering to depositors will end at 12:00 Noon, local time, on March 19,
1999. If the conversion is not completed by May 3, 1999 and the Office of
Thrift Supervision gives First Federal additional time to complete the
conversion, First Bancorp will give all persons who have placed an order
the opportunity to modify or cancel their orders. First Bancorp will hold
all funds received in the offering in an interest-bearing savings account
at First Federal Savings Bank until the completion or termination of the
conversion. Funds will be returned promptly if the conversion is canceled.
_____________________
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
FOR A DISCUSSION OF RISKS THAT YOU SHOULD CONSIDER, SEE "RISK FACTORS" BEGINNING
ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION, NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
____________________
For assistance, please contact First Federal's stock information center at (812)
436-4777.
CAPITAL RESOURCES, INC.
THE DATE OF THIS PROSPECTUS IS FEBRUARY 11, 1999
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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Summary..................................................................... 1
Risk Factors................................................................ 6
Selected Financial Information.............................................. 10
Recent Developments......................................................... 12
Use of Proceeds............................................................. 16
Dividend Policy............................................................. 18
Market for Common Stock..................................................... 19
Capitalization.............................................................. 20
Historical and Pro Forma Regulatory Capital Compliance...................... 22
Pro Forma Data.............................................................. 23
Subscriptions by Executive Officers and Directors........................... 28
First Federal Savings Bank and Subsidiary Consolidated
Statements of Income....................................................... 29
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 30
Business of First Bancorp................................................... 43
Business of First Federal................................................... 44
Management of First Bancorp................................................. 61
Management of First Federal................................................. 62
Regulation.................................................................. 72
Taxation.................................................................... 80
The Conversion.............................................................. 82
Restrictions on Acquisition of First Bancorp................................ 97
Description of Capital Stock of First Bancorp............................... 102
Registration Requirements................................................... 103
Legal and Tax Opinions...................................................... 103
Experts..................................................................... 103
Where You Can Find More Information......................................... 104
Index to Consolidated Financial Statements.................................. 105
</TABLE>
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SUMMARY
Because this is a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus carefully
before you decide to invest. For assistance, please contact First Federal's
stock information center at (812) 436-4777.
THE COMPANIES
FIRST BANCORP OF INDIANA, INC. First Federal formed First Bancorp to be
2200 West Franklin Street the holding company for First Federal.
Evansville, Indiana 47712 To date, First Bancorp has only
(812) 423-3196 conducted organizational activities.
After the conversion, First Bancorp will
own all of First Federal's capital stock
and will direct, plan and coordinate
First Federal's business activities. In
the future, First Bancorp might become
an operating company or acquire or
organize other operating subsidiaries,
including other financial institutions,
although it currently has no specific
plans or agreements to do so.
FIRST FEDERAL SAVINGS BANK First Federal is a community oriented
2200 West Franklin Street financial institution that operates out
Evansville, Indiana 47712 of four offices in Evansville, Indiana.
(812) 423-3196 First Federal's principal business is
attracting deposits from the general
public and using those funds to
originate residential mortgage loans.
First Federal also maintains a
significant portfolio of investment and
mortgage-backed securities. At September
30, 1998, First Federal had assets of
$111.6 million, deposits of $91.0
million and equity of $15.1 million. For
a discussion of First Federal's business
strategy and recent results of
operations, see "Management's Discussion
and Analysis of Financial Condition and
Results of Operations." For a discussion
of First Federal's business activities,
see "Business of First Federal."
THE CONVERSION
WHAT IS THE CONVERSION (PAGE 82) The conversion is a change in First
Federal's legal form of organization. As
a mutual savings bank, First Federal
currently has no stock or stockholders.
Instead, First Federal operates for the
mutual benefit of its depositors, who
elect the board of directors and vote on
other important matters. Through the
conversion, First Federal will become a
stock savings bank and will be owned and
controlled by the holder of its stock,
which will be First Bancorp. Voting
rights in First Bancorp will belong to
its stockholders. First Federal is
conducting the conversion under the
terms of its plan of conversion. The
Office of Thrift Supervision has
approved the conversion with the
condition that First Federal's members
approve the plan of conversion. First
Federal has called a special meeting for
March 24, 1999 to vote on the plan of
conversion.
REASONS FOR THE CONVERSION (PAGE 83) By converting to the stock form of
organization, First Federal will be
structured in the form used by
commercial banks, most business entities
and a large number of savings
institutions. The conversion will be
important to First Federal's future
growth and performance by:
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. providing a larger capital base
from which First Federal can
operate;
. enhancing First Federal's
ability to attract and retain
qualified management through
stock-based compensation plans;
. enhancing First Federal's
ability to diversify into other
financial services related
activities; and
. expanding First Federal's
ability to provide services to
the public.
At this time, First Federal does not
have any specific plans or arrangements
for diversification or expansion.
BENEFITS OF THE CONVERSION TO In connection with the conversion, First
MANAGEMENT (PAGE 66) Bancorp and First Federal intend to
adopt the following benefit plans and
employment agreements:
. EMPLOYEE STOCK OWNERSHIP PLAN.
This plan intends to purchase
8% of the shares issued in the
conversion. The shares will be
allocated to employees over a
period of years in proportion
to their compensation.
. STOCK OPTION PLAN. Under this
plan, First Bancorp may award
stock options to key employees
and directors. The number of
options available under this
plan will be equal to 10% of
the number of shares sold in
the conversion. This plan will
require shareholder approval.
. MANAGEMENT RECOGNITION AND
DEVELOPMENT PLAN. Under this
plan, First Bancorp may award
shares of restricted stock to
key employees and directors at
no cost to the recipient. The
number of shares available
under this plan will equal 4%
of the number of shares sold in
the conversion. This plan will
require shareholder approval.
. EMPLOYMENT AGREEMENTS with
First Federal's President and
Executive Vice President. These
agreements will provide for
severance benefits if the
executive is terminated
following a change in control
of First Bancorp or First
Federal.
. EMPLOYEE SEVERANCE COMPENSATION
PLAN. This plan will provide
severance benefits to eligible
employees if there is a change
in control of First Bancorp or
First Federal.
For a table that summarizes the value of
these benefits, see "Management of First
Federal--Summary of Benefits to
Management from the Conversion." For a
discussion of certain risks associated
with these plans and agreements, see
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"Risk Factors--The implementation of
benefit plans will increase future
compensation expense" and "--Employment
agreements and severance plan could
discourage takeover attempts."
THE OFFERING
SUBSCRIPTION OFFERING (PAGE 86) First Federal has granted subscription
rights in the following order of priority
IMPORTANT: Subscription rights to:
are not transferable, and
persons with subscription rights 1. Persons with $50 or more on
may not subscribe for shares for deposit at First Federal as of
the benefit of any other person. June 30, 1997.
If you violate this prohibition
you may lose your right to
purchase shares in the 2. The First Federal Savings Bank
conversion and may be subject to Employee Stock Ownership Plan.
criminal prosecution and/or
other sanctions. 3. Persons with $50 or more on
deposit at First Federal as of
December 31, 1998.
4. First Federal's depositors as of
January 29, 1999 and borrowers
of First Federal as of March 16,
1988 whose loans continue to be
outstanding as of January 29,
1999.
To ensure that First Federal properly
identifies your subscription rights, you
must list all your savings accounts and
loans as of the eligibility dates on the
stock order form. IF YOU DO NOT LIST ALL
YOUR ACCOUNTS AND LOANS YOUR SUBSCRIPTION
MAY BE REDUCED OR REJECTED IF THE
OFFERING IS OVERSUBSCRIBED.
The subscription offering will expire at
12:00 Noon, local time, on March 19,
1999. If the offering is oversubscribed,
shares will be allocated in order of the
priorities described above following a
formula contained in the plan of
conversion and described under "The
Conversion--The Subscription, Direct
Community and Syndicated Community
Offerings."
COMMUNITY OFFERING (PAGE 87) First Bancorp may offer shares not sold
in the subscription offering to the
general public. People and trusts of
people who are residents of Vanderburgh,
Warrick, Posey, Gibson and Spencer
Counties, Indiana will have first
preference to purchase these shares. If
shares are available, First Bancorp
expects to offer shares to the general
public immediately after the conclusion
of the subscription offering, but may
begin a community offering at any time
during the subscription offering.
First Bancorp and First Federal may
reject orders received from the general
public either in whole or in part. If
your order is rejected in part, you will
not have the right to cancel the
remainder of the order.
PURCHASE PRICE (PAGE 92) The purchase price is $10.00 per share.
The purchase price was determined by the
Boards of Directors of First Bancorp and
First Federal in consultation with
Capital Resources. You
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will not pay a commission to buy any
shares in the conversion.
NUMBER OF SHARES TO BE ISSUED First Bancorp will sell between 1,615,000
(PAGE 92) and 2,185,000 shares of its common stock
in this offering. With the approval of
the Office of Thrift Supervision, First
Bancorp may increase the number of shares
to 2,512,750.
The amount of common stock being offered
in the conversion is based on an
independent appraisal of First Bancorp
and First Federal. Capital Resources
Group, Inc., the independent appraiser,
has estimated that, in its opinion, as of
December 4, 1998, the value of First
Bancorp and First Federal ranged between
$16,150,000 and $21,850,000, with a
midpoint of $19,000,000. Capital
Resources Group is the parent company of
Capital Resources. The appraisal was
based in part on First Federal's
financial condition and operations and
the effect of the additional capital
raised by the sale of common stock in
this offering. The independent appraisal
will be updated prior to the completion
of the conversion.
PURCHASE LIMITATIONS (PAGE 94) The minimum purchase is 25 shares.
The maximum purchase in the subscription
offering for any person or group of
persons through a single deposit account
is $150,000 of common stock, which equals
15,000 shares.
The maximum purchase for any person in
the community offering is $150,000 of
common stock, which equals 15,000 shares.
The maximum purchase in the subscription
offering and community offering combined
by any person, related persons or persons
acting together is $220,000 of common
stock, which equals 22,000 shares.
HOW TO PURCHASE COMMON STOCK If you want to subscribe for shares of
(PAGE 90) common stock, complete an original stock
order form and send it together with full
IMPORTANT: After First payment to First Federal in the
Federal receives your postage-paid envelope provided. You must
order, you cannot sign the certification that is part of
withdraw or change your the stock order form. First Federal must
order without the receive your stock order form before the
consent of First end of the subscription offering.
Federal. If First
Bancorp intends to sell You may pay for shares in any of the
fewer than 1,615,000 following ways:
shares or more than
2,512,750 shares, all . IN CASH if delivered in person.
subscribers will be
notified and provided . BY CHECK OR MONEY ORDER made
with the opportunity to payable to First Bancorp of
modify or cancel their Indiana, Inc.
orders.
. BY WITHDRAWAL from an account at
First Federal. To use funds in an
IRA at First Federal you must
transfer your account to an
unaffiliated institution or
broker. Please contact First
Federal's stock information center
at least one week before the
expiration of the subscription
offering for assistance.
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PLEASE NOTE: Payment for subscriptions of
$25,000 or more must be by certified or
cashier's check, money order or account
withdrawal.
First Federal will pay interest on
subscription funds at the rate it pays on
passbook accounts from the date it
receives your funds until completion or
termination of the conversion. All funds
authorized for withdrawal from deposit
accounts with First Federal will earn
interest at the applicable account rate
until completion of the conversion. There
will be no early withdrawal penalty for
subscriptions paid for by withdrawal from
certificates of deposit.
USE OF PROCEEDS (PAGE 16) First Bancorp will use 50% of the net
proceeds of the offering to buy all of
the common stock of First Federal. First
Federal will use these funds to expand
its residential and consumer loan
portfolios and to purchase investments
similar to the kinds it currently holds.
First Bancorp will loan an amount equal
to 8% of the gross proceeds of the
offering to First Federal's employee
stock ownership plan to fund its purchase
of common stock and will keep the
remainder of the net proceeds for general
corporate purposes. These purposes may
include, for example, paying dividends or
buying back shares of common stock. First
Bancorp and First Federal may also use
the proceeds of the offering for
expansion and diversification of their
business, although they have no specific
plans for such activity at this time.
PURCHASES BY OFFICERS AND DIRECTORS First Federal's directors and executive
(PAGE 28) officers intend to subscribe for 98,600
shares, which equals 4.5% of the shares
issued at the maximum of the offering
range. Directors and executive officers
will pay the same $10.00 per share price
as all other persons who purchase shares
in the conversion.
MARKET FOR COMMON STOCK (PAGE 19) First Bancorp has obtained preliminary
approval for its common stock to be
quoted on the Nasdaq National Market
under the symbol FBEI. After shares of
First Bancorp common stock commence
trading, you may contact a stock broker
to buy or sell shares. First Bancorp
cannot assure you that there will be an
active trading market for its common
stock. See "Risk Factors--Possible
limited market for First Bancorp's common
stock may negatively affect the market
price."
DIVIDEND POLICY (PAGE 18) First Bancorp intends to adopt a policy
of paying regular cash dividends, but has
not yet made a decision as to how much or
how often.
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RISK FACTORS
Before investing in the common stock please carefully consider the matters
discussed below. First Bancorp's common stock is not a savings account or
deposit and is not insured by the Federal Deposit Insurance Corporation or any
other government agency.
COMPETITION HAS HURT FIRST FEDERAL'S NET INTEREST INCOME
First Federal faces intense competition both in making loans and attracting
deposits. Competition has made it more difficult for First Federal to make new
loans and has led First Federal to maintain a large investment in debt and
mortgage-backed securities, which generally earn less interest for First Federal
than loans. In recent years, in order to compete for deposits with larger
financial institutions that provide a wider range of products and services,
First Federal has offered amongst the highest deposit rates in its market area.
This competition for loans and deposits has contributed to a narrow interest
rate spread, which has hurt First Federal's net interest income. For more
information about the market in which First Federal operates and the competition
it faces, see "Business of First Federal--Market Area" and "--Competition."
EXPANDED CONSUMER LENDING OPERATIONS WILL MAKE LOAN PORTFOLIO MORE RISKY AND MAY
NOT BE AS PROFITABLE AS EXPECTED
In January 1999, First Federal significantly expanded its consumer lending
operations by hiring four loan officers and three clerical staff to develop an
indirect automobile lending program. First Federal's goal is to sell 60% to 80%
of the automobile loans that it makes and to grow its consumer loan portfolio to
$20 million over two years. Automobile loans tend to have a higher rate of
default than mortgage loans and full repayment of defaulted loans is more
unlikely because the value of the automobiles securing these loans goes down
over time. First Federal's consumer loan portfolio will have additional risk
because a portion of the loans that First Federal intends to keep will be those
where the borrower has a lower credit rating. These loans have higher interest
rates to compensate for the lower credit quality. As its consumer loan portfolio
grows, First Federal expects to increase its allowance for loan losses by
charging a provision for loan losses against income. If actual losses exceed
expectations, First Federal could have to take additional charges to income.
First Federal expects to make a profit on the sale of automobile loans. However,
if First Federal is not able to make as many loans as it expects, the income
from its consumer lending operations may not exceed the costs of these
operations.
INCREASING INTEREST RATES MAY HURT FIRST FEDERAL'S PROFITS
Like most financial institutions, First Federal's ability to make a profit
depends largely on its net interest income, which is the difference between
interest income it receives from its loans and investment securities and
interest it pays on deposits and borrowings. If interest rates rise, First
Federal anticipates that its net interest income could be negatively affected as
interest paid on deposits would increase more quickly than the interest received
on loans and investment securities. In addition, rising interest rates may
adversely affect First Federal's earnings because rising rates may cause a
decrease in customer demand for loans and a reduction in value of First
Federal's securities available for sale. For further discussion of how changes
in interest rates could impact First Federal, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Market Risk
Analysis."
HIGH CAPITAL LEVELS WILL CAUSE FIRST BANCORP TO HAVE A BELOW AVERAGE RETURN ON
EQUITY AFTER CONVERSION
Return on equity, which is net income divided by average equity, is a ratio
used by many investors to compare the performance of a particular company with
other companies. In recent years, First Federal's return on equity has been
below the average return on equity for publicly held savings associations and
banks of comparable size. As a result of the additional capital to be raised in
this offering, First Bancorp expects that after the conversion its return on
equity will continue to be below average. In addition, compensation expense
will increase as a result of adopting new benefit plans. Over time, First
Bancorp intends to use the proceeds from this offering to increase earnings per
share and book value per share, without assuming undue risk, with the goal of
achieving a return on
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equity competitive with other publicly traded financial institutions. This goal
could take a number of years to achieve, and First Bancorp cannot assure you
that this goal can be attained. Consequently, you should not expect a
competitive return on equity in the near future. See "Pro Forma Data" for an
illustration of the impact of this stock offering.
THE IMPLEMENTATION OF BENEFIT PLANS WILL INCREASE FUTURE COMPENSATION EXPENSE
First Federal will recognize additional material employee compensation and
benefit expenses that stem from the shares purchased or granted to employees and
executives under new benefit plans. First Federal cannot predict the actual
amount of these new expenses because applicable accounting practices require
that they be based on the fair market value of the shares of common stock at
specific points in the future. First Federal would recognize expenses for its
Employee Stock Ownership Plan when shares are committed to be released to
participants' accounts and would recognize expenses for the Management
Recognition and Development Plan over the vesting period of awards made to
recipients. These expenses have been reflected in the pro forma financial
information under "Pro Forma Data" assuming the $10.00 per share purchase price
as fair market value. Actual expenses, however, may be higher or lower.
Recently proposed accounting rules would also require First Bancorp to recognize
compensation expense for stock options awarded to non-employee directors. For
further discussion of these plans, see "Management of First Federal--Benefits."
ISSUANCE OF SHARES FOR BENEFIT PROGRAMS MAY REDUCE YOUR OWNERSHIP INTEREST
If stockholders approve the new stock-based benefit plans, First Bancorp
intends to issue shares to its officers and directors through these plans. If
the shares for the Management Recognition and Development Plan are issued from
authorized but unissued stock, your ownership interest could be reduced by up to
approximately 3.85%. If the shares for the Stock Option Plan are issued from
authorized but unissued stock, your ownership interest could be reduced by up to
approximately 9.09%. See "Pro Forma Data."
POSSIBLE VOTING CONTROL BY MANAGEMENT AND EMPLOYEES MAY DISCOURAGE TAKEOVER
ATTEMPTS
The shares that First Federal's directors and executive officers intend to
purchase in the conversion, when combined with the shares that may be awarded or
sold to participants under First Federal's Employee Stock Ownership Plan and
First Bancorp's stock-based benefit plans, could ultimately result in management
and employees controlling a significant percentage of First Bancorp's common
stock. If these individuals were to coordinate their actions they could have
significant influence over the outcome of any stockholder vote. This voting
power may discourage takeover attempts that you would like to see happen. In
addition, the total voting power of management and employees could reach in
excess of 20% of First Bancorp's outstanding stock. That level would enable
management and employees as a group to defeat any stockholder matter that
requires an 80% vote. For information about management's intended purchases and
shares that may be awarded under new benefit plans, see "Subscriptions by
Executive Officers and Directors" and "Management of First Federal--Benefits."
ANTI-TAKEOVER PROVISIONS AND STATUTORY PROVISIONS COULD DISCOURAGE TAKEOVER
ATTEMPTS
Provisions in First Bancorp's Articles of Incorporation and Bylaws, the
corporation law of the state of Indiana, and federal regulations may make it
difficult and expensive to pursue a takeover attempt that management opposes.
These provisions may discourage or prevent takeover attempts that you would like
to see happen. These provisions will also make the removal of the current board
of directors or management of First Bancorp, or the appointment of new
directors, more difficult. These provisions include: limitations on voting
rights of beneficial owners of more than 10% of First Bancorp's common stock;
supermajority voting requirements for certain business combinations; the
election of directors to staggered terms of three years; the elimination of
cumulative voting for directors; the removal of directors without cause only
upon the vote of holders of two thirds of the outstanding voting shares; and
limitations on calling special meetings of shareholders. The Bylaws of First
Bancorp also contain provisions regarding the timing and content of stockholder
proposals. For further information about these provisions, see "Restrictions on
Acquisition of First Bancorp."
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EMPLOYMENT AGREEMENTS AND SEVERANCE PLAN COULD DISCOURAGE TAKEOVER ATTEMPTS
The proposed employment agreements with the President and Executive Vice
President of First Federal provide for cash severance payments if the executive
is terminated following a change in control of First Bancorp or First Federal.
If a change in control had occurred at September 30, 1998 the aggregate amount
of the severance payment to these executive officers under the agreements would
have been approximately $486,000. In addition, if a change in control had
occurred at September 30, 1998 and all eligible employees had been terminated,
the aggregate payment due under First Federal's severance plan would have been
approximately $381,000. These arrangements may have the effect of increasing
the costs of acquiring First Bancorp, thereby discouraging future attempts to
take over First Bancorp or First Federal. For information about the proposed
employment agreements and the severance plan, see "Management of First Federal--
Executive Compensation."
YEAR 2000 DATA PROCESSING PROBLEMS COULD INTERRUPT FIRST FEDERAL'S BUSINESS AND
HAVE AN ADVERSE FINANCIAL IMPACT
First Federal uses computers, computer software and equipment utilizing
embedded microprocessors that will be affected by the year 2000 issue. As the
century date change occurs, date-sensitive systems that use a two-digit date
field to designate a year 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.
Because First Federal 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 First Federal's business and
could have a material adverse financial impact on First Federal. Failure to
resolve year 2000 issues presents the following risks to First Federal:
(1) First Federal could lose customers to other financial institutions,
resulting in a loss of revenue, if First Federal's third party
service bureau is unable to process properly customer transactions;
(2) governmental agencies, such as the Federal Home Loan Bank, and
correspondent banks could fail to provide funds to First Federal,
which could materially impair First Federal's liquidity and affect
First Federal'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 First
Federal experiencing deposit outflows prior to December 31, 1999;
and
(4) First Federal could incur increased personnel costs if additional
staff is required to perform functions that inoperative systems
would have otherwise performed.
First Federal has developed a plan and created a committee to analyze how the
year 2000 will impact its operations and to monitor the status of its vendors.
For further information on First Federal's year 2000 compliance efforts, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Issues."
POSSIBLE LIMITED MARKET FOR FIRST BANCORP'S COMMON STOCK MAY NEGATIVELY AFFECT
THE MARKET PRICE
Although First Bancorp has received preliminary approval to list its common
stock on the Nasdaq National Market, First Bancorp does not know whether an
active trading market will develop. Because of the relatively small size of
this offering, you may not be able to sell all of your shares of First Bancorp
on short notice and the sale of a large number of shares at one time could
temporarily depress the market price. Furthermore, First Bancorp cannot
guarantee that if you purchase shares in the conversion you will be able to sell
your shares at or above the $10.00 purchase price. For further information
about the trading market for First Bancorp's common stock, see "Market for
Common Stock."
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POSSIBLE INCREASE IN NUMBER OF SHARES ISSUED WOULD RESULT IN LESS FAVORABLE
PRICING RATIOS
Capital Resources Group may increase its appraisal up to 15% to reflect the
results of the offering or changes in the financial condition or results of
operations of First Federal or changes in market conditions or general
financial, economic or regulatory conditions after the offering begins without
any further notice to you. If this happens, First Bancorp anticipates that it
would issue, without any additional notice, up to 2,512,750 shares of common
stock for an aggregate price of up to $25,127,500. This increase in the number
of shares would decrease pro forma net earnings per share and stockholders'
equity per share, which means that the price-to-earnings and price-to-book
ratios for First Bancorp would increase. Because many investors favor
purchasing shares of financial institutions at lower price-to-book and price-to-
earnings ratios, an increase in the number of shares sold could negatively
effect the market price of First Bancorp's common stock. For further
information regarding pro forma information, see "Pro Forma Data."
YOUR SUBSCRIPTION FUNDS COULD BE HELD FOR AN EXTENDED PERIOD IF COMPLETION OF
THE CONVERSION IS DELAYED
If the conversion is not completed by May 3, 1999 as a result of changes
that lead to a material revision in the appraisal of First Federal and the
Office of Thrift Supervision consents to an extension of time to complete the
conversion, First Bancorp would conduct a resolicitation offering. Federal
regulations permit the Office of Thrift Supervision to grant one or more time
extensions, none of which may exceed 90 days. Extensions may not go beyond
March 24, 2001. In the resolicitation offering, all subscribers would be mailed
a supplement to this prospectus and given the opportunity to confirm, modify or
cancel their subscriptions. Failure to respond would be deemed a cancellation
and all subscription funds, together with accrued interest, would be returned to
the subscriber, or if the subscriber authorized payment by withdrawal of funds
on deposit at First Federal, that authorization would terminate. If a
subscriber affirmatively confirms his or her subscription order during the
resolicitation offering, First Bancorp and First Federal would continue to hold
the subscriber's subscription funds until the end of the resolicitation
offering. All subscriptions held by First Bancorp and First Federal when the
resolicitation offering expires would be irrevocable without the consent of
First Bancorp and First Federal until the completion or termination of the
conversion.
REGULATORY REFORM LEGISLATION MAY REDUCE POWERS OF FIRST BANCORP AND FIRST
FEDERAL
In 1998 the U.S. Congress considered legislation that was intended to
modernize the financial services industry. Under the proposed legislation,
newly formed unitary savings and loan holding companies would not be permitted
to exercise the broad powers currently available to these companies. Previous
proposals would have eliminated the federal savings association charter by
requiring that all federal savings associations convert to national banks or
other banking charters, but such provision was not included in the final
legislation that was considered. First Federal is a federal savings association
and First Bancorp, upon completion of the conversion, will be a unitary savings
and loan holding company. First Bancorp does not know whether federal
legislation will be enacted that affects the federal savings association charter
or unitary savings and loan holding companies, or if such legislation is
enacted, what form this legislation might take. Accordingly, management of
First Federal and First Bancorp cannot predict what impact, if any, banking
reform legislation would have on the activities and operations of First Federal
and First Bancorp.
9
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables provide selected information concerning the financial
position and results of operations of First Federal at the dates and for the
periods indicated. You should read this information in conjunction with the
Consolidated Financial Statements and Notes presented at the end of this
prospectus. Information at September 30, 1998 and for the three months ended
September 30, 1998 and 1997 is unaudited, but, in the opinion of management,
reflects all adjustments necessary for a fair presentation. None of these
adjustments are other than normal recurring entries. Results for the three
months ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending June 30, 1999.
<TABLE>
<CAPTION>
At At June 30,
September 30, -------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
------------ --------- --------- ---------- --------- ---------
(IN THOUSANDS)
SELECTED BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C>
Total assets........................... $111,627 $108,964 $110,747 $110,905 $105,846 $105,803
Other investment securities............ 15,168 18,195 18,940 17,246 8,788 6,455
Mortgage-backed securities............. 36,835 35,545 41,394 41,607 47,936 51,118
Loans receivable, net.................. 38,183 35,655 32,164 32,441 32,492 32,396
Deposit accounts....................... 90,961 89,229 88,560 88,844 86,886 87,615
Borrowings............................. 3,645 3,645 7,050 7,500 5,000 5,000
Equity capital......................... 15,117 14,949 14,053 13,575 13,002 12,363
</TABLE>
<TABLE>
<CAPTION>
Three Months
Ended
September 30, Years Ended June 30,
--------------------- -------------------------------------------------------
1998 1997 1998 1997 1996 1995 1994
-------- -------- -------- -------- ------- -------- -------
(IN THOUSANDS)
SELECTED OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income...................... $1,831 $1,887 $7,715 $7,474 $7,295 $6,658 $6,069
Interest expense..................... 1,185 1,192 4,977 4,763 4,645 4,062 3,656
------ ------ ------ ------ ------ ------ ------
Net interest income.................. 646 695 2,738 2,711 2,650 2,596 2,413
Provision for loan losses............ -- -- -- -- 100 -- --
------ ------ ------ ------ ------ ------ ------
Net interest income after provision
for loan losses..................... 646 695 2,738 2,711 2,550 2,596 2,413
Other income......................... 76 43 601(1) 179 169 219 214
Other expense........................ 506 415 2,044 2,391(2) 1,900 1,901 1,863
------ ------ ------ ------ ------ ------ ------
Income before income taxes and
cumulative effect of a change in
accounting principle.............. 216 323 1,295 499 819 914 764
Income taxes......................... 61 108 415 112 199 264 301
Cumulative effect of change in
accounting principle(3)........... -- -- -- -- -- -- 11
------ ------ ------ ------ ------ ------ ------
Net income..................... $ 155 $ 215 $ 880 $ 387 $ 620 $ 650 $ 474
====== ====== ====== ====== ====== ====== ======
</TABLE>
____________________
(1) Includes gains of $400,000 on the sale of a branch office and related
deposits.
(2) Includes one-time assessment of $561,000 to recapitalize the Savings
Association Insurance Fund.
(3) Reflects adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
10
<PAGE>
<TABLE>
<CAPTION>
AT
SEPTEMBER 30, AT JUNE 30,
-----------------------------------
1998 1998 1997 1996 1995 1994
------------- ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OTHER DATA:
Number of:
Real estate loans outstanding..... 773 747 759 789 811 855
Deposit accounts.................. 8,799 8,852 9,226 9,515 9,890 9,716
Full-service offices.............. 4 4 4 4 4 4
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEARS ENDED JUNE 30,
-------------------- ------------------------------------------------------
1998 1997 1998 1997 1996 1995 1994
----------- -------- --------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
PERFORMANCE RATIOS (1):
Return on average assets (2)...... 0.56% 0.78% 0.77% 0.35% 0.57% 0.62% 0.47%
Return on average equity (3)...... 4.13 6.08 6.04 2.83 4.66 5.14 3.91
Average equity as a percent of
average total assets............ 13.58 12.82 12.79 12.35 12.33 12.01 11.91
Interest rate spread (4).......... 1.97 2.15 2.03 2.08 2.09 2.01 1.98
Net interest margin (5)........... 2.47 2.64 2.53 2.56 2.57 2.53 2.44
Average interest-earning assets
to average interest-bearing
liabilities..................... 110.98 110.88 110.75 110.71 110.68 113.18 112.51
Other expenses as a percent of
average total assets............ 1.83 1.50 1.79 2.16 1.76 1.80 1.83
CAPITAL RATIOS:
Tangible.......................... 13.47 12.96 13.60 12.62 12.28 12.29 11.69
Core.............................. 13.47 12.96 13.60 12.62 12.28 12.29 11.69
Risk-based........................ 34.88 39.01 34.75 37.35 36.95 36.42 35.13
ASSET QUALITY RATIOS:
Nonperforming loans as a percent
of total loans (6).............. 0.00 0.09 0.00 0.08 0.00 0.12 0.22
Nonperforming assets as a percent
of total assets (7)............. 0.00 0.02 0.00 0.02 0.00 0.04 0.07
Allowance for loan losses as a
percent of total loans.......... 0.65 0.79 0.70 0.77 0.76 0.46 0.46
Allowance for loan losses as a
percent of nonperforming loans.. N/A 925.93 N/A 925.93 N/A 263.16 138.89
Net charge-offs as a percent of
average outstanding loans....... N/A N/A N/A N/A N/A N/A N/A
</TABLE>
____________________
(1) Ratios for the three-month periods are annualized where appropriate.
(2) Net income divided by average total assets.
(3) Net income divided by average total equity.
(4) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Nonperforming loans consist of loans accounted for on a nonaccrual basis
and accruing loans 90 days or more past due.
(7) Nonperforming assets consist of nonperforming loans, real estate acquired
in settlement of loans, and restructured loans. See "Business of First
Federal--Lending Activities--Nonperforming Assets and Delinquencies."
11
<PAGE>
RECENT DEVELOPMENTS
The selected financial and operating data presented below at December 31,
1998 and for the three and six-month periods ended December 31, 1998 and 1997
are derived from unaudited financial data but, in the opinion of management,
reflects all adjustments which are necessary to present fairly the results from
such interim periods. These adjustments consist only of normal recurring
adjustments. The results of operations for the three and six months ended
December 31, 1998 are not necessary indicative of the results of operations that
may be expected for the year ending June 30, 1999.
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, JUNE 30,
1998 1998
------------ --------
(IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL DATA:
Total assets..................................... $112,482 $108,964
Other investment securities...................... 15,592 18,195
Mortgage-backed securities....................... 37,862 35,545
Loans receivable, net............................ 39,020 35,655
Deposit accounts................................. 92,310 89,229
Borrowings....................................... 3,645 3,645
Equity capital................................... 15,209 14,949
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -----------------
1998 1997 1998 1997
------ ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income...................................................... $ 1,835 $ 1,937 $ 3,666 $ 3,823
Interest expense..................................................... 1,180 1,213 2,364 2,404
------- ------- ------- -------
Net interest income.................................................. 655 724 1,302 1,419
Provision for loan losses............................................ -- -- -- --
------- ------- ------- -------
Net interest income after provision
for loan losses................................................... 655 724 1,302 1,419
Other income......................................................... 81 447 155 489
Other expense........................................................ 590 563 1,096 978
------- ------- ------- -------
Income before income taxes........................................... 146 608 361 930
Income taxes......................................................... 35 217 95 324
------- ------- ------- -------
Net income..................................................... $ 111 $ 391 $ 266 $ 606
======= ======= ======= =======
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- --------------------
1998 1997 1998 1997
-------- -------- ------- -------
SELECTED FINANCIAL RATIOS AND OTHER DATA (1):
<S> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets (2)................................................ 0.40% 1.40% 0.48% 1.09%
Return on average equity (3)................................................ 2.93 10.76 3.52 8.45
Average equity as a percent of average
total assets............................................................. 13.52 12.98 13.55 12.90
Interest rate spread (4).................................................... 1.96 2.23 1.97 2.18
Net interest margin (5)..................................................... 2.47 2.72 2.47 2.68
Average interest-earning assets to average
interest-bearing liabilities............................................. 111.36 110.92 111.17 110.90
Other expenses as a percent of average
total assets............................................................. 2.10 2.01 1.97 1.76
CAPITAL RATIOS:
Tangible.................................................................... 13.46 12.42 13.46 12.42
Core........................................................................ 13.46 12.42 13.46 12.42
Risk-based.................................................................. 31.08 34.79 31.08 34.79
ASSET QUALITY RATIOS:
Total nonperforming loans as a percent of
total loans (6).......................................................... 0.11 0.18 0.11 0.18
Nonperforming assets as a percent of
total assets (7)......................................................... 0.04 0.05 0.04 0.05
Allowance for loan losses as a percent of
total loans.............................................................. 0.64 0.79 0.64 0.79
Allowance for loan losses as a percent of
nonperforming loans...................................................... 581.40 446.43 581.40 446.43
Net charge-offs as a percent of average
outstanding loans........................................................ N/A N/A N/A N/A
</TABLE>
______________________________
(1) Ratios for the three- and six-month periods are annualized where
appropriate.
(2) Net income divided by average total assets.
(3) Net income divided by average total equity.
(4) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Nonperforming loans consist of loans accounted for on a nonaccrual basis
and accruing loans 90 days or more past due.
(7) Nonperforming assets consist of nonperforming loans, real estate acquired
in settlement of loans, and restructured loans. See "Business of First
Federal--Lending Activities--Nonperforming Assets and Delinquencies."
13
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND JUNE 30, 1998
Total assets increased $3.5 million, or 3.2%, to $112.5 million at December
31, 1998 compared to June 30, 1998. The largest increase was in loans, which
increased $3.4 million, or 9.4%. The increase in loans was principally in real
estate mortgage loans, and was a result of First Federal's competitive mortgage
interest rates in its target market, favorable nationwide mortgage rates which
spurred an increase in home purchases and refinancing, and the results of hiring
a new loan originator in fiscal 1998. During the three months ended December
31, 1998, First Federal's two commissioned loan officers left to pursue other
opportunities. While First Federal is actively seeking to fill these positions,
a prolonged vacancy could negatively impact the volume of loan originations.
First Federal adjusted its investment portfolio by decreasing debt securities by
$2.6 million and increasing mortgage-backed securities by $2.3 million. The
growth in loans was primarily funded by an increase in deposits of $3.1 million,
or 3.5%. The deposit increase can be attributed primarily to competitive
interest rates offered on certificates of deposit and money market accounts.
Borrowings were unchanged.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER
31, 1998 AND 1997
GENERAL. Net income decreased by $280,000 to $111,000 for the three
months ended December 31, 1998 from $391,000 for the same period in 1997. Net
income for the six months ended December 31, 1998 decreased $340,000 to $266,000
from $606,000 for the six months ended December 31, 1997. First Federal
recognized gains of $400,000 in 1997 in connection with a branch sale, with no
comparable transaction in 1998. The decrease in net income also was related to
a decrease in net interest income caused by the narrowing of First Federal's
interest rate spread to 1.97% compared to 2.18% for the first half of last year
and to increased other expenses. The decrease in the interest rate spread is
due to management's decision to offer competitive mortgage interest rates in an
effort to increase First Federal's loan portfolio, and to offer certificates of
deposit and money market accounts at rates slightly higher than that of its
competition to attract the funds to support loan growth.
NET INTEREST INCOME. Net interest income decreased $69,000, or 9.5%, in
the second quarter and $117,000, or 8.2%, in the first six months of fiscal 1999
compared to the same periods last year, primarily as a result of the narrowing
of First Federal's interest rate spread.
Total interest income decreased 5.3% to $1.8 million for the second quarter
and decreased 4.1% to $3.7 million for the first half of fiscal 1999. The
decrease for both periods was caused primarily by a reduced yield on investment
securities as higher yielding securities matured, repriced or were repaid. This
was partially offset by a larger average balance of higher yielding loans. The
average yield on interest-earning assets was 6.95% for the six months ended
December 31, 1998 compared to 7.22% for the six months ended December 31, 1997.
Total interest expense decreased 2.7% to $1.2 million for the second
quarter and decreased 1.7% to $2.4 million for the first half of fiscal 1999.
For the second quarter, growth in deposits reflected a 16.2% increase in the
average balance of demand and savings deposits and a 0.5% decrease in the
average balance of certificates of deposit. This deposit growth produced a
small increase in interest expense, but the shift in deposits reduced the
average cost of deposits to 4.90% in the second quarter this year compared to
4.98% last year. Demand and savings deposits grew primarily as a result of the
introduction in February 1998 of a money market deposit account with a higher
minimum balance that pays a higher rate of interest. The increase in interest
expense on deposits was offset by a decrease in borrowings. For the first half
of fiscal 1999, growth in deposits reflected an 11.3% increase in the average
balance of demand and savings deposits and a 0.7% increase in the average
balance of certificates of deposit. This deposit growth produced a 2.7%
increase in interest expense, but the shift in deposits reduced the average cost
of deposits to 4.93% in the first half of fiscal 1999 compared to 4.95% in the
same period last year. The increase in interest expense during the first half of
fiscal 1999 was offset by reduced borrowings. The average cost of interest-
bearing liabilities was 4.98% for the six months ended December 31, 1998
compared to 5.04% for the six months ended December 31, 1997.
14
<PAGE>
PROVISION FOR LOAN LOSSES. There was no provision for loan losses in
either the three or six months ended December 31, 1998 or 1997 because
management believed the allowance for loan losses was adequate at its current
level.
OTHER INCOME. Other income was $81,000 for the three months ended December
31, 1998 compared to $447,000 in the same period last year. For the six months
ended December 31, 1998, other income was $155,000, compared to $489,000 for the
same period last year. Included in other income in 1997 are $400,000 in gains
on the sale of real estate, equipment and deposit accounts from First Federal's
sale of its Mt. Vernon, Indiana branch in October 1997. Excluding these gains,
other income increased as result of increased ATM fees and increased gains on
the sale of mortgage loans.
OTHER EXPENSE. Other expenses increased 4.8% for the second quarter of
fiscal 1999 and 12.1% for the first half of fiscal 1999. This increase was
primarily due to increases in salaries and employee benefits, which totaled
$360,000 and $641,000 for the three and six months ended December 31, 1998.
First Federal added additional personnel in the mortgage loan department and in
the areas of technology and branch administration.
INCOME TAX EXPENSE. Total income tax expense was $35,000 for the three
months ended December 31, 1998 compared to $217,000 for the same period last
year. Total income tax expense was $95,000 for the six months ended December
31, 1998 compared to $324,000 for the same period last year. The decrease for
both the three and six month periods was primarily the result of lower taxable
income. The effective tax rate was 26.3% for the first half of fiscal 1999
compared to 34.8% for the same period last year.
EXPANSION OF CONSUMER LENDING OPERATIONS
In January 1999, First Federal significantly expanded its consumer lending
operations by hiring four loan officers and three clerical staff to develop an
indirect automobile lending program. First Federal anticipates originating
automobile loans through approximately 75 to 100 automobile dealers in southern
Indiana, northwestern Kentucky and southern Illinois. These dealers will provide
First Federal applications to finance vehicles sold by their dealerships.
Although substantially all of the dealers through which First Federal will
originate loans will sell both new and used automobiles, First Federal expects
that most of the loans it will originate will be secured by used automobiles.
First Federal will process loan applications through "CreditDesk," an automated
underwriting program by Fair Isaac and Company, Inc. Applications processed
through "CreditDesk" will receive a score which, along with other underwriting
criteria, will determine if the application will be approved, denied or approved
at an increased interest rate or on other terms.
First Federal anticipates developing a contractual relationship with
another financial institution in order to sell indirect automobile loans on a
flow basis for an origination fee of approximately 1.50% of the loan amount.
First Federal intends that this contract will define the criteria to be
satisfied for loans to be eligible for sale to the purchasing institution.
First Federal will sell all loans with servicing released and without recourse
to First Federal. Interest rates will be determined by reference to the rate
sheet in effect on the date the loan was closed and approved by the financial
institution purchasing the loan. Under the terms of its arrangement, First
Federal will have no minimum or maximum delivery requirements. This will
eliminate the risk that First Federal will not be able to sell the loans and
that an increase in market interest rates will reduce the value of the loans
before they can be sold.
First Federal intends to sell 60% to 80% of its indirect automobile loan
production and to retain the remainder for its own portfolio, with the goal of
increasing its consumer loan portfolio to $20 million over two years. The loans
sold will be primarily the ones with the highest credit quality. The loans
retained for First Federal's portfolio will generally have a lower credit
quality, but with a correspondingly higher interest rate. First Federal
believes that it will benefit from the higher yields earned on consumer loans
and that the shorter duration of consumer loans will improve First Federal's
interest rate risk position. However, because consumer loans tend to have a
higher rate of default than mortgage loans and because full repayment of
defaulted loans is less likely when the loan is secured by a depreciating asset
like an automobile, First Federal expects that it will increase its allowance
15
<PAGE>
for loan losses as its consumer loan portfolio grows. First Federal will
increase its allowance for loan losses by charging a provision for loan losses
against income.
First Federal estimates that it will have capital expenditures and other
start-up expenses of $115,000 for its consumer loan operations in the quarter
ending March 31, 1999. First Federal will also experience an increase in salary
and benefits and other operating expenses as a result of hiring additional
personnel and the expansion of its lending operations.
First Federal has been sued by United Fidelity Bank, FSB, which previously
employed the persons hired by First Federal to conduct its consumer lending
operations. For information about this lawsuit, see "Business of First Federal
- -Legal Proceedings."
USE OF PROCEEDS
The amount of common stock being offered in the conversion is based on
Capital Resources Group's estimate that, as of December 4, 1998, the pro forma
market value of First Bancorp and First Federal ranged from $16,150,000 to
$21,850,000 ("Estimated Valuation Range"). The net proceeds from the sale of
the common stock in this offering will range from approximately $15.5 million to
$21.1 million, or up to $24.4 million if the Estimated Valuation Range is
increased by 15%. See "Pro Forma Data" for the assumptions used to arrive at
these amounts. First Bancorp will purchase all of the capital stock of First
Federal to be issued in the conversion in exchange for 50% of the net proceeds
of the offering. This will result in First Bancorp retaining approximately $7.7
million to $10.6 million of net proceeds, or up to $12.2 million if the
Estimated Valuation Range is increased by 15%, and First Federal receiving an
equal amount.
Receipt of 50% of the net proceeds of the sale of the common stock will
increase First Federal's capital and will support the expansion of First
Federal's existing business activities. First Federal will use the funds
contributed to it for general corporate purposes, including, initially, lending
and investment in short-term U.S. Government and agency obligations. First
Federal intends to increase its residential and consumer loan portfolios.
Depending on loan demand, First Federal may consider using a portion of the
conversion proceeds for additional investment in mortgage-backed securities.
In connection with the conversion and the establishment of First Federal's
Employee Stock Ownership Plan ("ESOP"), First Bancorp intends to loan the ESOP
the amount necessary to purchase 8% of the shares of common stock sold in the
conversion. First Bancorp's loan to fund the ESOP may range from $1,292,000 to
$1,748,000 based on the sale of 129,200 shares to the ESOP at the minimum of the
Estimated Valuation Range and 174,800 shares at the maximum of the Estimated
Valuation Range, respectively, at $10.00 per share. If 15% above the maximum of
the Estimated Valuation Range, or 2,512,750 shares, are sold in the conversion,
First Bancorp's loan to the ESOP would be $2,010,200 based on the sale of
201,020 shares to the ESOP. The Bank anticipates that the ESOP loan will have a
12-year term with interest payable at the prime rate as published in The Wall
Street Journal on the closing date of the conversion. The loan will be repaid
principally from First Federal's contributions to the ESOP and from any
dividends paid on shares of common stock held by the ESOP.
Other than as described above, neither First Bancorp nor First Federal has
specific plans for the investment of the proceeds of this offering. Although
First Federal's capital currently exceeds regulatory requirements, First Federal
is pursuing the mutual-to-stock conversion at this time in order to structure
itself in the form used by commercial banks and most other financial services
companies. For a discussion of management's business reasons for undertaking
the conversion, see "The Conversion--Reasons for the Conversion."
The remaining net proceeds retained by First Bancorp initially will be
invested primarily in short-term U.S. Government and agency obligations. These
funds will be available for additional contributions to First Federal in the
form of debt or equity, to support future diversification or acquisition
activities, as a source of dividends to the stockholders of First Bancorp and
for future repurchases of common stock to the extent permitted under Indiana law
16
<PAGE>
and federal regulations. First Bancorp will consider exploring opportunities to
use these funds to expand operations through acquiring or establishing
additional branch offices or acquiring other financial institutions. Currently,
there are no specific plans, arrangements, agreements or understandings, written
or oral, regarding any expansion activities.
Following the conversion, the Board of Directors will have the authority to
adopt plans for repurchases of common stock, consistent with statutory and
regulatory requirements. Because First Bancorp has not yet issued stock there
currently is insufficient information upon which an intention to repurchase
stock could be based. The facts and circumstances upon which the Board of
Directors may determine to repurchase stock in the future would include but are
not limited to:
(1) market and economic factors such as the price at which the stock is
trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk
involved in the investment, the ability to increase the book value
and/or earnings per share of the remaining outstanding shares, and the
ability to improve First Bancorp's return on equity;
(2) the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund
employee stock benefit plans; and
(3) any other circumstances in which repurchases would be in the best
interests of First Bancorp and its stockholders.
Any stock repurchases will require a determination by the Board of
Directors that both First Bancorp and First Federal will be capitalized in
excess of all applicable regulatory requirements after any such repurchases and
that capital will be adequate, taking into account, among other things, First
Federal's level of nonperforming and classified assets, First Bancorp's and
First Federal's current and projected results of operations and asset/liability
structure, the economic environment and tax and other regulatory considerations.
For a discussion of the regulatory limitations applicable to stock repurchases,
see "The Conversion--Restrictions on Repurchase of Stock."
17
<PAGE>
DIVIDEND POLICY
GENERAL
First Bancorp's Board of Directors anticipates declaring and paying cash
dividends on the common stock. However, the Board of Directors has not made a
decision as to the amount or timing of dividends. In addition, the Board of
Directors may determine to pay periodic special cash dividends in addition to,
or in lieu of, regular cash dividends. Before declaring or paying any
dividends, First Bancorp's Board of Directors will take into account the amount
of the net proceeds retained by First Bancorp, First Bancorp's financial
condition, results of operations, tax considerations, capital requirements,
industry standards, economic conditions and other factors, including the
regulatory restrictions that affect the payment of dividends by First Federal to
First Bancorp discussed below. Under Indiana law, First Bancorp will be
permitted to pay cash dividends after the conversion so long as First Bancorp is
able to pay its debts as they come due in the usual course of business and First
Bancorp's assets are greater than the sum of its total liabilities plus the
amount that would be needed, if First Bancorp were to be dissolved at the time
of the dividend, to satisfy any rights that are preferential to those of the
persons receiving the dividend. In order to pay cash dividends, however, First
Bancorp must have available cash either from the net proceeds raised in the
conversion and retained by First Bancorp, borrowings by First Bancorp, dividends
received from First Federal or earnings on First Bancorp's assets. No
assurances can be given that any dividends, either regular or special, will be
declared or, if declared, what the amount of dividends will be or whether such
dividends, if commenced, will continue.
CURRENT RESTRICTIONS
Dividends from First Bancorp may depend, in part, upon receipt of dividends
from First Federal because First Bancorp initially will have no source of income
other than dividends from First Federal and earnings from the investment of the
net proceeds from the offering retained by First Bancorp. Office of Thrift
Supervision ("OTS") regulations require First Federal to give the OTS 30 days'
advance notice of any proposed declaration of dividends to First Bancorp, and
the OTS has the authority under its supervisory powers to prohibit the payment
of dividends to First Bancorp. The OTS imposes certain limitations on the
payment of dividends from First Federal to First Bancorp which utilize a three-
tiered approach that permits various levels of distributions based primarily
upon a savings association's capital level. Based on its current capital
levels, after prior notice to and no objection made by the OTS, First Federal
could at its option distribute up to 100% of its net income during the calendar
year plus 50% of its surplus capital ratio at the beginning of the calendar year
less any distributions previously paid during the year. In addition, First
Federal may not declare or pay a cash dividend on its capital stock if the
effect thereof would be to reduce the regulatory capital of First Federal below
the amount required for the liquidation account to be established under First
Federal's plan of conversion. See "Regulation--Federal Regulation of Savings
Associations--Limitations on Capital Distributions," "The Conversion--Effects of
Conversion to Stock Form on Depositors and Borrowers of First Federal--
Liquidation Account" and Note 10 of the Notes to Consolidated Financial
Statements included at the end of this prospectus.
Additionally, in connection with the conversion, First Bancorp and First
Federal have committed to the OTS that during the one-year period following
consummation of the conversion, First Bancorp will not take any action to
declare an extraordinary dividend to stockholders that would be treated by
recipients as a tax-free return of capital for federal income tax purposes.
TAX CONSIDERATIONS
In addition to the foregoing, retained earnings of First Federal
appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used by First Federal to pay cash dividends to First Bancorp without
the payment of federal income taxes by First Federal at the then current income
tax rate on the amount deemed distributed, which would include the amounts of
any federal income taxes attributable to the distribution. See "Taxation--
Federal Taxation" and Note 8 of the Notes to Consolidated Financial Statements
included at the end
18
<PAGE>
of this prospectus. First Bancorp does not contemplate any distribution by First
Federal that would result in a recapture of First Federal's bad debt reserve or
create the above-mentioned federal tax liabilities.
MARKET FOR COMMON STOCK
First Bancorp has never issued capital stock and, consequently, there is no
existing market for the common stock. Although First Bancorp has received
preliminary approval to list the common stock on the Nasdaq National Market
under the symbol FBEI, there can be no assurance that First Bancorp will meet
the Nasdaq National Market listing requirements, which include a minimum market
capitalization, at least three market makers and a minimum number of
shareholders. Capital Resources has agreed to make a market for the common
stock following consummation of the conversion, although it has no obligation to
do so, and will assist First Bancorp in seeking to encourage at least two
additional market makers to establish and maintain a market in the common stock.
Making a market involves maintaining bid and ask quotations and being able, as
principal, to effect transactions in reasonable quantities at those quoted
prices. First Bancorp anticipates that prior to the completion of the
conversion it will be able to obtain the commitment from at least two additional
broker-dealers to act as market maker for the common stock. Additionally, the
development of a liquid public market depends on the existence of willing buyers
and sellers, the presence of which is not within the control of First Bancorp,
First Federal or any market maker.
There can be no assurance that an active and liquid trading market for the
common stock will develop or that, if developed, it will continue. The number
of active buyers and sellers of the common stock at any particular time may be
limited. Under such circumstances, investors in the common stock could have
difficulty disposing of their shares on short notice and should not view the
common stock as a short-term investment. Furthermore, there can be no assurance
that purchasers will be able to sell their shares at or above the $10.00
purchase price or that quotations will be available on the Nasdaq National
Market as contemplated.
19
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of First Federal
at September 30, 1998, and the pro forma consolidated capitalization of First
Bancorp after giving effect to the assumptions listed under "Pro Forma Data,"
based on the sale of the number of shares of common stock at the minimum,
midpoint, maximum and maximum, as adjusted, of the Estimated Valuation Range.
The shares that would be issued at the maximum, as adjusted, of the Estimated
Valuation Range would depend upon receipt of OTS approval of an updated
appraisal confirming the valuation. This table does not reflect the issuance of
additional shares under the proposed Stock Option Plan. A CHANGE IN THE NUMBER
OF SHARES TO BE ISSUED IN THE CONVERSION MAY MATERIALLY AFFECT PRO FORMA
CONSOLIDATED CAPITALIZATION.
<TABLE>
<CAPTION>
HOLDING COMPANY
PRO FORMA CONSOLIDATED CAPITALIZATION
BASED UPON THE SALE OF
-------------------------------------------------------------
BANK
CAPITALIZATION 1,615,000 1,900,000 2,185,000 2,512,750
AS OF SHARES AT SHARES AT SHARES AT SHARES AT
SEPTEMBER 30, $10.00 $10.00 $10.00 $10.00
1998 PER SHARE PER SHARE PER SHARE PER SHARE
------------- ------------ ------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits (1).................................... $90,961 $ 90,961 $ 90,961 $ 90,961 $ 90,961
Borrowings...................................... 3,645 3,645 3,645 3,645 3,645
------- ---------- ---------- ---------- ----------
Total deposits and borrowed funds............... $94,606 $ 94,606 $ 94,606 $ 94,606 $ 94,606
======= ========== ========== ========== ==========
Stockholders' equity:
Preferred stock:
1,000,000 shares, $.01 par value per
share, authorized; none issued or
outstanding............................ $ -- $ -- $ -- $ -- $ --
Common stock:
9,000,000 shares, $.01 par value per
share, authorized; specified number
of shares assumed to be issued and
outstanding (2)........................ -- 16 19 22 25
Additional paid-in capital...................... -- 15,463 18,278 21,092 24,329
Retained earnings (3)........................... 15,055 15,055 15,055 15,055 15,055
Accumulated other comprehensive
income....................................... 62 62 62 62 62
Less:
Common stock acquired by ESOP (4)............ -- (1,292) (1,520) (1,748) (2,010)
Common stock to be acquired by
MRDP (5).................................. -- (646) (760) (874) (1,005)
------- ---------- ---------- ---------- ----------
Total stockholders' equity...................... $15,117 $ 28,658 $ 31,134 $ 33,609 $ 36,456
======= ========== ========== ========== ==========
</TABLE>
_____________________
(1) Withdrawals from deposit accounts for the purchase of common stock are not
reflected. Withdrawals to purchase common stock will reduce pro forma
deposits by the amounts of the withdrawals.
(2) First Federal's authorized capital consists solely of 1,000 shares of common
stock, par value $1.00 per share, 1,000 shares of which will be issued to
First Bancorp, and 9,000 shares of preferred stock, no par value per share,
none of which will be issued in connection with the conversion.
20
<PAGE>
(3) Retained earnings are substantially restricted by applicable regulatory
capital requirements. Additionally, First Federal will be prohibited from
paying any dividend that would reduce its regulatory capital below the
amount in the liquidation account, which will be established for the benefit
of First Federal's eligible depositors as of June 30, 1997 and December 31,
1998 at the time of the conversion and adjusted downward thereafter as such
account holders reduce their balances or cease to be depositors. See "The
Conversion--Effects of Conversion on Depositors and Borrowers of First
Federal--Liquidation Account."
(4) Assumes that 8% of the common stock sold in the conversion will be acquired
by the ESOP in the conversion with funds borrowed from First Bancorp. Under
generally accepted accounting principles, the amount of common stock to be
purchased by the ESOP represents unearned compensation and is, accordingly,
reflected as a reduction of capital. As shares are released to ESOP
participants' accounts, a corresponding reduction in the charge against
capital will occur. Since the funds are borrowed from First Bancorp, the
borrowing will be eliminated in consolidation and no liability or interest
expense will be reflected in the consolidated financial statements of First
Bancorp. See "Management of First Federal--Benefits--Employee Stock
Ownership Plan."
(5) Assumes the purchase in the open market at $10.00 per share, under the
proposed Management Recognition and Development Plan ("MRDP"), of a number
of shares equal to 4% of the shares of common stock issued in the conversion
at the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range. The shares are reflected as a reduction of stockholders'
equity. See "Risk Factors--Issuance of shares for benefit programs may
reduce your ownership interest," "Pro Forma Data" and "Management of First
Federal--Benefits--Management Recognition and Development Plan." The MRDP
will require stockholder approval at a meeting following the conversion.
21
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table presents First Federal's historical and pro forma
capital position relative to its capital requirements at September 30, 1998.
The amount of capital infused into First Federal for purposes of the following
table is 50% of the net proceeds of the offering. For purpose of the table
below, the amount expected to be borrowed by the ESOP and the cost of the shares
expected to be acquired by the MRDP are deducted from pro forma regulatory
capital. For a discussion of the assumptions underlying the pro forma capital
calculations presented below, see "Use of Proceeds," "Capitalization" and "Pro
Forma Data." The definitions of the terms used in the table are those provided
in the capital regulations issued by the OTS. For a discussion of the capital
standards applicable to First Federal, see "Regulation--Federal Regulation of
Savings Associations--Capital Requirements."
<TABLE>
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1998
----------------------------------------------------------------------------------
15% ABOVE
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
VALUATION RANGE VALUATION RANGE VALUATION RANGE VALUATION RANGE
------------------- ------------------- ------------------- -------------------
HISTORICAL AT 1,615,000 SHARES 1,900,000 SHARES 2,185,000 SHARES 2,512,750 SHARES
SEPTEMBER 30, 1998 AT $10.00 PER SHARE AT $10.00 PER SHARE AT $10.00 PER SHARE AT $10.00 PER SHARE
------------------ ------------------- ------------------- ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ADJUSTED ADJUSTED ADJUSTED ADJUSTED ADJUSTED
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT ASSETS (1) AMOUNT ASSETS (1) AMOUNT ASSETS (1) AMOUNT ASSETS (1) AMOUNT ASSETS (1)
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Equity (2)..............$15,117 13.54% $20,918 17.62% $21,985 18.32% $23,052 19.00% $24,279 19.77%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Tangible capital (2).........$15,056 13.47% $20,857 17.55% $21,924 18.25% $22,991 18.93% $24,218 19.70%
Tangible capital
requirement............... 1,676 1.50 1,783 1.50 1,802 1.50 1,822 1.50 1,844 1.50
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess.......................$13,380 11.97% $19,074 16.05% $20,122 16.75% $21,169 17.43% $22,374 18.20%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Core capital (2).............$15,056 13.47% $20,857 17.55% $21,924 18.25% $22,991 18.93% $24,218 19.70%
Core capital requirement..... 3,353 3.00 3,565 3.00 3,604 3.00 3,643 3.00 3,688 3.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess.......................$11,703 10.47% $17,292 14.55% $18,320 15.25% $19,348 15.93% $20,530 16.70%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Total risk-based capital (3).$15,306 34.88% $21,107 46.59% $22,174 48.66% $23,241 50.72% $24,468 53.05%
Total risk-based capital
requirement............... 3,511 8.00 3,625 8.00 3,645 8.00 3,666 8.00 3,690 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess.......................$11,795 26.88% $17,482 38.59% $18,529 40.66% $19,575 42.72% $20,778 45.05%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
________________________________
(1) Tangible capital levels and core capital levels are shown as a percentage of
adjusted total assets. Risk-based capital levels are shown as a percentage
of risk-weighted assets.
(2) Unrealized gains on investment securities account for the difference between
GAAP capital and each of tangible capital and core capital.
(3) Percentage represents total core and supplementary capital divided by total
risk-weighted assets. Assumes net proceeds are invested in assets that
carry a 20% risk-weighting.
22
<PAGE>
PRO FORMA DATA
Under the plan of conversion, the common stock must be sold at a price
equal to the estimated pro forma market value of First Bancorp and First Federal
as converted, based upon an independent valuation. The Estimated Valuation
Range as of December 4, 1998 is from a minimum of $16,150,000 to a maximum of
$21,850,000 with a midpoint of $19,000,000. At a price per share of $10.00,
this results in a minimum number of shares of 1,615,000, a maximum number of
shares of 2,185,000 and a midpoint number of shares of 1,900,000. The actual
net proceeds from the sale of the common stock cannot be determined until the
conversion is completed. However, net proceeds contained in the following table
are based upon the following assumptions:
(1) Capital Resources will receive fees of approximately $175,000,
$207,000, $240,000 and $278,000 at the minimum, midpoint, maximum and
15% above the maximum of Estimated Valuation Range, respectively (see
"The Conversion--Plan of Distribution for the Subscription, Direct
Community and Syndicated Community Offerings");
(2) all of the common stock will be sold pursuant to subscription rights;
and
(3) conversion expenses, excluding the fees paid to Capital Resources,
will total approximately $496,000 at each of the minimum, midpoint,
maximum and 15% above the maximum of Estimated Valuation Range.
Actual expenses may vary from this estimate, and the fees paid will depend
upon whether a syndicate of broker-dealers or other means is necessary to sell
the shares, and other factors.
The following table summarizes the historical net income and retained
income of First Federal and the pro forma consolidated net income and
stockholders' equity of First Bancorp at and for the dates indicated based on
the minimum, midpoint and maximum of the Estimated Valuation Range and based on
a 15% increase in the maximum of the Estimated Valuation Range. The pro forma
consolidated net income of First Federal for the three months ended September
30, 1998 and the year ended June 30, 1998 has been calculated as if the
conversion had been consummated at the beginning of each period and the
estimated net proceeds received by First Bancorp and First Federal had been
invested at 4.41% at the beginning of each period, which represents the one-year
U.S. Treasury Bill yield as of September 30, 1998. While OTS regulations
provide for the use of a yield representing the arithmetic average of the
weighted average yield earned by First Federal on its interest-earning assets
and the rates paid on its deposits, First Bancorp believes that the U.S.
Treasury Bill yield represents a more realistic yield on the investment of the
conversion proceeds. As discussed under "Use of Proceeds," First Bancorp
expects to retain 50% of the net proceeds of the offering from which it will
fund the ESOP loan. A pro forma after-tax return of 2.65% is used for both
First Bancorp and First Federal for both the three months ended September 30,
1998 and the year ended June 30, 1998, after giving effect to an incremental
combined federal and state income tax rate of 40.0%. Historical and pro forma
per share amounts have been calculated by dividing historical and pro forma
amounts by the number of shares of common stock indicated in the table.
While reviewing the following tables you should consider the following:
. The final column gives effect to the sale of an additional 327,750
shares in the conversion, which may be issued without any further
notice if Capital Resources Group increases its appraisal to reflect
the results of this offering or changes in the financial condition or
results of operations of First Federal or changes in market conditions
after the offering begins. See "The Conversion--Stock Pricing and
Number of Shares to be Issued."
. Since funds on deposit at First Federal may be withdrawn to purchase
shares of common stock, the amount of funds available for investment
will be reduced by the amount of withdrawals for stock purchases. The
pro forma tables do not reflect withdrawals from deposit accounts.
23
<PAGE>
. Historical per share amounts have been computed as if the shares of
common stock expected to be issued in the conversion had been
outstanding at the beginning of the periods shown in the tables, but
without any adjustment of historical or pro forma stockholders' equity
to reflect the investment of the estimated net proceeds of the sale of
shares in the conversion, the additional ESOP expense or the proposed
MRDP expense.
. "Book value" represents the difference between the stated amounts of
First Federal's assets and liabilities. The amounts shown do not
reflect the liquidation account, which will be established for the
benefit of eligible depositors as of June 30, 1997 and December 31,
1998, or the federal income tax consequences of the restoration to
income of First Federal's special bad debt reserves for income tax
purposes, which would be required in the unlikely event of
liquidation. See "The Conversion--Effects of Conversion to Stock Form
on Depositors and Borrowers of First Federal" and "Taxation." The
amounts shown for book value do not represent fair market values or
amounts distributable to stockholders in the unlikely event of
liquidation.
. The amounts shown as pro forma stockholders' equity per share do not
represent possible future price appreciation or depreciation of First
Bancorp's common stock.
. No effect has been given to the shares to be reserved for issuance
under First Bancorp's Stock Option Plan, which requires stockholder
approval at a meeting following the conversion.
THE FOLLOWING PRO FORMA INFORMATION MAY NOT BE REPRESENTATIVE OF THE
FINANCIAL EFFECTS OF THE CONVERSION AT THE DATE ON WHICH THE CONVERSION ACTUALLY
OCCURS AND SHOULD NOT BE TAKEN AS INDICATIVE OF FUTURE RESULTS OF OPERATIONS.
STOCKHOLDERS' EQUITY REPRESENTS THE DIFFERENCE BETWEEN THE STATED AMOUNTS OF
CONSOLIDATED ASSETS AND LIABILITIES OF FIRST BANCORP COMPUTED IN ACCORDANCE WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. STOCKHOLDERS' EQUITY HAS NOT BEEN
INCREASED OR DECREASED TO REFLECT THE DIFFERENCE BETWEEN THE CARRYING VALUE OF
LOANS AND OTHER ASSETS AND MARKET VALUE. STOCKHOLDERS' EQUITY IS NOT INTENDED
TO REPRESENT FAIR MARKET VALUE NOR DOES IT REPRESENT AMOUNTS THAT WOULD BE
AVAILABLE FOR DISTRIBUTION TO STOCKHOLDERS IN THE EVENT OF LIQUIDATION.
24
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------------------------
15% ABOVE
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
VALUATION VALUATION VALUATION VALUATION
RANGE RANGE RANGE RANGE
------------ ----------- ----------- -----------
1,615,000 1,900,000 2,185,000 2,512,750
SHARES SHARES SHARES SHARES
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE
------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds.................................. $ 16,150 $ 19,000 $ 21,850 $ 25,128
Less: estimated expenses....................... (671) (703) (736) (774)
---------- ---------- ---------- ----------
Estimated net proceeds.......................... 15,479 18,297 21,114 24,354
Less: common stock acquired by ESOP............ (1,292) (1,520) (1,748) (2,010)
Less: common stock to be acquired by MRDP...... (646) (760) (874) (1,005)
---------- ---------- ---------- ----------
Net investable proceeds...................... $ 13,541 $ 16,017 $ 18,492 $ 21,339
========== ========== ========== ==========
Consolidated net income:
Historical................................... $ 155 $ 155 $ 155 $ 155
Pro forma income on net proceeds............. 90 106 123 141
Pro forma ESOP adjustments (1)............... (16) (19) (22) (25)
Pro forma MRDP adjustments (2)............... (19) (23) (26) (30)
---------- ---------- ---------- ----------
Pro forma net income...................... $ 210 $ 219 $ 230 $ 241
========== ========== ========== ==========
Consolidated net income per share:
Historical................................... $ 0.10 $ 0.09 $ 0.07 $ 0.06
Pro forma income on net proceeds............. 0.06 0.06 0.06 0.06
Pro forma ESOP adjustments (1)............... (0.01) (0.01) (0.01) (0.01)
Pro forma MRDP adjustments (2)............... (0.01) (0.01) (0.01) (0.01)
---------- ---------- ---------- ----------
Pro forma net income per share............ $ 0.14 $ 0.13 $ 0.11 $ 0.10
========== ========== ========== ==========
Number of shares used to calculate pro forma
net income per share......................... 1,487,146 1,749,583 2,012,021 2,313,824
Consolidated stockholders' equity (book value):
Historical................................... $ 15,117 $ 15,117 $ 15,117 $ 15,117
Estimated net proceeds....................... 15,479 18,297 21,114 24,354
Less: common stock acquired by ESOP......... (1,292) (1,520) (1,748) (2,010)
Less: common stock to be acquired by
MRDP (2).............................. (646) (760) (874) (1,005)
---------- ---------- ---------- ----------
Pro forma stockholders' equity............ $ 28,658 $ 31,134 $ 33,609 $ 36,456
========== ========== ========== ==========
Consolidated stockholders' equity per share:
Historical................................... $ 9.36 $ 7.96 $ 6.92 $ 6.02
Estimated net proceeds....................... 9.58 9.63 9.66 9.69
Less: common stock acquired by ESOP......... (0.80) (0.80) (0.80) (0.80)
Less: common stock to be acquired by
MRDP (2).............................. (0.40) (0.40) (0.40) (0.40)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per share.. $ 17.74 $ 16.39 $ 15.38 $ 14.51
========== ========== ========== ==========
Number of shares used to calculate pro forma
stockholders' equity per share............... 1,615,000 1,900,000 2,185,000 2,512,750
Purchase price as a percentage of pro forma
stockholders' equity per share............... 56.37% 61.01% 65.02% 68.92%
Purchase price as a multiple of pro forma
net income per share (3)..................... 17.86x 19.23x 22.73x 25.00x
</TABLE>
(footnotes on page 27)
25
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30, 1998
------------------------------------------------------
15% ABOVE
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
VALUATION VALUATION VALUATION VALUATION
RANGE RANGE RANGE RANGE
------------- ------------ ----------- ------------
1,615,000 1,900,000 2,185,000 2,512,750
SHARES SHARES SHARES SHARES
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE
------------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds............................................ $ 16,150 $ 19,000 $ 21,850 $ 25,128
Less: estimated expenses................................. (671) (703) (736) (774)
---------- ---------- ---------- ----------
Estimated net proceeds.................................... 15,479 18,297 21,114 24,354
Less: common stock acquired by ESOP...................... (1,292) (1,520) (1,748) (2,010)
Less: common stock to be acquired by MRDP................ (646) (760) (874) (1,005)
---------- ---------- ---------- ----------
Net investable proceeds................................ $ 13,541 $ 16,017 $ 18,492 $ 21,339
========== ========== ========== ==========
Consolidated net income:
Historical............................................. $ 880 $ 880 $ 880 $ 880
Pro forma income on net proceeds....................... 359 424 490 565
Pro forma ESOP adjustments (1)......................... (65) (76) (87) (101)
Pro forma MRDP adjustments (2)......................... (78) (91) (105) (121)
---------- ---------- ---------- ----------
Pro forma net income................................ $ 1,096 $ 1,137 $ 1,178 $ 1,223
========== ========== ========== ==========
Consolidated net income per share:
Historical............................................. $ 0.58 $ 0.50 $ 0.43 $ 0.38
Pro forma income on net proceeds....................... 0.24 0.24 0.24 0.24
Pro forma ESOP adjustments (1)......................... (0.04) (0.04) (0.04) (0.04)
Pro forma MRDP adjustments (2)......................... (0.05) (0.05) (0.05) (0.05)
---------- ---------- ---------- ----------
Pro forma net income per share...................... $ 0.73 $ 0.65 $ 0.58 $ 0.53
========== ========== ========== ==========
Number of shares used to calculate pro forma
net income per share................................... 1,491,183 1,754,333 2,017,483 2,320,106
Consolidated stockholders' equity (book value):
Historical............................................. $ 14,949 $ 14,949 $ 14,949 $ 14,949
Estimated net proceeds................................. 15,479 18,297 21,114 24,354
Less: common stock acquired by ESOP................... (1,292) (1,520) (1,748) (2,010)
Less: common stock to be acquired by MRDP (2)......... (646) (760) (874) (1,005)
---------- ---------- ---------- ----------
Pro forma stockholders' equity...................... $ 28,490 $ 30,966 $ 33,441 $ 36,288
========== ========== ========== ==========
Consolidated stockholders' equity per share:
Historical............................................. $ 9.26 $ 7.87 $ 6.84 $ 5.95
Estimated net proceeds................................. 9.58 9.63 9.66 9.69
Less: common stock acquired by ESOP................... (0.80) (0.80) (0.80) (0.80)
Less: common stock to be acquired by MRDP (2)......... (0.40) (0.40) (0.40) (0.40)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per share............ $ 17.64 $ 16.30 $ 15.30 $ 14.44
========== ========== ========== ==========
Number of shares used to calculate pro forma
stockholders' equity per share......................... 1,615,000 1,900,000 2,185,000 2,512,750
Purchase price as a percentage of pro forma
stockholders' equity per share......................... 56.69% 61.35% 65.36% 69.25%
Purchase price as a multiple of pro forma
net income per share................................... 13.70x 15.38x 17.24x 18.87x
</TABLE>
(footnotes on next page)
26
<PAGE>
______________________
(1) Assumes that the ESOP will purchase 8% of the shares of common stock offered
in the conversion. The funds used to acquire such shares will be borrowed
by the ESOP (at an interest rate equal to the prime rate as published in The
Wall Street Journal on the closing date of the conversion, which rate is
currently 7.75%) from the net proceeds from the conversion retained by First
Bancorp. The amount of this borrowing has been reflected as a reduction
from gross proceeds to determine estimated net investable proceeds. First
Federal intends to make contributions to the ESOP in amounts at least equal
to the principal and interest requirement of the debt. As the debt is paid
down, stockholders' equity will be increased. First Federal's payment of
the ESOP debt is based upon equal installments of principal over a 12-year
period, assuming a combined federal and state income tax rate of 40.0%.
Interest income earned by First Bancorp on the ESOP debt offsets the
interest paid by First Federal on the ESOP loan. No reinvestment is assumed
on proceeds contributed to fund the ESOP. Applicable accounting practices
require that compensation expense for the ESOP be based upon shares
committed to be released and that unallocated shares be excluded from
earnings per share computations. The valuation of shares committed to be
released would be based upon the average market value of the shares during
the year, which, for purposes of this calculation, was assumed to be equal
to the $10.00 per share purchase price. See "Management of First Federal--
Benefits--Employee Stock Ownership Plan."
(2) In calculating the pro forma effect of the MRDP, it is assumed that the
required stockholder approval has been received, that the shares were
acquired by the MRDP at the beginning of the period presented in open market
purchases at the $10.00 per share purchase price, that 20% of the amount
contributed was an amortized expense during such period, and that the
combined federal and state income tax rate is 40.0%. The issuance of
authorized but unissued shares of the common stock instead of open market
purchases would dilute the voting interests of existing stockholders by
approximately 3.85%.
For purposes of this table, shares issued under the MRDP vest 20% per year
and compensation expense is recognized on a straight-line basis over each
vesting period. If the fair market value per share is greater than $10.00
per share on the date shares are awarded under the MRDP, total MRDP expense
would be greater. The total estimated MRDP expense was multiplied by 20%
(the total percent of shares for which expense is recognized in the first
year). No effect has been given to the shares reserved for issuance under
the proposed Stock Option Plan. Recently proposed accounting rules would
require First Bancorp to recognize compensation expense for stock options
awarded to non-employee directors.
The following table shows what pro forma net income and stockholders' equity
per share would be if shares for the MRDP were authorized but unissued
shares instead of repurchased shares. The table also shows pre-tax MRDP
expense.
<TABLE>
<CAPTION>
15% ABOVE
MINIMUM MIDPOINT MAXIMUM MAXIMUM
OF OF OF OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
VALUATION VALUATION VALUATION VALUATION
RANGE RANGE RANGE RANGE
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Pro forma net income per share:
Three months ended September 30, 1998............................. $ 0.14 $ 0.12 $ 0.11 $ 0.10
Year ended June 30, 1998.......................................... $ 0.72 $ 0.63 $ 0.57 $ 0.52
Pro forma stockholders' equity per share:
At September 30, 1998............................................. $ 17.45 $ 16.14 $ 15.17 $ 14.33
At June 30, 1998.................................................. $ 17.35 $ 16.06 $ 15.10 $ 14.27
Pre-tax MRDP expense:
Three months ended September 30, 1998............................. $ 32,300 $ 38,000 $ 43,700 $ 50,300
Year ended June 30, 1998.......................................... $129,200 $152,000 $174,800 $201,000
</TABLE>
(3) Annualized.
27
<PAGE>
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as to the intended
purchases of common stock by each director and executive officer of First
Federal, including their associates, as defined by applicable regulations. No
individual has entered into a binding agreement with respect to such intended
purchases, and, therefore, actual purchases could be more or less than indicated
below. Directors and officers of First Federal and their associates may not
purchase in excess of 33% of the shares sold in the conversion. For purposes of
the following table, it has been assumed that sufficient shares will be
available to satisfy subscriptions in all categories. Directors, officers,
their associates and employees will pay the same price as all other subscribers
for the shares for which they subscribe.
<TABLE>
<CAPTION>
PERCENT OF
SHARES AT
MAXIMUM OF
ANTICIPATED NUMBER OF ANTICIPATED DOLLAR ESTIMATED
NAME AND POSITION SHARES PURCHASED (1) AMOUNT PURCHASED VALUATION RANGE
- ----------------- --------------------- ------------------ ---------------
<S> <C> <C> <C>
Robert L. Clayton, Sr. 5,000 $ 50,000 0.2%
Director
Herbert V. Dassel 20,000 200,000 0.9
Director
Frank E. Kern 4,000 40,000 0.2
Director
James L. Will, Jr. 10,000 100,000 0.5
Director
Jerry Ziemer 15,000 150,000 0.7
Director
Harold Duncan 15,000 150,000 0.7
President, Chief Executive
Officer and Director
Michael H. Head 20,000 200,000 0.9
Executive Vice President and
Chief Operating Officer
Monica L. Stinchfield 1,000 10,000 0.1
Senior Vice President
Christopher A. Bengert 600 6,000 0.0
Senior Vice President and Treasurer
Kirby W. King 7,000 70,000 0.3
Senior Vice President
Richard L. Witte 500 5,000 0.0
Vice President
Dale Holt 500 5,000 0.0
Vice President ------ -------- ---
98,600 $986,000 4.5%
====== ======== ===
</TABLE>
_________________________
(1) Does not include any shares to be awarded under the ESOP and MRDP or options
to acquire shares awarded under the Stock Option Plan.
28
<PAGE>
FIRST FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
The following Consolidated Statement of Income of First Federal for the
fiscal years ended June 30, 1998, 1997 and 1996 has been audited by Olive LLP,
independent auditors, whose report appears elsewhere in this prospectus. The
Consolidated Statement of Income for the three months ended September 30, 1998
and 1997 was not audited by Olive LLP, but, in the opinion of management,
reflects all adjustments, none of which are other than normal recurring entries,
necessary for a fair presentation. The results of operations for the three
months ended September 30, 1998 are not necessarily indicative of the results of
operations that may be expected for the entire fiscal year. You should read
this statement in conjunction with the Consolidated Financial Statements and
related Notes included at the end of this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED JUNE 30,
------------------------ ------------------------------------------
1998 1997 1998 1997 1996
------------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable, including fees.................. $ 744,657 $ 660,287 $2,694,771 $2,580,620 $2,602,248
Investment securities:
Mortgage-backed securities..................... 579,840 687,485 2,664,326 2,771,610 2,974,734
Other investment securities.................... 249,833 350,283 1,443,477 1,313,347 873,474
Deposits with financial institutions.............. 231,809 164,250 818,200 719,044 713,306
Federal funds sold................................ 10,302 9,436 35,277 30,592 32,532
Other interest and dividend income................ 14,722 15,126 58,650 58,550 98,658
---------- ---------- ---------- ---------- ----------
Total interest income....................... 1,831,163 1,886,867 7,714,701 7,473,763 7,294,952
---------- ---------- ---------- ---------- ----------
Interest expense:
Deposits.......................................... 1,119,852 1,078,314 4,584,001 4,301,758 4,292,375
Borrowings........................................ 52,865 105,027 354,630 432,896 334,477
Other............................................. 11,892 8,315 37,993 27,893 17,717
---------- ---------- ---------- ---------- ----------
Total interest expense...................... 1,184,609 1,191,656 4,976,624 4,762,547 4,644,569
---------- ---------- ---------- ---------- ----------
Net interest income.................................. 646,554 695,211 2,738,077 2,711,216 2,650,383
Provision for loan losses............................ -- -- -- -- 100,000
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan
losses............................................ 646,554 695,211 2,738,077 2,711,216 2,550,383
---------- ---------- ---------- ---------- ----------
Other income:
Gain on disposal of branch office................. -- -- 261,024 -- --
Gain on disposal of deposits...................... -- -- 138,528 -- --
Increase in cash surrender values of
life insurance................................. 23,334 19,704 87,234 81,975 83,364
Other income...................................... 51,398 22,898 114,601 97,971 85,808
---------- ---------- ---------- ---------- ----------
Total other income.......................... 74,732 42,602 601,387 179,946 169,172
---------- ---------- ---------- ---------- ----------
Other expense:
Salaries and employee benefits.................... 280,869 225,658 1,134,397 972,717 947,422
Net occupancy expense............................. 43,627 30,836 181,065 141,808 161,937
Equipment expense................................. 28,233 17,623 103,749 65,660 62,273
Deposit insurance expense......................... 14,699 14,103 56,468 118,678 199,162
SAIF special assessment........................... -- -- -- 561,290 --
Data processing fees.............................. 25,672 21,622 99,478 86,588 88,621
Other expenses.................................... 112,843 104,912 469,117 444,622 441,242
---------- ---------- ---------- ---------- ----------
Total other expense......................... 505,943 414,754 2,044,274 2,391,363 1,900,657
---------- ---------- ---------- ---------- ----------
Income before income tax............................. 215,343 323,059 1,295,190 499,799 818,898
Income tax expense................................ 60,776 107,729 415,486 112,439 198,852
---------- ---------- ---------- ---------- ----------
Net income........................................... $ 154,567 $ 215,330 $ 879,704 $ 387,360 $ 620,046
========== ========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 First Federal. The information contained in this
section should be read in conjunction with the consolidated financial statements
and accompanying notes contained in this prospectus.
OPERATING STRATEGY
The principal business activity of First Federal consists of attracting
deposits from the general public and originating loans secured by one-to-four
family residential real estate properties located in its market area. First
Federal also maintains a substantial investment portfolio of mortgage-backed and
other securities. Earnings depend primarily upon net interest income, which is
the difference between the interest income First Federal receives on its loan
and investment portfolios and the interest it pays on deposits and borrowings.
First Federal's profitability is also affected by the level of other income and
expenses. Other income includes service charges, fees and gains on sales of
loans. Other expenses include compensation and benefits, occupancy and
equipment expenses, deposit insurance premiums, and data processing. First
Federal's profitability is also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government legislation and regulation, and monetary and fiscal policies.
First Federal's strategy is to operate as an independent, retail financial
institution dedicated to financing home ownership and other consumer needs in
Evansville, Indiana. First Federal's operating philosophy has been to be
conservative with respect to its underwriting standards and maintain a high
level of asset quality, while generating profits, remaining well capitalized and
providing a high level of customer service. First Federal's current business
strategy includes an emphasis on increasing its mortgage loan, consumer loan and
loan servicing portfolios. It also includes continued maintenance of a
substantial investment portfolio of U.S. government and agency securities and
investment grade mortgage-backed securities and deposit growth to support the
growth in loans and investments. First Federal intends to expand its mortgage
loan and loan servicing portfolios through increased origination efforts and not
by lowering its underwriting standards. First Federal has recently expanded its
consumer lending activities by initiating an indirect automobile lending
program. See "Recent Developments--Expansion of Consumer Lending Operations."
The conversion will increase the consolidated capital of First Bancorp by
the amount of the net proceeds, after deduction for the shares to be sold to the
ESOP. Funds withdrawn from deposit accounts to purchase shares will decrease
interest-bearing liabilities, and new funds used to purchase shares will
increase interest-earning assets. While First Bancorp expects these changes to
increase its net interest income, First Bancorp also expects that the adoption
of the ESOP and the MRDP will increase its non-interest expenses. See "Risk
Factors--The implementation of benefit plans will increase future compensation
expense." For additional information regarding the effects of this offering,
see "Pro Forma Data."
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND JUNE 30, 1998
Total assets increased $2.7 million, or 2.4%, to $111.6 million at
September 30, 1998 compared to June 30, 1998. The largest increase was in
loans, which increased $2.5 million, or 7.09%. The increase in loans was
principally in real estate mortgage loans, and was a result of First Federal's
competitive mortgage interest rates in its target market, favorable nationwide
mortgage rates which spurred an increase in home purchases and refinancing, and
the results of hiring of a new loan originator in fiscal 1998. The growth in
loans was primarily funded by an increase in deposits of $1.7 million, or 1.9%.
The deposit increase can be attributed primarily to competitive interest rates
offered on certificates of deposit and money market accounts. Borrowings were
unchanged.
30
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND 1997
Total assets at June 30, 1998 were $109.0 million compared to $110.7
million at June 30, 1997. The decrease of $1.7 million, or 1.6%, was a result
of management's decision to use funds from maturing securities to fund loan
growth and debt maturities. In order to cover the liquidity needs of expected
loan growth, as investments matured, cash in excess of that needed for immediate
loans was maintained in cash and cash equivalents. Investment securities
decreased by $6.6 million. This was offset by a $3.5 million increase in loans.
The growth in loans was primarily in mortgage loans, which increased 12.2%, or
$3.8 million. The growth in mortgage loans was in part due to First Federal's
competitive mortgage rates, nationally decreasing rates, and the hiring of a
loan originator. First Federal reduced its borrowings from the Federal Home
Loan Bank by $3.4 million. The majority of this decrease was the payoff of $3.0
million in fixed rate advances from the Federal Home Loan Bank in February 1998.
Equity capital increased $895,000 because of $880,000 in net income and a
$15,000 increase in the unrealized gain on securities available for sale due to
decreases in market rates of interest and a corresponding increase in the market
value of First Federal's investments.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
AND 1997
GENERAL. Net income decreased by $60,000 to $155,000 for the three months
ended September 30, 1998 from $215,000 for the same period in 1997. The
decrease was primarily related to a decrease in net interest income caused by
the narrowing of First Federal's interest rate spread to 1.97% compared to 2.15%
for the first quarter last year and to increased other expenses. The decrease
in the interest rate spread is due to management's decision to offer competitive
mortgage interest rates in an effort to increase First Federal's loan portfolio,
and to offer certificates of deposit and money market accounts at rates slightly
higher than that of its competition to attract the funds to support loan growth.
NET INTEREST INCOME. Net interest income decreased $49,000, or 7.1%, to
$646,000 in the first quarter of fiscal 1999 compared to the first quarter last
year primarily as a result of the narrowing of First Federal's interest rate
spread. Total interest income decreased by 3.0% to $1.8 million for the three
months ended September 30, 1998, from $1.9 million for the same period ending in
1997. This decrease was caused by both a reduced yield on investment securities
and a reallocation of the portfolio of interest earning assets from securities
to lower yielding deposits with financial institutions. Interest income on
loans increased as the result of the growth of the portfolio, while interest
income on investment securities decreased as a result of the reduction of the
portfolio and lower yields. During 1998, higher yielding securities were
prepaid or called by the issuer, which left First Federal with lower yielding
securities. Instead of reinvesting the proceeds of redeemed securities at lower
market rates, First Federal kept the funds in cash pending investment in loans.
The average yield on interest-earning assets decreased to 6.99% for the three
months ended September 30, 1998 from 7.16% for the three months ended September
30, 1997 primarily as a result of the maturity, repricing and repayment of
higher yielding securities.
Interest expense decreased by $7,000 for the three months ended September
30, 1998 in comparison to the same period in 1997. The average cost of total
interest bearing liabilities remained unchanged at 5.02%. The decrease in
interest expense resulted from a net decrease in average total interest bearing
liabilities of $659,000. The increase in average deposits included increases in
demand and savings accounts of $1.3 million and certificates of deposit of $1.3
million. These increases were offset by reduced borrowings.
31
<PAGE>
The following table provides information as of September 30, 1998 regarding
the balances of interest-earning assets and interest-bearing liabilities and
their yields and costs. The following table provides for the three months ended
September 30, 1998 and 1997 information regarding average balances of assets and
liabilities as well as the total dollar amounts of interest income from average
interest-earning assets and interest expense on average interest-bearing
liabilities and average yields and costs. Average balances are presented on a
daily average basis. Such yields and costs for the periods indicated are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1998 1998 1997
---------------- --------------------------------- --------------------------------
INTEREST INTEREST
YIELD/ AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE COST BALANCE DIVIDENDS COST (1) BALANCE DIVIDENDS COST (1)
------- ------ ------- --------- -------- ------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (2)................. $ 38,183 7.79% $ 36,169 $ 744 8.23% $ 32,052 $ 660 8.24%
Investment securities..................... 52,003 6.37 51,728 830 6.42 60,590 1,039 6.86
Deposits with financial institutions...... 15,436 5.70 15,377 232 6.03 11,339 164 5.79
Federal funds sold........................ 420 5.75 737 10 5.43 671 9 5.37
Other..................................... 727 8.00 727 15 8.25 727 15 8.25
-------- -------- ------ -------- ------
Total interest-earning assets........... 106,769 6.79 104,738 1,831 6.99 105,379 1,887 7.16
Non-interest-earning assets................ 4,858 5,869 5,031
-------- -------- --------
Total assets............................ $111,627 $110,607 $110,410
======== ======== ========
Interest-bearing liabilities:
Demand and savings deposits............... $ 22,226 2.94 $ 21,738 160 2.94 $ 20,376 135 2.65
Certificates of deposit................... 68,735 5.60 68,520 960 5.60 67,254 944 5.61
-------- -------- ------ -------- ------
Total deposits.......................... 90,961 4.95 90,258 1,120 4.96 87,630 1,079 4.93
Borrowings............................... 3,645 5.50 3,645 53 5.82 7,050 105 5.96
Other.................................... 519 9.59 475 12 10.11 357 8 8.96
-------- -------- ------ -------- ------
Total interest-bearing liabilities...... 95,125 5.00 94,378 1,185 5.02 95,037 1,192 5.02
------ ------
Non-interest-bearing liabilities........... 1,385 1,209 1,220
Stockholders' equity....................... 15,117 15,020 14,153
-------- -------- --------
Total liabilities and stockholders'
equity............................... $111,627 $110,607 $110,410
======== ======== ========
Net interest income........................ $ 646 $ 695
====== ======
Interest rate spread (3)................... 1.97% 2.14%
Net interest margin (4).................... 2.47% 2.64%
Ratio of average interest-earning assets
to average interest-bearing liabilities... 110.98% 110.88%
</TABLE>
___________________
(1) Amounts are annualized.
(2) Average loans receivable includes nonperforming loans. Interest income
includes interest and fees on loans, but does not include interest on loans
90 days or more past due.
(3) Yield on interest-earning assets less cost of interest-bearing liabilities.
(4) Net interest income as a percentage of average interest-earning assets.
32
<PAGE>
The following table sets forth the effects of changing rates and volumes on
net interest income of First Federal. Information is provided with respect to
(1) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate) and (2) effects on interest income attributable
to changes in rate (changes in rate multiplied by prior volume). Changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1998 COMPARED TO 1997
------------------------------------
INCREASE (DECREASE)
DUE TO
------------------------
RATE VOLUME NET
-------- --------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (2).............................................. $ (1) $ 85 $ 84
Investment securities.................................................. (64) (145) (209)
Deposits with financial institutions................................... 7 61 68
Federal funds sold..................................................... -- 1 1
Other.................................................................. -- -- --
---- ----- -----
Total net change in income on interest-earning assets................ (58) 2 (56)
Interest-bearing liabilities:
Demand and savings deposits............................................ 15 10 25
Certificates of deposit................................................ -- 16 16
---- ----- -----
Total deposits...................................................... 15 26 41
Borrowings............................................................. (3) (49) (52)
Other.................................................................. 1 3 4
---- ----- -----
Total net change in expense on interest-bearing liabilities......... 13 (20) (7)
---- ----- -----
Net change in net interest income......................................... $(71) $ 22 $ (49)
==== ===== =====
</TABLE>
PROVISION FOR LOAN LOSSES. The provision for loan losses is determined by
management as the amount to be added to the allowance for loan losses after net
charge-offs have been deducted to bring the allowance to a level which is
considered adequate to absorb losses inherent in the loan portfolio. The Board
of Directors reviews the allowance for loan losses on a monthly basis. As a
result of First Federal's focus on residential mortgage loans and adherence to
strict underwriting and collection guidelines, First Federal's historical loan
loss experience has been low. No assurances, however, can be given as to future
loss experience. For the three months ended September 30, 1998 and 1997, First
Federal took no provision for loan losses.
OTHER INCOME. Other income increased $32,000 to $75,000 for the three
months ended September 30, 1998. This increase was primarily due to an increase
in ATM fees and increased gains on the sale of mortgage loans. Interest rates
declined during the three months ended September 30, 1998, which increased the
market value of loans originated by First Federal and then later sold.
OTHER EXPENSE. Other expenses increased 22% to $506,000 for the three
months ended September 30, 1998 from $415,000 for the same period in 1997. The
majority of this increase is attributable to a 24.5% increase in salaries and
employee benefits. At September 30, 1998 First Federal had 40 employees
compared to 33 employees at September 30, 1997. With First Federal's increased
focus on the origination of mortgage loans, additional personnel were necessary
in the mortgage loan department in order to originate and service new loans.
Additional employees were also hired in the areas of technology and branch
administration.
INCOME TAX EXPENSE. Total income tax expense was $61,000 for the three
months ended September 30, 1998, compared to $108,000 for the three months ended
September 30, 1997. This decrease is associated with the
33
<PAGE>
decrease in income before tax expense of $108,000. The effective tax rate was
28.2% for the three months ending September 30, 1998, as compared to 33.3% for
the same period in 1997.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
GENERAL. Net income increased by $493,000 to $880,000 for the year ended
June 30, 1998, from $387,000 for the fiscal year ended June 30, 1997. The
majority of the increase was due to a branch sale in fiscal 1998 and the one-
time Savings Association Insurance Fund assessment in fiscal 1997. Net interest
income increased $27,000, or less than 1%.
Net income decreased by 38%, to $387,000 for the year ended June 30, 1997,
compared to $620,000 for the year ended June 30, 1996. Net interest income
increased by $61,000 from fiscal 1996 to fiscal 1997, but the one-time deposit
insurance fund assessment negatively impacted fiscal 1997 pre-tax income by
$561,000.
NET INTEREST INCOME. Net interest income increased less than 1% to $2.7
million in fiscal 1998. Interest income increased $241,000 to $7.7 million for
fiscal 1998 from $7.5 million for fiscal 1997. The increase was the result of
First Federal's increased focus on the origination of loans, which generated a
slightly higher rate of interest than investments, and to larger average
balances of investment securities and deposits with financial institutions. The
average yield on interest-earning assets increased to 7.12% for fiscal 1998 from
7.05% for fiscal 1997.
Interest expense increased by $214,000 to $5.0 million for fiscal 1998 from
$4.8 million for fiscal 1997. The increase in interest expense was due to an
increase in interest bearing deposits, primarily certificates of deposit, and a
12 basis point increase in the average cost of interest bearing liabilities.
Certificates of deposit were First Federal's largest type of interest-bearing
liability, comprising, on average, 73% of the total. The average balance of
certificates of deposit outstanding during the year increased $5.2 million, to
$71.8 million from $66.6 million for fiscal 1997. Additionally, the average
yield on certificates of deposit increased 8 basis points, to 5.68% from 5.60%
for fiscal 1997. Following the sale of a branch office and the opening of a new
office in October 1997, First Federal offered a short-term certificate of
deposit at an above-market rate in order to attract customers to its new branch.
There was also an increase in the average cost of borrowings, which was
partially offset by decreases in the average cost of demand and savings deposits
and in other interest bearing liabilities.
Net interest income increased $61,000, or 2.3%, from fiscal 1996 to fiscal
1997. Total interest income for fiscal 1997 increased by $179,000, or 2.5%,
over the prior year to $7.5 million. While the average yield on interest
earning assets decreased slightly to 7.05% for fiscal 1997 compared to 7.07% for
fiscal 1996, the average balance of interest-earning assets increased by $2.9
million, to $106.1 million for fiscal 1997 from $103.2 million for fiscal 1996.
The largest increase was in investment securities.
Interest expense for fiscal 1997 increased $118,000, or 2.5%, over fiscal
1996 to $4.8 million. The average cost of interest-bearing liabilities was
essentially unchanged. However, the average balance of interest-bearing
liabilities increased 2.8% to $95.8 million for fiscal 1997 from $93.2 million
for fiscal 1996 as a result of increases in the average balances of certificates
of deposit and borrowings.
34
<PAGE>
The following table sets forth for the years ended June 30, 1998, 1997 and
1996 information regarding average balances of assets and liabilities as well as
the total dollar amounts of interest income from average interest-earning assets
and interest expense on average interest-bearing liabilities and average yields
and costs. Average balances are presented on a daily average basis. Such yields
and costs for the periods indicated are derived by dividing income or expense by
the average balances of assets or liabilities, respectively, for the periods
presented.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------------------
INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/ AVERAGE
BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE BALANCE
-------- --------- ------- -------- --------- ---- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)..................... $ 32,675 $2,695 8.25% $ 32,000 $2,581 8.07% $ 31,916
Investment securities.................... 60,379 4,108 6.80 60,034 4,085 6.80 57,782
Deposits with financial institutions..... 13,909 818 5.88 12,729 719 5.65 12,134
Federal funds sold....................... 637 35 5.49 572 31 5.42 587
Other.................................... 727 59 8.12 727 58 7.98 762
-------- ------ -------- ------ --------
Total interest-earning assets......... 108,327 7,715 7.12 106,062 7,474 7.05 103,181
Non-interest-earning assets................. 5,589 4,822 4,691
-------- -------- --------
Total assets.......................... $113,916 $110,884 $107,872
======== ======== ========
Interest-bearing liabilities:
Demand and savings accounts.............. $ 19,573 500 2.55 $ 21,379 571 2.67 $ 22,821
Certificates of deposit.................. 71,847 4,084 5.68 66,636 3,731 5.60 64,565
-------- ------ -------- ------ --------
Total deposits........................ 91,420 4,584 5.01 88,015 4,302 4.89 87,386
Borrowings............................... 5,991 355 5.93 7,498 433 5.77 5,655
Other.................................... 400 38 9.50 288 28 9.72 184
-------- ------ -------- ------ --------
Total interest-bearing liabilities.... 97,811 4,977 5.09 95,801 4,763 4.97 93,225
Non-interest-bearing liabilities............ 1,536 1,386 1,341
Stockholders' equity........................ 14,569 13,697 13,306
-------- -------- --------
Total liabilities and stockholders'
equity............................. $113,916 $110,884 $107,872
======== ======== ========
Net interest income......................... $2,738 $2,711
====== ======
Interest rate spread (2).................... 2.03% 2.08%
Net interest margin (3)..................... 2.53% 2.56%
Ratio of average interest-earning assets
to average interest-bearing liabilities.. 110.75% 110.71% 110.68%
<CAPTION>
--------------------
1996
--------------------
INTEREST
AND YIELD/
DIVIDENDS RATE
--------------------
<C> <C>
Interest-earning assets:
Loans receivable (1)..................... $2,602 8.15%
Investment securities.................... 3,848 6.66
Deposits with financial institutions..... 713 5.88
Federal funds sold....................... 33 5.62
Other.................................... 99 12.99
------
Total interest-earning assets......... 7,295 7.07
Non-interest-earning assets.................
Total assets..........................
Interest-bearing liabilities:
Demand and savings accounts.............. 648 2.84
Certificates of deposit.................. 3,644 5.64
------
Total deposits........................ 4,292 4.91
Borrowings............................... 335 5.92
Other.................................... 18 9.78
------
Total interest-bearing liabilities.... 4,645 4.98
Non-interest-bearing liabilities............
Stockholders' equity........................
Total liabilities and stockholders'
equity.............................
Net interest income......................... $2,650
======
Interest rate spread (2).................... 2.09%
Net interest margin (3)..................... 2.57%
Ratio of average interest-earning assets
to average interest-bearing liabilities..
</TABLE>
_______________________________
(1) Average loans receivable includes nonperforming loans. Interest income
includes interest and fees on loans, but does not include interest on loans
90 days or more past due.
(2) Yield on interest-earning assets less cost of interest-bearing liabilities.
(3) Net interest income as a percentage of average interest-earning assets.
35
<PAGE>
The following table sets forth the effects of changing rates and volume on
net interest income of First Federal for the years ended June 30, 1998, 1997 and
1996. Information is provided with respect to (1) effects on interest income
attributable to changes in volume (changes in volume multiplied by prior rate)
and (2) effects on interest income attributable to changes in rate (changes in
rate multiplied by prior volume). Changes attributable to the combined input of
volume and rate have been allocated proportionately to the changes due to volume
and the changes due to rate.
<TABLE>
<CAPTION>
1998 VS. 1997 1997 VS. 1996
----------------------------------- -----------------------------
INCREASE INCREASE
(DECREASE) DUE TO (DECREASE) DUE TO
-------------------------- -----------------------------
RATE VOLUME NET RATE VOLUME NET
---- ------ --- ---- ------ ---
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net....................... $ 59 $ 55 $114 $(28) $ 7 $(21)
Investment securities....................... (1) 24 23 84 153 237
Deposits with financial institutions........ 31 68 99 (24) 30 6
Federal funds sold.......................... 1 3 4 (1) (1) (2)
Other....................................... 1 -- 1 (37) (4) (41)
---- ---- ---- ---- ---- ----
Total net change in income on
interest-earning assets............... 91 150 241 (6) 185 179
Interest-bearing liabilities:
Demand and savings accounts................. (24) (47) (71) (38) (39) (77)
Certificates of deposit..................... 57 296 353 (28) 115 87
---- ---- ---- ---- ---- ----
Total deposits........................... 33 249 282 (66) 76 10
Borrowings.................................. 11 (89) (78) (8) 106 98
Other....................................... (1) 11 10 -- 10 10
---- ---- ---- ---- ---- ----
Total net change in expense on
interest-bearing liabilities.......... 43 171 214 (74) 192 118
Net change in net interest income.............. ---- ---- ---- ---- ---- ----
$ 48 $(21) $ 27 $ 68 $ (7) $ 61
==== ==== ==== ==== ==== ====
</TABLE>
PROVISION FOR LOAN LOSSES. First Federal took no provision for loan losses
in fiscal 1998 or fiscal 1997 as it had no loan losses during those years and
believed that the allowance for loan losses reflected the inherent risks within
the loan portfolio. The provision for loan losses was $100,000 in fiscal 1996.
Although there were no losses that year, management determined that an upward
adjustment was needed to bring the allowance for loan losses to a balance to
reflect risks within the loan portfolio and the fact that a loss on a single
loan could consume a significant amount of the allowance for loan losses.
OTHER INCOME. Other income increased by $422,000, to $601,000 for fiscal
1998 from $179,000 for fiscal 1997. Included in other income for fiscal 1998 are
gains on the sale of real estate, equipment and deposit accounts from First
Federal's sale of its Mt. Vernon, Indiana branch in October 1997. First Federal
recognized gains on the sale of real estate and equipment of $261,000 and gains
on the sale of deposits of $139,000. The primary components of other income are
loan servicing, deposit, ATM and other customer fees, increases in cash
surrender value of life insurance, and gains on sales of loans.
Other income increased by 6.4% to $179,000 for fiscal 1997 from $169,000
for fiscal 1996.
OTHER EXPENSE. Other expenses decreased by 14.5%, to $2.0 million during
fiscal 1998 from $2.4 million for fiscal 1997. This decrease was principally
associated with the $561,000 one time Savings Association Insurance Fund
assessment that was paid and expensed during fiscal 1997. Pursuant to
legislation enacted on September 30, 1996, the Federal Deposit Insurance
Corporation ("FDIC") imposed a one-time special assessment on deposits held by
financial institutions that are insured through the Savings Association
Insurance Fund. The special assessment was equal to $0.657 per $100 of insured
deposits and was required to be applied against deposits held as of
36
<PAGE>
March 31, 1995. The assessment had the effect of reducing First Federal's annual
assessment per $1,000 of insured deposits from $0.23 to $0.0648. Salaries and
employee benefits increased $162,000, or 16.6%, from fiscal 1997. First Federal,
in addition to normal increases, added personnel to the mortgage loan
department, technology, and branch administration. In addition to selling the
Mt. Vernon, Indiana branch, as discussed above, First Federal also purchased a
new branch location from another financial institution and opened this location
for business. Additional personnel were added to operate this full-service
branch. Net occupancy and equipment expense also combined to reflect an increase
of $77,000 for fiscal 1998 over fiscal 1997. Reasons for this increase included
depreciation and related costs for the new branch, as well as for significant
improvements in the area of technology.
Other expense for fiscal 1997 increased by $491,000, or 26%, over fiscal
1996. The biggest increase in other expense was the one-time deposit insurance
assessment. This was partially offset by a related decrease in federal deposit
insurance expense of $80,000. Without this one-time expense, other expenses
would have increased by less than 1% from fiscal 1996.
INCOME TAX EXPENSE. Income tax expense increased $303,000 to $415,000 for
fiscal 1998 from $112,000 for fiscal 1997 as a result of the increase in taxable
income. The effective tax rate increased to 32% for fiscal 1998 from 22% for
fiscal 1997 due principally to an increased amount of earnings relative to a
consistent amount of tax credits from First Federal's investment in a low-income
apartment complex. First Federal receives approximately $73,000 per year in
low-income housing tax credits through this investment. Such credits are
expected to be available through February 2004.
Income tax expense decreased in fiscal 1997 from fiscal 1996 due to the
decrease in net income. The effective tax rate decreased to 22% for fiscal 1997
from 24% for fiscal 1996.
MARKET RISK ANALYSIS
QUANTITATIVE ASPECTS OF MARKET RISK. First Federal 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,
First Federal is not subject to foreign currency exchange rate risk or commodity
price risk. For information regarding the sensitivity to interest rate risk of
First Federal's interest-earning assets and interest-bearing liabilities, see
the tables under "Business of First Federal--Lending Activities--Loan Portfolio
Analysis," "--Investment Activities" and "--Deposit Activities and Other Sources
of Funds--Deposit Accounts."
First Federal 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, First Federal 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.
37
<PAGE>
The following table is provided by the OTS and sets forth the change in
First Federal's net portfolio value at September 30, 1998, based on OTS
assumptions, that would occur in the event of an immediate change in interest
rates, with no effect given to any steps that management might take to
counteract that change.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
-------------------------------------------------------------------------------------------
BASIS POINT NET PORTFOLIO VALUE PORTFOLIO VALUE OF ASSETS
------------------------------------------------- --------------------------------
("BP")
CHANGE IN RATES $ AMOUNT $ CHANGE (1) % CHANGE NPV RATIO CHANGE
- ------------------- ------------- --------------- --------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400bp $11,980 $(5,057) (30.0)% 11.23% (364)bp
300 13,536 (3,502) (21.0) 12.43 (245)
200 15,030 (2,007) (12.0) 13.53 (135)
100 16,171 (867) (5.0) 14.32 (56)
0 17,037 14.87
(100) 17,564 526 3.0 15.16 29
(200) 18,133 1,095 6.0 15.47 60
(300) 18,862 1,825 11.0 15.89 101
(400) 19,625 2,588 15.0 16.31 144
</TABLE>
The above table indicates that in the event of a sudden and sustained
increase in prevailing market interest rates, First Federal's net portfolio
value would be expected to decrease.
Certain assumptions utilized by the OTS in assessing the interest rate risk
of savings associations within First Federal's region were utilized in preparing
the preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
QUALITATIVE ASPECTS OF MARKET RISK. First Federal's principal financial
objective is to achieve long-term profitability while reducing its exposure to
fluctuating market interest rates. First Federal has sought to reduce the
exposure of its earnings to changes in market interest rates by attempting to
manage the mismatch between asset and liability maturities and interest rates.
In order to reduce the exposure to interest rate fluctuations, First Federal has
developed strategies to manage its liquidity and shorten its effective
maturities of certain interest-earning assets.
Management has sought to decrease the average maturity of its assets by:
(1) offering a variety of adjustable-rate residential mortgage loans and
consumer loans, all of which are retained by First Federal for its
portfolio;
(2) purchasing mortgage-backed and related securities with adjustable
rates or estimated lives of five to ten years or less; and
(3) purchasing short- to intermediate-term investment securities.
38
<PAGE>
In addition, First Federal sells a portion of its long-term, fixed-rate
single-family residential mortgage loans for cash in the secondary market. The
retention of ARM loans and adjustable-rate mortgage-backed securities, which
reprice at regular intervals, helps to ensure that the yield on First Federal's
loan portfolio will be sufficient to offset increases in First Federal's cost of
funds. However, periodic and lifetime interest rate adjustment limits may
prevent ARM loans from repricing to market interest rates during periods of
rapidly rising interest rates. First Federal does not use any hedging
techniques to manage the exposure of its assets to fluctuating market interest
rates. First Federal relies on retail deposits as its primary source of funds
and maintains a moderate proportion of lower-costing passbook, NOW and money
market accounts. First Federal has attempted to lengthen the term of deposits
by offering certificates of deposit with terms of up to ten years. Management
believes retail deposits, compared to brokered deposits, reduce the effects of
interest rate fluctuations because they generally represent a more stable source
of funds.
LIQUIDITY AND CAPITAL RESOURCES
First Federal's principal sources of funds are proceeds from maturities of
investment securities, principal payments received on mortgage-backed and
related securities, loan repayments and deposits. While scheduled payments from
the amortization of loans, investment securities and interest-bearing time
deposits are relatively predictable sources of funds, deposit flows and loan or
investment security prepayments are greatly influenced by general interest
rates, economic conditions, and competition. First Federal has been able to
generate sufficient cash through its deposits and has been able to maintain its
borrowings from the Federal Home Loan Bank at a relatively low level. Funds
borrowed from the Federal Home Loan Bank are generally matched against higher
yielding assets of like amounts with similar maturities to provide a built in
margin of interest to First Federal.
First Federal 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. First Federal invests excess funds in overnight
deposits and other short-term interest-earning assets to provide liquidity to
meet these needs. At September 30, 1998, cash and cash equivalents totaled
$14.0 million, or 12.5% of total assets. At September 30, 1998, First Federal
had outstanding commitments to originate loans of $3.1 million. At the same
time, certificates of deposit which are scheduled to mature in one year or less
totaled $37.5 million. Based upon historical experience, management believes
the majority of maturing certificates of deposit will remain with First Federal.
In addition, management of First Federal believes that it can adjust the
offering rates of certificates of deposit to retain deposits in changing
interest rate environments. If a significant portion of these deposits are not
retained by First Federal, First Federal would be able to utilize Federal Home
Loan Bank advances to fund deposit withdrawals, which would result in an
increase in interest expense to the extent that the average rate paid on such
advances exceeds the average rate paid on deposits of similar duration.
Federal regulations require First Federal to maintain minimum levels of
liquid assets, such as cash and eligible investments. 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. At September 30, 1998, First Federal's
liquidity ratio, defined as liquid assets as a percentage of net withdrawable
savings deposits and short-term borrowings, was 24.1%.
The primary investing activities of First Federal are originating loans and
purchasing investments and mortgage-backed securities. Proceeds from maturities
of investment securities and principal payments received on mortgage-backed and
related securities, net of purchases, totaled $6.8 million for the year ended
June 30, 1998, while loan originations in excess of repayments totaled $3.4
million. For the three months ended September 30, 1998, proceeds from
maturities of investment securities and principal payments received on mortgage-
backed and related securities, net of purchases totaled $1.8 million and loan
originations in excess of repayments totaled $2.5 million.
First Federal's most significant financing activities are deposit accounts
and Federal Home Loan Bank borrowings. The repayment of Federal Home Loan Bank
borrowings of $3.4 million was the primary use of cash during 1998. This cash
outflow was offset by net increases in deposits totaling $3.4 million during
1998. During
39
<PAGE>
the three months ended September 30, 1998, First Federal had no change in
Federal Home Loan Bank advances while the net increase in deposits was $1.7
million.
Management believes its ability to generate funds internally will satisfy
its liquidity requirements. If First Federal requires funds beyond its ability
to generate them internally, it has the ability to borrow funds from the Federal
Home Loan Bank. At September 30, 1998, First Federal had approximately $11.4
million available to it under its borrowing arrangement with the Federal Home
Loan Bank. At September 30, 1998, First Federal had $3.6 million in advances
from the Federal Home Loan Bank.
OTS regulations require First Federal to maintain specific amounts of
capital. As of September 30, 1998, First Federal complied with all regulatory
capital requirements as of that date with tangible, core and risk-based capital
ratios of 13.5%, 13.5% and 34.9%, respectively. For a detailed discussion of
regulatory capital requirements, see "Regulation--Federal Regulation of Savings
Associations--Capital Requirements." See also "Historical And Pro Forma
Regulatory Capital Compliance."
YEAR 2000 ISSUES
First Federal 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.
First Federal 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 First Federal's year 2000 preparedness.
(2) Assessment - Inventory of all technology assets and identification
of third-party vendors and service providers. First Federal 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
First Federal's year 2000 inquiries and development of a follow-up
plan and timeline. This phase has been completed. None of First
Federal'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. First Federal is currently in this phase of its
plan. A third-party service bureau processes all customer
transactions and has indicated to First Federal that it has
completed upgrades to its systems to be year 2000 compliant. First
Federal will test the third party systems by reviewing the results
of transactions at six different test dates before and after the
year 2000 date change covering all of the applications used by First
Federal. Testing is scheduled to be completed by March 31, 1999.
If testing reveals that the third party systems are not year 2000
compliant, First Federal's service bureau intends to either transfer
First Federal to other systems that are year 2000 compliant or
provide additional resources to resolve the year 2000 issues. Other
parties whose year 2000 compliance may effect First Federal include
Fannie Mae, the Federal Home Loan Bank-Indianapolis, brokerage
firms, the operator of First Federal's ATM network and First
Federal's pension plan administrator. These third parties have
indicated their compliance or intended
40
<PAGE>
compliance. Where it is possible to do so, First Federal has
scheduled testing with these third parties. Where testing is not
possible, First Federal will rely on certifications from vendors and
service providers. While reliance on certifications is less
preferable since it does not afford First Federal the opportunity to
confirm year 2000 compliance, First Federal 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 First Federal 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 First Federal progresses through the validation phase, First
Federal expects to determine necessary remedial actions and provide
for their implementation. First Federal 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. First Federal's plan provides for year 2000
readiness to be completed by mid-1999.
First Federal 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 September 30,
1998, approximately $155,000 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. First Federal 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 First Federal 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 First Federal's
business and could have a material adverse financial impact on First Federal.
Failure to resolve year 2000 issues presents the following risks to First
Federal, which First Federal believes reflects its most reasonably likely worst-
case scenario:
(1) First Federal could lose customers to other financial institutions,
resulting in a loss of revenue, if First Federal's third party
service bureau is unable to properly process customer transactions;
(2) Governmental agencies, such as the Federal Home Loan Bank, and
correspondent banks could fail to provide funds to First Federal,
which could materially impair First Federal's liquidity and affect
First Federal'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 First
Federal experiencing deposit outflows prior to December 31, 1999;
and
(4) First Federal 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 First Federal's loan
portfolio consists of residential mortgage and consumer loans, management
believes that year 2000 issues will not impair the ability of First Federal's
borrowers to repay their debt.
There can be no assurances that First Federal's year 2000 plan will
effectively address the year 2000 issue, that First Federal's estimates of the
timing and costs of completing the plan will ultimately be accurate or that the
impact of any failure of First Federal or its third-party vendors and service
providers to be year 2000 compliant will not have a material adverse effect on
First Federal's business, financial condition or results of operations.
41
<PAGE>
IMPACT OF ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES
COMPREHENSIVE INCOME. Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," issued in July 1997, establishes standards for
reporting and presentation of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is presented with the same prominence as other
financial statements. SFAS No. 130 requires that companies (1) classify items
of other comprehensive income by their nature in a financial statement and (2)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
statement of financial condition. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Comparative financial statements are
required to be reclassified to reflect the provisions of this statement. First
Federal adopted SFAS No. 130 in the quarter ended September 30, 1998.
SEGMENT INFORMATION. Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information,"
establishes standards for the way public business enterprises report information
about operating segments and establishes standards for related disclosures about
products and services, geographic areas and major customers. Operating segments
are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Information
required to be disclosed includes segment profit or loss, certain specific
revenue and expense items, segment assets and certain other information. This
statement is effective for First Bancorp for financial statements issued for the
fiscal year ending June 30, 1999. Adoption of SFAS No. 131 is not anticipated
to have a significant effect upon the presentation of First Bancorp's financial
statements.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," issued in February 1998,
standardizes disclosure requirements for pensions and other postretirement
benefits and requires additional disclosure on changes in benefit obligations
and fair values of plan assets in order to facilitate financial analysis. This
statement is effective for First Bancorp for financial statements issued for the
fiscal year ending June 30, 1999. Adoption of SFAS No. 132 is not anticipated
to have a significant effect upon the presentation of First Bancorp's financial
statements.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" establishes accounting and reporting standards for
derivative instruments and requires that all derivatives be recognized as either
assets or liabilities in the statement of financial position. Under this
standard, all derivative instruments should be measured at fair value. At the
date of initial application, an entity may transfer any held-to-maturity
securities into the available-for-sale category or the trading category. First
Bancorp has not determined whether it will transfer any securities from held-to-
maturity. An entity will then be able in the future to designate a security
transferred into the available-for-sale category as a hedged item. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. First Bancorp intends to adopt this standard effective July 1, 1999,
although early adoption is permitted. Because First Federal does not hold off-
balance sheet derivative instruments or enter into hedging transactions,
adoption of this statement is not anticipated to have a significant effect on
First Bancorp's financial position or results of operations.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
in this prospectus have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars, without considering the change
in the relative purchasing power of money over time due to inflation. The
impact of inflation is reflected in the increased cost of First Federal's
operations. Unlike most industrial companies, virtually all the assets and
liabilities of a financial
42
<PAGE>
institution are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
BUSINESS OF FIRST BANCORP
GENERAL
First Bancorp was organized as an Indiana business corporation at the
direction of First Federal in November 1998 for the purpose of becoming the
holding company for First Federal upon completion of the conversion. As a
result of the conversion, First Federal will be a wholly-owned subsidiary of
First Bancorp and all of the issued and outstanding capital stock of First
Federal will be owned by First Bancorp.
BUSINESS
Prior to the conversion, First Bancorp has not and will not engage in any
significant activities other than of an organizational nature. Upon completion
of the conversion, First Bancorp's sole business activity will be the ownership
of the outstanding capital stock of First Federal. First Bancorp also will hold
a note receivable from the ESOP. In the future, First Bancorp may acquire or
organize other operating subsidiaries, although there are no current plans,
arrangements, agreements or understandings, written or oral, to do so.
Initially, First Bancorp will neither own nor lease any property but will
instead use the premises, equipment and furniture of First Federal with the
payment of appropriate rental fees, as required by applicable law and
regulations.
Since First Bancorp will only hold the outstanding capital stock of First
Federal following completion of the conversion, the competitive conditions
applicable to First Bancorp will be the same as those confronting First Federal.
See "Business of First Federal--Competition."
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<PAGE>
BUSINESS OF FIRST FEDERAL
GENERAL
First Federal was chartered in 1904 as an Indiana building and loan
association named "West Side Building, Loan and Savings Association." In 1934,
First Federal became a federal savings and loan association and adopted the name
"First Federal Savings and Loan Association of Evansville." In 1988, First
Federal became a federal savings bank and changed its name to "First Federal
Savings Bank."
First Federal is regulated by the OTS and the FDIC. First Federal's
deposits have been federally-insured by the FDIC since 1934 and are currently
insured by the FDIC under the Savings Association Insurance Fund. First Federal
has been a member of the Federal Home Loan Bank System since 1934.
MARKET AREA
First Federal conducts its operations through four offices located in
Evansville, Indiana. Most of First Federal's depositors live in the areas
surrounding its branches and most of First Federal's loans are made to persons
in Evansville and the surrounding counties.
Evansville, which is in the southwest corner of Indiana, had a population
of approximately 168,000 persons as of 1997. At May 1998, unemployment in
Vanderburgh County was 3.1%, compared with 2.8% for the State of Indiana and
4.3% for the United States. The service sector (primarily medical services) is
the largest source of employment. However, manufacturing has played an
increasingly larger role in recent years with the addition or reopening of
several plants. The area's largest manufacturers produce pharmaceuticals, home
appliances, aluminum and plastic products, and automobiles. Employers include
Whirlpool Corporation, Bristol-Myers Squibb, Alcoa, AK Steel, General Electric
and Toyota Motor Corp. Unemployment is currently low and First Federal believes
the outlook for the area's economy is positive.
First Federal faces intense competition for deposits and loan originations
from the many financial institutions conducting business within its market area.
Four commercial banks and three other savings banks have retail banking offices
in Vanderburgh County. Most of these financial institutions are larger than
First Federal. See "--Competition" and "Risk Factors--Competition has hurt
First Federal's net interest income."
LENDING ACTIVITIES
GENERAL. At September 30, 1998, loans receivable totaled $38.2 million,
which was 34.2% of total assets. The principal lending activity of First
Federal is the origination of mortgage loans for the purpose of purchasing or
refinancing one- to four-family residential property. To a significantly lesser
extent, First Federal also originates construction loans, mortgage loans secured
by commercial and multi-family real estate and consumer loans. Most of First
Federal's borrowers and the properties securing its loans are located in
Evansville, Indiana and the surrounding counties.
44
<PAGE>
LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition of
First Federal's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT JUNE 30,
-------------------------------------------------------------
1998 1998 1997 1996
------------------ ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family..................... $36,745 92.73% $33,493 90.95% $31,106 94.44% $31,240 93.70%
Construction............................ 1,090 2.75 1,551 4.21 77 0.23 372 1.12
Commercial and multi-family............. 107 0.27 117 0.32 153 0.46 193 0.58
------- ------ ------- ------ ------- ------ ------- ------
Total mortgage loans................. 37,942 95.75 35,161 95.48 31,336 95.13 31,805 95.40
Credit line equity......................... 997 2.52 937 2.55 1,047 3.18 997 2.99
Savings account loans...................... 146 0.37 226 0.61 131 0.40 156 0.47
Consumer loans............................. 542 1.36 501 1.36 424 1.29 381 1.14
------- ------ ------- ------ ------- ------ ------- ------
Total loans.......................... 39,627 100.00% 36,825 100.00% 32,938 100.00% 33,339 100.00%
------- ====== ------- ====== ------- ====== ------- ======
Less:
Undisbursed loan funds.................. 958 700 349 463
Deferred loan fees...................... 236 220 175 185
Allowance for loan losses............... 250 250 250 250
------- ------- ------- -------
Net loans.................................. $38,183 $35,655 $32,164 $32,441
======= ======= ======= =======
</TABLE>
The following table sets forth certain information at September 30, 1998
regarding the dollar amount of loans maturing in First Federal's portfolio based
on their scheduled contractual principal repayments. Demand loans, loans having
no stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less. Loan balances do not include undisbursed
loan funds, deferred loan fees and allowance for loan losses.
<TABLE>
<CAPTION>
AMOUNT DUE
-------------------------------------------------------------------
AFTER ONE AFTER AFTER
YEAR 3 YEARS 5 YEARS
WITHIN THROUGH THROUGH THROUGH BEYOND
ONE YEAR 3 YEARS 5 YEARS 10 YEARS 10 YEARS TOTAL
-------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family...................... $2,252 $4,061 $4,130 $10,290 $16,012 $36,745
Construction............................. 20 43 50 158 819 1,090
Commercial and multi-family.............. 19 34 31 23 -- 107
Credit line equity loans.................... 207 484 306 -- -- 997
Savings account loans....................... 146 -- -- -- -- 146
Consumer loans.............................. 156 268 118 -- -- 542
------ ------ ------ ------- ------- -------
Total................................. $2,800 $4,890 $4,635 $10,471 $16,831 $39,627
====== ====== ====== ======= ======= =======
</TABLE>
45
<PAGE>
The following table sets forth, as of September 30, 1998, the dollar amount
of all loans due or repricing after September 30, 1999, based on their scheduled
contractual principal payments, which have fixed interest rates and have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
FLOATING OR
ADJUSTABLE
FIXED-RATE RATE
---------- -----------
(IN THOUSANDS)
<C> <C>
<S>
Mortgage loans:
One- to four-family........................ $30,630 $3,863
Construction............................... 1,070 --
Commercial and multi-family................ 7 81
Credit line equity loans...................... -- 790
Savings account loans......................... -- --
Consumer loans................................ 386 --
------- ------
Total................................ $32,093 $4,734
======= ======
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less
than their contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give First Federal the right to declare loans
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase, however, when current mortgage
loan market rates are substantially higher than rates on existing mortgage loans
and, conversely, decreases when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
RESIDENTIAL REAL ESTATE LOANS. The primary lending activity of First
Federal is the origination of mortgage loans to enable borrowers to purchase
existing homes or to refinance existing mortgage loans. At September 30, 1998,
$36.7 million, or 92.7%, of First Federal's total loan portfolio consisted of
loans secured by residential real estate. At September 30, 1998, 10.7% of First
Federal's residential real estate loans were subject to periodic interest rate
adjustments and 89.3% were fixed-rate loans.
First Federal offers a variety of fixed and adjustable-rate mortgage loan
products. The loan fees charged, interest rates and other provisions of First
Federal's mortgage loans are determined by First Federal on the basis of its own
pricing criteria and market conditions. Generally, all loans originated by
First Federal conform to Fannie Mae underwriting standards. First Federal's
fixed-rate loans typically have maturities of 15 to 30 years, although 30-year
loans constitute the largest percentage of originations. First Federal also
offers five- and seven-year balloon mortgages based on a 30-year amortization
schedule. First Federal's ARM loans are typically based on a 30-year
amortization schedule. Interest rates and payments on First Federal's ARM loans
generally are adjusted annually after a specified period ranging from one to ten
years to a rate typically equal to 2.75% above the one-year constant maturity
U.S. Treasury index. First Federal currently offers ARM loans with initial
rates below those which would prevail under the foregoing computation,
determined by First Federal based on market factors and competitive rates for
loans having similar features offered by other lenders for such initial periods.
The maximum amount by which the interest rate may be increased or decreased in a
given period on First Federal's ARM loans is generally 2% per adjustment period
and the lifetime interest rate cap is generally 6% over the initial interest
rate of the loan. First Federal qualifies the borrower based on the borrower's
ability to repay the ARM loan based on the maximum interest rate at the first
adjustment, in the case of one-year ARM loans, and based on the initial interest
rate in the case of ARM loans that adjust after three or more years. First
Federal does not originate negative amortization loans. The terms and
conditions of the ARM loans offered by First Federal, including the index for
interest rates, may vary from time to time. First Federal believes that the
annual adjustment feature of its ARM loans also provides flexibility to meet
competitive conditions as to initial rate concessions while preserving First
Federal's return on equity objectives by limiting the duration of the initial
rate concession.
46
<PAGE>
Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment. As a result of
the low interest rate environment in recent years, First Federal has experienced
a strong customer preference for fixed-rate loans.
The retention of ARM loans in First Federal's loan portfolio helps reduce
First Federal's exposure to changes in the interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer. It is possible that, during periods
of rising interest rates, the risk of default on ARM loans may increase as a
result of repricing and the increased costs to the borrower. Furthermore,
because the ARM loans originated by First Federal generally provide, as a
marketing incentive, for initial rates of interest below the rates which would
apply were the adjustment index used for pricing initially (discounting), these
loans are subject to increased risks of default or delinquency. Another
consideration is that although ARM loans allow First Federal to increase the
sensitivity of its asset base to changes in interest rates, the extent of this
interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limits. Because of these considerations, First Federal has no
assurance that yields on ARM loans will be sufficient to offset increases in
First Federal's cost of funds.
While fixed-rate single-family residential real estate loans are normally
originated with 15- to 30-year terms, and First Federal permits its ARM loans to
be assumed by qualified borrowers, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan. In addition, substantially all mortgage loans in First
Federal's loan portfolio contain due-on-sale clauses providing that First
Federal may declare the unpaid amount due and payable upon the sale of the
property securing the loan. First Federal enforces these due-on-sale clauses to
the extent permitted by law and as business judgment dictates. Thus, average
loan maturity is a function of, among other factors, the level of purchase and
sale activity in the real estate market, prevailing interest rates and the
interest rates payable on outstanding loans.
First Federal requires title insurance insuring the status of its first
lien on real estate secured loans and also requires that the fire and extended
coverage casualty insurance (and, if appropriate, flood insurance) be maintained
in an amount at least equal to the outstanding loan balance.
First Federal's residential mortgage loans typically do not exceed 80% of
the appraised value of the property. First Federal's lending policies permit
First Federal to lend up to 97% of the appraised value of the property; however,
First Federal generally requires private mortgage insurance on the portion of
the principal amount that exceeds 80% of the appraised value of the property.
First Federal obtains appraisals on all first mortgage real estate loans from
outside appraisers.
CONSTRUCTION LOANS. First Federal originates loans to individuals for the
construction of their personal residence. Recently, First Federal began
originating loans to local home builders. Construction loans to individuals are
made on the same terms as First Federal's residential mortgage loans, but
provide for the payment of interest only during the construction phase, which is
usually six months. At the end of the construction phase, the loan converts to a
permanent mortgage loan. First Federal's construction loans to builders
generally have fixed interest rates and are for a term of up to 18 months. Loans
to builders are usually made on a speculative basis, which means that the
builder has not identified a purchaser for the home at the time the loan is
made. Builders are evaluated on a case-by-case basis to establish a maximum
credit limit, however the maximum amount that First Federal will loan to any one
builder is $750,000. At September 30, 1998, First Federal had no outstanding
construction loans to builders. First Federal occasionally originates loans for
the purchase of residential building lots. Most of these loans have terms of
five years or less and may have fixed or adjustable rates. At September 30,
1998, First Federal did not have any land loans outstanding.
47
<PAGE>
Construction lending is generally considered to involve a higher degree of
risk than single-family permanent mortgage lending because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost of the project. The nature of these loans is such that
they are generally more difficult to evaluate and monitor. If the estimate of
construction cost proves to be inaccurate, First Federal may be required to
advance funds beyond the amount originally committed to permit completion of the
project. If the estimate of value upon completion proves to be inaccurate, the
Company may be confronted with a project whose value is insufficient to assure
full repayment. Projects may also be jeopardized by disagreements between
borrowers and builders and by the failure of builders to pay subcontractors.
Loans to builders to construct homes for which no purchaser has been identified
carry more risk because the payoff for the loan is dependent on the builder's
ability to sell the property prior to the time that the construction loan is
due.
First Federal has attempted to minimize the foregoing risks by, among other
things, monitoring the project and controlling the disbursement of funds. Prior
to making a commitment to fund a construction loan, First Federal requires an
appraisal of the property. First Federal also reviews and inspects each project
prior to disbursement of funds during the term of the construction loan. In most
cases, loan proceeds are disbursed after inspection of the project based on
percentage of completion.
COMMERCIAL AND MULTI-FAMILY REAL ESTATE LOANS. First Federal engages in a
limited amount of commercial and multi-family real estate lending. At September
30, 1998, commercial and multi-family real estate loans in First Federal's
portfolio totaled $107,000 and consisted of three loans. The maximum loan-to-
value ratio for a commercial or multi-family real estate loan is 75%. The
maximum term for a commercial or multi-family real estate loan is 15 years and
the maximum loan amount is $1,000,000. The majority of First Federal's
commercial real estate loans have been secured by small office buildings, motels
and retail establishments in Indiana.
Loans secured by commercial and multi-family real estate generally are
larger and involve greater risks than one- to four-family residential mortgage
loans. Payments on loans secured by such properties are often dependent on
successful operation or management of the properties. Repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy. First Federal seeks to minimize these risks in a variety
of ways, including limiting the size of such loans and strictly scrutinizing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan. The properties securing First
Federal's commercial and multi-family real estate loans are inspected by First
Federal's lending personnel before the loan is made. First Federal also obtains
appraisals on each property in accordance with applicable regulations.
CONSUMER AND OTHER LOANS. At September 30, 1998, First Federal's consumer
and other loans totaled approximately $1.7 million, or 4.3% of First Federal's
total loans. First Federal's consumer and other loans consist primarily of
credit line equity loans, savings account loans and automobile loans. In January
1999, First Federal significantly expanded its consumer lending operations. See
"Recent Developments--Expansion of Consumer Lending Operations."
First Federal originates home equity loans in the form of lines of credit.
At September 30, 1998, First Federal had $997,000 of credit line equity loans
and unused commitments to extend credit under credit line equity loans of $2.2
million. Most of these loans are made to existing customers. First Federal's
home equity loans have variable interest rates tied to the prime lending rate.
First Federal imposes a maximum loan-to-value ratio of 80% after considering
both the first and second mortgage loans. First Federal's home equity loans may
have greater credit risk than one- to four-family residential mortgage loans
because they are secured by mortgages subordinated to an existing first mortgage
on the property, which, in most cases, is held by First Federal.
First Federal makes savings account loans for up to 90% of the depositor's
account balance. The interest rate is normally 2.0% or 3.0% above the rate paid
on the deposit account, depending on the type of account, and the account must
be pledged as collateral to secure the loan. Savings account loans are payable
on demand, although interest must be paid every six months.
48
<PAGE>
First Federal originates consumer loans secured by automobiles and,
occasionally, boats and other recreational vehicles. Automobile loans are
secured by both new and used cars and light trucks. Both new and used cars are
financed for a period of up to 60 months and the rate on such loans is fixed for
the term of the loan.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various Federal and state laws, including
Federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Such loans may also give rise to claims and defenses
by a consumer loan borrower against an assignee of such loans such as First
Federal, and a borrower may be able to assert against such assignee claims and
defenses that it has against the seller of the underlying collateral.
LOAN SOLICITATION AND PROCESSING. Loan applicants come through direct
solicitation by First Federal's branch managers and commissioned loan
originators, as well as through referrals by realtors and past and present
customers. First Federal does not advertise extensively. All types of loans may
be originated and closed in any of First Federal's offices. Loans are serviced
from First Federal's main office.
Upon receipt of a loan application from a prospective borrower, a credit
report and other data are obtained to verify specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of the
real estate offered as collateral generally is undertaken by a fee appraiser
approved by First Federal and licensed or certified by the State of Indiana.
Loans in the amount of up to $240,000 must be approved by two members of
First Federal's Executive Committee, one of which must be First Federal's
President. The Executive Committee consists of First Federal's President,
Executive Vice President and members of the Board of Directors. Loans of more
than $240,000 must be approved by a majority of First Federal's Executive
Committee.
Loan applicants are promptly notified of the decision of First Federal.
Interest rates are subject to change if the approved loan is not closed within
the time of the commitment, which usually is 45 days.
LOAN ORIGINATIONS, SALES AND PURCHASES. In an effort to manage its interest
rate risk position, First Federal generally sells the fixed-rate mortgage loans
with terms in excess of 15 years that it originates. However, since the
beginning of 1998, First Federal has retained selected 30-year, fixed-rate loans
in order to build its loan portfolio and increase the yield on its interest-
earning assets. The sale of loans in the secondary mortgage market reduces First
Federal's risk that the interest rates paid to depositors will increase while
First Federal holds long-term, fixed-rate loans in its portfolio. It also allows
First Federal to continue to fund loans when savings flows decline or funds are
not otherwise available. First Federal generally sells loans without recourse to
Fannie Mae with servicing retained. Gains, net of origination expense, from the
sale of such loans are recorded at the time of sale. Generally a loan is
committed to be sold and a price for the loan is fixed after the loan is
approved by the Executive Committee and the interest rate is approved by the
customer. This eliminates the risk to First Federal that a rise in market
interest rates will reduce the value of a mortgage before it can be sold.
In the past First Federal has supplemented its loan originations through
the purchase of whole loans and loan participations. However, First Federal has
not purchased any loans or loan participations in many years.
At September 30, 1998, First Federal was servicing loans for others (Fannie
Mae) amounting to approximately $9.1 million. Servicing loans for others
generally consists of collecting mortgage payments,
49
<PAGE>
maintaining escrow accounts, disbursing payments to investors and foreclosure
processing. Loan servicing income is recorded on the accrual basis and includes
servicing fees from investors.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
------------------------- ----------------------------------------------
1998 1997 1998 1997 1996
---------- ---------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loan originated:
Mortgage loans:
One- to four-family.................... $5,471 $ 971 $11,557 $3,974 $ 6,057
Construction........................... 406 433 1,767 571 850
Commercial and multi-family............ -- -- -- -- --
Credit line equity loans.................. 277 185 848 818 907
Savings account loans..................... 32 33 249 85 242
Consumer loans............................ 87 44 398 290 151
------ ------ ------- ------ -------
Total loans originated.............. 6,273 1,666 14,819 5,738 8,207
Loans purchased........................... -- -- -- -- --
Loans sold................................ 1,361 203 1,844 627 543
Mortgage loan principal repayments........ 1,998 2,069 8,379 5,289 6,633
Increase (decrease) in other items, net... (386) (174) (1,105) (99) (1,082)
------ ------ ------- ------ -------
Net increase (decrease) in loans
receivable............................. $2,528 $ (780) $ 3,491 $ (277) $ (51)
====== ====== ======= ====== =======
</TABLE>
LOAN COMMITMENTS. First Federal issues commitments for fixed- and
adjustable-rate one- to four-family residential mortgage loans conditioned upon
the occurrence of certain events. Such commitments are made on specified terms
and conditions and are honored for up to 45 days from the date of loan approval.
First Federal had outstanding mortgage loan commitments of approximately
$876,000 at September 30, 1998, $793,000 and $83,000 of which were at fixed and
adjustable rates, respectively. At September 30, 1998, First Federal also had
commitments to fund $2.2 million of credit line equity loans. See Note 9 of
Notes to Consolidated Financial Statements.
LOAN ORIGINATION AND OTHER FEES. First Federal, in most instances, receives
loan origination fees and discount "points." Loan fees and points are a
percentage of the principal amount of the mortgage loan which are charged to the
borrower for funding the loan. The amount of points charged by First Federal
generally is 1%. Current accounting standards require fees received (net of
certain loan origination costs) for originating loans to be deferred and
amortized into interest income over the contractual life of the loan. Net
deferred fees or charges associated with loans that are prepaid are recognized
as income adjustments at the time of prepayment. First Federal had $236,000 of
net deferred mortgage loan fees at September 30, 1998.
NONPERFORMING ASSETS AND DELINQUENCIES. First Federal generates reports
regarding delinquent loans at regular intervals each month to enable management
to track their status. First Federal also generates a series of notices at
regular intervals to inform mortgage loan borrowers when a required payment is
past due. When a payment becomes 30 days past due, First Federal contacts the
borrower by letter. If a satisfactory response is not obtained, continuous
follow-up contacts, including contact by telephone, are attempted until the loan
has been brought current. Before the 90th day of delinquency, attempts to
interview the borrower, preferably in person, are made to establish the cause of
the delinquency, whether the cause is temporary, the attitude of the borrower
toward
50
<PAGE>
the debt, and a mutually satisfactory arrangement for curing the default. In
most cases, delinquencies are cured promptly; however, if by the 91st day of
delinquency, or sooner if the borrower is chronically delinquent and all
reasonable means of obtaining payment on time have been exhausted, foreclosure,
according to the terms of the security instrument and applicable law, is
approved by the Board of Directors.
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, First Federal institutes collection
procedures. The first notice is mailed to the borrower 15 days following the
payment due date. A computer-generated collection report is received by First
Federal daily. The customer is contacted by telephone to ascertain the nature of
the delinquency. In most cases, delinquencies are cured promptly; however, if,
by the 45th day following the grace period of delinquency no progress has been
made, a written notice is mailed informing the borrowers of their right to cure
the delinquency within 20 days and of First Federal's intent to begin legal
action if the delinquency is not corrected. Depending on the type of property
held as collateral, First Federal either obtains a judgment in small claims
court or takes action to repossess the collateral.
Loans are placed on nonaccrual status when they become 90 days past due.
Nonaccrual loans are returned to accrual status when they become less than 90
days past due.
First Federal's Board of Directors is informed on a monthly basis as to the
status of all mortgage and consumer loans that are delinquent 60 days or more,
the status on all loans currently in foreclosure, and the status of all
foreclosed and repossessed property owned by First Federal.
The following table sets forth information with respect to First Federal's
nonperforming assets and restructured loans within the meaning of SFAS No. 15 at
the dates indicated.
<TABLE>
<CAPTION>
AT
SEPTEMBER 30, AT JUNE 30,
-----------------------------------------------
1998 1998 1997 1996
---------------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis............ $ -- $ -- $ 27 $ --
Accruing loans past due 90 days or more.............. -- -- -- --
--------------- -------- ----- ---------
Nonperforming loans.................................. -- -- 27 --
Real estate owned (net).............................. -- -- -- --
--------------- -------- ----- ---------
Total nonperforming assets..................... $ -- $ -- $ 27 $ --
=============== ======== ===== =========
Restructured loans................................... -- -- -- --
Total loans delinquent 90 days or more to net
loans............................................. N/A N/A 0.08% N/A
Total loans delinquent 90 days or more to total
assets............................................ N/A N/A 0.02% N/A
Total nonperforming assets to total assets........... N/A N/A 0.02% N/A
</TABLE>
REAL ESTATE OWNED. Real estate acquired by First Federal as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is recorded at the lower of its
cost, which is the unpaid principal balance of the related loan plus foreclosure
costs, or fair market value. Subsequent to foreclosure, the property is carried
at the lower of the foreclosed amount or fair value. Upon receipt of a new
appraisal and market analysis, the carrying value is written down through a
charge to income, if appropriate. At September 30, 1998, First Federal had no
real estate owned.
ASSET CLASSIFICATION. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem
51
<PAGE>
assets and, if appropriate, require them to be classified. There are three
classifications for problem assets: substandard, doubtful and loss. Substandard
assets must have one or more defined weaknesses and are characterized by the
distinct possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution without establishment of a specific
reserve is not warranted. If an asset or portion thereof is classified loss, the
insured institution establishes specific allowances for loan losses for the full
amount of the portion of the asset classified loss. A portion of general loan
loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. OTS regulations also
require that assets that do not currently expose an institution to a sufficient
degree of risk to warrant classification as loss, doubtful or substandard but do
possess credit deficiencies or potential weakness deserving management's close
attention shall be designated "special mention" by either the institution or its
examiners.
First Federal reviews and classifies its assets on a monthly basis. At
September 30, 1998 First Federal had no loans classified as loss, doubtful or
substandard. At such date First Federal had two one- to four-family mortgage
loans aggregating $153,000 classified as special mention. First Federal had no
impaired loans at September 30, 1998 or at June 30, 1998, 1997 and 1996.
ALLOWANCE FOR LOAN LOSSES. In originating loans, First Federal recognizes
that losses will be experienced and that the risk of loss will vary with, among
other things, the type of loan being made, the creditworthiness of the borrower
over the term of the loan, general economic conditions and, in the case of a
secured loan, the quality of the security for the loan. The allowance method is
used in providing for loan losses: all loan losses are charged to the allowance
and all recoveries are credited to it. The allowance for loan losses is
established through a provision for loan losses charged to First Federal's
income. The provision for loan losses is based on management's periodic
evaluation of First Federal's past loan loss experience, changes in the
composition of the portfolio, the current condition and amount of loans
outstanding and the probability of collecting all amounts due.
At September 30, 1998, First Federal had an allowance for loan losses of
$250,000, which represented 0.65% of total loans. Management believes that the
amount maintained in the allowances will be adequate to absorb losses inherent
in the portfolio. Although management believes that it uses the best information
available to make such determinations, future adjustments to the allowance for
loan losses may be necessary and results of operations could be significantly
and adversely affected if circumstances differ substantially from the
assumptions used in making the determinations. While First Federal believes it
has established its existing allowance for loan losses in accordance with
generally accepted accounting principles, there can be no assurance that First
Federal's regulators, in reviewing First Federal's loan portfolio, will not
request First Federal to increase significantly its allowance for loan losses.
In addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance
for loan losses is adequate or that substantial increases will not be necessary
should the quality of any loans deteriorate as a result of the factors discussed
above. Any material increase in the allowance for loan losses may adversely
affect First Federal's financial condition and results of operations.
52
<PAGE>
The following table sets forth an analysis of First Federal's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
--------------------------- --------------------------------------------------
1998 1997 1998 1997 1996
------------ ------------- ------------ ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period............. $ 250 $ 250 $ 250 $ 250 $ 150
Provision for loan losses.................... -- -- -- -- 100
Charge-offs.................................. -- -- -- -- --
Recoveries................................... -- -- -- -- --
----- ------- ----- ------- -----
Net charge-offs.............................. -- -- -- -- --
----- ------- ----- ------- -----
Allowance at end of period................ $ 250 $ 250 $ 250 $ 250 $ 250
===== ======= ===== ======= =====
Ratio of allowance to total loans
outstanding at the end of the period...... 0.65% 0.79% 0.70% 0.77% 0.76%
Ratio of net charge-offs to average loans
outstanding during the period............. N/A N/A N/A N/A N/A
Allowance for loan losses to
nonperforming loans....................... N/A 925.93% N/A 925.93% N/A
</TABLE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT JUNE 30,
---------------------------------------------------------------------
1998 1998 1997 1996
----------------------- ----------------------- --------------------- ---------------------
% OF % OF % OF % OF
LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
---------- ---------- ---------- ---------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans................ $ 225 95.75% $ 225 95.48% $ 250 95.13% $ 250 95.40%
Consumer and other
loans...................... 25 4.25 25 4.52 -- 4.87 -- 4.60
Unallocated................... -- N/A -- N/A -- N/A -- N/A
----- ------ ----- ------ ----- ------ ----- ------
Total allowance for
loan losses............. $ 250 100.00% $ 250 100.00% $ 250 100.00% $ 250 100.00%
===== ====== ===== ====== ===== ====== ===== ======
</TABLE>
INVESTMENT ACTIVITIES
First Federal is permitted under applicable law to invest in various types
of liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the Federal
Home Loan Bank-Indianapolis, certificates of deposit of federally insured
institutions, certain bankers' acceptances and federal funds. Subject to various
restrictions, savings institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and mutual funds. Savings
institutions like First Federal are also required to maintain an investment in
Federal Home Loan Bank stock and a minimum level of liquid assets.
53
<PAGE>
See "Regulation" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
First Federal must categorize its investments as "held to maturity," "trading"
or "available for sale," based on management's intent as to the ultimate
disposition of each security. Debt securities may be classified as "held to
maturity" and reported in financial statements at amortized cost only if First
Federal has the positive intent and ability to hold those securities to
maturity. Securities that might be sold in response to changes in market
interest rates, changes in the security's prepayment risk, increases in loan
demand, or other similar factors cannot be classified as "held to maturity."
Debt and equity securities held for current resale are classified as "trading."
Such securities are reported at fair value, and unrealized gains and losses on
such securities would be included in earnings. First Federal does not currently
use or maintain a trading account. Debt and equity securities not classified as
either "held to maturity" or "trading" are classified as "available for sale."
Such securities are reported at fair value, and unrealized gains and losses on
such securities are excluded from earnings and reported as a net amount in a
separate component of equity.
First Federal's President determines appropriate investments in accordance
with the Board of Directors' approved investment policies and procedures.
Investments are made following certain considerations, which include First
Federal's liquidity position and anticipated cash needs and sources, which in
turn include outstanding commitments, upcoming maturities, estimated deposits
and anticipated loan amortization and repayments. Further, the effect that the
proposed investment would have on First Federal's credit and interest rate risk,
and risk-based capital is given consideration during the evaluation. The
interest rate, yield, settlement date and maturity are also reviewed. The Board
of Directors must ratify all investments up to $3 million and must provide its
prior approval for any investments above such amount.
First Federal purchases investments to provide necessary liquidity for day-to-
day operations and to manage First Federal's interest rate risk and overall
credit risk profile. In recent years First Federal has purchased mortgage-
backed and related securities when investable funds exceed loan demand.
First Federal maintains a significant portfolio of mortgage-backed and related
securities. Almost all of these securities were issued by Fannie Mae, Freddie
Mac or Ginnie Mae. Mortgage-backed securities generally entitle First Federal
to receive a pro rata portion of the cash flows from an identified pool of
mortgages. Ginnie Mae certificates are guaranteed as to principal and interest
by the full faith and credit of the United States, while Fannie Mae and Freddie
Mac certificates are guaranteed by Fannie Mae and Freddie Mac. Approximately
41.7% of First Federal's mortgage-backed securities are real estate mortgage
investment conduits ("REMICs"), which are created by redirecting the cash flows
from a pool of mortgages or mortgage-backed securities to create two or more
classes (or tranches) with different maturity or risk characteristics designed
to meet a variety of investor needs and preferences. Management believes these
securities represent attractive alternatives relative to other investments due
to the wide variety of maturity, repayment and interest rate options available.
Current investment practices of First Federal prohibit the purchase of high risk
REMICs. At September 30, 1998, 53.2% of First Federal's mortgage-backed
securities were adjustable rate and 46.8% were fixed rate.
Of First Federal's $36.8 million mortgage-backed securities portfolio at
September 30, 1998, $6.5 million had contractual maturities within ten years and
$30.3 million had contractual maturities over ten years. However, the actual
maturity of a mortgage-backed security may be less than its stated maturity due
to prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and may result in a loss of any
premiums paid and thereby reduce the net yield on such securities. Although
prepayments of underlying mortgages depend on many factors, including the type
of mortgages, the coupon rate, the age of mortgages, the geographical location
of the underlying real estate collateralizing the mortgages and general levels
of market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest rates offered for mortgage
loans, refinancing generally increases and accelerates the prepayment of the
underlying mortgages and the related security. Under such circumstances, First
Federal may be subject to
54
<PAGE>
reinvestment risk because, to the extent that First Federal's mortgage-backed
securities amortize or prepay faster than anticipated, First Federal may not be
able to reinvest the proceeds of such repayments and prepayments at a comparable
rate. In contrast to mortgage-backed securities in which cash flow is received
(and hence, prepayment risk is shared) pro rata by all securities holders, the
cash flow from the mortgages or mortgage-backed securities underlying REMICs are
segmented and paid in accordance with a predetermined priority to investors
holding various tranches of such securities or obligations. A particular tranche
of REMICs may therefore carry prepayment risk that differs from that of both the
underlying collateral and other tranches.
A portion of First Federal's investment portfolio consists of corporate
securities and commercial paper. First Federal's investment policy requires
that such investments have one of the two highest ratings by a nationally
recognized rating agency such as Standard & Poor's or Moody's. A high credit
rating indicates only that the rating agency believes there is a low risk of
default. However, all of First Federal's investment securities, including those
that have high credit ratings, are subject to market risk insofar as increases
in market rates of interest may cause a decrease in their market value.
Corporate securities are also subject to credit risk insofar as the payment
obligations on such securities are dependent on the successful operation of the
issuer's business. First Federal purchased corporate obligations, most of which
have fixed interest rates, because they offered a yield higher than that
available for U.S. Government agency obligations of similar duration.
First Federal also maintains a small investment in collateralized auto
obligations. These asset-backed securities are similar to mortgage-backed
securities in that they generally entitle First Federal to receive a pro rata
portion of the cash flows from an identified pool of auto loans. As with
corporate securities, First Federal's investment policy requires that such
investments have one of the two highest ratings by a nationally recognized
rating agency. First Federal purchased these securities, which generally have
fixed interest rates, because they offered a yield higher than that available
for U.S. Government agency obligations of similar duration.
The following table sets forth First Federal's investment securities portfolio
at carrying value at the dates indicated.
<TABLE>
<CAPTION>
AT
SEPTEMBER 30, AT JUNE 30,
--------------------------------------------
1998 1998 1997 1996
---------------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities....................... $ 4,016 $ 4,376 $ 7,864 $11,862
HELD TO MATURITY:
U.S. Government agency obligations............... 8,235 10,232 16,201 15,688
Collateralized auto obligations.................. 1,008 1,009 249 570
Corporate obligations............................ 2,944 2,956 -- --
Mortgage-backed securities....................... 32,819 31,169 33,530 29,745
Commercial paper................................. 2,981 3,998 2,490 988
------- ------- ------- -------
Total held to maturity........................ 47,987 49,364 52,470 46,991
------- ------- ------- -------
Total...................................... $52,003 $53,740 $60,334 $58,853
======= ======= ======= =======
</TABLE>
At September 30, 1998, First Federal held a mortgage-backed security issued by
First Alliance Mortgage Loan Trust that had a book value of $2.0 million and a
market value of $2.0 million. The security has been rated AAA by Standard &
Poor's and AAA by Moody's and is insured by MBIA Insurance Corporation. First
Federal held no other securities by an issuer where the aggregate book value of
the securities exceeded 10% of the equity capital of First Federal at September
30, 1998, except for securities issued by the U.S. Government or U.S. Government
agencies and corporations.
55
<PAGE>
The following table sets forth the maturities and weighted average yields of
the securities in First Federal's investment securities portfolio at September
30, 1998. Expected maturities of mortgage-backed securities will differ from
contractual maturities due to scheduled repayments and because borrowers may
have the right to call or prepay obligations with or without prepayment
penalties.
<TABLE>
<CAPTION>
LESS THAN ONE TO FIVE TO
ONE YEAR FIVE YEARS TEN YEARS
------------------------- ----------------------- -----------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------------ ----------- ---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities......... $ -- --% $ 704 7.72% $ 546 7.70%
HELD TO MATURITY:
U.S. Government agency............. 1,197 7.16 3,000 6.09 3,040 7.11
obligations ....................
Collateralized auto obligations.... -- -- 1,008 5.65 -- --
Corporate obligations.............. 1,001 5.55 1,943 5.99 -- --
Mortgage-backed securities......... -- -- 1,183 7.43 4,087 6.61
Commercial paper................... 2,981 5.61 -- -- -- --
------ ------ ------
Total held to maturity.......... 5,179 5.95 7,134 6.22 7,127 6.82
------ ------ ------
Total..................... $5,179 5.95 $7,838 5.36 $7,673 6.89
====== ====== ======
<CAPTION>
OVER
TEN YEARS
-------------------------
AMOUNT YIELD
---------- -------------
<S>................................ <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities......... $ 2,766 7.32%
HELD TO MATURITY:
U.S. Government agency............. 998 7.00
obligations
Collateralized auto obligations.... -- --
Corporate obligations.............. -- --
Mortgage-backed securities......... 27,549 6.60
Commercial paper................... -- --
-------
Total held to maturity.......... 28,547 6.61
-------
Total..................... $31,313 6.68
=======
</TABLE>
The following table sets forth the carrying value of investment securities
which have fixed interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
---------------------------------------
FLOATING OR
FIXED ADJUSTABLE
RATES RATES
------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities.......................... $ 2,086 $ 1,930
HELD TO MATURITY:
U.S. Government agency obligations.................. 8,235 --
Collateralized auto obligations..................... 1,008 --
Corporate obligations............................... 2,944 --
Mortgage-backed securities.......................... 15,165 17,654
Commercial paper.................................... 2,981 --
------- -------
Total held to maturity........................... 30,333 17,654
------- -------
Total investment securities................ $32,419 $19,584
======= =======
</TABLE>
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits and loan repayments are the major sources of First
Federal's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings from Federal Home Loan Bank-
Indianapolis may be used to compensate for reductions in the availability of
funds from other sources. First Federal had no other borrowing arrangements at
September 30, 1998.
DEPOSIT ACCOUNTS. Substantially all of First Federal's depositors are
residents of the State of Indiana. Deposits are attracted from within First
Federal's market area through the offering of a broad selection of deposit
instruments, including NOW checking accounts, money market deposit accounts,
regular savings accounts, certificates of deposit and retirement savings plans.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. In determining the terms of its deposit accounts, First Federal
considers current market interest rates, profitability to First Federal,
matching deposit and loan products and its customer preferences and concerns.
First Federal
56
<PAGE>
generally reviews its deposit mix and pricing weekly. In recent years First
Federal has offered amongst the highest deposit rates in its market area in
order to complete with larger financial institutions that provide a wider range
of products and services. First Federal is evaluating the possibility of
expanding its checking account program as a means of attracting lower cost
funding.
In the unlikely event First Federal is liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to First Bancorp as the sole stockholder of First Federal.
The following table indicates the amount of First Federal's jumbo certificates
of deposit by time remaining until maturity as of September 30, 1998. Jumbo
certificates of deposit represent minimum deposits of $100,000.
<TABLE>
<CAPTION>
MATURITY PERIOD AMOUNT
---------------- ------------------
(IN THOUSANDS)
<S> <C>
Three months or less................... $ 447
Over three through six months.......... 1,164
Over six through twelve months......... 2,304
Over twelve months..................... 3,363
------
Total............................ $7,278
======
</TABLE>
The following table sets forth the certificates of deposits in First Federal
classified by rates at the dates indicated.
<TABLE>
<CAPTION>
AT AT JUNE 30,
SEPTEMBER 30, --------------------------------------------
1998 1998 1997 1996
------------------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
4.00 - 4.99%................ $ 8,200 $ 7,771 $11,657 $14,555
5.00 - 5.99%................ 36,753 35,999 36,503 31,104
6.00 - 6.99%................ 22,174 22,803 17,482 17,028
7.00 - 7.99%................ 1,286 1,299 1,506 2,814
8.00 - 8.99%................ 120 144 464 484
9.00 - 9.99%................ 183 183 307 285
------- ------- ------- -------
Total................. $68,736 $68,199 $67,919 $66,270
======= ======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time deposits at
September 30, 1998.
<TABLE>
<CAPTION>
AMOUNT DUE
-----------------------------------------------------------------------------------
LESS THAN 1 - 2 2 - 3 3 - 4 AFTER
ONE YEAR YEARS YEARS YEARS 4 YEARS
-------------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
4.00 - 4.99%................ $ 7,985 $ 235 $ -- $ -- $ --
5.00 - 5.99%................ 21,842 9,985 3,615 781 530
6.00 - 6.99%................ 7,468 14,010 59 237 400
7.00 - 7.99%................ -- 690 48 435 113
8.00 - 8.99%................ 69 19 32 -- --
9.00 - 9.99%................ 183 -- -- -- --
------- ------- ------ ------ ------
Total................. $37,547 $24,939 $3,754 $1,453 $1,043
======= ======= ====== ====== ======
</TABLE>
57
<PAGE>
The following table sets forth the balances and changes in dollar amounts of
deposits in the various types of accounts offered by First Federal between the
dates indicated.
<TABLE>
<CAPTION>
AT
SEPTEMBER 30, AT JUNE 30,
-----------------------------------------------------------------------
1998 1998 1997 1996
---------------------------- ------------------------- --------------------------- ----------------
PERCENT PERCENT PERCENT PERCENT
OF INCREASE/ OF INCREASE/ OF INCREASE/ OF
AMOUNT TOTAL DECREASE AMOUNT TOTAL DECREASE AMOUNT TOTAL DECREASE AMOUNT TOTAL
------- ------- -------- ------- ------ -------- ------ ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits.............. $11,866 13.04% $1,242 $10,624 11.91% $1,714 $ 8,910 10.06% $(1,131) $10,041 11.30%
Savings deposits............. 10,359 11.39 (47) 10,406 11.66 (1,325) 11,731 13.25 (802) 12,533 14.11
Certificates which mature:
Within 1 year............... 37,547 41.28 1,845 35,702 40.01 (7,287) 42,989 48.54 7,388 35,601 40.07
After 1 year, but within
2 years.................. 24,939 27.42 (430) 25,369 28.43 8,771 16,598 18.74 (3,580) 20,178 22.71
After 2 years, but within
5 years.................. 5,790 6.36 (785) 6,575 7.37 (836) 7,411 8.37 (1,449) 8,860 9.97
Certificates maturing
thereafter............... 460 0.51 (93) 553 0.62 (368) 921 1.04 (710) 1,631 1.84
------- ------ ------ ------- ------ ------ ------- ------ ------- ------- ------
Total............... $90,961 100.00% $1,732 $89,229 100.00% $ 669 $88,560 100.00% $ (284) $88,844 100.00%
======= ====== ====== ======= ====== ====== ======= ====== ======= ======= ======
</TABLE>
The following table sets forth the deposit activities of First Federal for the
periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
----------------------------- -----------------------------------------------
1998 1997 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance............................ $89,229 $88,560 $88,560 $88,844 $86,886
Net increase (decrease) before
interest credited........................ 1,410 (2,279) (2,582) (3,140) (836)
Interest credited............................ 322 404 3,251 2,856 2,794
------- ------- ------- ------- -------
Net increase (decrease) in deposits.......... 1,732 (1,875) 669 (284) 1,958
------- ------- ------- ------- -------
Ending balance............................... $90,961 $86,685 $89,229 $88,560 $88,844
======= ======= ======= ======= =======
</TABLE>
BORROWINGS. First Federal has the ability to use advances from the Federal
Home Loan Bank-Indianapolis to supplement its supply of lendable funds and to
meet deposit withdrawal requirements. The Federal Home Loan Bank-Indianapolis
functions as a central reserve bank providing credit for savings and loan
associations and certain other member financial institutions. As a member,
First Federal is required to own capital stock in the Federal Home Loan Bank-
Indianapolis and is authorized to apply for advances on the security of such
stock and certain of its mortgage loans and other assets (principally securities
which are obligations of, or guaranteed by, the U.S. Government) provided
certain creditworthiness standards have been met. Advances are made under
several different credit programs. Each credit program has its own interest
rate and range of maturities. Depending on the program, limitations on the
amount of advances are based on the financial condition of the member
institution and the adequacy of collateral pledged to secure the credit. At
September 30, 1998, First Federal had a borrowing capacity of $33.4 million
based on available collateral.
58
<PAGE>
The following table sets forth certain information regarding First
Federal's use of Federal Home Loan Bank advances during the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
September 30, YEARS ENDED JUNE 30,
------------------------------ ------------------------------------------------
1998 1997 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Maximum balance at any month end............ $3,645 $7,050 $7,050 $7,500 $8,000
Average balance............................. 3,645 7,050 5,991 7,498 5,655
Period end balance.......................... 3,645 7,050 3,645 7,050 7,500
Weighted average interest rate:
At end of period......................... 5.58% 5.88% 5.77% 5.91% 5.78%
During the period........................ 5.75 5.91 5.93 5.77 5.92
</TABLE>
COMPETITION
First Federal faces intense competition in the attraction of savings
deposits (its primary source of lendable funds) and in the origination of loans.
Its most direct competition for savings deposits has historically come from
other thrift institutions, credit unions and from commercial banks located in
its market area. First Federal has faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. First Federal's competition for loans comes principally
from other thrift institutions, commercial banks, credit unions, mortgage
banking companies and mortgage brokers.
PERSONNEL
As of September 30, 1998, First Federal had 39 full-time employees and 1
part-time employee. The employees are not represented by a collective
bargaining unit and First Federal believes its relationship with its employees
is good.
SUBSIDIARY ACTIVITIES
First Federal has one subsidiary, FFSL Service Corporation, Inc. Federal
savings associations generally may invest up to 3% of their assets in service
corporations, provided that any amount in excess of 2% is used primarily for
community, inner-city and community development projects. At September 30, 1998,
First Federal's equity investment in its subsidiary was $268,000, or 0.2% of
total assets. First Federal used the service corporation in 1994 to purchase a
$500,000 equity interest in a limited partnership organized to build, own and
operate a 44-unit low-income apartment complex. The limited partnership
generates low-income housing credits of approximately $73,000 per year.
59
<PAGE>
PROPERTIES
The following table sets forth First Federal's offices, as well as certain
additional information relating to these offices, as of September 30, 1998.
First Federal owns all of its offices.
<TABLE>
<CAPTION>
YEAR APPROXIMATE
LOCATION OPENED NET BOOK VALUE (1) SQUARE FOOTAGE
- --------- ------ ------------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
MAIN OFFICE
2200 West Franklin Street 1904 $313 17,507
Evansville, Indiana
BRANCH OFFICES
2028 Division Street 1956 95 5,276
Evansville, Indiana
1001 N. Green River Road 1981 514 2,603
Evansville, Indiana
4451 N. First Avenue 1997 581 7,300
Evansville, Indiana
</TABLE>
___________________
(1) Represents the net book value of land, buildings, furniture, fixtures and
equipment owned by First Federal.
LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits involving First
Federal, such as claims to enforce liens, condemnation proceedings on properties
in which First Federal holds security interests, claims involving the making and
servicing of real property loans and other issues incident to First Federal's
business. In the opinion of management, after consultation with First Federal's
legal counsel, no significant loss is expected from any of such pending claims
or lawsuits. Except as described below, First Federal 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 First Federal in connection with First Federal'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 First
Federal 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 First Federal'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 First Federal's consumer loan department in order to
avoid the unjust enrichment of First Federal. 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 First Federal has misappropriated these trade secrets.
The complaint requests injunctive relief prohibiting First Federal 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
60
<PAGE>
order, a preliminary injunction or any other interim relief. The Bank is in the
process of answering the plaintiffs' complaint and intends to vigorously defend
the action. No trial date has been set.
MANAGEMENT OF FIRST BANCORP
Directors shall be elected by the stockholders of First Bancorp for staggered
three-year terms, or until their successors are elected and qualified. First
Bancorp's Board of Directors consists of six persons divided into three classes,
each of which contains one third of the Board. One class, consisting of Messrs.
Robert L. Clayton, Sr. and James L. Will, Jr., has a term of office expiring at
the first annual meeting of stockholders after their initial election by
stockholders; a second class, consisting of Messrs. Herbert V. Dassel and Jerry
Ziemer, has a term of office expiring at the second annual meeting of
stockholders after their initial election by stockholders; and a third class,
consisting of Messrs. Frank E. Kern and Harold Duncan, has a term of office
expiring at the third annual meeting of stockholders after their initial
election by stockholders. First Bancorp anticipates that its first annual
meeting of stockholders will be held in October 1999.
The Board of Directors has established an Audit Committee consisting of
Directors Kern, Dassel and Ziemer and a Compensation Committee consisting of
Directors Dassel, Kern and Will.
The executive officers of First Bancorp are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors. The executive officers
of First Bancorp are:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
Harold Duncan....................................... President, Chief Executive Officer and Chairman of the Board
Michael H. Head..................................... Vice President
Christopher A. Bengert.............................. Treasurer
</TABLE>
Since the formation of First Bancorp, none of the executive officers,
directors or other personnel has received remuneration from First Bancorp.
Initially, no separate compensation will be paid for service as an executive
officer of First Bancorp. For information concerning the principal occupations,
employment and compensation of the directors and executive officers of First
Bancorp during the past five years, see "Management of First Federal--
Biographical Information."
61
<PAGE>
<TABLE>
<CAPTION>
CURRENT
DIRECTOR TERM
NAME AGE (1) POSITION Since EXPIRES
- ---- ------- -------- -------- -------
<S> <C> <C> <C> <C>
Robert L. Clayton, Sr................ 69 Chairman of the Board 1974 2000
Herbert V. Dassel.................... 67 Director 1988 2001
Frank E. Kern........................ 69 Director 1979 1999
James L. Will, Jr.................... 40 Director 1987 2000
Jerry Ziemer......................... 60 Director 1979 2001
Harold Duncan........................ 57 President, Chief Executive Officer 1978 1999
and Director
</TABLE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
-------------------------------------------
<TABLE>
<CAPTION>
NAME AGE (1) POSITION
- ---- ------- --------
<S> <C> <C>
Michael H. Head.......................... 40 Executive Vice President and Chief Operating Officer
Monica L. Stinchfield.................... 42 Senior Vice President
Christopher A. Bengert................... 41 Senior Vice President and Treasurer
Kirby W. King............................ 44 Senior Vice President
Richard L. Witte......................... 45 Vice President
Dale Holt................................ 44 Vice President
</TABLE>
______________________
(1) As of September 30, 1998
BIOGRAPHICAL INFORMATION
Information regarding the directors and executive officers of First Federal
is provided below. Unless otherwise stated, each director and executive officer
has held his or her current occupation for the last five years. There are no
family relationships among the directors or executive officers.
Robert L. Clayton, Sr. was employed by First Federal from 1952 until his
retirement in 1992. From 1974 to 1990 he served as President of First Federal.
Mr. Clayton has been Chairman of the Board since 1976.
Herbert V. Dassel is a retired businessman. Prior to his retirement, he
was the President and co-owner of Adroit Mold & Tool Corp., a tooling
manufacturer located in Evansville, Indiana.
Frank E. Kern is the Executive Director of the Evansville Association for
the Blind, a not-for-profit enterprise engaged in rehabilitation and
manufacturing.
62
<PAGE>
James L. Will, Jr. is the owner of an insurance agency in Evansville,
Indiana.
Jerry Ziemer is the President and majority shareholder of Ziemer Funeral
Homes in Evansville, Indiana.
Harold Duncan joined First Federal in 1964 and served as a loan officer,
Assistant Vice President, Vice President, and Executive Vice President before
becoming President in 1990. Mr. Duncan added the title of Chief Executive
Officer in 1991.
Michael H. Head joined First Federal in 1980. From 1984 to 1994, he served
as Vice President and manager of the loan department. In 1994, he became Senior
Vice President. In 1996, Mr. Head became Executive Vice President and in
September 1998 added the title of Chief Operating Officer.
Monica L. Stinchfield joined First Federal in 1980. From 1985 to 1993 she
served as Assistant Vice President and from 1993 to September 1998, she served
as Vice President. In 1996, Ms. Stinchfield became the manager of the loan
department and secondary market activity. In September 1998, Ms. Stinchfield
became Senior Vice President.
Christopher A. Bengert joined First Federal in 1986. From 1991 to 1994,
Mr. Bengert served as Vice President and Treasurer. In 1994, he became Senior
Vice President.
Kirby W. King joined First Federal in January 1999 as Senior Vice
President-Consumer Lending. He was previously employed by United Fidelity Bank
as Senior Vice President.
Richard L. Witte joined First Federal in 1997 and in October 1998 became
Vice President. Mr. Witte is responsible for the savings department and deposit
services. Prior to joining First Federal, Mr. Witte was employed by Evansville
Federal Savings Bank for 21 years.
Dale Holt joined First Federal in January 1999 as Vice President-Consumer
Lending. He was previously employed by United Fidelity Bank as Vice President.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The business of First Federal is conducted through meetings and activities
of its Board of Directors and its committees. During the fiscal year ended June
30, 1998, the Board of Directors held 12 regular meetings and no director
attended fewer than 75% of the total meetings of the Board of Directors of First
Federal and committees on which such director served.
The Audit Committee, consisting of Frank E. Kern, Herbert V. Dassel and
Jerry Ziemer, receives and reviews all reports prepared by First Federal's
independent auditors. The Audit Committee met one time during the fiscal year
ended June 30, 1998.
The Salary Committee, consisting of Herbert V. Dassel, Frank E. Kern and
James L. Will, Jr., is responsible for setting the salaries of all employees.
The Salary Committee met once during the fiscal year ended June 30, 1998.
DIRECTORS' COMPENSATION
Directors receive a fee of $900 per month. Following consummation of the
conversion, directors' fees will continue to be paid by First Federal and,
initially, no separate fees are expected to be paid for service on First
Bancorp's Board of Directors.
First Federal maintains a deferred compensation arrangement for directors
who may elect on an annual basis to defer up to 100% of their monthly Board and
committee meeting fees and retainers. Upon the director's
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attainment of an age specified in his individual deferral agreement, First
Federal will pay the balance of the director's deferral account in monthly
installments over a period specified in the director's individual agreement.
Over the deferral period, a director's account is credited with 10% annual
interest with monthly compounding. In the event of a change in control of First
Federal (as defined in the program) followed by a director's termination of
service, each director will be entitled to receive a benefit increased to
reflect three additional years of deferrals. First Federal has acquired life
insurance on members of the Board to provide informal funding for its
obligations under the program. During the fiscal year ended June 30, 1998, all
directors participated in the director deferral program. As of September 30,
1998, First Federal had accrued a liability of $370,000 with respect to its
obligations under the director deferral program.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following information is furnished for Mr.
Duncan for the year ended June 30, 1998. No other executive officer of First
Federal received salary and bonus of $100,000 or more during the year ended June
30, 1998.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
------------------------------------
OTHER
ANNUAL ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION (2) COMPENSATION (3)
- ------------------- ------ -------- ------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Harold Duncan 1998 $125,086 $8,642 $10,800 $4,150
President and Chief Executive
Officer
</TABLE>
______________________
(1) Compensation information for the years ended June 30, 1997 and 1996 has
been omitted as First Federal was not a public company nor a subsidiary
thereof at such time.
(2) Consists of directors fees. Does not include the aggregate amount of
perquisites and other personal benefits, which was less than 10% of the
total annual salary and bonus reported.
(3) Consists of employer contributions to First Federal's 401(k) plan.
EMPLOYMENT AGREEMENTS. In connection with the conversion, First Bancorp and
First Federal plan to enter into three-year employment agreements with Messrs.
Duncan and Head. Under the employment agreements, the initial salary levels for
Mr. Duncan and Mr. Head will be $136,000 and $72,000, respectively, which amount
will be paid by First Federal and may be increased at the discretion of the
Board of Directors or an authorized committee of the Board. On each anniversary
of the commencement date of the employment agreement, the term of each agreement
may be extended for an additional year at the discretion of the Board. The
agreements are terminable by the employers at any time, by the executive if he
is assigned duties inconsistent with his initial position, duties,
responsibilities and status, or upon the occurrence of certain events specified
by federal regulations. If the executive's employment is terminated without
cause or upon the executive's voluntary termination following the occurrence of
an event described in the preceding sentence, First Federal would be required to
honor the terms of the agreement through the expiration of the current term,
including payment of current cash compensation and continuation of employee
benefits.
The employment agreements also provide for a severance payment and other
benefits in the event of involuntary termination of employment in connection
with any change in control of First Bancorp or First Federal. A severance
payment also will be provided on a similar basis in connection with a voluntary
termination of employment where, subsequent to a change in control, the
executive is assigned duties inconsistent with his position, duties,
responsibilities and status immediately prior to such change in control. The
term "change in control" is defined in the agreement as having occurred when,
among other things:
(1) there occurs a change in control of First Bancorp within the meaning
of the Home Owners' Loan Act and OTS regulations;
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(2) any person or entity is or becomes the beneficial owner, directly or
indirectly, of securities of First Bancorp representing 25% or more of
the combined voting power of First Bancorp's then outstanding securities;
(3) the membership of the Board of Directors changes as the result of a
contested election; or
(4) shareholders of First Bancorp approve a merger, consolidation, sale or
disposition of all or substantially all of First Bancorp's assets, or a
plan of partial or complete liquidation.
The maximum present value of the severance benefits under the employment
agreements is 2.99 times the executive's average annual compensation during the
five-year period preceding the effective date of the change in control (the
"base amount"). The employment agreements provide that the value of the maximum
benefit may be distributed, at the executive's election, in the form of a lump
sum cash payment equal to 2.99 times the executive's base amount or a
combination of a cash payment and continued coverage under First Federal's
health, life and disability programs for a 36-month period following the change
in control, the total value of which does not exceed 2.99 times the executive's
base amount. Assuming that a change in control had occurred at September 30,
1998 and that Mr. Duncan and Mr. Head elected to receive a lump sum cash
payment, they would have been entitled to payments of approximately $332,000 and
$154,000, respectively. Section 280G of the Internal Revenue Code provides that
severance payments that equal or exceed three times the individual's base amount
are deemed to be "excess parachute payments" if they are contingent upon a
change in control. Individuals receiving excess parachute payments are subject
to a 20% excise tax on the amount of such excess payments, and First Bancorp
would not be entitled to deduct the amount of such excess payments.
The employment agreements restrict the executive's right to compete against
First Bancorp and First Federal for a period of one year from the date of
termination of the agreement if he voluntarily terminates employment, except in
the event of a change in control.
SUPPLEMENTAL RETIREMENT AGREEMENT. First Federal maintains a supplemental
executive retirement program for key personnel in order to encourage continued
employment and to provide an additional source of retirement income. The
program provides that, upon the attainment of a specified retirement age, a
participating officer will receive a benefit equal to the product of the
officer's highest annual base compensation and the officer's "wage replacement
percentage" reduced by the annual benefits derived by the officer from any other
tax-qualified or non-qualified retirement arrangements sponsored by First
Federal. The officer's retirement age and "wage replacement factor" are
specified in individual agreements entered into between First Federal and the
officer. If the officer dies prior to attaining the normal retirement age, a
survivor benefit is payable to the officer's surviving spouse or other
designated beneficiary. In the event of an officer's termination without cause
prior to attaining the normal retirement age, payment of the officer's accrued
benefit as of the date of termination is deferred until the officer attains
normal retirement age. In the event of disability, the officer may elect to
begin receipt of his accrued benefit immediately in lieu of a deferred
retirement benefit. In the event of a change in control of First Federal, as
defined in the program, followed by the officer's termination of employment, the
officer would be entitled to receive his full normal retirement benefit upon
attaining his specified retirement age. All benefits are payable in the form of
a monthly annuity over a period specified in the officer's individual agreement.
As a condition of Mr. Duncan's receipt of benefits, he must, during the five-
year period after benefits commence, provide certain consulting and advisory
services to First Federal at the request of the Board of Directors. At present,
Mr. Duncan, four other officers and one former employee participate in the
supplemental retirement program. As of September 30, 1998, First Federal had
accrued $140,000 as a liability with respect to its obligations under the
supplemental retirement program.
EMPLOYEE SEVERANCE COMPENSATION PLAN
In connection with the conversion, the Board of Directors of First Federal
intends to adopt the First Federal Savings Bank Employee Severance Compensation
Plan to provide benefits to eligible employees in the event of a change in
control of First Bancorp or First Federal. Eligible employees are employees with
a minimum of two years
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of service with First Federal. However, officers who enter into separate
employment or severance agreements with First Bancorp and First Federal will not
be eligible to participate in the severance plan. Under the severance plan, in
the event of a change in control of First Bancorp or First Federal, eligible
employees, other than officers of First Federal, who are terminated or who
terminate employment upon the occurrence of events specified in the severance
plan within 12 months of the effective date of a change in control will be
entitled to a payment based on years of service with First Federal with a
maximum payment equal to 26 weeks of compensation. In addition, officers of
First Federal (four persons) and branch managers (three persons) would be
eligible to receive a severance payment equal to 24 and 12 months, respectively,
of their current compensation. Assuming that a change in control had occurred at
September 30, 1998 and the termination of all eligible employees, the maximum
aggregate payment due under the severance plan would be approximately $381,000.
SUMMARY OF BENEFITS TO MANAGEMENT FROM THE CONVERSION
First Federal intends to establish an Employee Stock Ownership Plan that
will purchase stock in the conversion. The ESOP will purchase an amount of
stock equal to 8% of the shares sold in this offering. First Bancorp also
intends to adopt a Stock Option Plan, which will reserve a number of shares
equal to 10% of the number of shares sold in the conversion, and a Management
Recognition and Development Plan, which will reserve a number of shares equal to
4% of the number of shares sold in the conversion. The shares that may be
issued under the Stock Option Plan and the MRDP may be authorized but unissued
shares or treasury shares. The ESOP, Stock Option Plan and MRDP are discussed
in more detail below.
The following table presents the total value of the shares of common stock,
at the maximum of the offering range, which would be acquired by the Employee
Stock Ownership Plan and the total value of all shares available for award and
issuance under the Stock Option Plan and MRDP. The table assumes that the value
of the shares is the same as the sales price of the shares in the offering. The
table does not include a value for the options because that value will be equal
to the fair market value of the common stock on the day that the options are
granted. As a result, financial gains can be realized under an option only if
the market price of common stock increases.
<TABLE>
<CAPTION>
PERCENTAGE OF
ESTIMATED SHARES ISSUED
VALUE OF IN THE
SHARES CONVERSION
------------- -----------------
<S> <C> <C>
Employee Stock Ownership Plan................... $1,748,000 8.0%
MRDP awards..................................... 874,000 4.0
Stock options................................... -- 10.0
---------- ----
Total..................................... $2,622,000 22.0%
========== ====
</TABLE>
Additionally, two officers will receive employment agreements that could
provide those individuals with cash payments if they are terminated following a
change in control of First Bancorp or First Federal. First Federal also intends
to adopt an Employee Severance Compensation Plan that would provide cash
payments to eligible employees in the event of a change in control of First
Bancorp or First Federal. The employment agreements and severance plan are
described in more detail above.
BENEFITS
INSURANCE. First Federal provides full-time employees, with minimal
contribution or expense to them, with group plan insurance that covers
hospitalization, dependent coverage, long-term disability and accidental death
and dismemberment. This insurance is available generally and on the same basis
to all full-time employees.
RETIREMENT PLAN. First Federal is a participant in the Financial
Institutions Retirement Fund, a multi-employer, non-contributory defined benefit
retirement plan. The following table indicates the annual retirement benefits
that would be payable under the retirement plan upon retirement at age 65 to a
participant electing to
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receive his retirement benefit in the standard form of benefit, assuming various
specified levels of plan compensation and various specified years of credited
service. Under the Internal Revenue Code, maximum annual benefits under the
retirement plan are limited to $130,000 per year for the 1999 calendar year.
<TABLE>
<CAPTION>
HIGHEST FIVE-YEAR YEARS OF SERVICE
------------------------------------------------------------------------------------------
AVERAGE ANNUAL
COMPENSATION 5 10 15 25 35 40 45
- ------------------ -------- --------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 10,000 $ 1,000 $ 2,000 $ 3,000 $ 5,000 $ 7,000 $ 8,000 $ 9,000
20,000 2,000 4,000 6,000 10,000 14,000 16,000 18,000
30,000 3,000 6,000 9,000 15,000 21,000 24,000 27,000
40,000 4,000 8,000 12,000 20,000 28,000 32,000 36,000
60,000 6,000 12,000 18,000 30,000 42,000 48,000 54,000
80,000 8,000 16,000 24,000 40,000 56,000 64,000 72,000
100,000 10,000 20,000 30,000 50,000 70,000 80,000 90,000
120,000 12,000 24,000 36,000 60,000 84,000 96,000 99,000
130,000 13,000 26,000 38,000 65,000 91,000 104,000 117,000
</TABLE>
The retirement plan is a non-contributory, defined benefit plan which
provides for monthly payments to, or on behalf of, each covered employee. All
full-time employees are eligible to participate in the retirement plan after
completion of one year of service to First Federal and the attainment of age 21.
To obtain one year of service, an employee must complete at least at least 1,000
hours of service in 12 consecutive months. Benefits are based upon years of
service and salary excluding bonuses, fees, etc. Employees become vested
following five years of service. As of June 30, 1998, Mr. Duncan had 33 years
of credited service under the retirement plan.
The normal retirement age is 65 and the early retirement age is before age
65, but after age 45. Normal retirement benefits are equal to 2% multiplied by
the years of service to First Federal and by the employees's average base salary
above the covered compensation level for the five highest consecutive years
preceding retirement. If an employee elects early retirement, but defers the
receipt of benefits until age 65, the formula for computation of early
retirement benefits is the same as if the employee had retired at the normal
retirement age. However, if the employee elects early retirement benefits
payable under the retirement plan the benefits are equal to the benefits payable
assuming retirement at age 65 reduced by applying an early retirement factor
based on age and vesting service when payments begin. Payment may also be
deferred to any time up to age 70, in which case the retirement allowance
payable at age 65 will be increased by 0.8% for each month of deferment after
age 65. The maximum increase allowable is 48%. Under the retirement plan,
First Federal makes annual contributions to fund the benefits computed on an
actuarial basis.
Upon retirement, the regular form of benefit under the retirement plan is
an annuity payable in equal monthly installments for the life of the employee.
Optional annuity or lump sum benefit forms may also be elected by the employee.
Benefits under the retirement plan are not integrated with social security.
At June 30, 1998, which is the date of the most recent retirement plan
statement, the retirement plan's assets exceeded current liabilities by
approximately $160,000.
401(K) PLAN. First Federal maintains a 401(k) Plan for the benefit of
eligible employees of First Federal. The 401(k) Plan is intended to be a tax-
qualified plan under Sections 401(a) and 401(k) of the Internal Revenue Code.
Employees of First Federal who have completed 1,000 hours of service during 12
consecutive months and who have attained age 21 are eligible to participate in
the 401(k) Plan. Participants may contribute up to 15% of their annual
compensation to the 401(k) Plan through a salary reduction election. First
Federal matches 50% of participant contributions to a maximum of 6% of the
participant's salary. In addition to employer matching contributions, First
Federal may contribute a discretionary amount to the 401(k) Plan in any plan
year which is allocated to individual participants in the proportion that their
annual compensation bears to the total compensation of all participants during
the plan year. To be eligible to receive a discretionary employer contribution,
the
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participant must complete 1,000 hours of service during the plan year and remain
employed by First Federal on the last day of the plan year. Participants are at
all times 100% vested in their 401(k) Plan accounts. For the year ended June 30,
1998, First Federal incurred total contribution-related expenses of
approximately $22,000 in connection with the 401(k) Plan.
EMPLOYEE STOCK OWNERSHIP PLAN. The Board of Directors has authorized the
adoption by First Federal of an ESOP for employees of First Federal to become
effective upon the completion of the conversion. The ESOP is intended to
satisfy the requirements for an employee stock ownership plan under the Internal
Revenue Code and the Employee Retirement Income Security Act of 1974, as
amended. Full-time employees of First Bancorp and First Federal who have been
credited with at least 1,000 hours of service during a 12-month period and who
have attained age 21 will be eligible to participate in the ESOP.
First Bancorp intends to loan the ESOP the amount necessary to purchase 8%
of the common stock to be sold in the conversion. The loan will equal 100% of
the aggregate purchase price of the common stock. The loan to the ESOP will be
repaid principally from First Federal's contributions to the ESOP and dividends
payable on common stock held by the ESOP over the anticipated 12-year term of
the loan. The interest rate for the ESOP loan is expected to be the prime rate
as published in The Wall Street Journal on the closing date of the conversion.
See "Pro Forma Data." To the extent that the ESOP is unable to acquire 8% of
the common stock sold in the offering, it is anticipated that such additional
shares may be acquired following the conversion through open market purchases.
In any plan year, First Federal may make additional discretionary
contributions to the ESOP for the benefit of plan participants in either cash or
shares of common stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders or which
constitute authorized but unissued shares or shares held in treasury by First
Bancorp. The timing, amount, and manner of such discretionary contributions
will be affected by several factors, including applicable regulatory policies,
the requirements of applicable laws and regulations, and market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held in
a suspense account and released on a pro rata basis as the loan is repaid.
Discretionary contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of each participant's
proportional share of total compensation. Forfeitures will be reallocated among
the remaining plan participants.
Participants will vest in their accrued benefits under the ESOP at the rate
of 20% per year, beginning upon the completion of two years of service. A
participant is fully vested at retirement, in the event of disability or upon
termination of the ESOP. Benefits are distributable upon a participant's
retirement, early retirement, death, disability, or termination of employment.
First Federal's contributions to the ESOP are not fixed, so benefits payable
under the ESOP cannot be estimated.
It is anticipated that members of First Federal's Board of Directors will
serve as trustees of the ESOP. Under the ESOP, the trustees must vote all
allocated shares held in the ESOP in accordance with the instructions of plan
participants and unallocated shares and allocated shares for which no
instructions are received must be voted in the same ratio on any matter as those
shares for which instructions are given.
Under applicable accounting requirements, compensation expense for a
leveraged ESOP is recorded at the fair market value of the ESOP shares when
committed to be released to participants' accounts. See "Pro Forma Data."
The ESOP will be subject to the requirements of the Employee Retirement
Income Security Act and the regulations of the Internal Revenue Service and the
Department of Labor. First Federal intends to request a determination letter
from the IRS regarding the tax-qualified status of the ESOP. Although no
assurance can be given that a favorable determination letter will be issued,
First Federal expects that a favorable determination letter will be received by
the ESOP.
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STOCK OPTION PLAN. The Board of Directors of First Bancorp intends to
adopt the Stock Option Plan and to submit the Stock Option Plan to stockholders
for approval at a meeting held no earlier than six months following consummation
of the conversion. Under current OTS regulations, the approval of a majority
vote of First Bancorp's outstanding shares is required for implementation of the
Stock Option Plan within one year of the consummation of the conversion. The
Stock Option Plan will comply with all applicable regulatory requirements.
However, the Stock Option Plan will not be approved or endorsed by the OTS.
The Stock Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such officers, key
employees and nonemployee directors with a proprietary interest in First Bancorp
as an incentive to contribute to the success of First Bancorp and First Federal,
and to reward officers and key employees for outstanding performance. The Stock
Option Plan will provide for the grant of incentive stock options intended to
comply with the requirements of Section 422 of the Internal Revenue Code and for
nonqualified stock options. Under the Stock Option Plan, stock options may be
granted to key employees of First Bancorp and its subsidiaries, including First
Federal. Unless sooner terminated, the Stock Option Plan will continue in
effect for a period of ten years from the date the Stock Option Plan is approved
by stockholders.
First Bancorp will reserve a number of authorized shares of common stock
equal to 10% of the number of shares of common stock issued in connection with
the conversion for future issuance under the Stock Option Plan, or 218,500
shares based on the issuance of 2,185,000 shares at the maximum of the Estimated
Valuation Range. Shares acquired upon exercise of options will be authorized
but unissued shares or treasury shares. In the event of a stock split, reverse
stock split, stock dividend, or similar event, the number of shares of common
stock under the Stock Option Plan, the number of shares to which any award
relates and the exercise price per share under any option may be adjusted to
reflect the increase or decrease in the total number of shares of common stock
outstanding.
A committee of the Board of Directors will administer and interpret the
Stock Option Plan. Subject to applicable OTS regulations, the committee will
determine which nonemployee directors, officers and key employees will be
granted options, whether, in the case of officers and employees, such options
will be incentive stock options or non-qualified options, the number of shares
subject to each option, and the exercisability of such options. All options
granted to nonemployee directors will be non-qualified options. The per share
exercise price of all options will equal at least 100% of the fair market value
of a share of common stock on the date the option is granted.
It is anticipated that all options granted under the Stock Option Plan will
be granted subject to a vesting schedule whereby the options become exercisable
over a specified period following the date of grant. Under OTS regulations, if
the Stock Option Plan is implemented within the first year following
consummation of the conversion the minimum vesting period will be five years.
All unvested options will be immediately exercisable in the event of the
recipient's death or disability. Unvested options also will be exercisable
following a change in control (as defined in the Stock Option Plan) of First
Bancorp or First Federal to the extent authorized or not prohibited by
applicable law or regulations. OTS regulations currently provide that if the
Stock Option Plan is implemented prior to the first anniversary of the
conversion, vesting may not be accelerated upon a change in control of First
Bancorp or First Federal.
Each stock option that is awarded to an officer or key employee will remain
exercisable at any time on or after the date it vests through the earlier to
occur of the tenth anniversary of the date of grant or three months after the
date on which the optionee terminates employment (one year in the event of the
optionee's termination by reason of death or disability), unless such period is
extended. Each stock option that is awarded to a nonemployee director will
remain exercisable through the earlier to occur of the tenth anniversary of the
date of grant or one year (two years in the event of a nonemployee director's
death or disability) following the termination of a nonemployee director's
service on the Board. All stock options are nontransferable except by will or
the laws of descent or distribution.
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Under current provisions of the Internal Revenue Code, the federal tax
treatment of incentive stock options and non-qualified options is different.
With respect to incentive stock options, an optionee who satisfies certain
holding period requirements will not recognize income at the time the option is
granted or at the time the option is exercised. If the holding period
requirements are satisfied, the optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of common stock received
upon the exercise of a stock option. If the holding period requirements are not
satisfied, the difference between the fair market value of the common stock on
the date of grant and the option exercise price, if any, will be taxable to the
optionee at ordinary income tax rates. A federal income tax deduction generally
will not be available to First Bancorp as a result of the grant or exercise of
an incentive stock options, unless the optionee fails to satisfy the holding
period requirements. With respect to non-qualified options, the grant of a non-
qualified option generally is not a taxable event for the optionee and no tax
deduction will be available to First Bancorp. However, upon the exercise of a
non-qualified option, the difference between the fair market value of the common
stock on the date of exercise and the option exercise price generally will be
treated as compensation to the optionee upon exercise, and First Bancorp will be
entitled to a compensation expense deduction in the amount of income realized by
the optionee.
Under generally accepted accounting principles, compensation expense is
generally not recognized with respect to the award of options to officers and
employees of First Bancorp and its subsidiaries. However, the Financial
Accounting Standards Board recently indicated that it would propose rules during
1999 that would generally require recognition of compensation expense with
respect to awards made to non-employees, including non-employee directors of
First Bancorp, and that the proposed changes would apply to awards made after
December 15, 1998.
Although no specific award determinations have been made at this time,
First Bancorp and First Federal anticipate that if stockholder approval is
obtained it would provide awards to its directors, officers and employees to the
extent and under terms and conditions permitted by applicable regulations.
Under current OTS regulations, if the Stock Option Plan is implemented within
one year of the consummation of the conversion, no officer or employees could
receive an award of options covering in excess of 25% of the number of shares
reserved for issuance under the Stock Option Plan, no nonemployee director could
receive in excess of 5% of the number of shares reserved for issuance under the
Stock Option Plan and nonemployee directors, as a group, could not receive in
excess of 30% of the number of shares reserved for issuance under the Stock
Option Plan.
MANAGEMENT RECOGNITION AND DEVELOPMENT PLAN. Following the conversion, the
Board of Directors of First Bancorp intends to adopt an MRDP for officers,
employees, and nonemployee directors of First Bancorp and First Federal, and to
submit the MRDP to stockholders for approval at a meeting held no earlier than
six months following consummation of the conversion. The MRDP will enable First
Bancorp and First Federal to provide participants with a proprietary interest in
First Bancorp as an incentive to contribute to the success of First Bancorp and
First Federal. The MRDP will comply with all applicable regulatory
requirements. However, the MRDP will not be approved or endorsed by the OTS.
Under current OTS regulations, the approval of a majority vote of First
Bancorp's outstanding shares is required for implementation of the MRDP within
one year of the consummation of the conversion.
The MRDP expects to acquire a number of shares of First Bancorp's common
stock equal to 4% of the common stock issued in connection with the conversion
(87,400 shares based on the issuance of 2,185,000 shares in the conversion at
the maximum of the Estimated Valuation Range). Such shares will be acquired on
the open market, if available, with funds contributed by First Bancorp or First
Federal to a trust which First Bancorp may establish in conjunction with the
MRDP or from authorized but unissued shares or treasury shares of First Bancorp.
A committee of the Board of Directors of First Bancorp will administer the
MRDP, the members of which will also serve as trustees of the MRDP trust, if
formed. The trustees will be responsible for the investment of all funds
contributed by First Bancorp or First Federal to the MRDP trust. The Board of
Directors of First Bancorp may terminate the MRDP at any time and, upon
termination, all unallocated shares of common stock will revert to First
Bancorp.
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Shares of common stock granted under the MRDP will be in the form of
restricted stock payable ratably over a specified vesting period following the
date of grant. During the period of restriction, all shares will be held in
escrow by First Bancorp or by the MRDP trust. Under OTS regulations, if the
MRDP is implemented within the first year following consummation of the
conversion, the minimum vesting period will be five years. All unvested MRDP
awards will vest in the event of the recipient's death or disability. Unvested
MRDP awards will also vest following a change in control (as defined in the
MRDP) of First Bancorp or First Federal to the extent authorized or not
prohibited by applicable law or regulations. OTS regulations currently provide
that, if the MRDP is implemented prior to the first anniversary of the
conversion, vesting may not be accelerated upon a change in control of First
Bancorp or First Federal.
A recipient of an MRDP award in the form of restricted stock generally will
not recognize income upon an award of shares of common stock, and First Bancorp
will not be entitled to a federal income tax deduction, until the termination of
the restrictions. Upon such termination, the recipient will recognize ordinary
income in an amount equal to the fair market value of the common stock at the
time and First Bancorp will be entitled to a deduction in the same amount after
satisfying federal income tax withholding requirements. However, the recipient
may elect to recognize ordinary income in the year the restricted stock is
granted in an amount equal to the fair market value of the shares at that time,
determined without regard to the restrictions. In that event, First Bancorp
will be entitled to a deduction in such year and in the same amount. Any gain
or loss recognized by the recipient upon subsequent disposition of the stock
will be either a capital gain or capital loss.
Although no specific award determinations have been made at this time,
First Bancorp and First Federal anticipate that if stockholder approval is
obtained it would provide awards to its directors, officers and employees to the
extent and under terms and conditions permitted by applicable regulations.
Under current OTS regulations, if the MRDP is implemented within one year of the
consummation of the conversion, no officer or employees could receive an award
covering in excess of 25% of the number of shares reserved for issuance under
the MRDP, no nonemployee director could receive in excess of 5% of the number of
shares reserved for issuance under the MRDP and nonemployee directors, as a
group, could not receive in excess of 30% of the number of shares reserved for
issuance under the MRDP.
TRANSACTIONS WITH FIRST FEDERAL
Federal regulations require that all loans or extensions of credit by First
Federal to executive officers and directors must generally be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, unless
the loan or extension of credit is made under a benefit program generally
available to all other employees and does not give preference to any insider
over any other employee, and must not involve more than the normal risk of
repayment or present other unfavorable features. First Federal's policy is to
offer consumer loans, savings account loans and fixed-rate mortgage loans to
directors, officers and employees at rates lower than those offered to the
general public. In addition, loans made to a director or executive officer in
an amount that, when aggregated with the amount of all other loans to such
person and his or her related interests, are in excess of the greater of
$25,000, or 5% of First Federal's capital and surplus (up to a maximum of
$500,000) must be approved in advance by a majority of the disinterested members
of the Board of Directors. See "Regulation--Federal Regulation of Savings
Associations--Transactions with Affiliates." The aggregate amount of loans by
First Federal to its executive officers and directors and their associates was
$302,000 at September 30, 1998, or approximately 1.0% of First Bancorp's pro
forma stockholders' equity, based on the issuance of shares at the midpoint of
the Estimated Valuation Range.
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REGULATION
GENERAL
First Federal is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by
the Home Owners' Loan Act, as amended and, in certain respects, the Federal
Deposit Insurance Act and the regulations issued by the OTS and the FDIC to
implement these statutes. These laws and regulations delineate the nature and
extent of the activities in which federal savings associations may engage.
Lending activities and other investments must comply with various statutory and
regulatory capital requirements. In addition, First Federal's relationship with
its depositors and borrowers is also regulated to a great extent, especially in
such matters as the ownership of deposit accounts and the form and content of
First Federal's mortgage documents. First Federal must file reports with the
OTS and the FDIC concerning its activities and financial condition in addition
to obtaining regulatory approvals prior to entering into certain transactions
such as mergers with, or acquisitions of, other financial institutions. There
are periodic examinations by the OTS and the FDIC to review First Federal's
compliance with various regulatory requirements. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or Congress, could have a material
adverse impact on First Federal and its operations.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
OFFICE OF THRIFT SUPERVISION. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
FEDERAL HOME LOAN BANK SYSTEM. The Federal Home Loan Bank System,
consisting of 12 Federal Home Loan Banks, is under the jurisdiction of the
Federal Housing Finance Board. The designated duties of the Federal Housing
Finance Board are to supervise the Federal Home Loan Banks, to ensure that the
Federal Home Loan Banks carry out their housing finance mission, to ensure that
the Federal Home Loan Banks remain adequately capitalized and able to raise
funds in the capital markets, and to ensure that the Federal Home Loan Banks
operate in a safe and sound manner. First Federal, as a member of the Federal
Home Loan Bank-Indianapolis, is required to acquire and hold shares of capital
stock in the Federal Home Loan Bank-Indianapolis in an amount equal to the
greater of (1) 1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or (2) 1/20 of its advances (i.e., borrowings) from the Federal
Home Loan Bank-Indianapolis. First Federal is in compliance with this
requirement with an investment in Federal Home Loan Bank-Indianapolis stock of
$727,000 at September 30, 1998. Among other benefits, the Federal Home Loan
Bank-Indianapolis provides a central credit facility primarily for member
institutions. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the Federal Home Loan Bank System. It makes
advances to members in accordance with policies and procedures established by
the Federal Housing Finance Board and the Board of Directors of the Federal Home
Loan Bank-Indianapolis.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
depository institutions. The FDIC currently maintains two separate insurance
funds: the Bank Insurance Fund and the Savings Association Insurance Fund. As
insurer of First Federal's deposits, the FDIC has examination, supervisory and
enforcement authority over First Federal.
First Federal's accounts are insured by the Savings Association Insurance
Fund to the maximum extent permitted by law. First Federal pays deposit
insurance premiums based on a risk-based assessment system established by the
FDIC. Under applicable regulations, institutions are assigned to one of three
capital groups that
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are based solely on the level of an institution's capital --"well capitalized,"
"adequately capitalized," and "undercapitalized" -- which are defined in the
same manner as the regulations establishing the prompt corrective action system,
as discussed below. These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates that until September 30, 1996 ranged from 0.23% for
well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk of loss to the Savings Association Insurance Fund unless effective
corrective action is taken.
Under the Deposit Insurance Funds Act, which was enacted on September 30,
1996, the FDIC imposed a special assessment on each depository institution with
deposits insured under the Savings Association Insurance Fund which resulted in
the insurance fund achieving its designated reserve ratio. In connection
therewith, the FDIC reduced the assessment schedule for Savings Association
Insurance Fund members, effective January 1, 1997, to a range of 0% to 0.27%,
with most institutions, including First Federal, paying 0%. This assessment
schedule is the same as that for the Bank Insurance Fund, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, members
of the Savings Association Insurance Fund are charged an assessment of 0.065% of
assessable deposits for the purpose of paying interest on the obligations issued
by the Financing Corporation in the 1980s to help fund the thrift industry
cleanup. Deposits insured under the Bank Insurance Fund will be charged an
assessment to help pay interest on the Financing Corporation bonds at a rate of
approximately 0.013% until the earlier of December 31, 1999 or the date upon
which the last savings association ceases to exist, after which time the
assessment will be the same for all insured deposits.
The Deposit Insurance Funds Act provides for the merger of the Bank
Insurance Fund and the Savings Association Insurance Fund into the Deposit
Insurance Fund on January 1, 1999, but only if no insured depository institution
is a savings association on that date. The Act contemplates the development of
a common charter for all federally chartered depository institutions and the
abolition of separate charters for national banks and federal savings
associations. It is not known what form the common charter may take and what
effect, if any, the adoption of a new charter would have on the operation of
First Federal.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of First Federal.
LIQUIDITY REQUIREMENTS. Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
4.0%) of its net withdrawable accounts plus short-term borrowings. Monetary
penalties may be imposed for failure to meet liquidity requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
PROMPT CORRECTIVE ACTION. Under federal law, each federal banking agency
is required to implement a system of prompt corrective action for institutions
that it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action. Under
the regulations, an institution shall be deemed to be
. "well capitalized" if it has a total risk-based capital ratio of 10.0%
or more, has a Tier I risk-based capital ratio of 6.0% or more, has a
leverage ratio of 5.0% or more and is not subject to specified
requirements to meet and maintain a specific capital level for any
capital measure;
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. "adequately capitalized" if it has a total risk-based capital ratio of
8.0% or more, has a Tier I risk-based capital ratio of 4.0% or more,
has a leverage ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;"
. "undercapitalized" if it has a total risk-based capital ratio that is
less than 8.0%, has a Tier I risk-based capital ratio that is less
than 4.0% or has a leverage ratio that is less than 4.0% (3.0% under
certain circumstances);
. "significantly undercapitalized" if it has a total risk-based capital
ratio that is less than 6.0%, has a Tier I risk-based capital ratio
that is less than 3.0% or has a leverage ratio that is less than 3.0%;
and
. "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.
An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.
At September 30, 1998, First Federal was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking regulatory
agencies have prescribed, by regulation, guidelines for all insured depository
institutions relating to: internal controls, information systems and internal
audit systems; loan documentation; credit underwriting; interest rate risk
exposure; asset growth; asset quality; earnings; and compensation, fees and
benefits. The guidelines describe the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. If the OTS determines
that First Federal fails to meet any standard prescribed by the guidelines, the
agency may require First Federal to submit to the agency an acceptable plan to
achieve compliance with the standard. OTS regulations establish deadlines for
the submission and review of such safety and soundness compliance plans.
QUALIFIED THRIFT LENDER TEST. All savings associations are required to
meet a qualified thrift lender test to avoid certain restrictions on their
operations. A savings institution that fails to become or remain a qualified
thrift lender shall either convert to a national bank charter or be subject to
the following restrictions on its operations:
(1) the institution may not make any new investment or engage in
activities that would not be permissible for national banks;
(2) the institution may not establish any new branch office where a
national bank located in the savings institution's home state would
not be able to establish a branch office;
(3) the institution shall be ineligible to obtain new advances from any
Federal Home Loan Bank; and
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(4) the payment of dividends by the institution shall be subject to the
rules regarding the statutory and regulatory dividend restrictions
applicable to national banks.
Also, beginning three years after the date on which the savings institution
ceases to be a qualified thrift lender, the savings institution would be
prohibited from retaining any investment or engaging in any activity not
permissible for a national bank and would be required to repay any outstanding
advances to any Federal Home Loan Bank. In addition, within one year of the
date on which a savings association controlled by a company ceases to be a
qualified thrift lender, the company must register as a bank holding company and
become subject to the rules applicable to such companies. A savings institution
may requalify as a qualified thrift lender if it thereafter complies with the
qualified thrift lender test.
Currently, the qualified thrift lender test requires that either an
institution qualify as a domestic building and loan association under the
Internal Revenue Code or that 65% of an institution's "portfolio assets" (as
defined) consist of certain housing and consumer-related assets on a monthly
average basis in nine out of every 12 months. Assets that qualify without limit
for inclusion as part of the 65% requirement are loans made to purchase,
refinance, construct, improve or repair domestic residential housing and
manufactured housing; home equity loans; mortgage-backed securities (where the
mortgages are secured by domestic residential housing or manufactured housing);
Federal Home Loan Bank stock; direct or indirect obligations of the FDIC; and
loans for educational purposes, loans to small businesses and loans made through
credit cards. In addition, the following assets, among others, may be included
in meeting the test subject to an overall limit of 20% of the savings
institution's portfolio assets: 50% of residential mortgage loans originated
and sold within 90 days of origination; 100% of consumer loans; and stock issued
by Freddie Mac or Fannie Mae. Portfolio assets consist of total assets minus
the sum of goodwill and other intangible assets, property used by the savings
institution to conduct its business, and liquid assets up to 20% of the
institution's total assets. At September 30, 1998, First Federal was in
compliance with the qualified thrift lender test.
CAPITAL REQUIREMENTS. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less intangibles other than certain
mortgage servicing rights and credit card relationships. In calculating
adjusted total assets, adjustments are made to total assets to give effect to
the exclusion of certain assets from capital and to account appropriately for
the investments in and assets of both includable and non-includable
subsidiaries. Institutions that fail to meet the core capital requirement would
be required to file with the OTS a capital plan that details the steps they will
take to reach compliance. In addition, the OTS's prompt corrective action
regulation provides that a savings institution that has a leverage ratio of less
than 4% (3% for institutions receiving the highest CAMEL examination rating)
will be deemed to be "undercapitalized" and may be subject to certain
restrictions. See "--Prompt Corrective Action."
Savings associations also must maintain "tangible capital" not less than
1.5% of adjusted total assets. "Tangible capital" is defined, generally, as core
capital minus any "intangible assets" other than purchased mortgage servicing
rights.
Savings associations must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined. The components of supplementary
capital currently include cumulative preferred stock, long-term perpetual
preferred stock, mandatory convertible securities, subordinated debt and
intermediate preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock and
the allowance for loan and lease losses limited to a maximum of 1.25% of risk-
weighted assets.
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The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans
are assigned a 100% risk weight, as are nonqualifying residential mortgage loans
and that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totaled to arrive at total risk-weighted assets. Off-
balance sheet items are included in risk-weighted assets by converting them to
an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
First Federal's assets, as calculated in accordance with guidelines promulgated
by the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of First
Federal's assets. That dollar amount is deducted from an association's total
capital in calculating compliance with its risk-based capital requirement.
Under the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings association with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise. The rule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure. In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in lieu
of the OTS-calculated amount. The OTS has postponed the date that the component
will first be deducted from an institution's total capital.
See "Historical and Pro Forma Regulatory Capital Compliance" for a table
that sets forth in terms of dollars and percentages the OTS tangible, core and
risk-based capital requirements, First Federal's historical amounts and
percentages at September 30, 1998 and pro forma amounts and percentages based
upon the assumptions stated.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require First Federal to give the OTS 30
days' advance notice of any proposed declaration of dividends, and the OTS has
the authority under its supervisory powers to prohibit the payment of dividends.
The regulation utilizes a three-tiered approach which permits various levels of
distributions based primarily upon a savings association's capital level.
A Tier 1 savings association has capital in excess of its capital
requirement both before and after the proposed capital distribution. A Tier 1
savings association may make (without application but upon prior notice to, and
no objection made by, the OTS) capital distributions during a calendar year up
to 100% of its net income to date during the calendar year plus one-half its
surplus capital ratio, i.e., the amount of capital in excess of its requirement,
at the beginning of the calendar year or the amount authorized for a Tier 2
association. Capital
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distributions in excess of such amount require advance notice to the OTS. A Tier
2 savings association has capital equal to or in excess of its minimum capital
requirement but below its requirement (both before and after the proposed
capital distribution). Such an association may make (without application)
capital distributions up to an amount equal to 75% of its net income during the
previous four quarters depending on how close the association is to meeting its
capital requirement. Capital distributions exceeding this amount require prior
OTS approval. Tier 3 associations are savings associations with capital below
the minimum capital requirement either before or after the proposed capital
distribution. Tier 3 associations may not make any capital distributions without
prior approval from the OTS.
First Federal currently meets the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of the
calendar year less any distributions previously paid during the year.
Effective April 1, 1999, the OTS's capital distribution regulation will
change. Under the new regulation, an application to and prior approval of the
OTS will be required prior to any capital distribution if the institution does
not meet the criteria for expedited treatment of applications under OTS
regulations, the total capital distributions for the calendar year exceed net
income for that year plus the amount of retained net income for the preceding
two years, the institution would be undercapitalized following the distribution
or the distribution would otherwise be contrary to a statute, regulation or
agreement with the OTS. If an application is not required, the institution must
still provide prior notice to the OTS of the capital distribution.
LOANS TO ONE BORROWER. Under federal law, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of First Federal's unimpaired capital and surplus,
plus an additional 10% of unimpaired capital and surplus, if such loan is
secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion. The OTS by regulation has amended the loans
to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower in
additional amounts under circumstances limited essentially to loans to develop
or complete residential housing units. At September 30, 1998, First Federal's
regulatory limit on loans to one borrower was $2.3 million. At September 30,
1998, First Federal's largest aggregate amount of loans to one borrower was
$649,000.
ACTIVITIES OF ASSOCIATIONS AND THEIR SUBSIDIARIES. A savings association
may establish operating subsidiaries to engage in any activity that the savings
association may conduct directly and may establish service corporation
subsidiaries to engage in certain preapproved activities or, with approval of
the OTS, other activities reasonably related to the activities of financial
institutions. When a savings association establishes or acquires a subsidiary
or elects to conduct any new activity through a subsidiary that the association
controls, the savings association must notify the FDIC and the OTS 30 days in
advance and provide the information each agency may, by regulation, require.
Savings associations also must conduct the activities of subsidiaries in
accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of First Federal or is
inconsistent with sound banking practices or with the purposes of the Federal
Deposit Insurance Act. Based upon that determination, the FDIC or the OTS has
the authority to order the savings association to divest itself of control of
the subsidiary. The FDIC also may determine by regulation or order that any
specific activity poses a serious threat to the Savings Association Insurance
Fund. If so, it may require that no Savings Association Insurance Fund member
engage in that activity directly.
TRANSACTIONS WITH AFFILIATES. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. Under federal law, a savings
and loan holding company, its subsidiaries and any other company under common
control are considered affiliates of the subsidiary savings
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association. The aggregate amount of covered transactions with an individual
affiliate is limited to 10% of the capital and surplus of the savings
institution. The aggregate amount of covered transactions with all affiliates is
limited to 20% of the savings institution's capital and surplus. The transaction
with affiliates must be on terms and under circumstances that are at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. The term "covered transaction"
includes the making of loans, the purchase of assets, the issuance of a
guarantee and similar types of transactions. Any loan or extension of credit by
First Federal to an affiliate must be secured by collateral in accordance with
Section 23A.
Three additional rules apply to savings associations:
(1) a savings association may not make any loan or other extension of
credit to an affiliate unless that affiliate is engaged only in
activities permissible for bank holding companies;
(2) a savings association may not purchase or invest in securities
issued by an affiliate, other than securities of a subsidiary; and
(3) the OTS may, for reasons of safety and soundness, impose more
stringent restrictions on savings associations but may not exempt
transactions from or otherwise abridge Section 23A or 23B.
Exemptions from Section 23A or 23B may be granted only by the Federal
Reserve, as is currently the case with respect to all FDIC-insured banks.
First Federal's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities controlled by such persons, is
currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of
repayment. Regulation O also places individual and aggregate limits on the
amount of loans First Federal may make to such persons based, in part, on First
Federal's capital position, and requires certain board approval procedures to be
followed. The OTS regulations, with certain minor variances, apply Regulation O
to savings institutions.
COMMUNITY REINVESTMENT ACT. Savings associations are also subject to the
provisions of the Community Reinvestment Act of 1977, which requires the
appropriate federal bank regulatory agency, in connection with its regular
examination of a savings association, to assess the saving association's record
in meeting the credit needs of the community serviced by the savings
association, including low and moderate income neighborhoods. The regulatory
agency's assessment of the savings association's record is made available to the
public. Further, such assessment is required of any savings association which
has applied, among other things, to establish a new branch office that will
accept deposits, relocate an existing office or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated financial
institution.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
HOLDING COMPANY ACQUISITIONS. Federal law and OTS regulations generally
prohibit a savings and loan holding company, without prior OTS approval, from
acquiring more than 5% of the voting stock of any other savings association or
savings and loan holding company or controlling the assets thereof. They also
prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any savings
association not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
HOLDING COMPANY ACTIVITIES. As a unitary savings and loan holding company,
First Bancorp generally is not subject to activity restrictions under federal
law. If First Bancorp acquires control of another savings association as a
separate subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding
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company. There generally are more restrictions on the activities of a multiple
savings and loan holding company than on those of a unitary savings and loan
holding company. No multiple savings and loan holding company or subsidiary
thereof which is not an insured association may commence or continue for more
than two years after becoming a multiple savings and loan association holding
company or subsidiary thereof, any business activity other than:
(1) furnishing or performing management services for a subsidiary
insured institution,
(2) conducting an insurance agency or escrow business,
(3) holding, managing, or liquidating assets owned by or acquired from a
subsidiary insured institution,
(4) holding or managing properties used or occupied by a subsidiary
insured institution,
(5) acting as trustee under deeds of trust,
(6) those activities previously directly authorized by regulation as of
March 5, 1987 to be engaged in by multiple holding companies or
(7) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the OTS by
regulation, prohibits or limits such activities for savings and loan
holding companies.
Those activities described in (7) above also must be approved by the OTS prior
to being engaged in by a multiple savings and loan holding company.
QUALIFIED THRIFT LENDER TEST. Federal law provides that any savings and
loan holding company that controls a savings association that fails the
qualified thrift lender test, as explained under "--Federal Regulation of
Savings Associations--Qualified Thrift Lender Test," must, within one year after
the date on which First Federal ceases to be a qualified thrift lender, register
as and be deemed a bank holding company subject to all applicable laws and
regulations.
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TAXATION
FEDERAL TAXATION
GENERAL. Following completion of the conversion, First Bancorp and First
Federal will report their income on a calendar year basis using the accrual
method of accounting and will be subject to federal income taxation in the same
manner as other corporations with some exceptions, including particularly First
Federal's reserve for bad debts discussed below. The following discussion of
tax matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to First Federal or First
Bancorp. For additional information regarding income taxes, see Note 8 of Notes
to Consolidated Financial Statements.
BAD DEBT RESERVE. Historically, savings institutions such as First Federal
which met certain definitional tests primarily related to their assets and the
nature of their business were permitted to establish a reserve for bad debts and
to make annual additions thereto, which may have been deducted in arriving at
their taxable income. First Federal's deductions with respect to "qualifying
real property loans," which are generally loans secured by certain interest in
real property, were computed using an amount based on First Federal's actual
loss experience, or a percentage equal to 8% of First Federal's taxable income,
computed with certain modifications and reduced by the amount of any permitted
additions to the non-qualifying reserve. Due to First Federal's high equity in
relation to deposits, First Federal generally recognized a bad debt deduction
equal to net charge-offs.
The thrift bad debt rules were revised by Congress in 1996. The new rules
eliminated the percentage of taxable income method for deducting additions to
the tax bad debt reserves for all thrifts for tax years beginning after December
31, 1995. These rules also required that all institutions recapture all or a
portion of their bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988). For taxable years beginning after December
31, 1995, First Federal's bad debt deduction must be determined under the
experience method using a formula based on actual bad debt experience over a
period of years or, if First Federal is a "large" association (assets in excess
of $500 million) on the basis of net charge-offs during the taxable year. The
new rules allowed an institution to suspend bad debt reserve recapture for the
1996 and 1997 tax years if the institution's lending activity for those years is
equal to or greater than the institutions average mortgage lending activity for
the six taxable years preceding 1996 adjusted for inflation. For this purpose,
only home purchase or home improvement loans are included and the institution
can elect to have the tax years with the highest and lowest lending activity
removed from the average calculation. If an institution is permitted to
postpone the reserve recapture, it must begin its six year recapture no later
than the 1998 tax year. The unrecaptured base year reserves will not be subject
to recapture as long as the institution continues to carry on the business of
banking. In addition, the balance of the pre-1988 bad debt reserves continues
to be subject to provisions of present law referred to below that require
recapture of the pre-1988 bad debt reserve in the case of certain excess
distributions to shareholders.
DISTRIBUTIONS. To the extent that First Federal makes "nondividend
distributions" to First Bancorp, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if First Federal's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in First Federal's taxable income. Nondividend distributions
include distributions in excess of First Federal's current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. However, dividends paid out of First Federal's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from First
Federal's bad debt reserve. The amount of additional taxable income created
from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
if, after the conversion, First Federal makes a "nondividend distribution," then
approximately one and one-half times the Excess Distribution would be includable
in gross income for federal income tax purposes, assuming a 34% corporate income
tax rate, exclusive of state and local taxes. See "Regulation" and "Dividend
Policy" for limits on the payment of dividends by First Federal. First Federal
does not intend to pay dividends that would result in a recapture of any portion
of its tax bad debt reserve.
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CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code imposes a tax
on alternative minimum taxable income at a rate of 20%. The excess of the tax
bad debt reserve deduction using the percentage of taxable income method over
the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the alternative minimum
taxable income. In addition, only 90% of alternative minimum taxable income can
be offset by net operating loss carryovers. Alternative minimum taxable income
is increased by an amount equal to 75% of the amount by which First Federal's
adjusted current earnings exceeds its alternative minimum taxable income
(determined without regard to this preference and prior to reduction for net
operating losses).
DIVIDENDS-RECEIVED DEDUCTION. First Bancorp may exclude from its income
100% of dividends received from First Federal as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is generally
70% in the case of dividends received from unaffiliated corporations with which
First Bancorp and First Federal will not file a consolidated tax return, except
that if First Bancorp or First Federal owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
AUDITS. First Federal's federal income tax returns have not been audited
for the last five years.
STATE TAXATION
Indiana imposes an 8.5% franchise tax based on a financial institution's
adjusted gross income as defined by statute. In computing adjusted gross
income, deductions for municipal interest, U.S. Government interest, the bad
debt deduction computed using the reserve method and pre-1990 net operating
losses are disallowed. First Federal's state franchise tax returns have not
been audited for the past five tax years.
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THE CONVERSION
THE OTS HAS APPROVED THE PLAN OF CONVERSION SUBJECT TO APPROVAL OF THE PLAN
OF CONVERSION BY THE MEMBERS OF FIRST FEDERAL AND TO THE SATISFACTION OF CERTAIN
OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL. OTS APPROVAL DOES NOT
CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION.
GENERAL
On September 16, 1998, the Board of Directors of First Federal unanimously
adopted the plan of conversion, under which First Federal will be converted from
a federally chartered mutual savings bank to a federally chartered stock savings
bank to be held as a wholly-owned subsidiary of First Bancorp, a newly formed
Indiana corporation. The Board of Directors amended the plan of conversion on
December 16, 1998. THE FOLLOWING DISCUSSION OF THE PLAN OF CONVERSION IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN OF CONVERSION, WHICH IS
AVAILABLE TO MEMBERS OF FIRST FEDERAL UPON REQUEST. The plan of conversion is
also filed as an exhibit to the Registration Statement. See "Where You Can Find
More Information." The OTS has approved the plan of conversion subject to its
approval by the members of First Federal entitled to vote on the matter at a
Special Meeting called for that purpose to be held on March 24, 1999, and
subject to the satisfaction of certain other conditions imposed by the OTS in
its approval.
The conversion will be accomplished through adoption of a Federal Stock
Charter and Bylaws to authorize the issuance of capital stock by First Federal.
As part of the conversion, First Federal will issue all of its newly issued
common stock to First Bancorp in exchange for 50% of the net proceeds from the
sale of common stock by First Bancorp. The plan of conversion provides
generally that:
(1) First Federal will convert from a federally chartered mutual savings
bank to a federally chartered stock savings bank;
(2) First Bancorp will offer its common stock to persons having
subscription rights;
(3) if necessary, shares of common stock not subscribed for pursuant to
subscription rights will be offered to certain members of the
general public, with preference given to natural persons and trusts
of natural persons residing in Vanderburgh, Warrick, Posey, Gibson
and Spencer Counties, Indiana, and then to certain members of the
general public through a syndicate of registered broker-dealers
pursuant to selected dealers agreements; and
(4) First Bancorp will purchase all of the capital stock of First
Federal to be issued in connection with the conversion.
As part of the conversion, First Bancorp is offering its common stock in a
subscription offering to holders of subscription rights in the following order
of priority to:
(1) "Eligible Account Holders" -- depositors with $50.00 or more on
deposit as of June 30, 1997;
(2) First Federal's ESOP;
(3) "Supplemental Eligible Account Holders" -- depositors with $50.00 or
more on deposit as of December 31, 1998; and
(4) "Other Members" -- depositors of First Federal as of January 29,
1999 and borrowers of First Federal with loans outstanding as of
March 16, 1988 which continue to be outstanding as of January 29,
1999.
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Shares of common stock not subscribed for in the Subscription Offering may
be offered for sale to members of the general public through a direct community
offering. The direct community offering, if one is held, is expected to begin
immediately after the expiration of the subscription offering, but may begin at
any time during the subscription offering. Shares of common stock not sold in
the subscription offering and the direct community offering may be offered to
members of the general public on a best efforts basis by a selling group of
broker-dealers managed by Capital Resources in a syndicated community offering.
Regulations require that the direct community offering and the syndicated
community offering be completed within 45 days after completion of the
subscription offering unless extended by First Federal or First Bancorp with the
approval of the regulatory authorities. If the syndicated community offering is
determined not to be feasible, the Board of Directors of First Federal will
consult with the regulatory authorities to determine an appropriate alternative
method for selling the unsubscribed shares of common stock. The plan of
conversion provides that the conversion must be completed within 24 months after
the date of the approval of the plan of conversion by the members of First
Federal.
No sales of common stock may be completed, either in the subscription
offering, direct community offering or syndicated community offering unless the
plan of conversion is approved by the members of First Federal.
The completion of the offering, however, is subject to market conditions
and other factors beyond First Federal's control. No assurance can be given as
to the length of time after approval of the plan of conversion at the Special
Meeting that will be required to complete the direct community offering or the
syndicated community offering or other sale of the common stock. If delays are
experienced, significant changes may occur in the estimated pro forma market
value of First Bancorp and First Federal as converted, together with
corresponding changes in the net proceeds realized by First Bancorp from the
sale of the common stock. In the event the conversion is terminated, First
Federal would be required to charge all conversion expenses against current
income.
Orders for shares of common stock will not be filled until at least
$16,150,000 of common stock has been subscribed for or sold and the OTS approves
the final valuation and the conversion closes. If the conversion is not
completed within 45 days after the last day of the subscription offering and the
OTS consents to an extension of time to complete the conversion, subscribers
will be given the right to increase, decrease or rescind their subscriptions.
Unless an affirmative indication is received from subscribers that they wish to
continue to subscribe for shares, the funds will be returned promptly, together
with accrued interest at First Federal's passbook rate from the date payment is
received until the funds are returned to the subscriber. If such period is not
extended, or, in any event, if the conversion is not completed, all withdrawal
authorizations will be terminated and all funds held will be promptly returned
together with accrued interest at First Federal's passbook rate from the date
payment is received until the conversion is terminated.
REASONS FOR THE CONVERSION
The Board of Directors and management believe that the conversion is in the
best interests of First Federal, its members and the communities it serves.
First Federal's Board of Directors has formed First Bancorp to serve as a
holding company, with First Federal as its subsidiary, upon the consummation of
the conversion. By converting to the stock form of organization, First Bancorp
and First Federal will be structured in the form used by holding companies of
commercial banks, most business entities and by a large number of savings
institutions. Management of First Federal believes that the conversion offers a
number of advantages which will be important to the future growth and
performance of First Federal. The capital raised in the conversion is intended
to support First Federal's current lending and investment activities and may
also support possible future expansion and diversification of operations,
although there are no current specific plans, arrangements or understandings,
written or oral, regarding any such expansion or diversification. The
conversion is also expected to afford First Federal's management, members and
others the opportunity to become stockholders of First Bancorp and participate
more directly in, and contribute to, any future growth of First Bancorp and
First Federal. The conversion will also enable First Bancorp and First Federal
to raise additional capital in the public equity or debt markets should the need
arise, although there are no current specific plans, arrangements or
understandings, written or oral, regarding any such financing
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activities. First Federal, as a mutual savings bank, does not have the authority
to issue capital stock or debt instruments, other than by accepting deposits.
EFFECTS OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF FIRST FEDERAL
VOTING RIGHTS. Depositors and borrowers will have no voting rights in the
converted First Federal or First Bancorp and therefore will not be able to elect
directors of First Federal or First Bancorp or to control their affairs.
Currently, these rights are accorded to members of First Federal. After the
conversion, voting rights will be vested exclusively in First Bancorp with
respect to First Federal and the holders of the common stock as to matters
pertaining to First Bancorp. Each holder of common stock shall be entitled to
vote on any matter to be considered by the stockholders of First Bancorp. A
stockholder will be entitled to one vote for each share of common stock owned.
SAVINGS ACCOUNTS AND LOANS. First Federal's savings accounts, account
balances and existing FDIC insurance coverage of savings accounts will not be
affected by the conversion. Furthermore, the conversion will not affect the
loan accounts, loan balances or obligations of borrowers under their individual
contractual arrangements with First Federal.
TAX EFFECTS. First Federal has received an opinion from Muldoon, Murphy &
Faucette LLP, Washington, D.C., that the conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Internal Revenue Code. The
opinion states that:
(1) no gain or loss will be recognized to First Federal in its mutual or
stock form by reason of the conversion;
(2) no gain or loss will be recognized to its account holders upon the
issuance to them of accounts in First Federal immediately after the
conversion, in the same dollar amounts and on the same terms and
conditions as their accounts at First Federal in its mutual form
plus interest in the liquidation account;
(3) the tax basis of account holders' accounts in First Federal
immediately after the conversion will be the same as the tax basis
of their accounts immediately prior to conversion;
(4) the tax basis of each account holder's interest in the liquidation
account will be equal to the value, if any, of that interest;
(5) the tax basis of the common stock purchased in the conversion will
be the amount paid and the holding period for such stock will
commence at the date of purchase; and
(6) no gain or loss will be recognized to account holders upon the
receipt or exercise of subscription rights in the conversion, except
to the extent subscription rights are deemed to have value as
discussed below.
Unlike a private letter ruling issued by the IRS, an opinion of counsel
is not binding on the IRS and the IRS could disagree with the conclusions
reached in the opinion. In the event of such disagreement, no assurance can be
given that the conclusions reached in an opinion of counsel would be sustained
by a court if contested by the IRS.
Based upon past rulings issued by the IRS, the opinion provides that the
receipt of subscription rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the plan of conversion will be
taxable to the extent, if any, that the subscription rights are deemed to have a
fair market value. Capital Resources Group, a financial consulting firm
retained by First Federal, whose findings are not binding on the IRS, has issued
a letter indicating that the subscription rights do not have any value, based on
the fact that such rights are acquired by the recipients without cost, are
nontransferable and of short duration and afford the recipients the right
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only to purchase shares of the common stock at the same price paid by purchasers
in the direct community offering for unsubscribed shares of common stock. If the
subscription rights are deemed to have a fair market value, the receipt of such
rights may only be taxable to those Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members who exercise their subscription
rights. First Federal could also recognize a gain on the distribution of such
subscription rights. Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members are encouraged to consult with their own tax advisors
as to the tax consequences in the event the subscription rights are deemed to
have a fair market value.
First Federal has also received an opinion from Olive LLP that, assuming
the conversion does not result in any federal income tax liability to First
Federal, its account holders, or First Bancorp, implementation of the plan of
conversion will not result in any Indiana income tax liability to such entities
or persons.
The opinions of Muldoon, Murphy & Faucette LLP and Olive LLP and the letter
from Capital Resources Group are filed as exhibits to the Registration
Statement. See "Where You Can Find More Information."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
First Federal in its present mutual form, each depositor in First Federal would
receive a pro rata share of any assets of First Federal remaining after payment
of claims of all creditors, including the claims of all depositors up to the
withdrawal value of their accounts. Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his or her
deposit account to the total value of all deposit accounts in First Federal at
the time of liquidation.
After the conversion, holders of withdrawable deposit(s) in First Federal,
including certificates of deposit ("Savings Account(s)"), will not be entitled
to share in any residual assets in the event of liquidation of First Federal.
However, following OTS regulations, First Federal will, at the time of the
conversion, establish a liquidation account in an amount equal to its total
equity as of the date of the latest statement of financial condition contained
in this prospectus.
The liquidation account will be maintained by First Federal subsequent to
the conversion for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who retain their Savings Accounts in First Federal.
Each Eligible Account Holder and Supplemental Eligible Account Holder will, with
respect to each Savings Account held, have a related inchoate interest in a
portion of the liquidation account balance ("subaccount").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or a Supplemental Eligible Account Holder will be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's "qualifying deposit" in the
Savings Account and the denominator is the total amount of the "qualifying
deposits" of all such holders. The initial subaccount balance will not be
increased, and it will be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing day of First Federal subsequent to June 30, 1997, or December 31, 1998
is less than the lesser of the deposit balance in such Savings Account at the
close of business on any other annual closing date subsequent to June 30, 1997
or December 31, 1998 or the amount of the "qualifying deposit" in such Savings
Account on June 30, 1997 or December 31, 1998, then the subaccount balance for
such Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of
a downward adjustment, such subaccount balance shall not be subsequently
increased, notwithstanding any increase in the deposit balance of the related
Savings Account. If any such Savings Account is closed, the related subaccount
balance shall be reduced to zero.
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In the event of a complete liquidation of First Federal (and only in such
event) each Eligible Account Holder and Supplemental Eligible Account Holder
shall be entitled to receive a liquidation distribution from the liquidation
account in the amount of the then current adjusted subaccount balance(s) for
Savings Account(s) then held by such holder before any liquidation distribution
may be made to stockholders. No merger, consolidation, bulk purchase of assets
with assumptions of Savings Accounts and other liabilities or similar
transactions with another federally insured institution in which First Federal
is not the surviving institution shall be considered to be a complete
liquidation. In any such transaction the liquidation account shall be assumed
by the surviving institution.
In the unlikely event First Federal is liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to First Bancorp as the sole stockholder of First Federal.
THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS
SUBSCRIPTION OFFERING. In accordance with the plan of conversion,
nontransferable subscription rights to purchase the common stock have been
issued to persons and entities entitled to purchase the common stock in the
subscription offering. The amount of the common stock which these parties may
purchase will be subject to the availability of the common stock for purchase
under the categories specified in the plan of conversion. Subscription
priorities have been established for the allocation of stock to the extent that
the common stock is available. These priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or more
on deposit at First Federal as of June 30, 1997 will receive nontransferable
subscription rights to subscribe for up to the greater of $150,000 of common
stock, one-tenth of one percent of the total offering of common stock or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders. If the exercise of subscription
rights in this category results in an oversubscription, shares of common stock
will be allocated among subscribing Eligible Account Holders so as to permit
each Eligible Account Holder, to the extent possible, to purchase a number of
shares sufficient to make such person's total allocation equal 100 shares or the
number of shares actually subscribed for, whichever is less. Thereafter,
unallocated shares will be allocated among subscribing Eligible Account Holders
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all subscribing Eligible Account
Holders whose subscriptions remain unsatisfied. Subscription rights received by
officers and directors in this category based on their increased deposits in
First Federal in the one year period preceding June 30, 1997 are subordinated to
the subscription rights of other Eligible Account Holders.
Category 2: ESOP. The plan of conversion provides that the ESOP shall
receive nontransferable subscription rights to purchase up to 8% of the shares
of common stock sold in the conversion. The ESOP intends to purchase 8% of the
shares of common stock sold in the conversion. In the event the number of
shares offered in the conversion is increased above the maximum of the Estimated
Valuation Range, the ESOP shall have a priority right to purchase any such
shares exceeding the maximum of the Estimated Valuation Range up to an aggregate
of 8% of the common stock sold in the conversion. If the ESOP's subscription is
not filled in its entirety, the ESOP may purchase shares in the open market.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit as of December 31, 1998 will receive nontransferable
subscription rights to subscribe for up to the greater of $150,000 of common
stock, one-tenth of one percent of the total offering of common stock or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of qualifying deposits of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders. If the
exercise of subscription rights in this category results in an oversubscription,
shares of common stock will be allocated among subscribing Supplemental Eligible
Account Holders so as to permit each
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Supplemental Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation equal 100 shares
or the number of shares actually subscribed for, whichever is less. Thereafter,
unallocated shares will be allocated among subscribing Supplemental Eligible
Account Holders proportionately, based on the amount of their respective
qualifying deposits as compared to total qualifying deposits of all subscribing
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied.
Category 4: Other Members. Each depositor of First Federal as of January
29, 1999 and each borrower with a loan outstanding on March 16, 1988 which
continues to be outstanding as of January 29, 1999 will receive nontransferable
subscription rights to purchase up to $150,000 of common stock in the conversion
to the extent shares are available following subscriptions by Eligible Account
Holders and Supplemental Eligible Account Holders. In the event of an
oversubscription in this category, the available shares will be allocated
proportionately based on the amount of the respective subscriptions.
SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS SELLING OR OTHERWISE
TRANSFERRING THEIR RIGHTS TO SUBSCRIBE FOR COMMON STOCK IN THE SUBSCRIPTION
OFFERING OR SUBSCRIBING FOR COMMON STOCK ON BEHALF OF ANOTHER PERSON WILL BE
SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES IMPOSED BY THE OTS OR ANOTHER AGENCY OF THE U.S. GOVERNMENT. EACH
PERSON EXERCISING SUBSCRIPTION RIGHTS WILL BE REQUIRED TO CERTIFY THAT HE OR SHE
IS PURCHASING SUCH SHARES SOLELY FOR HIS OR HER OWN ACCOUNT AND THAT HE OR SHE
HAS NO AGREEMENT OR UNDERSTANDING WITH ANY OTHER PERSON FOR THE SALE OR TRANSFER
OF SUCH SHARES. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT
THE CONSENT OF FIRST FEDERAL AND FIRST BANCORP.
First Bancorp and First Federal will make reasonable attempts to provide a
prospectus and related offering materials to holders of subscription rights.
However, the subscription offering and all subscription rights under the plan of
conversion will expire at 12:00 Noon, local time, on March 19, 1999, whether or
not First Federal has been able to locate each person entitled to such
subscription rights. ORDERS FOR COMMON STOCK IN THE SUBSCRIPTION OFFERING
RECEIVED IN HAND BY FIRST FEDERAL AFTER 12:00 NOON ON MARCH 19, 1999 WILL NOT BE
ACCEPTED.
DIRECT COMMUNITY OFFERING. Any shares of common stock which remain
unsubscribed for in the subscription offering may be offered by First Bancorp to
certain members of the general public in a direct community offering, with
preference given to natural persons and trusts of natural persons residing in
Vanderburgh, Warrick, Posey, Gibson and Spencer Counties, Indiana. Purchasers
in the direct community offering are eligible to purchase up to $150,000 of
common stock. In the event an insufficient number of shares are available to
fill orders in the direct community offering, the available shares will be
allocated on a pro rata basis determined by the amount of the respective orders.
The direct community offering, if one is held, is expected to begin immediately
after the expiration of the subscription offering, but may begin at any time
during the subscription offering. The direct community offering may terminate
at the same time as the subscription offering or at any time subsequent thereto,
but no later than 45 days after the close of the subscription offering, unless
extended by First Bancorp and First Federal, with approval of the OTS.
THE RIGHT OF ANY PERSON TO PURCHASE SHARES IN THE DIRECT COMMUNITY OFFERING
IS SUBJECT TO THE ABSOLUTE RIGHT OF FIRST BANCORP AND FIRST FEDERAL TO ACCEPT OR
REJECT SUCH PURCHASES IN WHOLE OR IN PART. IF AN ORDER IS REJECTED IN PART, THE
PURCHASER DOES NOT HAVE THE RIGHT TO CANCEL THE REMAINDER OF THE ORDER. FIRST
BANCORP PRESENTLY INTENDS TO TERMINATE THE DIRECT COMMUNITY OFFERING AS SOON AS
IT HAS RECEIVED ORDERS FOR ALL SHARES AVAILABLE FOR PURCHASE IN THE CONVERSION.
If all of the common stock offered in the subscription offering is
subscribed for, no common stock will be available for purchase in the direct
community offering.
SYNDICATED COMMUNITY OFFERING. The plan of conversion provides that, if
necessary, all shares of common stock not purchased in the subscription offering
and direct community offering, if any, may be offered for sale to certain
members of the general public in a syndicated community offering through a
syndicate of registered broker-dealers to be formed and managed by Capital
Resources acting as agent of First Bancorp. FIRST BANCORP
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AND FIRST FEDERAL HAVE THE RIGHT TO REJECT ORDERS, IN WHOLE OR IN PART, IN THEIR
SOLE DISCRETION IN THE SYNDICATED COMMUNITY OFFERING. Neither Capital Resources
nor any registered broker-dealer shall have any obligation to take or purchase
any shares of the common stock in the syndicated community offering; however,
Capital Resources has agreed to use its best efforts in the sale of shares in
the syndicated community offering.
Stock sold in the syndicated community offering also will be sold at the
$10.00 purchase price. See "--Stock Pricing and Number of Shares to be Issued."
No person will be permitted to subscribe in the syndicated community offering
for shares of common stock with an aggregate purchase price of more than
$150,000. See "--Plan of Distribution for the Subscription, Direct Community
and Syndicated Community Offerings" for a description of the commission to be
paid to the selected dealers and to Capital Resources.
Capital Resources may enter into agreements with selected dealers to assist
in the sale of shares in the syndicated community offering. If a syndicate of
broker-dealers ("selected dealers") is formed to assist in the syndicated
community offering, a purchaser may pay for his or her shares with funds held by
or deposited with a selected dealer. If an order form is executed and forwarded
to the selected dealer or if the selected dealer is authorized to execute the
order form on behalf of a purchaser, the selected dealer is required to forward
the order form and funds to First Federal for deposit in a segregated account on
or before noon of the business day following receipt of the order form or
execution of the order form by the selected dealer. Alternatively, selected
dealers may solicit indications of interest from their customers to place orders
for shares. Such selected dealers shall subsequently contact their customers
who indicated an interest and seek their confirmation as to their intent to
purchase. Those indicating an intent to purchase shall execute order forms and
forward them to their selected dealer or authorize the selected dealer to
execute such forms. The selected dealer will acknowledge receipt of the order
to its customer in writing on the following business day and will debit such
customer's account on the third business day after the customer has confirmed
his intent to purchase (the "debit date") and on or before noon of the next
business day following the debit date will send order forms and funds to First
Federal for deposit in a segregated account. Although purchasers' funds are not
required to be in their accounts with selected dealers until the debit date if
this alternative procedure is employed, once a confirmation of an intent to
purchase has been received by the selected dealer, the purchaser has no right to
rescind his or her order.
The syndicated community offering may terminate no more than 45 days after
the expiration of the subscription offering, unless extended by First Bancorp
and First Federal, with approval of the OTS. In the event First Federal is
unable to find purchasers from the general public for all unsubscribed shares,
other purchase arrangements will be made by the Board of Directors of First
Federal, if feasible. Such other arrangements will be subject to the approval
of the OTS.
TIME TO COMPLETE THE OFFERING. OTS regulations require that First Bancorp
complete the sale of common stock within 45 days after the close of the
subscription offering. If the offering is not completed within such period all
funds received will be promptly returned with interest at First Federal's
passbook rate and all withdrawal authorizations will be canceled. The OTS may
grant one or more extensions of the offering period, provided that no single
extension exceeds 90 days, subscribers are given the right to increase, decrease
or rescind their subscriptions during the extension period, and the extensions
do not go more than two years beyond the date on which the members approved the
plan of conversion. If the OTS grants approval of an extension offering period,
all subscribers will be notified of such extension and of the duration of any
extension that has been granted, and will be given the right to increase,
decrease or rescind their orders. If an affirmative response to any
resolicitation is not received by First Bancorp from a subscriber, the
subscriber's order will be rescinded and all funds received will be promptly
returned with interest (or withdrawal authorizations will be canceled).
PERSONS IN NON-QUALIFIED STATES. First Bancorp and First Federal will make
reasonable efforts to comply with the securities laws of all states in the
United States in which persons entitled to subscribe for stock under the plan of
conversion reside. However, First Bancorp and First Federal are not required to
offer stock in the subscription offering to any person who resides in a foreign
country or in a state of the United States in which a small number of persons
otherwise eligible to subscribe for shares of common stock reside in such state
or who resides in a state with respect to which First Bancorp or First Federal
determines that compliance with the securities
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laws of such state would be impracticable for reasons of cost or otherwise. A
request or requirement that First Bancorp and First Federal or their officers,
directors or trustees register as a broker, dealer, salesman or selling agent,
under the securities laws of a state, or a request or requirement to register or
otherwise qualify the subscription rights or common stock for sale or submit any
filing in a state may form the basis for a decision not to sell the shares in
that state. Where the number of persons eligible to subscribe for shares in one
state is small, First Bancorp and First Federal will base their decision as to
whether or not to offer the common stock in such state on a number of factors,
including the size of accounts held by account holders in the state, the cost of
reviewing the registration and qualification requirements of the state (and of
actually registering or qualifying the shares) or the need to register First
Bancorp, its officers, directors or employees as brokers, dealers or salesmen.
PLAN OF DISTRIBUTION FOR THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED
COMMUNITY OFFERINGS
First Bancorp and First Federal have retained Capital Resources, a broker-
dealer registered with the SEC and a member of the NASD, to consult with and
advise First Bancorp and First Federal and to assist, on a best efforts basis,
in the distribution of the common stock in the conversion. The services Capital
Resources will perform include:
(1) training and educating First Federal's employees regarding the
mechanics and regulatory requirements of the stock conversion
process;
(2) conducting information meetings for potential subscribers, if
necessary;
(3) managing the sales efforts in the offering;
(4) assisting in the collection of proxies from depositors for use at
the Special Meeting; and
(5) keeping records of subscriptions and orders for common stock.
Capital Resources will receive for its services a fee equal to 1.25% of the
total dollar amount of stock sold, excluding shares purchased by the ESOP and by
officers, directors and employees and their immediate household family members.
If selected dealers are utilized in connection with the offering, First Bancorp
will pay a fee (negotiated at such time) to such selected dealers and a
management fee to Capital Resources under a selected dealer's agreement. The
fee to be negotiated with the selected dealers is expected to be up to 4.0% of
the total dollar amount sold through selected dealers. Capital Resources will
also be reimbursed for its legal fees and for reasonable out-of-pocket expenses
in an amount not to exceed $40,000. Capital Resources has received fees
totaling $60,000 for consulting and advisory services relating to the
conversion, which fees will be credited against marketing fees payable to
Capital Resources. Capital Resources is affiliated with Capital Resources
Group.
Subject to certain limitations, First Bancorp and First Federal have also
agreed to indemnify Capital Resources against liabilities and expenses,
including legal fees, incurred in connection with certain claims or litigation,
including claims or litigation arising out of or based upon untrue statements or
omissions contained in the offering material for the common stock.
DESCRIPTION OF SALES ACTIVITIES
The common stock will be offered in the subscription offering and direct
community offering principally by the distribution of this prospectus and
through activities conducted at First Federal's stock center at its main office
facility. The stock center is expected to operate during normal business hours
throughout the subscription offering and direct community offering. It is
expected that at any particular time one or more Capital Resources employees
will be working at the stock center. Such employees of Capital Resources will
be responsible for mailing materials relating to the offering, responding to
questions regarding the conversion and the offering and processing stock orders.
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Sales of common stock will be made by registered representatives affiliated
with Capital Resources or by the selected dealers managed by Capital Resources.
The management and employees of First Federal may participate in the offering in
clerical capacities, providing administrative support in effecting sales
transactions or, when permitted by state securities laws, answering questions of
a mechanical nature relating to the proper execution of the order form.
Management of First Federal may answer questions regarding the business of First
Federal when permitted by state securities laws. Other questions of prospective
purchasers, including questions as to the advisability or nature of the
investment, will be directed to registered representatives. The management and
employees of First Bancorp and First Federal have been instructed not to solicit
offers to purchase common stock or provide advice regarding the purchase of
common stock.
No officer, director or employee of First Federal or First Bancorp will be
compensated, directly or indirectly, for any activities in connection with the
offer or sale of securities issued in the conversion.
None of First Federal's personnel participating in the offering is
registered or licensed as a broker or dealer or an agent of a broker or dealer.
First Federal's personnel will assist in the above-described sales activities
under an exemption from registration as a broker or dealer provided by Rule 3a4-
1 promulgated under the Securities Exchange Act. Rule 3a4-1 generally provides
that an "associated person of an issuer" of securities shall not be deemed a
broker solely by reason of participation in the sale of securities of such
issuer if the associated person meets certain conditions. Such conditions
include, but are not limited to, that the associated person participating in the
sale of an issuer's securities not be compensated in connection therewith at the
time of participation, that such person not be associated with a broker or
dealer and that such person observe certain limitations on his or her
participation in the sale of securities. For purposes of this exemption,
"associated person of an issuer" is defined to include any person who is a
director, officer or employee of the issuer or a company that controls, is
controlled by or is under common control with the issuer.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION AND DIRECT COMMUNITY
OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the expiration of the subscription offering in accordance with Rule 15c2-8
under the Securities Exchange Act, no prospectus will be mailed any later than
five days prior to such date or hand delivered any later than two days prior to
such date. Execution of the order form will confirm receipt or delivery in
accordance with Rule 15c2-8. Order forms will only be distributed with a
prospectus. First Federal will accept for processing only orders submitted on
original order forms. First Federal is not obligated to accept orders submitted
on photocopied or telecopied order forms. ORDERS CANNOT AND WILL NOT BE
ACCEPTED WITHOUT THE EXECUTION OF THE CERTIFICATION APPEARING ON THE ORDER FORM.
By executing and returning the regulatory mandated certification form, you will
be certifying that you received this prospectus and acknowledging that the
common stock is not a deposit account and is not insured or guaranteed by any
federal or state governmental agency. You will also be acknowledging that you
received disclosure concerning the risks involved in this offering. The
certification form could be used as support to show that you understand the
nature of this investment.
To purchase shares in the subscription offering, an executed order form
with the required full payment for each share subscribed for, or with
appropriate authorization for withdrawal of full payment from the subscriber's
deposit account with First Federal (which may be given by completing the
appropriate blanks in the order form), must be received by First Federal by
12:00 Noon, local time, on March 19, 1999. Order forms that are not received by
such time or are executed defectively or are received without full payment or
without appropriate withdrawal instructions are not required to be accepted.
First Bancorp and First Federal have the right to waive or permit the correction
of incomplete or improperly executed order forms, but do not represent that they
will do so. Under the plan of conversion, the interpretation by First Bancorp
and First Federal of the terms and conditions of the plan of conversion and of
the order form will be final. In order to purchase shares in the direct
community offering, the order form, accompanied by the required payment for each
share subscribed for, must be received by First Federal prior to the time the
direct community offering terminates, which may be at the same time as or
subsequent to the expiration of the subscription offering. Once received, an
executed order form may not be modified, amended or
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rescinded without the consent of First Federal unless the conversion has not
been completed within 45 days after the end of the subscription offering, unless
such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (June 30,
1997) and/or the Supplemental Eligibility Record Date (December 31, 1998) and/or
the Voting Record Date (January 29, 1999) must list all accounts on the order
form giving all names in each account, the account number and the approximate
account balance as of such date. Failure to list an account could result in
fewer shares being allocated in the event of an oversubscription than if all
accounts had been disclosed.
Full payment for subscriptions may be made:
(1) in cash if delivered in person at First Federal's stock center;
(2) by check, bank draft, or money order; or
(3) by authorization of withdrawal from deposit accounts maintained with
First Federal.
Appropriate means by which such withdrawals may be authorized are provided
on the order form. No wire transfers will be accepted. Payment for
subscriptions of $25,000 or more must be by account withdrawal or by certified
or cashier's check or money order. Interest will be paid on payments made by
cash, check, bank draft or money order at First Federal's passbook rate from the
date payment is received until the completion or termination of the conversion.
If payment is made by authorization of withdrawal from deposit accounts, the
funds authorized to be withdrawn from a deposit account will continue to accrue
interest at the contractual rates until completion or termination of the
conversion, unless the certificate matures after the date of receipt of the
order form but prior to closing, in which case funds will earn interest at the
passbook rate from the date of maturity until consummation of the conversion,
but a hold will be placed on such funds, thereby making them unavailable to the
depositor until completion or termination of the conversion. At the completion
of the conversion, the funds received in the offering will be used to purchase
the shares of common stock ordered. THE SHARES OF COMMON STOCK ISSUED IN THE
CONVERSION CANNOT AND WILL NOT BE INSURED BY THE FDIC OR ANY OTHER GOVERNMENT
AGENCY. In the event that the conversion is not completed for any reason, all
funds submitted will be promptly refunded with interest as described above.
If a subscriber authorizes First Federal to withdraw the amount of the
aggregate purchase price from his or her deposit account, First Federal will do
so as of the effective date of conversion, though the account must contain the
full amount necessary for payment at the time the subscription order is
received. First Federal will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization the certificate
will be canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at First Federal's passbook rate.
IRAs maintained in First Federal do not permit investment in First
Bancorp's common stock. A depositor interested in using his or her IRA funds to
purchase common stock must do so through a self-directed IRA. Since First
Federal does not offer such accounts, it will allow such a depositor to make a
trustee-to-trustee transfer of the IRA funds to a trustee offering a self-
directed IRA program with the agreement that such funds will be used to purchase
First Bancorp's common stock in the offering. There will be no early withdrawal
or IRS interest penalties for such transfers. The new trustee would hold the
common stock in a self-directed account in the same manner as First Federal now
holds the depositor's IRA funds. An annual administrative fee may be payable to
the new trustee. Depositors interested in using IRA funds at First Federal to
purchase common stock should contact the stock information center as soon as
possible so that the necessary forms may be forwarded for execution and returned
prior to the expiration of the subscription offering. In addition, the
provisions of the Employee Retirement Income Security Act and IRS regulations
require that officers, directors and 10% shareholders who use self-directed IRA
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funds to purchase shares of common stock in the subscription offering, make such
purchases for the exclusive benefit of IRAs.
The ESOP will not be required to pay for the shares subscribed for at the
time it subscribes, but rather may pay for such shares of common stock
subscribed for at the $10.00 purchase price at the closing of the conversion,
provided that there is in force from the time of its subscription until such
time, a loan commitment from an unrelated financial institution or First Bancorp
to lend to the ESOP, at such time, the aggregate purchase price of the shares
for which it subscribed.
Certificates representing shares of common stock purchased, and any refund
due, will be mailed to purchasers at such address as may be specified in
properly completed order forms or to the last address of such persons appearing
on the records of First Federal as soon as practicable following consummation of
the sale of all shares of common stock. Any certificates returned as
undeliverable will be disposed of in accordance with applicable law. PURCHASERS
MAY NOT BE ABLE TO SELL THE SHARES OF COMMON STOCK WHICH THEY PURCHASED UNTIL
CERTIFICATES FOR THE COMMON STOCK ARE AVAILABLE AND DELIVERED TO THEM, EVEN
THOUGH TRADING OF THE COMMON STOCK MAY HAVE COMMENCED.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
Federal regulations promulgated by the OTS require that a converting
savings association issue and sell its capital stock at a total price equal to
the estimated pro forma market value of such stock in the converted savings
association, based on an independent valuation. These regulations require First
Bancorp and First Federal to retain an appraiser who is independent of First
Bancorp and First Federal, experienced and expert in the area of corporate
appraisal and acceptable to OTS. The term independent appraiser is defined by
the federal regulations. First Federal has retained Capital Resources Group to
prepare an appraisal of the pro forma market value of First Bancorp and First
Federal as converted and to assist in preparing a business plan. Capital
Resources Group is the parent company of and affiliated with Capital Resources,
the marketing agent for First Bancorp's conversion stock. Capital Resources
Group will receive a fee expected to total $35,000 for its appraisal services
and assistance in the preparation of a business plan, plus reasonable out-of-
pocket expenses incurred in connection with the appraisal and preparation of the
business plan, not to exceed $5,000 without prior approval by First Federal. If
an updated appraisal is required in connection with the conversion process,
Capital Resources Group will receive a fixed fee of $5,000 for preparation of an
updated appraisal. First Federal has agreed to indemnify Capital Resources
Group under certain circumstances against liabilities and expenses (including
legal fees) arising out of, related to, or based upon the conversion. Capital
Resources Group will also receive a fee of $20,000 for records management
services in connection with the conversion plus reimbursement of reasonable out-
of-pocket expenses incurred in connection with the records management services
not to exceed $5,000 without prior approval by First Federal.
The OTS has issued guidelines to appraisers in connection with the
appraisal of converting savings institutions which describe the methodology that
OTS expects the appraiser to utilize. OTS reviews the appraisal and any
appraisal update submitted to them, and the methodology employed in the
appraisal. In the past, OTS has required converting savings institutions to
adjust their appraisals or appraisal updates which has resulted in a change in
the number of shares issued. Although OTS has not objected to the appraisal of
First Bancorp and First Federal in connection with the conversion, there can be
no assurance that the OTS may not require First Federal to sell additional stock
to complete the conversion. There also can be no assurance that the common
stock will exhibit the post-conversion price and trading patterns experienced by
other converting mutual associations, or that the common stock will sell in the
aftermarket at $10.00 per share or in the aggregate at or above the estimated
pro form market value.
The appraisal contains an analysis of a number of factors including, but
not limited to, First Federal's financial condition and operating trends, the
competitive environment within which First Federal operates, operating trends of
certain thrift institutions and savings and loan holding
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companies, relevant economic conditions both nationally and in the State of
Indiana which affect the operations of thrift institutions, stock market values
of certain institutions, and stock market conditions for publicly traded savings
institutions and savings and loan holding companies. In addition, Capital
Resources Group has advised First Federal that it has considered and will
consider the effect of the additional capital raised by the sale of the common
stock on the estimated aggregate pro forma market value of such shares. The
Board of Directors has reviewed the appraisal, including the stated methodology
of Capital Resources Group and the assumptions used in the preparation of the
appraisal. The Board of Directors is relying upon the expertise, experience and
independence of Capital Resources Group and is not qualified to determine the
appropriateness of the assumptions or the methodology. The appraisal has been
filed as an exhibit to the registration statement of which this prospectus is a
part. See "Where You Can Find More Information."
OTS regulations require that the appraiser establish an estimated valuation
range for First Bancorp's common stock to allow for fluctuations in the
aggregate value of the stock due to changing market conditions and other
factors. On the basis of the foregoing, Capital Resources Group has advised
First Bancorp and First Federal that, in its opinion, as of December 4, 1998,
the pro forma market value of First Bancorp and First Federal as converted and,
therefore, the common stock, was within the valuation range of $16,150,000 to
$21,850,000 with a midpoint of $19,000,000. After reviewing the methodology and
the assumptions used by Capital Resources Group in the preparation of the
appraisal, the Board of Directors accepted the Estimated Valuation Range.
Assuming that the shares are sold at $10.00 per share in the conversion, the
estimated number of shares would be between 1,615,000 and 2,185,000 with a
midpoint of 1,900,000. The purchase price of $10.00 was determined by
discussion among the Boards of Directors of First Federal and First Bancorp and
Capital Resources, taking into account, among other factors, the requirement
under OTS regulations that the common stock be offered in a manner that will
achieve the widest distribution of the stock and desired liquidity in the common
stock subsequent to the conversion. Since the outcome of the offering relates
in large measure to market conditions at the time of sale, it is not possible to
determine the exact number of shares that will be issued by First Bancorp at
this time. The Estimated Valuation Range may be amended, with the approval of
the OTS, if necessitated by developments following the date of such appraisal
in, among other things, First Federal's financial condition and operating
trends, the competitive environment within which First Federal operates,
operating trends of certain thrift institutions and savings and loan holding
companies, relevant economic conditions both nationally and in the State of
Indiana which affect the operations of thrift institutions, stock market values
of certain institutions, and stock market conditions for publicly traded savings
institutions and savings and loan holding companies.
If, upon completion of the subscription offering, at least the minimum
number of shares are subscribed for, Capital Resources Group, after taking into
account factors similar to those involved in its prior appraisal as well as the
results of the subscription offering, will determine its estimate of the pro
forma market value of First Bancorp and First Federal as converted based on
information available to Capital Resources Group at that time. This may result
in an increase or decrease of the Estimated Valuation Range. An increase or
decrease in the Estimated Valuation Range will result in a change in the number
of shares to be issued in the conversion.
No sale of the shares will take place unless prior thereto Capital
Resources Group confirms to the OTS that, to the best of Capital Resources
Group's knowledge and judgment, nothing of a material nature has occurred that
would cause it to conclude that the actual total purchase price on an aggregate
basis was incompatible with its estimate of the total pro forma market value of
First Bancorp and First Federal as converted at the time of the sale. If,
however, the facts do not justify such a statement, the offering or other sale
may be canceled, a new Estimated Valuation Range and price per share set and new
subscription, direct community and syndicated community offerings held. Under
such circumstances, subscribers would have the right to modify or rescind their
subscriptions and to have their subscription funds returned promptly with
interest and holds on funds authorized for withdrawal from deposit accounts
would be released or reduced.
Depending upon market and financial conditions, the number of shares issued
may be more or less than the range in number of shares discussed in this
prospectus. Persons ordering shares will not be permitted to modify or cancel
their orders unless the change in the number of shares to be issued in the
conversion results in an offering which is either less than 1,615,000 shares or
more than 2,512,750 shares. In the event the total amount of shares issued is
less than 1,615,000 or more than 2,512,750 (15% above the maximum of the
Estimated Valuation Range), for aggregate gross proceeds of less than
$16,150,000 or more than $25,127,500, subscription funds will be returned
promptly with interest to each subscriber unless he indicates otherwise. In the
event a new valuation range is
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established by Capital Resources Group, such new range will be subject to
approval by the OTS. In the event of an increase in the valuation, First Bancorp
may increase the total number of shares to be issued in the conversion. An
increase in the total number of shares to be issued in the conversion would
decrease a subscriber's percentage ownership interest and pro forma net worth
(book value) per share and increase the pro forma net income and net worth (book
value) on an aggregate basis. In the event of a reduction in the valuation,
First Bancorp may decrease the number of shares to be issued to reflect the
reduced valuation. A decrease in the number of shares to be issued in the
conversion would increase a subscriber's percentage ownership interest and the
pro forma net worth (book value) per share and decrease the pro forma net income
and net worth on an aggregate basis. For a presentation of the possible effects
of an increase or decrease in the number of shares to be issued, see "Pro Forma
Data."
If purchasers cannot be found for an insignificant residue of unsubscribed
shares from the general public, other purchase arrangements will be made by the
Boards of Directors of First Federal and First Bancorp, if possible. These
other purchase arrangements will be subject to the approval of the OTS and may
provide for purchases for investment purposes by directors, officers, their
associates and other persons in excess of the limitations provided in the plan
of conversion and in excess of the proposed director purchases, although no
additional purchases are currently intended. If such other purchase
arrangements cannot be made, the plan of conversion will terminate.
In formulating its appraisal, Capital Resources Group relied upon the
truthfulness, accuracy and completeness of all documents First Federal furnished
to it. Capital Resources Group also considered financial and other information
from regulatory agencies, other financial institutions, and other public
sources, as appropriate. While Capital Resources Group believes this
information to be reliable, Capital Resources Group does not guarantee the
accuracy or completeness of such information and did not independently verify
the financial statements and other data provided by First Federal and First
Bancorp or independently value the assets or liabilities of First Bancorp and
First Federal. The appraisal considers First Bancorp and First Federal only as
a going concern and should not be considered to be a liquidation value. THE
APPRAISAL BY CAPITAL RESOURCES GROUP IS NOT INTENDED TO BE, AND MUST NOT BE
INTERPRETED AS, A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF VOTING TO
APPROVE THE PLAN OF CONVERSION OR OF PURCHASING SHARES OF COMMON STOCK.
MOREOVER, BECAUSE THE APPRAISAL IS NECESSARILY BASED ON MANY FACTORS WHICH
CHANGE FROM TIME TO TIME, THERE IS NO ASSURANCE THAT PERSONS WHO PURCHASE SUCH
SHARES IN THE CONVERSION WILL LATER BE ABLE TO SELL SHARES THEREAFTER AT PRICES
AT OR ABOVE THE PURCHASE PRICE IN THE OFFERING.
LIMITATIONS ON PURCHASES OF SHARES
The plan of conversion provides for certain limitations to be placed upon
the purchase of common stock by eligible subscribers and others in the
conversion. Each subscriber must subscribe for a minimum of 25 shares. The
plan of conversion provides the following purchase limitations:
(1) no eligible subscriber (including all persons on a joint account)
may purchase more than $150,000 of common stock in the subscription
offering;
(2) no person may purchase more than $150,000 of common stock in the
direct community offering;
(3) no person may purchase more than $150,000 of common stock in the
syndicated community offering; and
(4) no person, either alone or together with associates of or persons
acting in concert with such person, may purchase in the aggregate
more than the overall maximum purchase limitation of $220,000 of
common stock.
For purposes of the plan of conversion, the directors are not deemed to be
acting in concert solely by reason of their Board membership. Pro rata
reductions within each subscription rights category will be made in allocating
shares to the extent that the maximum purchase limitations are exceeded.
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First Federal's and First Bancorp's Boards of Directors may, in their sole
discretion, increase the maximum purchase limitation described above up to 9.99%
of the shares of common stock sold in the conversion, provided that if the
maximum purchase limitation is increased to more than 5% of the shares sold in
the conversion, orders for shares which exceed 5% of the shares of common stock
sold in the conversion may not exceed, in the aggregate, 10% of the shares sold
in the conversion. First Federal and First Bancorp do not intend to increase
the maximum purchase limitation unless market conditions are such that an
increase in the maximum purchase limitation is necessary to sell a number of
shares in excess of the minimum of the Estimated Valuation Range. If the Boards
of Directors decide to increase the purchase limitation above, persons who
subscribed for the maximum number of shares of common stock will be, and other
large subscribers in the discretion of First Bancorp and First Federal may be,
given the opportunity to increase their subscriptions accordingly, subject to
the rights and preferences of any person who has priority subscription rights.
The term "acting in concert" is defined in the plan of conversion to mean:
(1) knowing participation in a joint activity or interdependent
conscious parallel action towards a common goal whether or not under
an express agreement; or
(2) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose under any contract,
understanding, relationship, agreement or other arrangement, whether
written or otherwise.
In general, a person who acts in concert with another party shall also be
deemed to be acting in concert with any person who is also acting in concert
with that other party. First Bancorp and First Federal may presume that certain
persons are acting in concert based upon, among other things, joint account
relationships and the fact that such persons have filed joint Schedules 13D with
the SEC with respect to other companies.
The term "associate" of a person is defined in the plan of conversion to
mean:
(1) any corporation or organization (other than First Federal or a
majority-owned subsidiary of First Federal) of which such person is
an officer or partner or is, directly or indirectly, the beneficial
owner of 10% or more of any class of equity securities;
(2) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity (excluding tax-qualified employee
plans); and
(3) any relative or spouse of such person, or any relative of such
spouse, who either has the same home as such person or who is a
director or officer of First Federal or any of its parents or
subsidiaries.
For example, a corporation of which a person serves as an officer would be
an associate of such person and, therefore, all shares purchased by such
corporation would be included with the number of shares which such person could
purchase individually under the above limitations.
The term "officer" is defined in the plan of conversion to mean an
executive officer of First Federal, including its Chairman of the Board,
President, Vice Presidents, Secretary and Treasurer.
Common stock purchased under the conversion will be freely transferable,
except for shares purchased by directors and officers of First Federal and First
Bancorp and by NASD members. See "--Restrictions on Transferability by
Directors and Officers and NASD Members."
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RESTRICTIONS ON REPURCHASE OF STOCK
Under OTS regulations, OTS-regulated savings associations (and their
holding companies) may not for a period of three years from the date of an
institution's mutual-to-stock conversion repurchase any of its common stock from
any person, except in the event of an offer made to all of its stockholders to
repurchase the common stock on a pro rata basis, approved by the OTS, or the
repurchase of qualifying shares of a director. Furthermore, repurchases of any
common stock are prohibited if the effect thereof would cause First Federal's
regulatory capital to be reduced below the amount required for the liquidation
account or the regulatory capital requirements imposed by the OTS. Repurchases
are generally prohibited during the first year following conversion. Upon ten
days' written notice to the OTS, and if the OTS does not object, an institution
may make open market repurchases of its outstanding common stock during years
two and three following the conversion, provided that certain regulatory
conditions are met and that the repurchase would not adversely affect the
financial condition of the institution. Any repurchases of common stock by
First Bancorp would be subject to these regulatory restrictions unless the OTS
would provide otherwise.
RESTRICTIONS ON TRANSFERABILITY BY DIRECTORS AND OFFICERS AND NASD MEMBERS
Shares of common stock purchased in the offering by directors and officers
of First Bancorp may not be sold for a period of one year following consummation
of the conversion, except in the event of the death of the stockholder or in any
exchange of the common stock in connection with a merger or acquisition of First
Bancorp. Shares of common stock received by directors or officers through the
ESOP or the MRDP or upon exercise of options issued pursuant to the Stock Option
Plan or purchased subsequent to the conversion are not subject to this
restriction. Accordingly, shares of common stock issued by First Bancorp to
directors and officers shall bear a legend giving appropriate notice of the
restriction and, in addition, First Bancorp will give appropriate instructions
to the transfer agent for First Bancorp's common stock with respect to the
restriction on transfers. Any shares issued to directors and officers as a
stock dividend, stock split or otherwise with respect to restricted common stock
shall be subject to the same restrictions.
Purchases of outstanding shares of common stock of First Bancorp by
directors, executive officers (or any person who was an executive officer or
director of First Federal after adoption of the plan of conversion) and their
associates during the three-year period following the conversion may be made
only through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of First Bancorp's outstanding
common stock or to the purchase of stock pursuant to the Stock Option Plan.
First Bancorp has filed with the SEC a registration statement under the
Securities Act of 1933 for the registration of the common stock to be issued
pursuant to the conversion. The registration of shares of the common stock to
be issued in the conversion does not cover the resale of such shares. Shares of
common stock purchased by persons who are not affiliates of First Bancorp may be
resold without registration. Shares purchased by an affiliate of First Bancorp
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If First Bancorp meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of First Bancorp who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of 1% of the outstanding shares of First
Bancorp or the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by First
Bancorp to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
Under guidelines of the NASD, members of the NASD and their associates are
subject to certain restrictions on the transfer of securities purchased in
accordance with subscription rights and to certain reporting requirements upon
purchase of such securities.
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RESTRICTIONS ON ACQUISITION OF FIRST BANCORP
The following discussion is a summary of provisions of federal law and
regulations and Indiana corporate law, as well as the Articles of Incorporation
and Bylaws of First Bancorp, relating to stock ownership and transfers, the
Board of Directors and business combinations, all of which may be deemed to have
"anti-takeover" effects. The description of these provisions is necessarily
general and reference should be made to the actual law and regulations and to
the Articles of Incorporation and Bylaws of First Bancorp contained in the
Registration Statement filed with the SEC. See "Where You Can Find More
Information" as to how to obtain a copy of these documents.
CONVERSION REGULATIONS
OTS regulations prohibit any person from making an offer, announcing an
intent to make an offer or participating in any other arrangement to purchase
stock or acquiring stock or subscription rights in a converting institution (or
its holding company) from another person prior to completion of its conversion.
Further, without the prior written approval of the OTS, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the converting institution (or its holding company) for a period of
three years from the date of the completion of the conversion if, upon the
completion of such offer, announcement or acquisition, that person would become
the beneficial owner of more than 10% of the outstanding stock of the
institution (or its holding company). The OTS has defined "person" to include
any individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association (or its holding company) or an underwriter or
member of a selling group acting on the converting institution's (or its holding
company's) behalf for resale to the general public are excepted. The regulation
also provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution (or its holding company) or who controls more than 10% of
the outstanding shares or voting rights of a converting or converted institution
(or its holding company).
CHANGE OF CONTROL REGULATIONS
Under the Change in Bank Control Act, no person may acquire control of an
insured federal savings and loan association or its parent holding company
unless the OTS has been given 60 days' prior written notice and has not issued a
notice disapproving the proposed acquisition. In addition, OTS regulations
provide that no company may acquire control of a savings association without the
prior approval of the OTS. Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation by the OTS.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquirer has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings association's voting stock, if the acquirer also
is subject to any one of specified "control factors," constitutes a rebuttable
determination of control under the regulations. Such control factors include
the acquirer being one of the two largest stockholders. The determination of
control may be rebutted by submission to the OTS, prior to the acquisition of
stock or the occurrence of any other circumstances giving rise to such
determination, of a statement setting forth facts and circumstances which would
support a finding that no control relationship will exist and containing certain
undertakings. The regulations provide that persons or companies which acquire
beneficial ownership exceeding 10% or more of any class of a savings
association's stock must file with the OTS a certification form that the holder
is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable. There are also rebuttable presumptions in
the regulations concerning whether a group "acting in concert" exists, including
presumed action in concert among members of an "immediate family."
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The OTS may prohibit an acquisition of control if it finds, among other
things, that:
(1) the acquisition would result in a monopoly or substantially lessen
competition;
(2) the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
(3) the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or
the public to permit the acquisition of control by such person.
ANTI-TAKEOVER PROVISIONS IN FIRST BANCORP'S ARTICLES OF INCORPORATION AND BYLAWS
AND IN INDIANA LAW
A number of provisions of First Bancorp's Articles of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of First Bancorp's Articles of Incorporation and Bylaws and
regulatory provisions relating to stock ownership and transfers, the Board of
Directors and business combinations, which might be deemed to have a potential
"anti-takeover" effect. These provisions may have the effect of discouraging a
future takeover attempt which is not approved by the Board of Directors but
which individual First Bancorp stockholders may deem to be in their best
interests or in which stockholders may receive a substantial premium for their
shares over then current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of the incumbent Board of
Directors or management of First Bancorp more difficult. The following
description of certain of the provisions of the Articles of Incorporation and
Bylaws of First Bancorp is necessarily general and reference should be made in
each case to such Articles of Incorporation and Bylaws, which are incorporated
in this prospectus by reference. See "Where You Can Find More Information" as
to where to obtain a copy of these documents.
LIMITATION ON VOTING RIGHTS. The Articles of Incorporation of First
Bancorp provide that in no event shall any record owner of any outstanding
common stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of common
stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit, unless permitted by a resolution adopted by
a majority of the board of directors. Beneficial ownership is determined under
the federal securities laws and includes shares beneficially owned by such
person or any of his or her affiliates (as defined in the Articles of
Incorporation), shares which such person or his or her affiliates have the right
to acquire upon the exercise of conversion rights or options and shares as to
which such person and his or her affiliates have or share investment or voting
power, but shall not include shares beneficially owned by the ESOP or directors,
officers and employees of First Federal or First Bancorp or shares that are
subject to a revocable proxy and that are not otherwise beneficially, or deemed
by First Bancorp to be beneficially, owned by such person and his or her
affiliates.
BOARD OF DIRECTORS. The Board of Directors of First Bancorp is divided
into three classes, each of which shall contain approximately one-third of the
whole number of the members of the Board. The members of each class shall be
elected for a term of three years, with the terms of office of all members of
one class expiring each year so that approximately one-third of the total number
of directors are elected each year. The Articles of Incorporation provide that
any vacancy occurring in the Board, including a vacancy created by an increase
in the number of directors, may be filled by a vote of a majority of the
directors then in office and any director so chosen shall hold office for a term
expiring at the annual meeting of stockholders at which the term of the class to
which the director has been chosen expires. The classified Board is intended to
provide for continuity of the Board of Directors and to make it more difficult
and time consuming for a stockholder group to fully use its voting power to gain
control of the Board of Directors without the consent of the incumbent Board of
Directors of First Bancorp. The Articles of Incorporation of First Bancorp
provide that a director may be removed from the Board of Directors prior to the
expiration of his or her term only for cause and only upon the vote of two-
thirds of the outstanding shares of voting stock. In the absence of this
provision, the vote of the holders of a majority of the shares could remove one
or more directors with or without cause. The Bylaws of First Bancorp provide
that each director must at all times be the beneficial owner of not less than
100 shares of First Bancorp's common stock. The Bylaws also
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provide that no person seventy years of age shall be eligible for election to
the Board of Directors and that any director who becomes seventy years of age
may serve until the completion of his term. Finally, the Bylaws provide that to
be eligible for election to the Board of Directors a person must reside within
50 miles of an office of First Bancorp or First Federal.
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Articles of Incorporation do not provide for cumulative voting for any purpose.
Moreover, the Articles of Incorporation provide that special meetings of
stockholders of First Bancorp may be called only by the Board of Directors of
First Bancorp. Under Indiana law, action may be taken by shareholders without a
meeting only if evidenced by a written consent signed by all shareholders
entitled to vote.
AUTHORIZED SHARES. The Articles of Incorporation authorizes the issuance
of 9,000,000 shares of common stock and 1,000,000 shares of preferred stock.
The shares of common stock and preferred stock were authorized in an amount
greater than that to be issued in the conversion to provide First Bancorp's
Board of Directors with as much flexibility as possible to effect, among other
transactions, financing, acquisitions, stock dividends, stock splits, restricted
stock grants and the exercise of stock options. However, these additional
authorized shares may also be used by the Board of Directors, consistent with
fiduciary duties, to deter future attempts to gain control of First Bancorp.
The Board of Directors also has sole authority to determine the terms of any one
or more series of preferred stock, including voting rights, conversion rates,
and liquidation preferences. As a result of the ability to fix voting rights
for a series of preferred stock, the Board has the power, to the extent
consistent with its fiduciary duties, to issue a series of preferred stock to
persons friendly to management in order to attempt to block a tender offer,
merger or other transaction by which a third party seeks control of First
Bancorp, and thereby assist members of management to retain their positions.
First Bancorp's Board currently has no plans for the issuance of additional
shares, other than the issuance of shares of common stock upon exercise of stock
options and in connection with the MRDP.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL
STOCKHOLDERS. The Articles of Incorporation require the approval of the holders
of at least 80% of First Bancorp's outstanding shares of voting stock to approve
certain "Business Combinations" involving a "Related Person" except in cases
where the proposed transaction has been approved in advance by a majority of
those members of First Bancorp's Board of Directors who are unaffiliated with
the Related Person and were directors prior to the time when the Related Person
became a Related Person. The term "Related Person" is defined to include any
individual, corporation, partnership or other entity, other than First Bancorp
or its subsidiary, which owns beneficially or controls, directly or indirectly,
10% or more of the outstanding shares of voting stock of First Bancorp or an
affiliate of such person or entity. This provision of the Articles of
Incorporation applies to any "Business Combination," which is defined to
include:
(1) any merger or consolidation of First Bancorp with or into any
Related Person;
(2) any sale, lease, exchange, mortgage, transfer, or other disposition
of 25% or more of the assets of First Bancorp or combined assets of
First Bancorp and its subsidiaries to a Related Person;
(3) any merger or consolidation of a Related Person with or into First
Bancorp or a subsidiary of First Bancorp;
(4) any sale, lease, exchange, transfer, or other disposition of 25% or
more of the assets of a Related Person to First Bancorp or a
subsidiary of First Bancorp;
(5) the issuance of any securities of First Bancorp or a subsidiary of
First Bancorp to a Related Person;
(6) the acquisition by First Bancorp or a subsidiary of First Bancorp of
any securities of a Related Person;
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(7) any reclassification of common stock of First Bancorp or any
recapitalization involving the common stock of First Bancorp; or
(8) any agreement or other arrangement providing for any of the
foregoing.
Under Indiana law, absent this provision, business combinations, including
mergers, share exchanges and sales of substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of a majority of the outstanding shares of common stock of First Bancorp
and any other affected class of stock. The increased stockholder vote required
to approve a business combination may have the effect of foreclosing mergers and
other business combinations which a majority of stockholders deem desirable and
placing the power to prevent such a merger or combination in the hands of a
minority of stockholders.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. Amendments to First
Bancorp's Articles of Incorporation must be approved by a two-thirds vote of its
Board of Directors and also by a majority of the outstanding shares of its
voting stock, provided, however, that an affirmative vote of at least two-thirds
of the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Articles of Incorporation, including the provision limiting
voting rights, the provisions relating to approval of certain business
combinations, calling special meetings, the number and classification of
directors, director and officer indemnification by First Bancorp and amendment
of First Bancorp's Bylaws and Articles of Incorporation. First Bancorp's Bylaws
may be amended by its Board of Directors.
STOCKHOLDER NOMINATIONS AND PROPOSALS. The Bylaws of First Bancorp require
a stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give not less
than 60 nor more than 90 days' advance notice to the Secretary of First Bancorp.
The notice provision requires a stockholder who desires to raise new business to
provide certain information to First Bancorp concerning the nature of the new
business, the stockholder and the stockholder's interest in the business matter.
Similarly, a stockholder wishing to nominate any person for election as a
director must provide First Bancorp with certain information concerning the
nominee and the proposing stockholder.
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF FIRST BANCORP'S ARTICLES OF
INCORPORATION AND BYLAWS. The Board of Directors of First Federal believes that
the provisions described above are prudent and will reduce First Bancorp's
vulnerability to takeover attempts and certain other transactions that have not
been negotiated with and approved by its Board of Directors. These provisions
will also assist First Bancorp and First Federal in the orderly deployment of
the conversion proceeds into productive assets during the initial period after
the conversion. The Board of Directors believes these provisions are in the
best interest of First Federal and Holding Company and its stockholders. In the
judgment of the Board of Directors, First Bancorp's Board will be in the best
position to determine the true value of First Bancorp and to negotiate more
effectively for what may be in the best interests of its stockholders.
Accordingly, the Board of Directors believes that it is in the best interest of
First Bancorp and its stockholders to encourage potential acquirors to negotiate
directly with the Board of Directors of First Bancorp and that these provisions
will encourage such negotiations and discourage hostile takeover attempts. It
is also the view of the Board of Directors that these provisions should not
discourage persons from proposing a merger or other transaction at a price
reflective of the true value of First Bancorp and that is in the best interest
of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms that may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of First
Bancorp for its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of First Bancorp's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially
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above the current market prices, such offers are sometimes made for less than
all of the outstanding shares of a target company. As a result, stockholders may
be presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive First
Bancorp's remaining stockholders of benefits of certain protective provisions of
the Exchange Act, if the number of beneficial owners became less than 300,
thereby allowing for deregistration under the Exchange Act.
Despite the belief of First Federal and First Bancorp as to the benefits to
stockholders of these provisions of First Bancorp's Articles of Incorporation
and Bylaws, these provisions may also have the effect of discouraging a future
takeover attempt that would not be approved by First Bancorp's Board, but in
which stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to
participate in such a transaction may not have any opportunity to do so. Such
provisions will also render the removal of First Bancorp's Board of Directors
and of management more difficult. The Board of Directors of First Federal and
First Bancorp, however, have concluded that the potential benefits outweigh the
possible disadvantages.
Following the conversion, if permitted by applicable law and, if required,
following the approval by stockholders, First Bancorp may adopt additional anti-
takeover charter provisions or other devices regarding the acquisition of its
equity securities that would be permitted for an Indiana business corporation.
The cumulative effect of the restriction on acquisition of First Bancorp
contained in the Articles of Incorporation and Bylaws of First Bancorp and in
Federal and Indiana law may be to discourage potential takeover attempts and
perpetuate incumbent management, even though certain stockholders of First
Bancorp may deem a potential acquisition to be in their best interests, or deem
existing management not to be acting in their best interests.
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DESCRIPTION OF CAPITAL STOCK OF FIRST BANCORP
GENERAL
First Bancorp is authorized to issue 9,000,000 shares of common stock
having a par value of $.01 per share and 1,000,000 shares of preferred stock
having a par value of $.01 per share. Each share of First Bancorp's common
stock will have the same relative rights as, and will be identical in all
respects with, each other share of common stock. Upon payment of the purchase
price for the common stock, in accordance with the plan of conversion, all such
stock will be duly authorized, fully paid and nonassessable.
THE COMMON STOCK OF FIRST BANCORP WILL REPRESENT NON-WITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF ANY TYPE, AND WILL NOT BE INSURED BY THE FDIC OR ANY
OTHER GOVERNMENT AGENCY.
COMMON STOCK
DIVIDENDS. The payment of dividends by First Bancorp is subject to
limitations which are imposed by law and applicable regulation. See "Dividend
Policy" and "Regulation." The holders of common stock of First Bancorp will be
entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of First Bancorp out of funds legally available therefor.
If First Bancorp issues preferred stock, the holders thereof may have a priority
over the holders of the common stock with respect to dividends.
VOTING RIGHTS. Upon conversion, the holders of common stock of First
Bancorp will possess exclusive voting rights in First Bancorp. They will elect
First Bancorp's Board of Directors and act on such other matters as are required
to be presented to them under Indiana law or as are otherwise presented to them
by the Board of Directors. Except as discussed in "Restrictions on Acquisition
of First Bancorp," each holder of common stock will be entitled to one vote per
share and will not have any right to cumulate votes in the election of
directors. If First Bancorp issues preferred stock, holders of First Bancorp
preferred stock may also possess voting rights. Certain matters require a vote
of more than 50% of the outstanding shares entitled to vote thereon. See
"Restrictions on Acquisition of First Bancorp."
As a federal mutual savings bank, corporate powers and control of First
Federal are vested in its Board of Directors, who elect the officers of First
Federal and who fill any vacancies on the Board of Directors as it exists upon
conversion. Subsequent to conversion, voting rights will be vested exclusively
in the owners of the shares of capital stock of First Federal, all of which will
be owned by First Bancorp, and voted at the direction of First Bancorp's Board
of Directors. Consequently, the holders of the common stock will not have
direct control of First Federal.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
First Federal, First Bancorp, as holder of First Federal's capital stock would
be entitled to receive, after payment or provision for payment of all debts and
liabilities of First Federal (including all deposit accounts and accrued
interest thereon) and after distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders (see "The Conversion"), all assets of First Federal available
for distribution. In the event of liquidation, dissolution or winding up of
First Bancorp, the holders of its common stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all of
the assets of First Bancorp available for distribution. If First Bancorp issues
preferred stock, the holders thereof may have a priority over the holders of the
common stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the common stock of First Bancorp will not
be entitled to preemptive rights with respect to any shares that may be issued.
The common stock is not subject to redemption.
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PREFERRED STOCK
None of the shares of the authorized preferred stock will be issued in the
conversion and there are no plans to issue the preferred stock. Such stock may
be issued with such designations, powers, preferences and rights as the Board of
Directors may from time to time determine. The Board of Directors can, without
stockholder approval, issue preferred stock with voting, dividend, liquidation
and conversion rights that could dilute the voting strength of the holders of
the common stock and may assist management in impeding an unfriendly takeover or
attempted change in control.
RESTRICTIONS ON ACQUISITION
Acquisitions of First Bancorp are restricted by provisions in its Articles
of Incorporation and Bylaws and by the rules and regulations of various
regulatory agencies. See "Regulation" and "Restrictions on Acquisition of First
Bancorp."
REGISTRATION REQUIREMENTS
First Bancorp has registered the common stock with the SEC under Section
12(g) of the Exchange Act and will not deregister its common stock for a period
of at least three years following the completion of the conversion. As result
of such registration, the proxy and tender offer rules, insider trading
reporting and restrictions, annual and periodic reporting and other requirements
of the Exchange Act will be applicable.
LEGAL AND TAX OPINIONS
The legality of the common stock has been passed upon for First Bancorp by
Muldoon, Murphy & Faucette LLP, Washington, D.C., in reliance on the opinion of
Johnson, Carroll and Griffith, P.C., Evansville, Indiana. The federal tax
consequences of the offering have been opined upon by Muldoon, Murphy & Faucette
LLP and the Indiana tax consequences of the offering have been opined upon by
Olive LLP. Muldoon, Murphy & Faucette LLP, Johnson, Carroll and Griffith, P.C.,
and Olive LLP have consented to the references in this prospectus to their
opinions. Certain legal matters will be passed upon for Capital Resources, Inc.
by Steele, Silcox & Browning, P.C., Washington, D.C.
EXPERTS
The financial statements of First Federal as of June 30, 1998 and 1997 and
for the years ended June 30, 1998, 1997 and 1996 included in this prospectus
have been audited by Olive LLP independent auditors, as stated in its report
appearing in this prospectus, and have been so included in reliance upon the
report of such firm given upon its authority as experts in accounting and
auditing.
Capital Resources Group has consented to the publication in this prospectus
of the summary of its report to First Federal setting forth its opinion as to
the estimated pro forma market value of First Bancorp and First Federal as
converted and its letter with respect to subscription rights and to the use of
its name and statements with respect to it appearing in this prospectus.
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WHERE YOU CAN FIND MORE INFORMATION
First Bancorp has filed with the SEC a Registration Statement on Form S-1
(File No. 333-68793) under the Securities Act of 1933 with respect to the common
stock offered in the conversion. This prospectus does not contain all the
information provided in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. You may read
and copy such information at the SEC's public reference room in Washington, D.C.
You can request copies of those documents, upon payment of a duplicating fee, by
writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. The Registration
Statement, including this prospectus and the exhibits, also is available through
the SEC's World Wide Web site on the Internet (http://www.sec.gov).
First Federal has filed with the OTS an Application for Approval of
Conversion, which includes proxy materials for First Federal's Special Meeting
and certain other information. This prospectus omits certain information
contained in such Application. The Application, including the proxy materials,
exhibits and certain other information that are a part thereof, may be
inspected, without charge, at the offices of the OTS, 1700 G Street, N.W.,
Washington, D.C. 20552 and at the office of the Regional Director of the OTS at
the Central Regional Office of the OTS, 200 West Madison Street, Suite 1300,
Chicago, IL 60606.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
First Federal Savings Bank and Subsidiary
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditor's Report..................................... F-1
Consolidated Balance Sheet as of September 30, 1998 (unaudited)
and June 30, 1998 and 1997...................................... F-2
Consolidated Statement of Income for the
Three Months Ended September 30, 1998 and 1997 (unaudited) and
the Years Ended June 30, 1998, 1997 and 1996.................... 29
Consolidated Statement of Equity Capital for the
Three Months Ended September 30, 1998 (unaudited) and
the Years Ended June 30, 1998, 1997 and 1996.................... F-3
Consolidated Statement of Cash Flows for the
Three Months Ended September 30, 1998 and 1997 (unaudited) and
the Years Ended June 30, 1998, 1997 and 1996.................... F-4
Notes to Consolidated Financial Statements....................... F-5
</TABLE>
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
Separate financial statements for First Bancorp have not been included in
this prospectus because First Bancorp, which has engaged in only organizational
activities to date, has no significant assets, liabilities (contingent or
otherwise), revenues or expenses.
105
<PAGE>
[LOGO OF OLIVE APPEARS HERE]
INDEPENDENT AUDITOR'S REPORT
Board of Directors
First Federal Savings Bank
Evansville, Indiana
We have audited the consolidated balance sheet of First Federal Savings Bank and
subsidiary as of June 30, 1998 and 1997, and the related consolidated statements
of income, changes in equity capital and cash flows for each of the three years
in the period ended June 30, 1998. These consolidated financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of First
Federal Savings Bank and subsidiary as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ Olive LLP
Evansville, Indiana
August 12, 1998, except for note 16,
as to which the date is September 16,
1998
(F-1)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30
-----------------------------
1998 1998 1997
- --------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 888,262 $ 926,974 $ 940,736
Interest-bearing demand deposits 12,665,601 10,442,095 6,797,436
Federal funds sold 420,000 320,000 25,000
------------------------------------------
Total cash and cash equivalents 13,973,863 11,689,069 7,763,172
Interest-bearing deposits 1,882,000 2,279,000 5,546,000
Investment securities
Available for sale 4,015,967 4,375,672 7,864,682
Held to maturity (fair value of
$48,304,000 (unaudited), $49,463,000
and $52,118,000) 47,987,499 49,363,642 52,469,675
------------------------------------------
Total investment securities 52,003,466 53,739,314 60,334,357
Loans, net of allowance for loan
losses of $250,000 38,183,162 35,655,003 32,164,336
Premises and equipment 1,513,210 1,520,311 888,861
Federal Home Loan Bank stock 727,400 727,400 727,400
Other assets 3,344,239 3,353,715 3,322,798
------------------------------------------
Total assets $111,627,340 $108,963,812 $110,746,924
==========================================
LIABILITIES
Deposits
Non-interest bearing $ 216,530 $ 197,161 $ 205,586
Interest bearing 90,744,364 89,031,871 88,354,630
------------------------------------------
Total deposits 90,960,894 89,229,032 88,560,216
Borrowings 3,645,000 3,645,000 7,050,000
Advances by borrowers for taxes and
insurance 560,660 355,841 333,770
Other liabilities 1,344,144 785,282 749,565
------------------------------------------
Total liabilities 96,510,698 94,015,155 96,693,551
------------------------------------------
COMMITMENTS AND CONTINGENCIES
EQUITY CAPITAL
Retained earnings--substantially
restricted 15,055,306 14,900,739 14,021,035
Accumulated other comprehensive
income 61,336 47,918 32,338
------------------------------------------
Total equity capital 15,116,642 14,948,657 14,053,373
------------------------------------------
Total liabilities and equity
capital $111,627,340 $108,963,812 $110,746,924
==========================================
</TABLE>
See notes to consolidated financial statements.
(F-2)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF EQUITY CAPITAL
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
EARNINGS INCOME TOTAL
--------------------------------------------------------
<S> <C> <C> <C>
BALANCES, JULY 1, 1995 $13,013,629 $(11,425) $13,002,204
Comprehensive income
Net income 620,046 620,046
Other comprehensive income, net of tax--
unrealized losses on securities (47,707) (47,707)
--------------------------------------------------------
Comprehensive income 620,046 (47,707) 572,339
--------------------------------------------------------
BALANCES, JUNE 30, 1996 13,633,675 (59,132) 13,574,543
Comprehensive income
Net income 387,360 387,360
Other comprehensive income, net of tax--
unrealized gains on securities 91,470 91,470
--------------------------------------------------------
Comprehensive income 387,360 91,470 478,830
--------------------------------------------------------
BALANCES, JUNE 30, 1997 14,021,035 32,338 14,053,373
Comprehensive income
Net income 879,704 879,704
Other comprehensive income, net of tax--
unrealized gains on securities 15,580 15,580
--------------------------------------------------------
Comprehensive income 879,704 15,580 895,284
--------------------------------------------------------
BALANCES, JUNE 30, 1998 14,900,739 47,918 14,948,657
Comprehensive income
Net income (unaudited) 154,567 154,567
Other comprehensive income, net of tax--
unrealized gains on securities (unaudited) 13,418 13,418
--------------------------------------------------------
Comprehensive income (unaudited) 154,567 13,418 167,985
--------------------------------------------------------
BALANCES, SEPTEMBER 30, 1998 (UNAUDITED) $15,055,306 $ 61,336 $15,116,642
========================================================
</TABLE>
See notes to consolidated financial statements.
(F-3)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED JUNE 30
-------------------------------------------------------------------
1998 1997 1998 1997 1996
-------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 154,567 $ 215,330 $ 879,704 $ 387,360 $ 620,046
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 100,000
Depreciation and amortization 27,319 10,260 96,349 51,180 67,188
Amortization of net loan origination fees (14,836) (11,985) (47,940) (28,412) 34,612
Deferred income tax (5,487) (9,780) (41,607) (54,752) (80,561)
Increase in cash surrender value of life insurance
in excess of premiums paid (23,548) (19,782) (87,234) (81,975) (83,364)
Investment securities amortization (accretion), net 1,057 (30,365) (146,994) (164,730) (341,136)
Loans originated for sale (1,361,000) (203,000) (1,844,000) (627,000) (543,000)
Proceeds from sale of loans 1,361,000 203,000 1,844,000 627,000 543,000
Gain on disposal of branch office and deposits (399,552)
Net change in
Interest receivable 12,295 81,850 84,555 (5,750) (227,246)
Interest payable and other liabilities 558,862 402,554 35,717 234,808 154,469
Prepaid expense and other assets 15,634 74,352 1,853 1,500 86,850
-------------------------------------------------------------------
Net cash provided by operating activities 725,863 712,434 374,851 339,229 330,858
-------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in interest-bearing deposits 397,000 (395,000) 3,267,000 2,477,000 (894,000)
Proceeds from maturities of securities available for sale 383,705 1,027,645 3,528,075 4,177,517 3,240,899
Purchases of securities held to maturity (8,000,000) (8,230,000) (38,641,921) (14,317,656) (21,987,259)
Proceeds from maturities of securities held to maturity 9,375,086 12,389,295 41,882,979 8,982,598 16,875,685
Net change in loans (2,513,323) 791,942 (3,442,727) 305,532 (84,413)
Purchases of premises and equipment (20,218) (608,260) (779,275) (4,066) (14,768)
Disposal of branch office and deposits (2,319,522)
-------------------------------------------------------------------
Net cash provided (used) by investing activities (377,750) 4,975,622 3,494,609 1,620,925 (2,863,856)
-------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in
Non-interest bearing, interest-bearing demand
and savings deposits 1,195,282 (687,698) 1,091,502 (1,932,818) (625,457)
Certificates of deposit 536,580 (1,187,852) 2,347,864 1,648,781 2,584,129
Advances by borrowers for taxes and insurance 204,819 189,128 22,071 (83,229) (8,652)
Repayment of long-term debt (3,405,000) (450,000) (500,000)
Proceeds from long-term debt 3,000,000
-------------------------------------------------------------------
Net cash provided (used) by financing activities 1,936,681 (1,686,422) 56,437 (817,266) 4,450,020
-------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,284,794 4,001,634 3,925,897 1,142,888 1,917,022
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,689,069 7,763,172 7,763,172 6,620.284 4,703,262
-------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $13,973,863 $11,764,806 $11,689,069 $ 7,763,172 $ 6,620,284
===================================================================
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 704,609 $ 841,656 $ 5,041,792 $ 4,586,705 $ 4,629,667
Income tax paid 16,298 85,200 492,900 247,200 234,574
</TABLE>
See notes to consolidated financial statements.
(F-4)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Federal Savings Bank (Bank) and
its wholly-owned subsidiary, FFSL Service Corporation, conform to generally
accepted accounting principles and reporting practices followed by the thrift
industry. The more significant of these policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent 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.
The Bank operates under a federal thrift charter and provides full banking
services. As a federally-chartered thrift, the Bank is subject to regulation by
the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.
The Bank generates mortgage and consumer loans and receives deposits from
customers located primarily in Vanderburgh County, Indiana, and surrounding
counties. The Bank's loans are generally secured by specific items of
collateral, including real property and consumer assets.
FFSL Service Corporation's only current activity is that it owns an equity
interest in a limited partnership that is organized to build, own and operate a
44-unit low-income apartment complex.
The accompanying consolidated balance sheet as of September 30, 1998 and the
consolidated statements of income, changes in equity capital and cash flows for
the three months ended September 30, 1998 and 1997 are unaudited and include the
accounts of the Bank and its subsidiary after elimination of all material
intercompany transactions. Management is of the opinion that all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the results of the periods reported, have been included in the accompanying
financial statements. The results of operations for the three months ended
September 30, 1998 are not necessarily indicative of those expected for the
remainder of the year.
CONSOLIDATION -- The consolidated financial statements include the accounts of
the Bank and subsidiary after elimination of all material intercompany
transactions and accounts.
INVESTMENT SECURITIES-- Debt securities are classified as held to maturity when
the Bank has the positive intent and ability to hold the securities to maturity.
Securities held to maturity are carried at amortized cost. Debt securities not
classified as held to maturity are classified as available for sale. Securities
available for sale are carried at fair value with unrealized gains and losses
reported separately in equity capital, net of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
(F-5)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
LOANS are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. The accrual of interest on impaired
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. This is generally ninety days after the
loan becomes past due. When interest accrual is discontinued, all unpaid accrued
interest is reversed when considered uncollectible. Interest income is
subsequently recognized only to the extent cash payments are received. Certain
loan fees and direct costs are being deferred and amortized as an adjustment of
yield on the loans over the contractual life of those loans.
ALLOWANCE FOR LOAN LOSSES is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
outstanding and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that, as of
September 30, 1998 (unaudited), the allowance for loan losses is adequate based
on information currently available. A worsening or protracted economic decline
in the area within which the Bank operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based on the estimated
useful lives of the assets, which range from 5 to 50 years. Maintenance and
repairs are expensed as incurred while major additions and improvements are
capitalized. Gains and losses on dispositions are included in current
operations.
FEDERAL HOME LOAN BANK (FHLB) STOCK is a required investment for institutions
that are members of the FHLB system. The required investment in the common stock
is based on a predetermined formula.
INVESTMENT IN LIMITED PARTNERSHIP is included in other assets and is recorded
using the equity method of accounting. Losses due to impairment are recorded
when it is determined that the investment no longer has the ability to recover
its carrying amount. The benefits of low-income housing tax credits associated
with the investment are accrued when earned.
INCOME TAX in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Bank
files consolidated income tax returns with its subsidiary.
(F-6)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 2 -- INVESTMENT SECURITIES
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------------
<S> <C> <C> <C> <C>
AT SEPTEMBER 30, 1998 (UNAUDITED)
Available for sale
Mortgage-backed securities $ 3,908 $108 $ 4,016
--------------------------- ---------
Held to maturity
Federal agencies 8,235 66 8,301
Collateralized auto obligations 1,008 1 1,009
Corporate obligations 2,944 24 $ 1 2,967
Mortgage-backed securities 32,819 289 63 33,045
Commercial paper 2,981 1 2,982
------------------------------------------------------
Total held to maturity 47,987 381 64 48,304
------------------------------------------------------
Total investment securities $51,895 $489 $ 64 $52,320
======================================================
AT JUNE 30, 1998
Available for sale
Mortgage-backed securities $ 4,292 $ 84 $ 4,376
--------------------------- ---------
Held to maturity
Federal agencies 10,232 32 10,264
Collateralized auto obligations 1,009 $ 2 1,007
Corporate obligations 2,956 3 2 2,957
Mortgage-backed securities 31,169 220 151 31,238
Commercial paper 3,998 1 3,997
------------------------------------------------------
Total held to maturity 49,364 255 156 49,463
------------------------------------------------------
Total investment securities $53,656 $339 $156 $53,839
======================================================
AT JUNE 30, 1997
Available for sale
Mortgage-backed securities $ 7,808 $ 76 $ 20 $ 7,864
------------------------------------------------------
Held to maturity
Federal agencies 16,201 22 219 16,004
Collateralized auto obligations 249 249
Mortgage-backed securities 33,530 189 345 33,374
Commercial paper 2,490 1 2,491
------------------------------------------------------
Total held to maturity 52,470 212 564 52,118
------------------------------------------------------
Total investment securities $60,278 $288 $584 $59,982
======================================================
</TABLE>
All mortgage backed securities owned by the Bank at September 30, 1998 and
June 30, 1998 and 1997 are government agency backed by the Federal Home Loan
Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) or
Government National Mortgage Association (GNMA), with the exception of one
$2,000,000 security that was held in the "held to maturity" category at
September 30, 1998.
(F-7)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The amortized cost and fair market value of securities held to maturity and
available for sale at September 30, 1998 (unaudited) and June 30, 1998, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
----------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998 (UNAUDITED)
Within one year $ 5,179 $ 5,186
One to five years 5,951 5,988
Five to ten years 3,040 3,078
After ten years 998 1,007
-------------------
15,168 15,259
Mortgage-backed securities 32,819 33,045 $3,908 $4,016
---------------------------------------------
Totals $47,987 $48,304 $3,908 $4,016
=============================================
JUNE 30,1998
Within one year $ 6,194 $ 6,203
One to five years 5,963 5,964
Five to ten years 4,040 4,059
After ten years 1,998 1,999
-------------------
18,195 18,225
Mortgage-backed securities 31,169 31,238 $4,292 $4,376
---------------------------------------------
Totals $49,364 $49,463 $4,292 $4,376
=============================================
</TABLE>
Securities with a carrying value of $6,787,000 and $7,322,000 were pledged at
September 30, 1998 (unaudited) and June 30, 1998 to secure FHLB advances and
certain other funds advanced to the Bank as part of the Community Reinvestment
Act.
On December 31, 1995, the Bank transferred certain securities from held to
maturity to available for sale in accordance with a transition reclassification
allowed by the Financial Accounting Standards Board. Such securities had a
carrying value of $10,422,468 and a fair value of $10,469,217.
(F-8)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 3 -- LOANS AND ALLOWANCE
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30
---------------------
1998 1998 1997
-------------------------------------
(Unaudited)
<S> <C> <C> <C>
Real estate mortgages
One to four family $36,745 $33,493 $31,106
Other 1,197 1,668 230
Credit line equity loans 997 937 1,047
Loans to depositors secured by savings 146 226 131
Consumer loans 542 501 424
-------------------------------------
39,627 36,825 32,938
-------------------------------------
Undisbursed portion of loans (958) (700) (349)
Deferred loan fees (236) (220) (175)
Allowance for loan losses (250) (250) (250)
-------------------------------------
(1,444) (1,170) (774)
-------------------------------------
$38,183 $35,655 $32,164
=====================================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED JUNE 30
---------------------------------------------------------------------
1998 1997 1998 1997 1996
---------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses
Balances, beginning of period $250 $250 $250 $250 $150
Provision for losses 100
---------------------------------------------------------------------
Balances, end of period $250 $250 $250 $250 $250
=====================================================================
</TABLE>
The Bank has not had any impaired loans during the three years ended June 30,
1998, 1997 and 1996 or the three months ended September 30, 1998 (unaudited).
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The unpaid balances of these loans were $9,055,000
and $7,198,000 at September 30, 1998 and 1997 (unaudited) and $7,994,000,
$7,276,000 and $7,712,000 at June 30, 1998, 1997 and 1996.
(F-9)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 4 -- PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30
-----------------------
1998 1998 1997
---------------------------------------
(Unaudited)
<S> <C> <C> <C>
Land $ 639 $ 639 $ 515
Buildings 1,840 1,840 1,669
Equipment 858 838 787
---------------------------------------
Total cost 3,337 3,317 2,971
Accumulated depreciation (1,824) (1,797) (2,082)
---------------------------------------
Net $ 1,513 $ 1,520 $ 889
=======================================
</TABLE>
In October 1997, the Bank sold the real estate, equipment and deposit accounts
of its Mr. Vernon, Indiana branch in exchange for cash. Gains on the disposal of
real estate and equipment of $261,000 and on the disposal of deposits of
$139,000 are included in other income for 1998. Approximately $2,800,000 of
deposits were sold at a 5% premium.
(F-10)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 5 -- OTHER ASSETS AND OTHER LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30
----------------------
1998 1998 1997
-------------------------------------
(Unaudited)
<S> <C> <C> <C>
Other assets
Interest receivable
Investment securities $ 490 $ 502 $ 620
Loans 181 181 148
Cash value of insurance 2,084 2,061 1,973
Investment in limited partnership 268 277 330
Net deferred tax asset 142 148 117
Prepaid expenses and other 179 185 135
-------------------------------------
Total $3,344 $3,354 $3,323
=====================================
Other liabilities
Interest payable
Deposits $ 613 $ 144 $ 239
Other borrowings 114 103 73
Deferred directors' fees and officer compensation 405 382 296
Accrued expenses 212 156 142
-------------------------------------
Total $1,344 $ 785 $ 750
=====================================
</TABLE>
The investment in limited partnership of $268,000, $277,000 and $330,000 at
September 30, 1998 (unaudited) and June 30, 1998 and 1997 represents a 40
percent equity interest in Vann Park II, L.P., a limited partnership organized
to build, own and operate a 44-unit apartment complex. In addition to recording
its equity in the losses of $53,000, $32,000 and $82,000, the Bank has recorded
the benefit of low-income housing tax credits of $73,000 for each of the years
ended June 30, 1998, 1997 and 1996. For each of the three-month periods ended
September 30, 1998 and 1997 (unaudited), the Bank recorded equity in the losses
of the partnership of $9,000, as well as the benefit of low-income housing tax
credits of $18,250.
(F-11)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 6 -- DEPOSITS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30
-----------------------
1998 1998 1997
--------------------------------------
(Unaudited)
<S> <C> <C> <C>
Demand deposits $11,866 $10,624 $ 8,910
Savings deposits 10,359 10,406 11,731
Certificates and other time deposits of $100,000 or more 7,278 6,782 6,865
Other certificates and time deposits 61,458 61,417 61,054
--------------------------------------
Total deposits $90,961 $89,229 $88,560
======================================
</TABLE>
Certificates maturing in years ending:
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
- -------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
1999 $37,547 $35,702
2000 24,939 25,369
2001 3,754 4,423
2002 1,453 1,141
2003 583 1,011
Thereafter 460 553
--------------------------
$68,736 $68,199
==========================
</TABLE>
Interest expense on deposits:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED JUNE 30
------------------------------------------------------
1998 1997 1998 1997 1996
------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest-bearing demand $ 19 $ 23 $ 85 $ 103 $ 113
Money market savings deposits 71 27 115 117 138
Savings deposits 70 84 295 352 398
Certificates 960 944 4,089 3,730 3,643
------------------------------------------------------
$ 1,120 $ 1,078 $ 4,584 $ 4,302 $ 4,292
======================================================
</TABLE>
Deposits in excess of $100,000 are not federally insured.
(F-12)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 7 -- BORROWINGS
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
---------------------------
1998 1998 1997
-----------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Federal Home Loan Bank advances
Variable rate, 5.5% at September 30, 1998
(unaudited), due in March 1999 $3,645 $3,645 $4,050
Fixed rate, 5.9%, paid February 1998 3,000
-----------------------------------------------
$3,645 $3,645 $7,050
===============================================
</TABLE>
NOTE 8 -- INCOME TAX
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED JUNE 30
-------------------------------------------------------------
1998 1997 1998 1997 1996
-------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Income tax
Currently payable
Federal $45 $ 87 $ 332 $ 141 $ 179
State 21 31 125 25 101
Deferred
Federal (4) (7) (32) (45) (68)
State (1) (3) (10) (9) (13)
-------------------------------------------------------------
Total income tax expense $61 $108 $ 415 $ 112 $ 199
=============================================================
Reconciliation of federal statutory
to actual tax expense
Federal statutory income tax at 34% $73 $110 $ 440 $ 170 $ 278
State income taxes, net of federal benefit 13 19 76 11 58
Cash surrender value of life insurance (7) (7) (30) (28) (28)
Tax credits (18) (18) (73) (73) (73)
Other 4 2 32 (36)
-------------------------------------------------------------
Actual tax expense $61 $108 $ 415 $ 112 $ 199
=============================================================
Effective rate 28% 33% 32% 23% 24%
=============================================================
</TABLE>
(F-13)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30
----------------------------
1998 1998 1997
-------------------------------------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Differences in accounting for loan losses $ 90 $ 91 $ 90
Differences in accounting for loan fees 35 37 48
Deferred compensation and directors fees 198 188 139
Other 5 5 2
-------------------------------------------
Total assets 328 321 279
-------------------------------------------
LIABILITIES
Differences in depreciation methods (83) (83) (79)
Federal Home Loan Bank dividends (55) (55) (55)
Other (2)
Accretion of investment discounts (4)
Unrealized gain on securities available for sale (46) (35) (24)
-------------------------------------------
Total liabilities (186) (173) (162)
-------------------------------------------
$ 142 $ 148 $ 117
-------------------------------------------
</TABLE>
A valuation allowance was not considered necessary at September 30, 1998
(unaudited) and June 30, 1998 and 1997.
Retained earnings at September 30, 1998 (unaudited) and June 30, 1998 include
approximately $4,102,000, for which no deferred income tax liability has been
recognized. This amount represents an allocation of income to bad debt
deductions for tax purposes only. Reduction of amounts so allocated for purposes
other than tax bad debt losses or adjustments arising from carryback of net
operating losses would create income for tax purposes only, which income would
be subject to the then-current corporate income tax rate. The unrecorded
deferred income tax liability on the above amount at September 30, 1998
(unaudited) and June 30, 1998 was approximately $1,395,000.
NOTE 9 -- COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities, such as guarantees and commitments to extend credit
which are not included in the accompanying consolidated financial statements.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The Bank
uses the same credit policies in making such commitments as it does for
instruments that are included in the consolidated balance sheet.
(F-14)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
Commitments to extend credit, which represent financial instruments whose
contract amount represents credit risk, were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30
---------------------------------------
1998 1998 1997
--------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Loan commitments
At variable rates $2,308 $2,108 $1,855
At fixed rates ranging from
6.75% to 7.25% 793
6.75% to 7.25% 710
8.25% to 9.25% 176
--------------------------------------------------------
$3,101 $2,818 $2,031
========================================================
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies, but may include residential real estate,
income-producing commercial properties or other assets of the borrower.
The Bank and subsidiary are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate determination of such possible claims or
lawsuits will not have a material adverse effect on the consolidated financial
position of the Bank.
NOTE 10 -- REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by three ratios that are calculated
according to the regulations: total risk adjusted capital, Tier 1 capital, and
Tier 1 leverage ratios. The ratios are intended to measure capital relative to
assets and credit risk associated with those assets and off-balance sheet
exposures of the entity. The capital category assigned to an entity can also be
affected by qualitative judgments made by regulatory agencies about the risk
inherent in the entity's activities that are not part of the calculated ratios.
(F-15)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At September 30, 1998 (unaudited)
and June 30, 1998 and 1997, the Bank is categorized as well capitalized and met
all subject capital adequacy requirements. There are no conditions or events
since September 30, 1998 (unaudited) that management believes have changed the
Bank's classification.
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL* CAPITALIZED*
---------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
Total risk-based capital* (to risk-
weighted assets) $15,306 34.88% $3,511 8.00% $4,389 10.00%
Core capital* (to adjusted tangible
assets) 15,056 13.47 4,470 4.00 6,705 6.00
Core capital* (to adjusted total assets) 15,056 13.47 4,472 4.00 5,591 5.00
AS OF JUNE 30, 1998
Total risk-based capital* (to risk-
weighted assets) $15,151 34.7% $3,488 8.00% $4,361 10.00%
Core capital* (to adjusted tangible
assets) 14,901 13.6 4,383 4.00 6,575 6.00
Core capital* (to adjusted total assets) 14,901 13.6 4,385 4.00 5,482 5.00
AS OF JUNE 30, 1997
Total risk-based capital* (to risk-
weighted assets) $14,271 37.3% $3,057 8.00% $3,821 10.00%
Core capital* (to adjusted tangible
assets) 14,021 12.6 4,443 4.00 6,664 6.00
Core capital* (to adjusted total assets) 14,021 12.6 4,444 4.00 5,555 5.00
</TABLE>
*As defined by regulatory agencies
The Bank's tangible capital at September 30, 1998 (unaudited) and June 30, 1998
was $15,056,000 and $14,901,000, which amount was 13.5% and 13.6% of tangible
assets and exceeded the required ratio of 1.5%.
(F-16)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
Reconciliation of capital for financial statement purposes to regulatory capital
was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 (UNAUDITED)
-----------------------------------------------------
CORE TANGIBLE RISK-BASED
CAPITAL CAPITAL CAPITAL
-----------------------------------------------------
<S> <C> <C> <C>
Capital for financial statement purposes $15,117 $15,117 $15,117
Unrealized gain on securities available for sale (61) (61) (61)
General loan valuation allowance 250
-----------------------------------------------------
Regulatory capital $15,056 $15,056 $15,306
=====================================================
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
--------------------------------------------------------------------------------
RISK- RISK-
CORE TANGIBLE BASED CORE TANGIBLE BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Capital for financial statement purposes $14,949 $14,949 $14,949 $14,053 $14,053 $14,053
Unrealized gain on securities available
for sale (48) (48) (48) (32) (32) (32)
General loan valuation allowance 250 250
--------------------------------------------------------------------------------
Regulatory capital $14,901 $14,901 $15,151 $14,021 $14,021 $14,271
================================================================================
</TABLE>
NOTE 11 -- PENSION AND EMPLOYEE BENEFIT PLANS
The Bank is a participant in a pension fund known as the Financial Institutions
Retirement Fund (FIRF). This plan is a multi-employer plan; separate actuarial
valuations are not made with respect to each participating employer. According
to FIRF administrators, the market value of the fund's assets exceeded the value
of vested benefits in the aggregate as of June 30, 1998, the date of the latest
actuarial valuation. Pension expense was $200 and $1,400 for the three months
ended September 30, 1998 and 1997 (unaudited) and $1,700, $8,500 and $35,300 for
the years ended June 30, 1998, 1997 and 1996. This plan provides pension
benefits for substantially all of the Bank's employees.
The Bank has a retirement savings Section 401(k) plan in which substantially all
employees may participate. The Bank matches employees' contributions at the rate
of 50% of the first 6% of base salary contributed by participants. The Bank's
expense for the plan was $4,900 for each of the quarters ended September 30,
1998 and 1997 (unaudited) and $30,000, $23,700 and $23,300 for the years ended
June 30, 1998, 1997 and 1996.
(F-17)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The Bank also has a supplemental retirement plan and deferred compensation
arrangements for the benefit of certain officers. These arrangements are funded
by life insurance contracts which have been purchased by the Bank. The Bank's
expense for the plan was $9,700 and $8,600 for each of the quarters ended
September 30, 1998 and 1997 (unaudited) and $36,300, $32,100 and $27,700 for the
years ended June 30, 1998, 1997 and 1996. The Bank also established deferred
compensation arrangements with certain directors whereby, in lieu of currently
receiving fees, the directors or their beneficiaries will be paid benefits for
an established period following the director's retirement or death. These
arrangements are also funded by life insurance contracts which have been
purchased by the Bank.
NOTE 12 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS--The fair value of cash and cash equivalents
approximates carrying value.
INTEREST-BEARING DEPOSITS--The fair value of interest-bearing time deposits
approximates carrying value.
INVESTMENT SECURITIES--Fair values are based on quoted market prices.
LOANS--For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair values for certain mortgage loans, including one-to-four family
residential, are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in loan
characteristics. The fair value for other loans, are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
INTEREST RECEIVABLE/PAYABLE--The fair values of interest receivable/payable
approximate carrying values.
FHLB STOCK--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
CASH SURRENDER VALUE OF LIFE INSURANCE--The fair values of cash surrender values
of life insurance approximate carrying values.
DEPOSITS--The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. The carrying amounts for variable rate, fixed-term certificates of deposit
approximate their fair values at the balance sheet date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on such time deposits.
LONG-TERM DEBT--The fair value of these borrowings are estimated using a
discounted cash flow calculation, based on current rates for similar debt. Fair
value approximates carrying value.
(F-18)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
OFF-BALANCE SHEET COMMITMENTS--Commitments include commitments to purchase and
originate mortgage loans and commitments to sell mortgage loans and are
generally of a short-term nature. The fair value of such commitments are based
on fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the counterparties' credit standing.
The carrying amounts of these commitments, which are immaterial, are reasonable
estimates of the fair value of these financial instruments.
The estimated fair values of the Bank's financial instruments are as follows;
<TABLE>
<CAPTION>
JUNE 30
---------------------------------------------------
SEPTEMBER 30, 1998 1998 1997
-------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
--------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $13,974 $13,974 $11,689 $11,689 $ 7,763 $ 7,763
Interest-bearing deposits 1,882 1,882 2,279 2,279 5,546 5,546
Investment securities available for sale 4,016 4,016 4,376 4,376 7,864 7,864
Investment securities held to maturity 47,987 48,304 49,364 49,463 52,470 52,118
Loans, net 38,183 39,909 35,655 35,931 32,164 31,269
Interest receivable 671 671 683 683 768 768
FHLB stock 727 727 727 727 727 727
Cash surrender value of life insurance 2,084 2,084 2,061 2,061 1,973 1,973
LIABILITIES
Deposits 90,961 92,102 89,229 89,556 88,560 88,424
Long-term debt 3,645 3,645 3,645 3,645 7,050 7,050
Interest payable 727 727 247 247 312 312
</TABLE>
Note 13 -- OTHER COMPREHENSIVE INCOME--UNREALIZED GAINS (LOSSES) ON SECURITIES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30
---------------------------------------------------------
1998 1998 1997 1996
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Before tax amount $24 $27 $158 $(83)
Tax (expense) benefit (11) (11) (67) 35
-------------------------------------------------------------------------
Net-of-tax amount--other
comprehensive income $13 $16 $91 $(48)
=========================================================================
</TABLE>
(F-19)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 14--RELATED PARTY TRANSACTIONS
Deposits from related parties held by the Bank at September 30, 1998 (unaudited)
and June 30, 1998 and 1997, totaled $756,000, $855,900 and $767,500.
NOTE 15--YEAR 2000
Like all entities, the Bank and its subsidiary are exposed to risks associated
with the Year 2000 issue, which affects computer software and hardware;
transactions with customers, vendors and other entities, and equipment dependent
upon microchips. The Bank has begun, but has not yet completed, the process of
identifying and remediating potential Year 2000 problems. It is not possible for
any entity to guarantee the results of its own remediation efforts or to
accurately predict the impact of the Year 2000 issue on third parties with which
the Bank and its subsidiary do business. If remediation efforts of the Bank or
third parties with which the Bank and its subsidiary do business are not
successful, the Year 2000 issue could have negative effects on the Bank's
financial condition and results of operations in the near term.
NOTE 16--SUBSEQUENT EVENT--PLAN OF CONVERSION
On September 16, 1998, the Board of Directors adopted a plan of conversion
(Plan) whereby the Bank will convert from a federally chartered mutual
institution to a federally chartered stock savings bank. The Plan is subject to
approval of regulatory authorities and members at a special meeting. The stock
of the Bank will be issued to First Bancorp of Indiana, Inc. (First), a holding
company formed in connection with the conversion, and the Bank will become a
wholly-owned subsidiary of First. Pursuant to the Plan, shares of capital stock
of First are expected to be offered initially for subscription to eligible
members of the Bank and certain other persons as of specified dates subject to
various subscription priorities as provided in the Plan. The capital stock will
be offered at a price to be determined by the Board of Directors based upon an
appraisal to be made by an independent appraisal firm. The exact number of
shares to be offered will be determined by the Board of Directors in conjunction
with the determination of the subscription price. At least the minimum number of
shares offered in the conversion must be sold. Any stock not purchased in the
subscription offering may be sold in a community offering expected to be held
concurrently with the subscription offering.
(F-20)
<PAGE>
FIRST FEDERAL SAVINGS BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The Plan provides that when the conversion is completed, a "liquidation account"
will be established in an amount equal to the retained income of the Bank as of
the date of the most recent financial statements contained in the final
conversion prospectus. The liquidation account is established to provide a
limited priority claim to the assets of the Bank to qualifying depositors
(eligible account holders) at September 30, 1998 and other depositors
(supplemental eligible account holders) as of December 31, 1998 who continue to
maintain deposits in the Bank after conversion. In the unlikely event of a
complete liquidation of the Bank, and only in such event, eligible account
holders would receive from the liquidation account a liquidation distribution
based on their proportionate share of the then total remaining qualifying
deposits.
Certain regulations allow the Bank to pay dividends on its stock after the
conversion if its regulatory capital would not thereby be reduced below the
amount then required for the aforementioned liquidation account. Also, capital
distribution regulations limit the Bank's ability to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt and other transactions charged to
the capital account based on its capital level and supervisory condition.
Costs of conversion will be netted from proceeds of sale of common stock and
recorded as a reduction of additional paid-in capital or common stock. If the
conversion is not completed, such costs, totaling $48,000 at September 30, 1998
(unaudited), would be charged to expense.
(F-21)
<PAGE>
You should rely only on the information contained in this document. Neither
First Bancorp of Indiana, Inc. nor First Federal Savings Bank have authorized
anyone to provide you with information that is different. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person or in any jurisdiction in which such
offer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this prospectus nor any sale hereunder shall under any circumstances
create any implication that there has been no change in the affairs of First
Bancorp of Indiana, Inc. or First Federal Savings Bank since any of the dates as
of which information is furnished herein or since the date hereof.
First Bancorp of Indiana, Inc.
(Proposed Holding Company for
First Federal Savings Bank)
2,185,000 Shares of
Common Stock
----------------
Prospectus
----------------
Capital Resources, Inc.
February 11, 1999
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL THE LATER OF MARCH 16, 1999, OR 25 DAYS AFTER COMMENCEMENT OF THE
SYNDICATED COMMUNITY OFFERING OF COMMON STOCK, IF ANY, ALL DEALERS THAT EFFECT
TRANSACTIONS IN THESE SECURITIES MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
