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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 0-29814
FIRST BANCORP OF INDIANA, INC.
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(Exact name of registrant as specified in its charter)
Indiana 35-2061832
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2200 West Franklin Street, Evansville, Indiana 47712
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(Address of principal executive offices) (Zip Code)
(812) 423-3196
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changes since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
-
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,272,400 shares of common
stock, par value $0.01 per share, were outstanding as of November 1, 1999.
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FIRST BANCORP OF INDIANA, INC. AND SUBSIDIARY
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I Financial Information
Item 1. Consolidated Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk 10
Part II Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
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FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 1,763,805 $ 1,105,134
Interest-bearing demand deposits 5,830,155 15,567,989
Federal funds sold 930,000 25,000
-------------------------- -------------------------
Total cash and cash equivalents 8,523,960 16,698,123
Interest-bearing deposits 1,683,000 2,079,000
Investment securities
Available for sale 2,213,097 2,972,581
Held to maturity 45,055,599 40,003,256
-------------------------- -------------------------
Total investment securities 47,268,696 42,975,837
Loans 59,442,647 56,582,900
Allowance for loan losses (309,610) (274,000)
-------------------------- -------------------------
Net loans 59,133,037 56,308,900
Premises and equipment 1,492,861 1,508,570
Federal Home Loan Bank stock 727,400 727,400
Other assets 4,420,028 4,502,175
-------------------------- -------------------------
Total assets $ 123,248,982 $ 124,800,005
========================== =========================
Liabilities
Deposits
Non-interest bearing $ 414,837 $ 419,865
Interest bearing 84,711,564 86,302,246
-------------------------- -------------------------
Total deposits 85,126,401 86,722,111
Advances by borrowers for
taxes and insurance 540,457 381,226
Other liabilities 1,684,461 1,168,668
-------------------------- -------------------------
Total liabilities 87,351,319 88,272,005
-------------------------- -------------------------
Stockholders' Equity
Preferred stock, $.01 par value
Authorized and unissued - 1,000,000 shares
Common stock, $.01 par value
Authorized - 9,000,000 shares
Issued and outstanding - 2,272,400 shares 22,724 22,724
Additional paid-in capital 21,851,851 21,831,518
Retained earnings 15,763,659 15,473,935
Accumulated other comprehensive income 14,556 25,263
-------------------------- -------------------------
37,652,790 37,353,440
Less:
Unallocated employee stock ownership plan shares (1,755,127) (825,440)
-------------------------- -------------------------
Total stockholders' equity 35,897,663 36,528,000
-------------------------- -------------------------
Total liabilities and stockholders' equity $ 123,248,982 $ 124,800,005
========================== =========================
</TABLE>
See notes to unaudited consolidated financial statements
1
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FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Consolidated Statement of Income
<TABLE>
<CAPTION>
For the
Three Months Ended
September 30,
-------------------------------
1999 1998
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(Unaudited)
<S> <C> <C>
Interest Income
Loans receivable $ 1,150,982 $ 744,657
Investment securities 708,325 829,673
Deposits with financial institutions 152,481 231,809
Federal funds sold 9,077 10,302
Other interest and dividend income 19,581 14,722
------------- -------------
Total interest income 2,040,446 1,831,163
------------- -------------
Interest Expense
Deposits 1,001,501 1,119,852
Borrowings 0 52,865
Other 14,417 11,892
------------- -------------
Total interest expense 1,015,918 1,184,609
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Net Interest Income 1,024,528 646,554
------------- -------------
Provision for Loan Losses 45,000 0
------------- -------------
Net Interest Income after Provision 979,528 646,554
Noninterest Income
Increase in cash surrender values
of life insurance 24,048 23,334
Other Income 195,768 51,398
------------- -------------
Total other income 219,816 74,732
------------- -------------
Noninterest Expense
Salaries and employee benefits 410,916 280,869
Net occupancy expense 44,723 43,627
Equipment expense 44,612 28,233
Deposit insurance expense 16,253 14,699
Data processing fees 30,700 25,672
Other expense 215,129 112,843
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Total other expense 762,333 505,943
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Income Before Income Tax 437,011 215,343
Income tax expense 147,287 60,776
------------- -------------
Net Income $ 289,724 $ 154,567
============= =============
Basic earnings per share $ 0.14 N/A
Diluted earnings per share $ 0.14 N/A
Weighted average number of shares outstanding - Basic 2,130,257 0
Weighted average number of shares outstanding - Diluted 2,130,257 0
</TABLE>
See notes to unaudited consolidated financial statements
2
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FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Consolidated Statement of Changes in Equity Capital
<TABLE>
<CAPTION>
Common Stock Additional
-----------------------
Shares Paid-in Comprehensive Retained
Outstanding Amount Capital Income Earnings
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<S> <C> <C> <C> <C> <C>
Balances, June 30, 1999 2,272,400 $22,724 $21,831,518 $15,473,935
Net income $ 289,724 289,724
Other comprehensive income,
net of tax--Unrealized losses on
securities (unaudited) (10,707)
---------------
Comprehensive income (unaudited) $ 279,017
===============
Employee Stock Ownership Plan
shares allocated (483)
Purchase ESOP Shares
Refunded Conversion Expenses 20,816
----------------------------------------- -----------
Balances, September 30, 1999 (unaudited) 2,272,400 $22,724 $21,851,851 $15,763,659
========================================= ===========
<CAPTION>
Accumulated
Other Unallocated
Comprehensive ESOP
Income Shares Total
--------------------------------------------
<S> <C> <C> <C>
Balances, June 30, 1999 $ 25,263 ($825,440) $38,528,000
Net income 289,724
Other comprehensive income,
net of tax--Unrealized losses on
securities (unaudited) (10,707) (10,707)
Comprehensive income (unaudited)
Employee Stock Ownership Plan
shares allocated 50,724 50,241
Purchase ESOP Shares (980,411) (980,411)
Refunded Conversion Expenses 20,816
--------------------------------------------
Balances, September 30, 1999 (unaudited) $ 14,556 ($1,755,127) $35,897,663
============================================
</TABLE>
See notes to unaudited consolidated financial statements
3
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FIRST BANCORP OF INDIANA
AND SUBSIDIARY
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------------------
1999 1998
------------------ -------------------
(Unaudited)
<S> <C> <C>
Net Cash Provided (Used) by Operating Activities $ 1,040,175 $ 725,863
Investing Activities
Net change in interest-bearing deposits 396,000 397,000
Proceeds from maturities of securities available for sale 742,189 383,705
Purchases of securities held to maturity (10,273,981) (8,000,000)
Proceeds from maturities of securities held to maturity 5,198,525 9,375,086
Net change in loans (2,869,137) (2,513,323)
Purchases of premises and equipment (11,860) (20,218)
------------------ -------------------
Net cash used by investing activities (6,818,264) (377,750)
------------------ -------------------
Financing Activities
Net change in
Non-interest bearing, interest-bearing demand
and savings deposits 260,835 1,195,282
Certificates of deposit (1,856,545) 536,580
Advances by borrows for taxes and insurance 159,231 204,819
Refunded conversion expenses 20,816
Purchase of ESOP Shares (980,411)
------------------ -------------------
Net cash provided (used) by financing activities (2,396,074) 1,936,681
------------------ -------------------
Net Change in Cash and Cash Equivalents (8,174,163) 2,284,794
Cash and Cash Equivalents, Beginning of Period 16,698,123 11,689,069
------------------ -------------------
Cash and Cash Equivalents, End of Period $ 8,523,960 $ 13,973,863
================== ===================
Additional Cash Flow Information
Interest paid $ 590,120 $ 704,609
Income tax paid 135,858 16,298
</TABLE>
See notes to unaudited consolidated financial statements
4
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FIRST BANCORP OF INDIANA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of First Bancorp of
Indiana, Inc. (the "Company") have been prepared in accordance with instructions
to Form 10-Q. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, such information reflects all adjustments
(consisting solely of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the interim period.
The results of operations for the three months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the year ending June
30, 2000. The consolidated financial statements and notes thereto should be read
in conjunction with the audited consolidated financial statements and notes
thereto for the year ended June 30, 1999, contained in the Company's annual
report to shareholders.
2. CONVERSION TO STOCK FORM OF OWNERSHIP
On September 16, 1998, the Board of Directors of First Federal Savings Bank
(the "Bank") adopted a Plan of Conversion to convert from a federally chartered
mutual savings bank to a federally chartered capital stock savings bank. The
conversion was accomplished through the formation of the Company in November
1998, the adoption of a federal stock charter, the sale of all of the Bank's
stock to the Company on April 7, 1999 and the sale of the Company's stock to the
public on April 7, 1999.
In connection with the conversion, the Company issued 2,272,400 shares of
common stock for gross proceeds of $22.7 million. The aggregate purchase price
was determined by an independent appraisal. The Bank issued all its outstanding
capital stock to the Company in exchange for one-half of the net proceeds of the
offering. The Company accounted for the purchase in a manner similar to a
pooling of interests whereby assets and liabilities of the Bank maintain their
historical cost basis in the consolidated company.
3. EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the conversion, the Bank also established an Employee Stock
Ownership Plan ("ESOP") for the benefit of its employees. The Company issued
87,400 shares of common stock to the ESOP in exchange for a 12 year note in the
amount of approximately $874,000. The Bank will make contributions in the amount
necessary, when combined with any dividends earned by the ESOP on unallocated
shares, to make quarterly payments of principal and interest on the note. As
payments are made, the Company will release shares from collateral. Released
shares will be allocated to participants over the term of the note.
During the quarter ended September 30, 1999, the ESOP acquired an additional
94,392 shares of the Company's common stock in the open market. When combined
with the shares previously purchased by the ESOP in the Company's initial public
offering, the ESOP owns 8% of the Company's outstanding shares. The $980,411 for
the ESOP purchase was borrowed from the Company and added to the existing 12
year note.
5
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
federal securities laws. These statements are not historical facts, rather they
are statements based on the Company's current expectations regarding its
business strategies and their intended results and its future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends," and similar expressions. Forward-looking statements
are not guarantees of future performance. Numerous risks and uncertainties could
cause or contribute to the Company's actual results, performance, and
achievements to be materially different from those expressed or implied by the
forward-looking statements. Factors that may cause or contribute to these
differences include, without limitation, general economic conditions, including
changes in market interest rates and changes in monetary and fiscal policies of
the federal government; legislative and regulatory changes; the Company's
ability to remedy any computer malfunctions that may result from the advent of
year 2000; and other factors disclosed periodically in the Company's filings
with the Securities and Exchange Commission. Because of the risks and
uncertainties inherent in forward-looking statements, readers are cautioned not
to place undue reliance on them, whether included in this report or made
elsewhere from time to time by the Company or on its behalf. The Company assumes
no obligation to update any forward-looking statements.
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the unaudited consolidated financial
statements and accompanying notes thereto.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND JUNE 30, 1999
Total consolidated assets of the Company decreased $1.6 million from $124.8
million at June 30, 1999 to $123.2 million at September 30, 1999. This was
primarily the result of using cash to fund deposit withdrawals.
Cash and cash equivalents, which are primarily comprised of demand deposits at
the Federal Home Loan Bank of Indianapolis (FHLB), decreased by $8.2 million
from $16.7 million at June 30, 1999 to $8.5 million at September 30, 1999. This
decline was the result of management shifting funds to both the loan and
investment security portfolios as well as using a portion of its most liquid
assets to fund the slight decline in customer deposits.
Investment securities increased $4.3 million from $43.0 million at June 30,
1999 to $47.3 million at September 30, 1999. This growth was the result of the
Bank reinvesting a portion of its interest bearing demand deposits into higher
yielding investment securities.
Net loans grew $2.8 million from $56.3 million at June 30, 1999 to $59.1
million at September 30, 1999. This increase is primarily attributable to a
$2.4 million increase in consumer loans. The Bank has always been a strong
mortgage lender and continues to expand its consumer lending operation. During
the quarter, the Bank originated $13.0 million of indirect automobile loans of
which it retained $3.7 million for its own portfolio. It is management's intent
to sell 60%-80% of indirect automobile loan production and retain the remainder
in the Company's own portfolio.
6
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The allowance for loan losses increased from $274,000 at June 30, 1999 to
$310,000 at September 30, 1999. The ratios of the Company's allowance for loan
losses to total loans were 0.52% and 0.48% at September 30, 1999 and June 30,
1999, respectively. During that same period, the Company's non-performing
assets increased from $6,000 to $169,000. The ratios of the Company's allowance
for loan losses to total nonperforming loans were 226.28% and 4566.67% at
September 30, 1999 and June 30, 1999, respectively.
Total deposits declined $1.6 million from $86.7 million at June 30, 1999 to
$85.1 million at September 30, 1999. This slight decline was primarily the
result of unusually competitive pricing for deposits.
Other liabilities increased $516,000 from $1.2 million at June 30, 1999 to
$1.7 million at September 30, 1999. This increase was primarily attributable to
an increase in accrued interest payable on deposit accounts.
Total stockholders' equity decreased $630,000 from $36.5 million at June 30,
1999 to $35.9 million at September 30, 1999. This decline was attributable to
the purchase of additional shares of stock for the employee stock ownership plan
(ESOP) totaling $980,000, less a $50,000 allocation of ESOP shares, and a
decrease of $11,000 in net unrealized gains on securities available for sale.
Increasing stockholders' equity were net income of $290,000 and an increase of
$21,000 to additional paid-in capital for a refund and a reduction of conversion
related expenses.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998
GENERAL. Net income for the quarter ended September 30, 1999 increased
$135,000 or 87.1% from $155,000 for the quarter ended September 30, 1998 to
$290,000 for the quarter ended September 30, 1999. This was primarily
attributable to an increase in the Company's net interest income as the
Company's net interest rate spread increased from 1.97% for the quarter ended
September 30, 1998 to 2.28% for the quarter ended September 30, 1999. As a
result of its stock offering, the Company also had a large amount of interest-
earning assets compared to last year. The return on average assets was 0.93% for
the quarter ended September 30, 1999 compared to 0.56% for the same quarter
during 1998 and the return on average equity was 3.22% for the quarter ended
September 30, 1999 compared to 4.13% for the same quarter during 1998.
NET INTEREST INCOME. Net interest income for the quarter ended September 30,
1999 increased $378,000 from $647,000 during the quarter ended September 30,
1998 to $1.0 million for the quarter ended September 30, 1999.
The increase in net interest income was attributable to a $209,000 increase in
total interest income from $1.8 million for the quarter ended September 30, 1998
to $2.0 million for the same quarter during 1999 and was primarily the result of
a $406,000 increase in interest income from loans. The average loans outstanding
increased to $57.9 million with an average yield of 7.96% for the quarter ended
September 30, 1999 from $36.2 with an average yield of 8.24% for the same period
in the prior year. This increase in interest income was partially offset by a
$121,000 decline in interest income from investments and a $79,000 decline in
interest income from deposits with other financial institutions.
The increase in net interest income was also attributable to a $169,000
decline in interest expense from $1.2 million during the quarter ended September
30, 1998 to $1.0 million for the quarter ended September 30, 1999. This was the
result of average deposits declining from $90.3 million for the quarter ended
September 30, 1998 to $86.1 million for the quarter ended September 30, 1999,
and the average cost of those deposits declining from 4.96% to 4.66% for the
same respective periods. In addition, interest expense on borrowings declined
$53,000 as the Company used a portion of the proceeds from its conversion to
pay-off its borrowings.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the quarter
ended September 30, 1999 was $45,000 compared to none for the same quarter in
the prior year. The provision reflects management's
7
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analysis of the Company's loan portfolio based on information which is currently
available to it at such time. In particular, management considers the level of
non-performing loans (if any) and potential problem loans. The higher provision
for the quarter reflects overall growth in the Company's loan portfolio. While
Company management believes that the allowance for loan losses is sufficient
based on information currently available to it, no assurances can be made that
future events, conditions, or regulatory directives will not result in increased
provisions for loan losses or additions to the allowance for loan losses which
may adversely affect net income.
NONINTEREST INCOME. Noninterest income totaled $220,000 for the quarter ended
September 30, 1999 compared to $75,000 for the same period in the prior year, an
increase of $145,000. The increase was primarily attributable to $152,000 in
fee income generated through the sale of consumer loans into the secondary
market.
NONINTEREST EXPENSE. Total noninterest expense increased to $762,000 for the
quarter ended September 30, 1999 as compared to $506,000 for the same period in
1998, an increase of $256,000. Salaries and employee benefits totaled $411,000
during the quarter ended September 30, 1999, $130,000 higher than the $281,000
recorded during the same period in 1998. Approximately $71,000 of the increase
in salaries and employee benefits expense is attributable to the addition of a
new indirect lending department in January 1999. Compensation expense is also
approximately $50,000 higher for the quarter ended September 30,1999 as a result
of the Company's ESOP, which was adopted in conjunction with its initial public
offering in April 1999. The balance of the increase in salaries and employee
benefits is mainly due to incentive compensation bonuses and normal salary
increases for employees other than those previously noted.
Other noninterest expense increased $102,000, to $215,000 during the quarter
ended September 30, 1999 as compared to $113,000 during the same period in 1998.
This was primarily attributable to a $63,000 increase in professional fees
related to the increased reporting requirements associated with being a public
company and defense of a lawsuit in connection with the acquisition of the
indirect lending department, a $23,000 increase in expenses associated with the
new indirect lending department, and various other small increases in several
noninterest expense categories.
INCOME TAXES. Total income tax expense was $147,000 for the quarter ended
September 30, 1999, compared to $61,000 for the same period in 1998. The
increase is attributable to increased taxable income. The effective tax rates
for the quarters ended September 30, 1999 and 1998 were 33.6% and 28.2%.
LIQUIDITY AND CAPITAL RESOURCES
Federal regulations require First Federal to maintain 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, 1999, First Federal's liquidity ratio,
defined as liquid assets as a percentage of net withdrawable savings deposits
and short-term borrowings, was 13.1%.
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-bearing assets to provide liquidity to
meet these needs. At September 30, 1999, cash and cash equivalents totaled $8.5
million, or 6.9% of total assets. At September 30, 1999, First Federal had
commitments to fund loans of $2.5 million. At the same time, certificates of
deposit which are scheduled to mature in one year or less totaled $41.1 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 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.
8
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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, 1999, First Federal had approximately $15.0
million available to it under its borrowing arrangement with the Federal Home
Loan Bank. At September 30, 1999, First Federal had no borrowings from the
Federal Home Loan Bank.
Office of Thrift Supervision ("OTS") regulations require First Federal to
maintain specific amounts of capital. As of September 30, 1999, First Federal
exceeded its minimum capital requirements.
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 has completed 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 has tested the third-
party service bureau's systems by reviewing and verifying the results
of proxy test transactions at different test dates before and after
the year 2000 date change covering all of the applications used by
First Federal.
(5) Implementation - Replacement or repair of non-compliant technology.
As First Federal progressed through the validation phase, First
Federal determined necessary remedial actions and provided for their
implementation. First Federal has 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.
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, 1999,
approximately $158,000 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
9
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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.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
First Bancorp 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 Bancorp is not subject to foreign
currency exchange rate risk or commodity price risk.
First Bancorp 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.
First Bancorp measures interest rate risk by modeling the change in net
portfolio value over a variety of interest rate scenarios.
Although First Bancorp has not yet completed its interest rate sensitivity
analysis for September 30, 1999, management anticipates there has been no
material change from the information disclosed in the Company's annual report to
shareholders' at June 30, 1999.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1.
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 tortuously 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 report, the plaintiffs have not sought a
temporary restraining order, a preliminary injunction or any other interim
relief. First Federal intends to vigorously defend the action. The parties are
currently conducting discovery. A trial date has tentatively been set for
December 6, 1999.
ITEM 2.
CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5.
OTHER INFORMATION.
None.
11
<PAGE>
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
27 - Financial Data Schedule
b. Forms 8-K
No Forms 8-K were filed during the quarter ended September 30, 1999.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRST BANCORP OF INDIANA, INC.
Dated: November 9, 1999 By: /s/ Harold Duncan
----------------------------------
Harold Duncan
President, Chief Executive Officer
and Chairman of the Board
(principal executive officer)
Dated: November 9, 1999 By: /s/ Christopher A. Bengert
----------------------------------
Christopher A. Bengert
Treasurer
(principal financial and accounting officer)
13
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<PERIOD-START> JUL-01-1999
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