UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended June 30, 2000
[ ] TRANSITION REPORT UNDER 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.
(Exact name of registrant as specified in its charter)
INDIANA 35-2061832
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2200 West Franklin Street, Evansville, Indiana 47712
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812) 423-3196
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the voting and non-voting common equity held
by non-affiliates was $22.1 million, based upon the closing price of $11.25 as
quoted on the Nasdaq National Market for September 14, 2000. Solely for purposes
of this calculation, the shares held by the directors and officers of the
registrant are deemed to be held by affiliates.
The number of shares outstanding of the registrant's Common Stock as of
September 14, 2000 was 2,139,056.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders
are incorporated by reference into Part III of this Form 10-K
<PAGE>
INDEX
Part I
Page
Item 1. Business.........................................................3
Item 2. Properties......................................................26
Item 3. Legal Proceedings...............................................26
Item 4. Submission of Matters to a Vote of Securities
Holders........................................................26
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters....................................27
Item 6. Selected Financial Data.........................................28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................30
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.......39
Item 8. Financial Statements and Supplementary Data.....................39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ...........................39
Part III
Item 10. Directors and Executive Officers of the Registrant..............40
Item 11. Executive Compensation..........................................40
Item 12. Security Ownership of Certain Beneficial Owners and
Management.....................................................40
Item 13. Certain Relationships and Related Transactions..................40
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K. ..................................................40
<PAGE>
PART I
Item 1. BUSINESS
General
First Bancorp of Indiana, Inc. ("First Bancorp"), headquartered in
Evansville, Indiana, was formed in November 1998 as the holding company for
First Federal Savings Bank ("First Federal") in connection with the conversion
of First Federal from the mutual to the stock form of ownership ("Conversion").
The Conversion was completed on April 7, 1999 through the sale of 2,272,400
shares of common stock by First Bancorp at a price of $10.00 per share. First
Bancorp's sole business activity is the ownership of all of First Federal's
capital stock. First Bancorp does not transact any material business other than
through its subsidiary, First Federal. First Bancorp is subject to the
regulation of the Office of Thrift Supervision ("OTS") and the Securities and
Exchange Commission ("SEC"). First Bancorp is listed on the Nasdaq National
Market under the symbol FBEI.
First Federal operates as a community-oriented financial institution. First
Federal is regulated by the OTS and the Federal Deposit Insurance Corporation
("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 and Competition
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. First Federal will open a new office
location in Newburgh, Indiana in October. Also, in July 2000, First Federal
entered into an agreement to acquire two existing offices in Evansville, Indiana
from Old National Bank. First Federal will acquire approximately $42 million in
deposits and $22 million in loans as part of the transaction.
Evansville, which is in the southwest corner of Indiana, had a population
of approximately 165,000 persons as of 1999. 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, one other savings bank and 11 credit unions have retail
banking offices in Vanderburgh County. Most of these financial institutions are
larger than First Federal. 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.
Lending Activities
Loan Portfolio Composition. At June 30, 2000, net loans receivable totaled
$66.4 million, which was 52.1% 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 and consumer
loans for the purchase of automobiles. To a significantly lesser extent, First
Federal also originates construction loans and mortgage loans secured by
commercial and multi-family real estate. Most of First Federal's borrowers and
the properties securing its loans are located in Evansville, Indiana and the
surrounding counties. First Federal has formed a commercial loan department,
which will begin operations by December 2000.
3
<PAGE>
The following table sets forth the composition of First Federal's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------
2000 1999 1998
-------------------- --------------------- ---------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- ---------- --------- ----------- -------- -----------
(Dollars in thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
One- to four-family......................... $45,016 66.42% $39,718 68.80% $33,493 90.95%
Construction................................ 559 0.83 1,403 2.43 1,551 4.21
Commercial and multi-family................. 37 0.05 73 0.13 117 0.32
-------- ------- --------- ------- -------- --------
Total mortgage loans..................... 45,612 67.30 41,194 71.36 35,161 95.48
Credit line equity loans....................... 1,284 1.89 1,020 1.77 937 2.55
Savings account loans.......................... 200 0.30 127 0.22 226 0.61
Consumer loans................................. 20,680 30.51 15,389 26.65 501 1.36
-------- ------- --------- ------- -------- --------
Total loans.............................. 67,776 100.00% 57,730 100.00% 36,825 100.00%
-------- ======= --------- ======= -------- ========
Less:
Undisbursed loan funds...................... 879 981 700
Net deferred loan fees...................... 124 166 220
Allowance for loan losses................... 396 274 250
-------- --------- --------
Net loans...................................... $66,377 $56,309 $35,655
======== ========= ========
</TABLE>
The following table sets forth certain information at June 30, 2000
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 1 After After
Year 3 Years 5 Years
Within Through Through Through Beyond
1 Year 3 Years 5 Years 10 Years 10 Years Total
----------- ----------- ---------- ---------- ---------- ----------
(In thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
One- to four-family.............. $2,759 $ 3,950 $ 4,287 $ 9,780 $24,240 $45,016
Construction...................... 136 193 25 83 122 559
Commercial and multi-family....... 7 15 15 -- -- 37
Credit line equity loans............. 147 332 410 395 -- 1,284
Savings account loans................ 200 -- -- -- -- 200
Consumer loans....................... 4,466 9,771 6,284 159 -- 20,680
----------- ----------- ---------- ---------- ---------- ----------
Total.......................... $7,715 $14,261 $11,021 $10,417 $24,362 $67,776
=========== =========== ========== ========== ========== ==========
</TABLE>
4
<PAGE>
The following table sets forth, as of June 30, 2000, the dollar amount of
all loans due or repricing after June 30, 2001, 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)
Mortgage loans:
<S> <C> <C>
One- to four-family............... $35,962 $6,295
Construction...................... 423 --
Commercial and multi-family....... -- 30
Credit line equity loans............. -- 1,137
Savings account loans................ -- --
Consumer loans....................... 16,214 --
-------- ------
Total....................... $52,599 $7,462
======== ======
</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. A significant 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 June 30, 2000, 17.0%
of First Federal's residential real estate loans were subject to periodic
interest rate adjustments and 83.0% 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 adjustable-rate mortgage ("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.
5
<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.
The retention of ARM loans in First Federal's loan portfolio helps reduce
First Federal's exposure to changes in 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.
Construction Loans. First Federal originates loans to individuals for the
construction of their personal residence. First Federal also makes 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 June 30, 2000, First Federal had one outstanding construction loan to a
builder totaling $299,000. First Federal occasionally originates loans for the
purchase of residential building lots. These loans have fixed interest rates and
most have terms of five years or less. At June 30, 2000, First Federal did not
have any land loans outstanding.
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, First
Federal 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
6
<PAGE>
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 June 30,
2000, commercial and multi-family real estate loans in First Federal's portfolio
totaled $37,000 and consisted of one loan. 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.
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. First Federal originates unsecured consumer loans
and 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 72
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.
First Federal originates automobile loans through approximately 75 to 100
automobile dealers in southern Indiana, northwestern Kentucky and southern
Illinois. These dealers provide First Federal applications to finance vehicles
sold by their dealerships. Although substantially all of the dealers through
which First Federal originates loans sell both new and used automobiles, most of
the loans First Federal originates are secured by used automobiles. First
Federal processes loan applications through "CreditDesk," an automated
underwriting program by Fair Isaac and Company, Inc. Applications processed
through "CreditDesk" receive a score which, along with other underwriting
criteria, determine if the application will be approved, denied or approved at
an increased interest rate or on other terms.
During the year ended June 30, 2000, First Federal originated and retained
for its own portfolio $13.0 million in automobile loans. At June 30, 2000,
indirect automobile loans constituted 29.3% of total loans. First Federal has a
contractual relationship with another financial institution under which it sells
indirect automobile loans on a flow basis for an origination fee of
approximately 1.50% of the loan amount. This contract defines the criteria to be
satisfied for loans to be eligible for sale to the purchasing institution. First
Federal sells all loans with servicing released and without recourse to First
Federal. Interest rates are 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 has no
minimum or maximum delivery requirements. This eliminates 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.
7
<PAGE>
In fiscal year 2001, 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 $30
million. 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
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 originates home equity loans in the form of lines of credit
and fixed-rate term loans. At June 30, 2000, First Federal had $1.3 million of
credit line equity loans and unused commitments to extend credit under credit
line equity loans of $3.1 million. Most of these loans are made to existing
customers. First Federal's home equity line of credit loans have variable
interest rates tied to the prime lending rate. First Federal imposes a maximum
loan-to-value ratio of 100% 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.
Loan Solicitation and Processing. Mortgage 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.
Loans in the amount of up to $252,700 must be approved by two members of
First Federal's Executive Committee. The Executive Committee consists of First
Federal's President, Executive Vice President, Senior Vice President - Mortgage
Lending and members of the Board of Directors. Loans of more than $252,700 must
be approved by a majority of First Federal's Executive Committee.
Consumer loans in amounts up to $35,000 can be approved by consumer loan
underwriters. The Consumer Loan Committee must approve all loans above the
lending limit of a consumer loan underwriter. The maximum lending limits of the
Consumer Loan Committee are as follows: any one member, $50,000; any two
members, $75,000; all members, up to $100,000. The Consumer Loan Committee
consists of the President, Executive Vice President and the Senior Vice
President - Consumer Lending. Consumer loans in excess of $100,000 must be
approved by the majority of the Board of Directors.
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.
8
<PAGE>
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 June 30, 2000, First Federal was servicing loans for others (Fannie Mae)
amounting to approximately $9.6 million. Servicing loans for others generally
consists of collecting mortgage payments, 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.
In addition, in January 1999, First Federal significantly expanded its
consumer lending operations. For the fiscal years ended June 30, 2000 and 1999,
First Federal originated $43.7 million and $18 million, respectively, in
consumer loans as compared to $398,000 for the fiscal year ended June 30, 1998.
First Federal now originates automobile loans through approximately 75 to 100
automobile dealers in southern Indiana, northwestern Kentucky and southern
Illinois. First Federal also originates home equity loans in the form of lines
of credit and fixed-rate term loans. For the fiscal year ended June 30, 2000,
First Federal originated $900,000 in home equity loans.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------
2000 1999 1998
----------- ---------- -----------
(In thousands)
Loans originated:
Mortgage loans:
<S> <C> <C> <C>
One- to four-family........................ $ 9,600 $16,283 $11,557
Construction............................... 1,761 2,870 1,767
Commercial and multi-family................ -- -- --
Credit line equity loans...................... 1,399 1,015 848
Savings account loans......................... 174 60 249
Consumer loans................................ 43,670 18,010 398
----------- --------- ----------
Total loans originated.................. 56,604 38,238 14,819
Loans purchased............................... -- -- --
Loans sold.................................... 31,215 5,822 1,844
Loan principal repayments..................... 14,572 10,245 8,379
Increase (decrease) in other items, net....... (749) (1,517) (1,105)
----------- --------- ----------
Net increase (decrease) in loans $10,068 $20,654 $ 3,491
receivable................................. =========== ========= ==========
</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 loan commitments of approximately $380,000 at June
30, 2000, $230,000 and $150,000 of which were at fixed and adjustable rates,
respectively. At June 30, 2000, First Federal also had commitments to fund $3.1
million of credit line equity loans. See Note 11 of Notes to Consolidated
Financial Statements.
Loan Origination and Other Fees. First Federal, in most instances, receives
mortgage 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
9
<PAGE>
that are prepaid are recognized as income adjustments at the time of prepayment.
First Federal had $284,000 of net deferred mortgage loan fees at June 30, 2000.
In connection with its indirect automobile lending program, First Federal
pays the automobile dealers a flat fee for the origination of the loans. These
loan origination costs have been deferred and amortized over the contractual
life of the loan. At June 30, 2000, First Federal had $160,000 of deferred loan
charges related to its indirect automobile lending program.
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. 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. 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.
The following table sets forth information with respect to First Federal's
nonperforming assets and restructured loans within the meaning of Statement of
Financial Accounting Standards No. 15 at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------
2000 1999 1998
-------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis............ $ 85 $ 6 $ --
Accruing loans past due 90 days or more.............. -- -- --
------ ---- ----
Nonperforming loans.................................. 85 6 --
Real estate owned (net).............................. -- -- --
Other repossessed assets............................. 27 -- --
------ ---- ----
Total nonperforming assets..................... $112 $ 6 $ --
====== ==== ====
Restructured loans................................... -- -- --
Total loans delinquent 90 days or more to net
loans............................................. 0.13% 0.01% N/A
Total loans delinquent 90 days or more to total
assets............................................ 0.07% 0.00% N/A
Total nonperforming assets to total assets........... 0.09% 0.00% 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 June 30, 2000, First Federal had no real
estate owned.
10
<PAGE>
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 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 June
30, 2000 First Federal had no loans classified as loss, doubtful or substandard.
At such date First Federal had loans aggregating $155,000 classified as special
mention. First Federal had no impaired loans at June 30, 2000 or 1999.
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 June 30, 2000, First Federal had an allowance for loan losses of
$396,000, which represented 0.59% 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.
11
<PAGE>
The following table sets forth an analysis of First Federal's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------
2000 1999 1998
------------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Allowance at beginning of period..................... $274 $250 $250
Provision for loan losses............................ 184 24 --
Recoveries........................................... 19 -- --
Charge-offs.......................................... (81) -- --
------ ----- -----
Net charge-offs...................................... 62 -- --
------ ----- -----
Allowance at end of period........................ $396 $274 $250
====== ===== =====
Ratio of allowance to total loans
outstanding at the end of the period.............. 0.59% 0.48% 0.70%
Ratio of net charge-offs to average loans
outstanding during the period..................... 0.10% N/A N/A
Allowance for loan losses to nonperforming loans..... 465.88% 4,566.67% 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 June 30,
---------------------------------------------------------------
2000 1999 1998
-------------------- --------------------- --------------------
% of % of % of
Loans in Loans in Loans in
Each Each Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
-------- ---------- --------- ----------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans........................... $225 67.30% $225 71.36% $225 95.48%
Consumer and other loans................. 171 32.70 49 28.64 25 4.52
Unallocated.............................. -- N/A -- N/A -- N/A
-------- ---------- --------- ----------- --------- ----------
Total allowance for loan losses....... $396 100.00% $274 100.00% $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.
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
12
<PAGE>
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 26.0% 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 June 30, 2000, 48.7% of First Federal's
mortgage-backed securities were adjustable rate and 51.3% were fixed rate.
Of First Federal's $31.9 million mortgage-backed securities portfolio at
June 30, 2000, $6.8 million had contractual maturities within ten years and
$25.1 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 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.
13
<PAGE>
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.
The following table sets forth First Federal's investment securities
portfolio at carrying value at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------
2000 1999 1998
--------- -------- ---------
(In thousands)
Available for sale:
<S> <C> <C> <C>
U.S. Government agency obligations............... $1,001 $ -- $ --
Corporate obligations............................ 1,245 -- --
Mortgage-backed securities....................... 6,295 2,973 4,376
--------- -------- ---------
Total available for sale...................... 8,541 2,973 4,376
Held to maturity:
U.S. Government agency obligations............... 8,000 4,000 10,232
Collateralized auto obligations.................. -- 557 1,009
Corporate obligations............................ 2,113 5,499 2,956
Mortgage-backed securities....................... 25,596 27,964 31,169
Commercial paper................................. 2,783 1,983 3,998
--------- -------- ---------
Total held to maturity........................ 38,492 40,003 49,364
--------- -------- ---------
Total...................................... $47,033 $42,976 $53,740
========= ======== =========
</TABLE>
At June 30, 2000, First Federal held no securities by an issuer where the
aggregate book value of the securities exceeded 10% of the equity capital of
First Federal at June 30, 2000, except for securities issued by the U.S.
Government or U.S. Government agencies and corporations.
14
<PAGE>
The following table sets forth the maturities and weighted average yields
of the securities in First Federal's investment securities portfolio at June 30,
2000. 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 Over
One Year Five Years Ten Years Ten Years
------------------ ------------------ ------------------ ------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Available for sale:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agency
obligations................ $ -- --% $ 1,001 7.29% $ -- --% $ -- --%
Corporate obligations......... -- -- -- -- 1,245 7.84 -- --
Mortgage-backed securities.... -- -- -- -- 626 7.62 5,669 7.93
--------- --------- -------- -------
Total available for sale... -- -- 1,001 7.29 1,871 7.77 5,669 7.93
Held to maturity:
U.S. Government agency
obligations................ -- -- 2,000 6.52 3,000 7.69 3,000 7.04
Corporate obligations......... 2,113 6.52 -- -- -- -- -- --
Mortgage-backed securities.... 12 8.00 1,066 7.21 5,062 6.78 19,456 6.78
Commercial paper.............. 2,783 6.52 -- -- -- -- -- --
-------- --------- --------- -------
Total held to maturity..... 4,908 6.52 3,066 6.76 8,062 6.89 22,456 6.81
-------- --------- --------- -------
Total................ $4,908 6.52% $4,067 6.89% $9,933 7.05% $28,125 7.04%
======== ========= ========= =======
</TABLE>
The following table sets forth the carrying value of investment securities
which have fixed interest rates and have floating or adjustable interest rates.
At June 30, 2000
----------------------------
Floating or
Fixed Adjustable
Rates Rates
---------- -------------
(In thousands)
Available for sale:
U.S. Government agency obligations...... $ 1,001 $ --
Corporate obligations................... -- 1,245
Mortgage-backed securities.............. 5,530 765
------- --------
Total available for sale............. 6,531 2,010
Held to maturity:
U.S. Government agency obligations...... 8,000 --
Corporate obligations................... 2,113 --
Mortgage-backed securities.............. 10,846 14,750
Commercial paper........................ 2,783 --
------- --------
Total held to maturity............... 23,742 14,750
------- --------
Total investment securities.... $30,273 $ 16,760
======= ========
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. Borrowing from Federal Home Loan
Bank-Indianapolis is used to compensate for reductions in the availability of
funds from other sources. First Federal had no other borrowing arrangements at
June 30, 2000.
15
<PAGE>
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 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 compete with larger financial institutions that provide a wider
range of products and services. First Federal has expanded its checking account
program as a means of attracting lower cost funding.
The following table indicates the amount of First Federal's jumbo
certificates of deposit by time remaining until maturity as of June 30, 2000.
Jumbo certificates of deposit represent minimum deposits of $100,000.
Maturity Period Amount
------------------ -----------------
(In thousands)
Three months or less.................... $1,651
Over three through six months........... 1,618
Over six through twelve months.......... 787
Over twelve months...................... 4,053
-------
Total............................. $8,109
======
The following table sets forth the certificates of deposits in First
Federal classified by rates at the dates indicated.
At June 30,
-------------------------------------
2000 1999 1998
--------- --------- ---------
(In thousands)
3.00 - 3.99%................. $ 220 $ 563 $ --
4.00 - 4.99%................. 12,101 20,583 7,771
5.00 - 5.99%................. 35,581 23,846 35,999
6.00 - 6.99%................. 16,278 18,432 22,803
7.00 - 7.99%................. 588 1,302 1,299
8.00 - 8.99%................. 9 60 144
9.00 - 9.99%................. -- -- 183
----------- ----------- ----------
Total.................. $64,777 $64,786 $68,199
=========== =========== ==========
16
<PAGE>
The following table sets forth the amount and maturities of time deposits
at June 30, 2000.
<TABLE>
<CAPTION>
Amount Due
---------------------------------------------------------------
Less Than 1 - 2 2 - 3 3 - 4 After
1 Year Years Years Years 4 Years
----------- --------- -------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
3.00 - 3.99%............... $ 220 $ -- $ -- $ -- $ --
4.00 - 4.99%............... 7,477 3,406 328 481 409
5.00 - 5.99%............... 24,594 9,622 694 418 253
6.00 - 6.99%............... 1,228 10,744 4,057 86 163
7.00 - 7.99%............... 28 472 25 -- 63
8.00 - 8.99%............... 9 -- -- -- --
---------- --------- ------- -------- ---------
Total................ $ 33,556 $ 24,244 $ 5,104 $ 985 $ 888
========== ========= ======= ======== =========
</TABLE>
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 June 30,
------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ------------------------------ ------------------
Percent Percent Percent
of Increase/ of Increase/ of
Amount Total Decrease Amount Total Decrease Amount Total
--------- --------- --------- --------- -------- -------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits............ $12,196 14.18% $ (139) $12,335 14.22% $1,711 $10,624 11.91%
Savings deposits........... 9,001 10.47 (600) 9,601 11.07 (805) 10,406 11.66
Certificates which mature:
Within 1 year........... 33,556 39.03 (8,234) 41,790 48.19 6,088 35,702 40.01
After 1 year, but within
2 years.............. 24,244 28.20 6,543 17,701 20.41 (7,668) 25,369 28.43
After 2 years, but within
5 years............... 6,696 7.79 1,844 4,852 5.60 (1,723) 6,575 7.37
Certificates maturing
thereafter........... 281 0.33 (162) 443 0.51 (110) 553 0.62
-------- ------- ------- ------- ------- -------- ------- ------
Total............. $85,974 100.00% $ (748) $86,722 100.00% $(2,507) $89,229 100.00%
======== ======= ======= ======= ======= ======== ======= ======
</TABLE>
The following table sets forth the deposit activities of First Federal for
the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------
2000 1999 1998
---------- --------- ----------
(In thousands)
<S> <C> <C> <C>
Beginning balance........................ $86,722 $89,229 $88,560
Net increase (decrease) before
interest credited..................... (3,439) (5,499) (2,582)
Interest credited........................ 2,691 2,992 3,251
---------- -------- ---------
Net increase (decrease) in deposits...... (748) (2,507) 669
---------- -------- ---------
Ending balance........................... $85,974 $86,722 $89,229
========== ======== =========
</TABLE>
17
<PAGE>
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 June
30, 2000, First Federal had a borrowing capacity of $41.8 million based on
available collateral.
The following table sets forth certain information regarding First
Federal's use of Federal Home Loan Bank advances during the periods indicated.
Years Ended June 30,
---------------------------------------
2000 1999 1998
---------- ---------- -----------
(Dollars in thousands)
Maximum balance at any month end..... $5,000 $3,645 $7,050
Average balance...................... 2,404 2,656 5,991
Period end balance................... 5,000 -- 3,645
Weighted average interest rate:
At end of period.................. 6.47% N/A 5.77%
During the period................. 6.53 5.57% 5.93
Personnel
As of June 30, 2000, First Federal had 49 full-time employees and no
part-time employees. The employees are not represented by a collective
bargaining unit and First Federal believes its relationship with its employees
is good.
Subsidiary Activities
First Bancorp's sole subsidiary is First Federal. 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 June 30, 2000, First Federal's equity
investment in its subsidiary was $172,000, or 0.13% 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.
18
<PAGE>
REGULATION AND SUPERVISION
General
As a savings and loan holding company, First Bancorp is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the OTS. First Federal is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. First Federal is a member of the Federal Home Loan Bank System
and, with respect to deposit insurance, of the Savings Association Insurance
Fund ("SAIF") managed by the FDIC. 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 savings institutions. The OTS and/or
the FDIC conduct periodic examinations to test First Federal's safety and
soundness and compliance with various regulatory requirements. This regulation
and supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. 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 regulatory
requirements and policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on First Bancorp, First Federal and their
operations. Certain of the regulatory requirements applicable to First Federal
and to First Bancorp are referred to below or elsewhere herein. The description
of statutory provisions and regulations applicable to savings institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on First
Federal and First Bancorp.
Holding Company Regulation
First Bancorp is a nondiversified unitary savings and loan holding company
within the meaning of federal law. Under prior law, a unitary savings and loan
holding company, such as First Bancorp was not generally restricted as to the
types of business activities in which it may engage, provided that First Federal
continued to be a qualified thrift lender. See "Federal Savings Institution
Regulation - QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of a savings association after May 4, 1999 unless it
engages only in the financial activities permitted for financial holding
companies under the law or for multiple savings and loan holding companies as
described below. Further, the Gramm-Leach-Bliley Act specifies that savings and
loan holding companies may only engage in such activities. The
Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for
activities with respect to unitary savings and loan holding companies existing
prior to May 4, 1999, such as First Bancorp, so long as First Federal continues
to comply with the QTL Test. Upon any non-supervisory acquisition by First
Bancorp of another savings institution or savings bank that meets the qualified
thrift lender test and is deemed to be a savings institution by the OTS, First
Bancorp would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would generally be
limited to activities permissible for bank holding companies under Section
4(c)(8) of Bank Holding Company Act, subject to the prior approval of the OTS,
and certain activities authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of First Bancorp and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
19
<PAGE>
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. First Federal must notify
the OTS 30 days before declaring any dividend to First Bancorp. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS rating system) and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMEL financial institution rating system),
and, together with the risk-based capital standard itself, a 4% Tier 1
risk-based capital standard. The OTS regulations also require that, in meeting
the tangible, leverage and risk-based capital standards, institutions must
generally deduct investments in and loans to subsidiaries engaged in activities
as principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk capital charge. At June 30, 2000, First Federal met
each of its capital requirements.
The following table presents First Federal's capital position at June 30,
2000.
<TABLE>
<CAPTION>
Capital
---------------------------------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
----------------- ------------- ----------------- -------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible............ $25,265 $1,901 $23,364 19.94% 1.50%
Core (Leverage)..... 25,265 5,069 20,196 19.94 4.00
Risk-based.......... 25,661 5,349 20,312 38.38 8.00
</TABLE>
20
<PAGE>
Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. First Federal is a member of the SAIF. The
FDIC maintains a risk-based assessment system by which institutions are assigned
to one of three categories based on their capitalization and one of three
subcategories based on examination ratings and other supervisory information. An
institution's assessment rate depends upon the categories to which it is
assigned. Assessment rates for SAIF member institutions are determined
semiannually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999,
FICO payments for SAIF members approximated 6.1 basis points, while Bank
Insurance Fund ("BIF") members paid 1.2 basis points. By law, SAIF and BIF
members began equal sharing of FICO payments on January 1, 2000. The FDIC has
authority to increase insurance assessments. A significant increase in SAIF
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of First Federal. Management cannot predict what
insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of First Federal does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At June 30,
2000, First Federal's limit on loans to one borrower was $3.8 million, and First
Federal's largest aggregate outstanding balance of loans to one borrower was
$0.3 million.
QTL Test. The Home Owners' Loan Act requires savings institutions to meet a
qualified thrift lender test. Under the test, a savings association is required
to either qualify as a "domestic building and loan association" under the
Internal Revenue Code or maintain at least 65% of its "portfolio assets" (total
assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed securities)
in at least 9 months out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of June 30, 2000, First Federal maintained 86.7% of its
portfolio assets in
21
<PAGE>
qualified thrift investments and, therefore, met the qualified thrift lender
test. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered "qualified thrift
investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. An application to and the prior
approval of the OTS is required prior to any capital distribution if the
institution does not meet the criteria for "expedited treatment" of applications
under OTS regulations (i.e., generally, examination ratings in the two top
categories), 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 OTS. If an application is not required, the institution must
still provide prior notice to OTS of the capital distribution if, like First
Federal, it is a subsidiary of a holding company. In the event First Federal's
capital fell below its regulatory requirements or the OTS notified it that it
was in need of more than normal supervision, First Federal's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Liquidity. First Federal is required to maintain an average daily balance
of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4%, but may be changed from
time to time by the OTS to any amount within the range of 4% to 10%. Monetary
penalties may be imposed for failure to meet these liquidity requirements. First
Federal's liquidity ratio for June 30, 2000 was 10.2%, which exceeded the
applicable requirements. First Federal has never been subject to monetary
penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in First Federal's latest
quarterly thrift financial report. The assessments paid by First Federal for the
fiscal year ended June 30, 2000 totaled $35,000.
Transactions with Related Parties. First Federal's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including First Bancorp and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any 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. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions 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. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
First Federal's authority to extend credit to executive officers, directors
and 10% shareholders ("insiders"), as well as entities such persons control, is
also governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. An exception exists for loans
made pursuant to a benefit or compensation program that is widely available to
all employees of the institution and does not give preference to insiders over
other employees. The law limits both the individual and aggregate amount of
loans First Federal may make to insiders based, in part, on First Federal's
capital position and requires certain board approval procedures to be followed.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of
22
<PAGE>
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. The FDIC has the authority to recommend to the Director of the OTS that
enforcement action to be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth 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 a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
Federal Home Loan Bank System
First Federal is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank
provides a central credit facility primarily for member institutions. First
Federal, as a member of the Federal Home Loan Bank, is required to acquire and
hold shares of capital stock in that Federal Home Loan Bank in an amount at
least equal to 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the Federal Home Loan Bank, whichever is greater.
First Federal was in compliance with this requirement with an investment in
Federal Home Loan Bank stock at June 30, 2000 of $727,000.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, First Federal's net interest income
would likely also be reduced. Recent legislation has changed the structure of
the Federal Home Loan Banks funding obligations for insolvent thrifts, revised
the capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
membership.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $44.3 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $44.3 million, the reserve requirement is $1.329
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $44.3
million. The first $5.0 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. First Federal complies with the foregoing requirements.
FEDERAL AND STATE TAXATION
Federal Taxation
General. First Bancorp and First Federal report their income on a fiscal
year, consolidated basis and the accrual method of accounting, and are 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 Bancorp or First Federal. For its 2000 taxable year, First
Bancorp is subject to a maximum federal income tax rate of 34%.
23
<PAGE>
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code were permitted to use certain favorable
provisions to calculate their deductions from taxable income for annual
additions to their bad debt reserve. A reserve could be established for bad
debts on qualifying real property loans (generally secured by interests in real
property improved or to be improved) under (i) the percentage of taxable income
method or (ii) the experience method. The reserve for nonqualifying loans was
computed using the experience method.
Congress repealed the reserve method of accounting for bad debts for tax
years beginning after 1995 and required savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves.
Thrift institutions eligible to be treated as "small banks" (assets of $500
million or less) are allowed to use the experience method applicable to such
institutions, while thrift institutions that are treated as large banks (assets
exceeding $500 million) are required to use only the specific charge-off method.
Thus, the percentage of taxable income method of accounting for bad debts is no
longer available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the Internal
Revenue Service. Any Section 481(a) adjustment required to be taken into income
with respect to such change generally will be taken into income ratably over a
six-taxable year period, beginning with the first taxable year beginning after
1995, subject to a 2-year suspension if the "residential loan requirement" is
satisfied.
Under the residential loan requirement provision, the required recapture
will be suspended for each of two successive taxable years, beginning with First
Federal's 1996 taxable year, in which First Federal originates a minimum of
certain residential loans based upon the average of the principal amounts of
such loans made by First Federal during its six taxable years preceding its
current taxable year.
Distributions. If First Federal makes "non-dividend distributions" to First
Bancorp, such distributions will be considered to have been made from First
Federal's unrecaptured tax bad debt reserves (including the balance of its
reserves as of December 31, 1987) to the extent thereof, and then from First
Federal's supplemental reserve for losses on loans, to the extent thereof, and
an amount based on the amount distributed (but not in excess of the amount of
such reserves) will be included in First Federal's income. Non-dividend
distributions include distributions in excess of First Federal's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of First Federal's current or accumulated
earnings and profits will not be so included in its income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if First Federal makes a non-dividend
distribution to First Bancorp, approximately one and one-half times the amount
of such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. First Federal does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
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.
24
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of First Bancorp.
Name Age (1) Position
------- --------- ------------------
Harold Duncan....................... 59 President, Chief Executive
Officer and Chairman of
the Board
Michael H. Head..................... 42 Vice President
Christopher A. Bengert.............. 43 Treasurer
-------------
(1) As of June 30, 2000
The following table sets forth certain information regarding the executive
officers of First Federal.
Name Age (1) Position
------- --------- ------------------
Harold Duncan................... 59 President and Chief Executive
Officer
Michael H. Head................. 42 Executive Vice President and
Chief Operating Officer
Monica L. Stinchfield........... 44 Senior Vice President
Christopher A. Bengert.......... 43 Senior Vice President and
Treasurer
Kirby W. King................... 46 Senior Vice President
Richard S. Witte................ 47 Vice President
Dale Holt....................... 46 Vice President
-------------
(1) As of June 30, 2000
The executive officers of First Bancorp and First Federal are elected
annually and hold office until their successors have been elected and qualified
or until they are removed or replaced.
Biographical Information
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 S. 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.
25
<PAGE>
Dale Holt joined First Federal in January 1999 as Vice President-Consumer
Lending. He was previously employed by United Fidelity Bank as Vice President.
ITEM 2. PROPERTIES
First Federal currently conducts its business through its four full service
banking offices, including its main banking office. First Federal owns all four
of its offices. The following table sets forth information regarding First
Federal's properties.
<TABLE>
<CAPTION>
Original Net Book Value of
Year Property at Approximate
Location Acquired June 30, 2000(1) Square Footage
------------------------------------ -------------- ------------------- ------------------
(In thousands)
<S> <C> <C> <C>
Main Office:
2200 West Franklin Street
Evansville, Indiana................. 1904 $330 17,507
Branch Offices:
2028 Division Street
Evansville, Indiana................. 1956 196 5,276
1001 N. Green River Road
Evansville, Indiana................. 1981 534 2,603
4451 N. First Avenue
Evansville, Indiana................. 1997 564 7,300
</TABLE>
---------------
(1) Represents the net book value of land, buildings, furniture, fixtures and
equipment owned by First Federal.
ITEM 3. 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. First Federal is not a party to any material pending legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
26
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
First Bancorp's common stock has been listed on the Nasdaq National Market
since April 7, 1999. According to the records of its transfer agent, First
Bancorp had approximately 483 stockholders of record as of September 14, 2000.
This number does not reflect stockholders who hold their shares in "street
name." The following table sets forth the high and low sale price of First
Bancorp's common stock as of the close of market and dividends paid in each the
fiscal quarter's since First Bancorp's initial public offering.
High Low Dividends
----------- ----------- -----------
Fiscal 1999:
Fourth Quarter...... $10.50 $9.0625 --
Fiscal 2000:
First Quarter....... 10.625 9.375 --
Second Quarter...... 9.9375 9.125 --
Third Quarter....... 10.00 8.375 $0.07
Fourth Quarter...... 11.50 9.00 --
27
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain consolidated summary historical
financial information concerning the financial position of First Bancorp,
including its subsidiary, First Federal, for the period and at the dates
indicated. The financial data is derived in part from, and should be read in
conjunction with, the consolidated financial statements and related notes of
First Bancorp. Information for periods prior to 1999 is for First Federal only.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- --------- ---------
(In thousands)
Selected Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Total assets............................. $127,482 $124,800 $108,964 $110,747 $110,905
Other investment securities.............. 15,142 12,039 18,195 18,940 17,246
Mortgage-backed securities............... 31,891 30,937 35,545 41,394 41,607
Loans receivable, net.................... 66,377 56,309 35,655 32,164 32,441
Deposit accounts......................... 85,974 86,722 89,229 88,560 88,844
Borrowings............................... 5,000 -- 3,645 7,050 7,500
Stockholders' equity..................... 34,912 36,528 14,949 14,053 13,575
</TABLE>
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- -------- ------- -------
(In thousands)
Selected Operating Data:
<S> <C> <C> <C> <C> <C>
Interest income.......................... $8,548 $7,467 $7,715 $7,474 $7,295
Interest expense......................... 4,179 4,529 4,977 4,763 4,645
------- ------- -------- ------- -------
Net interest income...................... 4,369 2,938 2,738 2,711 2,650
Provision for loan losses................ 184 24 -- -- 100
------- ------- -------- ------- -------
Net interest income after provision for
loan losses........................... 4,185 2,914 2,738 2,711 2,550
Other income............................. 868 323 601(1) 179 169
Other expense............................ 3,389 2,454 2,044 2,391(2) 1,900
------- ------- -------- ------- -------
Income before income taxes............... 1,664 783 1,295 499 819
Income taxes............................. 518 210 415 112 199
------- ------- -------- ------- -------
Net income......................... $1,146 $ 573 $ 880 $ 387 $ 620
======= ======= ======== ======= =======
</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.
28
<PAGE>
<TABLE>
<CAPTION>
At or For the Years Ended June 30,
-------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
Selected Financial Ratios:
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (1)..... 0.92% 0.49% 0.77% 0.35% 0.57%
Return on average equity (2)..... 3.22 2.86 6.04 2.83 4.66
Average equity as a percent of
average total assets.......... 28.49 17.27 12.79 12.35 12.33
Interest rate spread (3)......... 2.50 2.04 2.03 2.08 2.09
Net interest margin (4).......... 3.72 2.69 2.53 2.56 2.57
Average interest-earning assets
to average interest-bearing
liabilities................... 134.24 115.81 110.75 110.71 110.68
Other expenses as a percent of
average total assets.......... 2.72 2.11 1.79 2.16 1.76
Dividend payout ratio............ 0.13 N/A N/A N/A N/A
Capital Ratios:
Tangible......................... 19.94 20.47 13.60 12.62 12.28
Core............................. 19.94 20.47 13.60 12.62 12.28
Risk-based....................... 38.38 40.95 34.75 37.35 36.95
Asset Quality Ratios:
Nonperforming loans as a percent
of total loans (5)............ 0.l3 0.01 0.00 0.08 0.00
Nonperforming assets as a percent
of total assets (6)........... 0.09 0.00 0.00 0.02 0.00
Allowance for loan losses as a
percent of total loans ....... 0.59 0.48 0.70 0.77 0.76
Allowance for loan losses as a
percent of nonperforming loans 465.88 4566.67 N/A 925.93 N/A
Net charge-offs as a percent of
average outstanding loans..... 0.10 N/A N/A N/A N/A
</TABLE>
---------------
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(4) Net interest income as a percentage of average interest-earning assets.
(5) Nonperforming loans consist of loans accounted for on a nonaccrual basis
and accruing loans 90 days or more past due.
6) Nonperforming assets consist of nonperforming loans, real estate acquired
in settlement of loans, other repossessed assets, and restructured loans.
29
<PAGE>
ITEM 7. 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 Bancorp. The information contained in this
section should be read in conjunction with the consolidated financial statements
and accompanying notes contained in this report.
Forward-Looking Statements
This Annual Report on Form 10-K contains certain forward-looking statements
which are based on certain assumptions and describe future plans, strategies and
expectations of First Bancorp. These forward-looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. First Bancorp's ability to
predict results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the operations
of First Bancorp and the subsidiaries include, but are not limited to, changes
in: interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in First Bancorp's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. First Bancorp does not undertake -- and
specifically disclaims any obligation -- to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
Operating Strategy
First Bancorp's principal business currently consists of the operations of
First Federal. The principal business activity of First Federal consists of
attracting deposits from the general public and originating mortgage and
consumer loans. 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 also expects to continue
to expand its consumer lending activities through its indirect automobile
lending program. First Federal has formed a commercial loan department which
will begin operations by December 2000.
30
<PAGE>
Comparison of Financial Condition at June 30, 2000 and June 30, 1999
Total consolidated assets increased $2.7 million, or 2.2%, from $124.8
million at June 30, 1999 to $127.5 million at June 30, 2000. This growth in
assets occurred primarily in investment securities and loans offset by a decline
in interest-bearing demand deposits. The growth in total assets was primarily
funded with borrowings from the Federal Home Loan Bank of Indianapolis (FHLB)
offset by a decline in total deposits and the repurchase of stock.
Cash and cash equivalents, which are primarily comprised of demand deposits
at the Federal Home Loan Bank, decreased by $10.3 million, or 61.7%, from $16.7
million at June 30, 1999 to $6.4 million at June 30, 2000. This decline was the
result of management investing excess cash proceeds from the stock offering into
higher yielding investment securities and loan portfolios, as well as using a
portion of its most liquid assets to fund the repurchase of First Bancorp stock
and the slight decline in customer deposits.
Investment securities increased $4.0 million, or 9.3%, from $43.0 million
at June 30, 1999 to $47.0 million at June 30, 2000. This increase was primarily
the result of management's effort to increase interest income by investing
proceeds from the stock offering into higher yielding investment securities.
Net loans grew $10.1 million, or 17.9%, from $56.3 million at June 30, 1999
to $66.4 million at June 30, 2000. This increase is attributable to a $5.3
million increase in one- to four-family mortgage loans and a $5.3 million
increase in consumer loans. First Federal has always been a strong mortgage
lender and continues to expand its consumer lending operation. During the
period, First Federal originated $42.6 million of indirect automobile loans of
which it retained $12.0 million for its own portfolio. It is management's intent
to sell 60% to 80% of its indirect automobile loan production and retain the
remainder in First Federal's own portfolio.
The allowance for loan losses increased from $274,000 at June 30, 1999 to
$396,000 at June 30, 2000. The ratios of the allowance for loan losses to total
loans were 0.59% at June 30, 2000 and 0.48% at June 30, 1999. During the same
period, non-performing assets increased from $6,000 to $112,000. The ratios of
the allowance for loan losses to total nonperforming loans were 465.88% and
4,566.67% at June 30, 2000 and June 30, 1999, respectively.
Total deposits declined $0.7 million, or 0.8%, from $86.7 million at June
30, 1999 to $86.0 million at June 30, 2000. This slight decline was primarily
the result of unusually competitive pricing for deposits. As an alternative to
gathering deposits, management chose to use the wholesale markets as a more
efficient method to fund growth. As a result, borrowings increased from zero at
June 30, 1999 to $5.0 million at June 30, 2000 as First Federal took advantage
of its borrowing capacity at the FHLB as an alternative to gathering deposits.
Total stockholders' equity decreased $1.6 million from $36.5 million at
June 30, 1999 to $34.9 million at June 30, 2000. This decline was attributable
to the purchase of additional shares of stock for the employee stock ownership
plan (ESOP) totaling $980,000, less a $172,000 allocation of ESOP shares, and
the purchase of First Bancorp stock totaling $1.9 million, $855,000 of which was
awarded in the form of restricted stock under the Stock-Based Incentive Plan.
First Bancorp's first dividend also reduced total shareholders' equity by
$147,000. Increasing stockholders' equity was net income of $1.1 million.
Comparison of Operating Results for the Years Ended June 30, 2000 and 1999
General. Net income for the year ended June 30, 2000 increased $573,000, or
100%, from $573,000 for the year ended June 30, 1999 to $1.1 million for the
year ended June 30, 2000. This was primarily attributable to an increase in the
net interest income as the net interest rate spread increased from 2.04% to
2.50% for the year ended June 30, 2000 as compared to same period during 1999.
The return on average assets was 0.92% for fiscal 2000 compared to 0.49% for
fiscal 1999 and the return on average equity was 3.22% for fiscal 2000 compared
to 2.86% for 1999.
Net Interest Income. Net interest income for the year ended June 30, 2000
increased $1.5 million, or 51.7%, from $2.9 million during the year ended June
30, 1999 to $4.4 million for the year ended June 30, 2000.
31
<PAGE>
The increase in net interest income was attributable in part to a $1.0
million increase in total interest income from $7.5 million for the year ended
June 30, 1999 to $8.5 million for the same period during 2000 and was primarily
the result of a $1.5 million increase in interest income from loans. Average
loans outstanding increased to $61.4 million with an average yield of 8.11% for
the year ended June 30, 2000 from $42.4 million with an average yield of 8.09%
for the same period in the prior year. This increase in interest income was
partially offset by a $76,000 decline in interest income from investments and a
$383,000 decline in interest income from deposits with other financial
institutions as funds invested in these assets were reallocated to the loan
portfolio.
The increase in net interest income was also attributable to a $351,000
decline in interest expense from $4.5 million during the year ended June 30,
1999 to $4.2 million for the year June 30, 2000. This was primarily the result
of average deposits declining from $90.1 million for the year ended June 30,
1999 to $84.5 million for the year ended June 30, 2000, and the average cost of
those deposits declining from 4.78% to 4.68% for the same respective periods.
Provision for Loan Losses. The provision for loan losses for the year ended
June 30, 2000 was $184,000 compared to $24,000 for the year ended June 30, 1999.
The provision reflects management's analysis of the 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 period reflects overall growth in
the loan portfolio. While 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. Net charge-offs for the year ended
June 30, 2000 were $62,000 compared to zero for the same period last year.
Noninterest Income. Noninterest income totaled $868,000 in fiscal 2000
compared to $324,000 in fiscal 1999, an increase of $544,000 or 167.9%. The
increase was attributable in part to a $446,000 increase in fee income generated
through the sale of loans which increased from $61,000 for the year ended June
30, 1999 to $507,000 for the same period ended June 30, 2000.
The increase in noninterest income was also attributable to a $100,000
increase in other noninterest income which increased from $165,000 for the year
ended June 30, 1999 to $265,000 for the same period ended June 30, 2000. This
increase was primarily the result of an $89,000 gain from the payout of a life
insurance policy.
Noninterest Expense. Total noninterest expense increased from $2.5 million
in fiscal 1999 to $3.4 million in fiscal 2000, an increase of $935,000 or 37.4%.
Salaries and employee benefits totaled $1.9 million during fiscal 2000, $516,000
higher than the $1.4 million recorded during fiscal 1999. Approximately $230,000
of the increase in salaries and employee benefits expense is attributable to the
indirect lending department. Fiscal 1999 reflects only six months of activity,
as this department was established in January 1999, while fiscal 2000 reflects a
full twelve months of operation. Compensation expense is also approximately
$126,000 higher during fiscal 2000 as a result of First Federal's ESOP. This is
attributable to fiscal 1999 reflecting only three months of benefits, as the
ESOP was adopted in conjunction with First Bancorp's initial public offering in
April 1999, while fiscal 2000 reflects a full twelve months of benefits.
Compensation expense is also approximately $28,000 higher for fiscal 2000 as
result of awards made under the First Bancorp of Indiana, Inc. 1999 Stock-Based
Incentive Plan that was approved by shareholder's at the annual meeting in
November 1999. Incentive compensation and bonuses added $47,000 to compensation
expense for the year ended June 30, 2000 as compared to the same period in 1999.
Retirement and medical expenses are also higher approximately $17,000 and
$8,000, respectively for the year ended June 30, 2000 as compared to the same
period in 1999. The balance of the increase in salaries and employee benefits is
mainly due to normal salary increases for employees other than those noted
above.
Equipment expense increased $64,000, or 45.1%, from $142,000 for the year
ended June 30, 1999 to $206,000 for the same period ended June 30, 2000.
Depreciation and equipment expense increased $37,000 and $27,000 respectively,
during fiscal 2000, as compared to the same period in 1999. During fiscal 2000
First Federal purchased new ATM machines for three offices and continued to
invest in and upgrade equipment to enhance data communications within and
between offices. Additional investments in electronic equipment were also made
in preparation for a change in data processors, allowing First Federal to
provide better service to its customers, including Internet and telephone
32
<PAGE>
banking services. First Federal also continued its investment in equipment and
software to automate the loan approval and underwriting process, reducing the
time from application to closing.
Other noninterest expense increased from $560,000 during fiscal 1999 to
$935,000 during fiscal 2000, an increase of $375,000 or 67.0%. Approximately
$89,000 of the increase was due to legal and other fees incurred in settlement
of a lawsuit in connection with the acquisition of the indirect lending
department. The increased expense is also attributable to professional fees and
other expenses associated with being a public company, which increased $143,000,
a $83,000 increase in expenses associated with the new indirect lending
department, a $16,000 increase in advertising, and various other small increases
in several noninterest expense categories.
Income Tax Expense. Total income tax expense was $518,000 in fiscal 2000
compared to $210,000 in 1999. The increase is attributable to increased taxable
income for fiscal 2000. The effective tax rates for the years ended June 30,
2000 and 1999 were 31.1% and 26.8%.
Comparison of Operating Results for the Years Ended June 30, 1999 and 1998
General. Net income for the year ended June 30, 1999 declined $307,000, or
34.8%, from $880,000 for the year ended June 30, 1998 to $573,000 for the year
ended June 30, 1999. This decrease was primarily attributable to a decline in
noninterest income coupled with an increase in noninterest expense. Included in
income in 1998 was $400,000 of gains in connection with the sale of a branch and
related deposits. The reduction in net income was somewhat offset by an increase
in net interest income. The return on average assets was 0.49% for fiscal 1999
compared to 0.77% for fiscal 1998 and the return on average equity was 2.86% for
fiscal 1999 compared to 6.04% for 1998.
Net Interest Income. Net interest income for the year ended June 30, 1999
increased $200,000, or 7.3%, from $2.7 million during the year ended June 30,
1998 to $2.9 million for the year ended June 30, 1999. The increase in net
interest income was attributable to a $448,000, or 9.0%, reduction in total
interest expense from $5.0 million during fiscal 1998 to $4.5 million during
fiscal 1999. This decline was primarily the result of a $278,000 decline in
interest expense on deposits, as average deposits decreased from $91.4 million
during 1998 to $90.1 million during 1999, and the average cost of those deposits
declined from 5.01% during 1998 to 4.78% during 1999 and a $207,000 decline in
interest expense on borrowings, as average borrowings declined from $6.0 million
during 1998 to $2.7 million during 1999, and the average cost of those
borrowings declined from 5.93% during 1998 to 5.57% during 1999.
In addition, interest income declined by $248,000, or 3.2%, from $7.7
million during fiscal 1998 to $7.5 million during fiscal 1999. This decline was
attributable to a $1.0 million, or 24.5%, decrease in interest income from
investment securities, from $4.1 million during 1998 to $3.1 million during 1999
as the average balance of investment securities declined from $60.4 million,
with an average yield of 6.80% during 1998 to $50.0 million with an average
yield of 6.26% during 1999.
This decline in interest income was partially offset by a $742,000 increase
in interest income from loans, as the average balance of loans receivable
increased from $32.7 million during fiscal 1998 to $42.5 million during fiscal
1999. The increase in interest income attributable to loan growth (volume) was
somewhat mitigated by a 16 basis point decline on the average yield on the
portfolio from 8.25% during fiscal 1998 to 8.09% during fiscal 1999.
Provision for Loan Losses. The provision for loan losses for the year ended
June 30, 1999 was $24,000 compared to no provision for the year ended June 30,
1998. The provision reflects management's analysis of the 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 1999 reflects overall growth in the loan
portfolio. First Federal did not experience any loan charge-offs during fiscal
1999 or 1998.
Noninterest Income. Noninterest income totaled $324,000 in fiscal 1999
compared to $601,000 in fiscal 1998, a decrease of $278,000 or 46.2%. Gains
related to the sale of a branch office during fiscal 1998 accounted for the
decrease and were somewhat offset by an increase in other noninterest income.
33
<PAGE>
Gain on branch disposal and gain on deposit disposal were $261,000 and
$139,000 respectively during fiscal 1998, while no such disposals occurred
during fiscal 1999. Other noninterest income was $227,000 during fiscal 1999
compared to $115,000 during fiscal 1998, an increase of $112,000, which was
primarily attributable to a $48,000 increase in gains on loan sales and an
approximately $38,000 increase in service charges on deposit accounts and other
customer fees.
Noninterest Expense. Total noninterest expense increased from $2.0 million
in fiscal 1998 to $2.5 million in fiscal 1999, an increase of $410,000 or 20.1%.
Salaries and employee benefits totaled $1.4 million during fiscal 1999,
$270,000, or 23.8%, higher than the $1.1 million recorded during fiscal 1998.
Approximately $147,000 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 was also approximately $47,000 higher during fiscal
1999 as a result of the implementation of First Federal's Employee Stock
Ownership Plan, which was adopted in conjunction with First Bancorp's initial
public offering in April 1999. Salaries for employees other than those
previously noted were $76,000 higher during fiscal 1999 due mainly to incentive
compensation bonuses and normal salary increases.
Other noninterest expense increased from $469,000 during fiscal 1998 to
$560,000 during fiscal 1999, an increase of $91,000 or 19.3%. This increase was
primarily the result of increased phone fees, office supplies, postage and other
expenses associated with the new indirect lending department totaling $31,000, a
$21,000 increase in professional fees primarily related to the defense of a
lawsuit in connection with the acquisition of the indirect lending department,
and various other small increases in several other noninterest expense
categories.
Income Tax Expense. Total income tax expense was $469,000 in fiscal 1999
compared to $415,000 in 1998. The decrease was attributable to a lower taxable
income for fiscal 1999. The effective tax rates for the years ended June 30,
1999 and 1998 were 26.8% and 32.1%.
34
<PAGE>
Average Balances, Interest and Average Yields/Cost
The following table sets forth for the years ended June 30, 2000, 1999 and
1998 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. 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,
--------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- --------------------------- ----------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
--------- --------- ------ ------- --------- ------- -------- --------- -------
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1)............. $ 61,353 $ 4,976 8.11% $ 42,472 $ 3,436 8.09% $ 32,675 $2,695 8.25%
Investment securities............ 46,716 3,027 6.48 49,607 3,103 6.26 60,379 4,108 6.80
Deposits with financial
institutions.................... 8,101 450 5.55 15,715 833 5.30 13,909 818 5.88
Federal funds sold............... 666 37 5.56 703 35 4.98 637 35 5.49
Other............................ 727 58 7.98 727 60 8.25 727 59 8.12
--------- ------- -------- ------- -------- ------
Total interest-earning assets. 117,563 8,548 7.27 109,224 7,467 6.84 108,327 7,715 7.12
Non-interest-earning assets......... 7,203 6,831 5,589
--------- --------- --------
Total assets.................. $ 124,766 $116,055 $113,916
========= ======== ========
Interest-bearing liabilities:
Demand and savings accounts...... $ 21,496 558 2.60 $ 22,666 596 2.63 $ 19,573 500 2.55
Certificates of deposit.......... 63,038 3,400 5.39 67,482 3,710 5.50 71,847 4,084 5.68
--------- ------- --------- ------- -------- ------
Total deposits................ 84,534 3,958 4.68 90,148 4,306 4.78 91,420 4,584 5.01
Borrowings....................... 2,404 157 6.53 2,656 148 5.57 5,991 355 5.93
Other............................ 641 64 9.98 1,508 75 4.97 400 38 9.50
--------- ------- -------- ------- -------- ------
Total interest-bearing liabilities 87,579 4,179 4.77 94,312 4,529 4.80 97,811 4,977 5.09
Non-interest-bearing liabilities.... 1,640 1,697 1,536
Stockholders' equity................ 35,547 20,046 14,569
--------- -------- --------
Total liabilities and
stockholders' equity......... $ 124,766 $116,055 $113,916
========= ======== ========
Net interest income................. $ 4,369 $ 2,938 $2,738
======= ======= ======
Interest rate spread (2)............ 2.50% 2.04% 2.03%
Net interest margin (3)............. 3.72% 2.69% 2.53%
Ratio of average interest-earning
assets to average interest-bearing
liabilities...................... 134.24% 115.81% 110.75%
</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>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
net interest income of First Bancorp for the years ended June 30, 2000, 1999 and
1998. 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>
2000 vs. 1999 1999 vs. 1998
-------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------- -------------------
Rate Volume Net Rate Volume Net
-------- -------- -------- ------- -------- -------
(In thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable, net.................... $ 9 $ 1,531 $ 1,540 $ (53) $ 794 $ 741
Investment securities.................... 109 (185) (76) (313) (692) (1,005)
Deposits with financial institutions..... 38 (421) (383) (85) 100 15
Federal funds sold....................... 4 (2) 2 (3) 3 --
Other.................................... (2) -- (2) 1 -- 1
-------- --------- --------- -------- ------- --------
Total net change in income on
interest-earning assets............ 158 923 1,081 (453) 205 (248)
Interest-bearing liabilities:
Demand and savings accounts.............. (8) (30) (38) 15 81 96
Certificates of deposit.................. (69) (241) (310) (131) (243) (374)
-------- --------- --------- -------- -------- ---------
Total deposits........................ (77) (271) (348) (116) (162) (278)
Borrowings............................... 24 (15) 9 (20) (187) (207)
Other.................................... (1) (10) (11) (25) 62 37
-------- --------- --------- --------- --------- ---------
Total net change in expense on
interest-bearing liabilities....... (54) (296) (350) (161) (287) (448)
-------- --------- --------- -------- -------- ---------
Net change in net interest income........... $ 212 $ 1,219 $ 1,431 $ (292) $ 492 $ 200
======== ========= ========= ======== ======== =========
</TABLE>
Market Risk Analysis
Quantitative Aspects of 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. For information regarding the sensitivity to interest rate risk of
First Bancorp's interest-earning assets and interest-bearing liabilities, see
the tables under Part I, Item 1, "Business --Lending Activities--Loan Portfolio
Composition," "--Investment Activities" and "--Deposit Activities and Other
Sources of Funds--Deposit Accounts."
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.
36
<PAGE>
The following table sets forth the change in First Bancorp's net portfolio
value at June 30, 2000 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
("bp")
Change in Rates Net Portfolio Value Portfolio Value of Assets
-------------------- ----------------------------------------------- ---------------------------
$ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
400bp $21,944 $(10,763) (32.9)% 20.19% (634)bp
300 25,709 (6,998) (21.4) 22.69 (384)
200 28,106 (4,601) (14.1) 24.09 (244)
100 30,479 (2,228) (6.8) 25.40 (113)
0 32,707 -- -- 26.53 --
(100) 34,603 1,896 5.8 27.39 86
(200) 35,673 2,966 9.1 27.73 120
(300) 35,921 3,214 9.8 27.58 105
(400) 35,462 2,755 8.4 27.03 50
</TABLE>
The above table indicates that in the event of a sudden and sustained
increase in prevailing market interest rates, First Bancorp's net portfolio
value would be expected to decrease.
Certain assumptions 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 Bancorp'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) establishing an indirect automobile lending program through which it
originates short-term, fixed-rate automobile loans;
(3) purchasing mortgage-backed and related securities with adjustable
rates or estimated lives of five to ten years or less; and
37
<PAGE>
(4) purchasing short- to intermediate-term investment securities.
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 June 30, 2000, cash and cash equivalents totaled $6.4
million, or 5.0% of total assets. At June 30, 2000, First Federal had
outstanding commitments to originate loans of $3.5 million. At the same time,
certificates of deposit which are scheduled to mature in one year or less
totaled $33.6 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 June 30, 2000, First Federal's liquidity
ratio, defined as liquid assets as a percentage of net withdrawable savings
deposits and short-term borrowings, was 10.2%.
The primary investing activities of First Federal are originating loans and
purchasing investments and mortgage-backed securities. Purchases, net of
proceeds from maturities of investment securities and principal payments
received on mortgage-backed and related securities, totaled $4.1 million for the
year ended June 30, 2000, while loan originations in excess of repayments
totaled $10.0 million.
First Federal's most significant financing activities are deposit accounts
and Federal Home Loan Bank borrowings. Federal Home Loan Bank borrowings of $5.0
million was the primary source of cash during 2000. This cash inflow was
somewhat offset by a $748,000 decline in total deposits and the purchase of $1.9
million of First Bancorp stock.
38
<PAGE>
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 June 30, 2000, First Federal had approximately $10.0 million
remaining available to it under its borrowing arrangement with the Federal Home
Loan Bank. At June 30, 2000, First Federal had $5.0 million of borrowings from
the Federal Home Loan Bank.
OTS regulations require First Federal to maintain specific amounts of
capital. As of June 30, 2000, First Federal complied with all regulatory capital
requirements as of that date with tangible, core and risk-based capital ratios
of 19.94%, 19.94% and 38.38%, respectively. For a detailed discussion of
regulatory capital requirements, see Part I, Item 1, "Regulation and
Supervision--Federal Savings Institution Regulation--Capital Requirements."
Impact of Accounting Pronouncements and Regulatory Policies
Accounting for Derivative Instruments and Hedging Activities. Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," issued in June 1998 (as amended by SFAS No. 137),
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. The statement requires
entities to carry all derivative instruments in the statement of financial
position at fair value. The accounting for changes in the fair value, gains and
losses, of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and, if so, on the reasons for
holding it. If certain conditions are met, entities may elect to designate a
derivative instrument as a hedge of exposures to changes in fair value, cash
flows or foreign currencies. The statement is effective for fiscal years
beginning after June 15, 2000. The statement is not expected to affect First
Bancorp because First Bancorp does not currently purchase derivative instruments
or enter into hedging activities.
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 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The above-captioned information appears in this report under Part II, Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed at Item 14 of this Form 10-K are
incorporated by reference into this Item 8 of Part II of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
39
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the directors and officers of First Bancorp is
incorporated herein by reference to First Bancorp's Proxy Statement for the 2000
Annual Meeting of Shareholders to be held on November 9, 2000 at pages 4 through
5 and to Part I, Item 1, "Business--Executive Officers of the Registrant" of
this report. Reference is made to the cover page of this report for information
regarding compliance with Section 16(a) of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation is incorporated herein by
reference to First Bancorp's Proxy Statement for the 2000 Annual Meeting of
Shareholders to be held on November 9, 2000 at pages 6 through 9.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to First Bancorp's Proxy
Statement for the 2000 Annual Meeting of Shareholders to be held on November 9,
2000 at page 3.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated herein by reference to First Bancorp's Proxy Statement for the
2000 Annual Meeting of Shareholders to be held on November 9, 2000 at page 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) The following are filed as a part of this report:
. Independent Auditors' Report
. Consolidated Balance Sheets as of June 30, 2000 and
1999
. Consolidated Statements of Income for the Years Ended
June 30, 2000, 1999 and 1998
. Consolidated Statements of Stockholders' Equity
for the Years Ended June 30, 2000, 1999 and 1998
. Consolidated Statements of Cash Flows for the
Years Ended June 30, 2000, 1999 and 1998
. Notes to Consolidated Financial Statements
(2) All financial statement schedules are omitted because they
are not required or applicable, or the required information
is shown in the consolidated financial statements or the
notes thereto.
40
<PAGE>
(3) Exhibits
3.1 Articles of Incorporation of First Bancorp of Indiana, Inc.(1)
3.2 Amended Bylaws of First Bancorp of Indiana, Inc.(2)
4.0 Form of Stock Certificate of First Bancorp of Indiana, Inc.(1)
10.1 First Federal Savings Bank Employee Stock Ownership Plan Trust
Agreement(2)
10.2 Employment Agreement between First Bancorp of Indiana, Inc., First
Federal Savings Bank and Harold Duncan(2)
10.3 Employment Agreement between First Bancorp of Indiana, Inc., First
Federal Savings Bank and Michael H. Head(2)
10.4 First Federal Savings Bank Employee Severance Compensation Plan(2)
10.5 First Federal Savings Bank Director Deferred Compensation Plan(1)
10.6 First Bancorp of Indiana, Inc. 1999 Stock-Based Incentive Plan(3)
21.0 Subsidiary information is incorporated herein by reference to Part I,
Item 1, "Business--Subsidiary Activities"
23.0 Consent of independent auditors
27.0 Financial Data Schedule
------------
(1) Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement and amendments thereto, initially filed on
December 11, 1998, Registration No. 333-68793.
(2) Incorporated herein by reference into this document from the Exhibits to
the Annual Report on Form 10-K filed on September 27, 1999.
(3) Incorporated herein by reference into this document from Exhibit 10 to the
Quarterly Report on From 10-Q filed on February 11, 2000.
(b) Reports on Form 8-K
None.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST BANCORP OF INDIANA, INC.
Date: September 15, 2000 By: /s/ Harold Duncan
----------------------------------
Harold Duncan
President, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Harold Duncan President, Chief Executive September 14, 2000
---------------------------- Officer and Chairman of the Board
Harold Duncan (principal executive officer)
/s/ Christopher A. Bengert Treasurer September 15, 2000
---------------------------- (principle financial and
Christopher A. Bengert accounting officer)
/s/ Michael H. Head Vice President and Director September 14, 2000
----------------------------
Michael H. Head
/s/ Herbert V. Dassel Director September 14, 2000
----------------------------
Herbert V. Dassel
/s/ Frank E. Kern Director September 14, 2000
----------------------------
Frank E. Kern
/s/ James E. Will, Jr. Director September 15, 2000
----------------------------
James E. Will, Jr.
/s/ Jerome A. Ziemer Director September 14, 2000
----------------------------
Jerome A. Ziemer
</TABLE>
42
<PAGE>
[LOGO] OLIVE
Independent Auditor's Report
Board of Directors
First Bancorp of Indiana, Inc.
Evansville, Indiana
We have audited the accompanying consolidated balance sheet of First Bancorp of
Indiana, Inc. and subsidiary as of June 30, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended June 30, 2000. These consolidated
financial statements are the responsibility of the Company'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
Bancorp of Indiana, Inc. and subsidiary as of June 30, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2000, in conformity with generally accepted accounting
principles.
/s/ Olive LLP
Evansville, Indiana
July 27, 2000
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30 2000 1999
--------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and due from banks $ 1,448,002 $ 1,105,134
Interest-bearing demand deposits 3,590,492 15,567,989
Federal funds sold 1,355,000 25,000
----------------------------------------
Cash and cash equivalents 6,393,494 16,698,123
Interest-bearing deposits 1,188,000 2,079,000
Investment securities
Available for sale 8,541,057 2,972,581
Held to maturity (fair value of
$37,442,000 and $39,709,000) 38,492,081 40,003,256
----------------------------------------
Total investment securities 47,033,138 42,975,837
Loans, net of allowance for loan
losses of $395,638 and $274,000 66,377,404 56,308,900
Premises and equipment 1,647,253 1,508,570
Federal Home Loan Bank stock 727,400 727,400
Other assets 4,115,537 4,502,175
----------------------------------------
Total assets $127,482,226 $124,800,005
========================================
Liabilities
Deposits
Noninterest bearing $ 673,479 $ 419,865
Interest bearing 85,300,789 86,302,246
----------------------------------------
Total deposits 85,974,268 86,722,111
Long-term debt 5,000,000
Advances by borrowers for taxes and insurance 339,217 381,226
Other liabilities 1,257,094 1,168,668
----------------------------------------
Total liabilities 92,570,579 88,272,005
----------------------------------------
Commitments and Contingent Liabilities
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 21,841,913 21,831,518
Retained earnings 16,472,853 15,473,935
Accumulated other comprehensive income 30,699 25,263
-----------------------------------------
38,368,189 37,353,440
Less:
Unallocated employee stock ownership plan
shares--166,642 and 87,400 shares (1,623,809) (825,440)
Unallocated management recognition plan
shares--90,896 shares (826,222)
Treasury stock, at cost--107,344 shares (1,006,511)
----------------------------------------
Total stockholders' equity 34,911,647 36,528,000
----------------------------------------
Total liabilities and stockholders' equity $127,482,226 $124,800,005
========================================
</TABLE>
See notes to consolidated financial statements.
(2)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------
Interest Income
<S> <C> <C> <C>
Loans receivable $ 4,975,989 $ 3,436,286 $ 2,694,771
Investment securities 3,026,947 3,103,298 4,107,803
Deposits with financial institutions 449,531 832,625 818,200
Federal funds sold 37,148 34,918 35,277
Other interest and dividend income 58,272 59,492 58,650
-----------------------------------------------------
Total interest income 8,547,887 7,466,619 7,714,701
-----------------------------------------------------
Interest Expense
Deposits 3,957,938 4,306,087 4,584,001
Long-term debt 157,136 148,040 354,630
Other 63,378 74,862 37,993
-----------------------------------------------------
Total interest expense 4,178,452 4,528,989 4,976,624
-----------------------------------------------------
Net Interest Income 4,369,435 2,937,630 2,738,077
Provision for Loan Losses 184,342 24,000
-----------------------------------------------------
Net Interest Income After Provision for Loan Losses 4,185,093 2,913,630 2,738,077
-----------------------------------------------------
Noninterest Income
Gain on disposal of branch office 261,024
Gain on disposal of deposits 138,528
Net gain on loan sales 507,490 61,353
Increase in cash surrender values of life insurance 94,760 97,315 87,234
Other income 265,496 165,148 114,601
-----------------------------------------------------
Total noninterest income 867,746 323,816 601,387
-----------------------------------------------------
Noninterest Expense
Salaries and employee benefits 1,920,250 1,404,244 1,134,397
Net occupancy expense 171,248 179,680 181,065
Equipment expense 205,526 141,812 103,749
Deposit insurance expense 37,913 55,097 56,468
Data processing fees 118,366 113,633 99,478
Other expenses 935,488 559,673 469,117
-----------------------------------------------------
Total noninterest expense 3,388,791 2,454,139 2,044,274
-----------------------------------------------------
Income Before Income Tax 1,664,048 783,307 1,295,190
Income tax expense 517,726 210,111 415,486
-----------------------------------------------------
Net Income $ 1,146,322 $ 573,196 $ 879,704
=====================================================
Basic Earnings per Share $ 0.56
==================
Diluted Earnings per Share $ 0.56
==================
</TABLE>
See notes to consolidated financial statements.
(3)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Accumulated
--------------------- Additional Other
Shares Paid-in Comprehensive Retained Comprehensive
Outstanding Amount Capital Income Earnings Income
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1997 $14,021,035 $32,338
Comprehensive income
Net income $879,704 879,704
Other comprehensive income, net of tax
Unrealized gains on securities 15,580 15,580
---------------
Comprehensive income $895,284
===============
------------------------------------ ---------------------------
Balances, June 30, 1998 14,900,739 47,918
Issuance of common stock 2,272,400 $22,724 $21,833,369
Comprehensive income
Net income $573,196 573,196
Other comprehensive income, net of tax
Unrealized losses on securities (22,655) (22,655)
---------------
Comprehensive income $550,541
===============
Employee Stock Ownership Plan shares
allocated (1,851)
------------------------------------ ---------------------------
Balances, June 30, 1999 2,272,400 22,724 21,831,518 15,473,935 25,263
Comprehensive income
Net income $1,146,322 1,146,322
Other comprehensive income, net of tax
Unrealized gains on securities 5,436 5,436
---------------
Comprehensive income $1,151,758
===============
Cash dividends ($0.07 per share) (147,404)
Purchase of treasury stock
Purchase of stock by Employee Stock
Ownership Plan
Transfer of shares to Management
Recognition Plan
Employee Stock Ownership Plan shares
allocated (9,578)
Management Recognition Plan shares
allocated (843)
Refund of conversion expenses 20,816
------------------------------------ ---------------------------
Balances, June 30, 2000 2,272,400 $22,724 $21,841,913 $16,472,853 $30,699
==================================== ===========================
<CAPTION>
Unallocated Unallocated
ESOP MRP Treasury
Shares Shares Stock Total
------------------------------------------------
Balances, July 1, 1997 $14,053,373
Comprehensive income
Net income 879,704
Other comprehensive income, net of tax
Unrealized gains on securities 15,580
Comprehensive income
------------------------------------------------
Balances, June 30, 1998 14,948,657
Issuance of common stock $ (874,000) 20,982,093
Comprehensive income
Net income 573,196
Other comprehensive income, net of tax
Unrealized losses on securities (22,655)
Comprehensive income
Employee Stock Ownership Plan shares
allocated 48,560 46,709
------------------------------------------------
Balances, June 30, 1999 (825,440) 36,528,000
Comprehensive income
Net income 1,146,322
Other comprehensive income, net of tax
Unrealized gains on securities 5,436
Comprehensive income
Cash dividends ($0.07 per share) (147,404)
Purchase of treasury stock $(1,861,225) (1,861,225)
Purchase of stock by Employee Stock
Ownership Plan (980,411) (980,411)
Transfer of shares to Management
Recognition Plan $(854,714) 854,714
Employee Stock Ownership Plan shares
allocated 182,042 172,464
Management Recognition Plan shares
allocated 28,492 27,649
Refund of conversion expenses 20,816
------------------------------------------------
Balances, June 30, 2000 $(1,623,809) $(826,222)$(1,006,511)$34,911,647
================================================
</TABLE>
See notes to consolidated financial statements.
(4)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $ 1,146,322 $ 573,196 $ 879,704
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Provision for loan losses 184,342 24,000
Depreciation 126,819 105,069 96,349
Amortization of net loan origination fees (4,528) (45,000) (47,940)
Deferred income tax (37,000) (109,000) (41,607)
Increase in cash surrender value of life insurance (94,000) (97,315) (87,234)
Investment securities amortization (accretion), net 23,335 34,416 (146,994)
Gain on disposal of branch office and deposits (399,552)
Loans originated for sale (31,215,256) (5,822,000) (1,844,000)
Proceeds from sales of loans originated for sale 31,722,746 5,883,353 1,844,000
Net gain on loan sales (507,490) (61,353)
Compensation expense related to employee stock
ownership plan and management recognition plan 200,113 46,709
Net change in
Other assets 318,620 (930,474) 86,408
Other liabilities 88,426 383,386 35,717
-----------------------------------------------------
Net cash provided (used) by operating activities 1,952,449 (15,013) 374,851
-----------------------------------------------------
Investing Activities
Net change in interest-bearing deposits 891,000 200,000 3,267,000
Proceeds from maturities of securities available for sale 1,531,700 1,372,969 3,528,075
Purchases of securities held to maturity (29,529,775) (30,582,723) (38,641,921)
Proceeds from maturities of securities held to maturity 23,926,893 39,904,489 41,882,979
Net change in loans (10,248,318) (20,632,897) (3,442,727)
Purchases of premises and equipment (265,502) (93,328) (779,275)
Disposal of branch office and deposits (2,319,522)
Redemption of life insurance policy 195,000
-----------------------------------------------------
Net cash provided (used) by investing activities (13,499,002) (9,831,490) 3,494,609
-----------------------------------------------------
Financing Activities
Net change in
Noninterest bearing, interest-bearing demand
and savings deposits (738,843) 906,079 1,091,502
Certificates of deposit (9,000) (3,413,000) 2,347,864
Advances by borrowers for taxes and insurance (42,009) 25,385 22,071
Proceeds of long-term debt 5,000,000
Repayment of long-term debt (3,645,000) (3,405,000)
Cash dividends (147,404)
Purchase of treasury stock (1,861,225)
Issuance of stock, net of offering costs 20,982,093
Purchase of stock by ESOP (980,411)
Refund of conversion expenses 20,816
-----------------------------------------------------
Net cash provided by financing activities 1,241,924 14,855,557 56,437
-----------------------------------------------------
Net Change in Cash and Cash Equivalents (10,304,629) 5,009,054 3,925,897
Cash and Cash Equivalents, Beginning of Year 16,698,123 11,689,069 7,763,172
-----------------------------------------------------
Cash and Cash Equivalents, End of Year $ 6,393,494 $16,698,123 $11,689,069
=====================================================
Additional Cash Flows Information
Interest paid $ 4,082,452 $ 4,517,989 $ 5,041,792
Income tax paid 758,319 98,768 492,900
</TABLE>
See notes to consolidated financial statements.
(5)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
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 Bancorp of Indiana, Inc.
(Company) and its wholly-owned subsidiary, First Federal Savings Bank (Bank),
conform to generally accepted accounting principles and reporting practices
followed by the thrift industry. The Bank has one wholly-owned subsidiary, FFSL
Service Corporation (FFSL). The more significant of the 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 Company is a savings and loan holding company whose principal activity is
the ownership and management of the Bank. The Bank operates under a federal
savings bank charter and provides full banking services in a single significant
business segment. As a federally-chartered savings bank, 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. Although the Bank has a
diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent upon economic conditions in Southwestern
Indiana.
Consolidation--The consolidated financial statements include the accounts of the
Company and Bank after elimination of all material intercompany transactions and
accounts.
Investment Securities--Debt securities are classified as held to maturity when
the Company 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 accumulated other comprehensive income,
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.
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. 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.
(6)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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 June
30, 2000, 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 stated at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based on the estimated
useful lives of the assets. 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.
Treasury stock is stated at cost. Cost is determined by the first-in, first-out
method.
Stock options are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. The
Company accounts for and will continue to account for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and, accordingly, recognizes no compensation expense for the stock option
grants.
Employee Stock Ownership Plan--The Company accounts for its employee stock
ownership plan (ESOP) in accordance with American Institute of Certified Public
Accountants (AICPA) Statement of Position 93-6, Employer's Accounting for
Employee Stock Ownership Plans. The cost of shares issued to the ESOP but not
yet allocated to participants are presented in the consolidated balance sheet as
a reduction of stockholders' equity. Compensation expense is recorded based on
the market price of the shares as they are committed to be released for
allocation to participant accounts. The difference between the market price and
the cost of the shares committed to be released is recorded as an adjustment to
paid-in capital. Dividends on allocated ESOP shares will be recorded as a
reduction of retained earnings; dividends on unallocated ESOP shares will be
reflected as a reduction of debt.
Shares will be considered outstanding for earnings per share calculations when
they are committed to be released; unallocated shares are not considered
outstanding.
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 Company
files consolidated income tax returns with its subsidiary.
Earnings per share are computed based upon the weighted average common and
common equivalent shares outstanding for periods subsequent to the Bank's
conversion to a stock savings bank on April 7, 1999. Earnings per share for 1999
are not meaningful.
(7)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Reclassifications of certain amounts in the 1999 financial statements have been
made to conform to the 2000 presentation.
Note 2 - Conversion to Stock Ownership
On April 7, 1999, the Bank consummated its conversion from a from a
federally-chartered mutual savings bank to a federally-chartered stock savings
bank pursuant to the Bank's Plan of Conversion. Concurrent with the formation of
the Company, the Company acquired 100% of the stock of the Bank and issued
2,272,400 shares of Company common stock, with $.01 par value, at $10.00 per
share. Net proceeds of the Company's stock issuance, after costs of $868,000 and
Employee Stock Ownership Plan shares of $874,000, were approximately $20.98
million.
Note 3 - Investment Securities
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------
At June 30, 2000
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $ 1,000 $ 1 $ 1,001
Corporate obligations 1,237 8 1,245
Mortgage-backed securities 6,251 48 $ 4 6,295
-------------------------------------------------------------------------
Total available for sale 8,488 57 4 8,541
-------------------------------------------------------------------------
Held to maturity
Federal agencies 8,000 304 7,696
Corporate obligations 2,113 4 2,109
Mortgage-backed securities 25,596 10 751 24,855
Commercial paper 2,783 1 2,782
-------------------------------------------------------------------------
Total held to maturity 38,492 10 1,060 37,442
-------------------------------------------------------------------------
Total investment securities $46,980 $67 $ 1,064 $ 45,983
=========================================================================
At June 30, 1999
Available for sale
Mortgage-backed securities $ 2,929 $ 45 $ 1 $ 2,973
-------------------------------------------------------------------------
Held to maturity
Federal agencies 4,000 151 3,849
Collateralized auto obligations 557 1 556
Corporate obligations 5,499 23 4 5,518
Mortgage-backed securities 27,964 85 245 27,804
Commercial paper 1,983 1 1,982
-------------------------------------------------------------------------
Total held to maturity 40,003 108 402 39,709
-------------------------------------------------------------------------
Total investment securities $42,932 $153 $ 403 $ 42,682
=========================================================================
</TABLE>
(8)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
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 June 30, 2000, 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>
Within one year $ 4,896 $ 4,891
One to five years 2,000 1,949 $ 1,000 $ 1,001
Five to ten years 3,000 2,931 1,237 1,245
After ten years 3,000 2,816
----------------------------------------------------------------------
12,896 12,587 2,237 2,246
Mortgage-backed securities 25,596 24,855 6,251 6,295
----------------------------------------------------------------------
Totals $ 38,492 $ 37,442 $ 8,488 $ 8,541
======================================================================
</TABLE>
During 2000, debt securities with an amortized cost of $7,085,276 were
transferred from held to maturity to available for sale in conjunction with the
Company's adoption of Statement of Financial Accounting Standard (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities. The securities had
an unrealized gain of approximately $49,000.
Note 4 - Loans and Allowance
<TABLE>
<CAPTION>
June 30 2000 1999 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate loans $ 45,612 $ 41,194 $ 35,161
Credit line equity loans 1,284 1,020 937
Loans to depositors secured by savings 200 127 226
Consumer loans 20,680 15,389 501
-----------------------------------------------------
67,776 57,730 36,825
Undisbursed portion of loans (879) (981) (700)
Deferred loan fees (124) (166) (220)
Allowance for loan losses (396) (274) (250)
-----------------------------------------------------
Total loans $ 66,377 $ 56,309 $ 35,655
=====================================================
Allowance for loan losses
Balances, July 1 $ 274 $ 250 $ 250
Provision for losses 184 24
Recoveries on loans 19
Loans charged off (81)
-----------------------------------------------------
Balances, June 30 $ 396 $ 274 $ 250
=====================================================
</TABLE>
(9)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Bank has not had any significant impaired loans during each of the years
ended June 30, 2000, 1999 and 1998.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The unpaid balances of these loans were $9,647,000
and $10,523,000 at June 30, 2000 and 1999.
Note 5 - Premises and Equipment
June 30 2000 1999
---------------------------------------------------------------------------
Land $ 649 $ 639
Buildings 1,891 1,852
Equipment 1,039 939
------------------------------------
Total cost 3,579 3,430
Accumulated depreciation (1,932) (1,921)
------------------------------------
Net $1,647 $1,509
====================================
(10)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 6 - Other Assets and Other Liabilities
<TABLE>
<CAPTION>
June 30 2000 1999
------------------------------------------------------------------------------------------------
Other assets
<S> <C> <C>
Interest receivable
Investment securities $ 439 $ 305
Loans 306 277
Cash surrender value of life insurance 2,057 2,158
Investment in limited partnership 172 226
Net deferred tax asset 306 273
Accounts receivable--dealer draft 181 700
Prepaid expenses and other 655 563
------------------------------------
Total $ 4,116 $ 4,502
====================================
Other liabilities
Interest payable
Deposits $ 145 $ 112
Other borrowings 209 146
Deferred directors' fees and officer compensation 523 466
Accrued expenses 380 445
------------------------------------
Total $ 1,257 $ 1,169
====================================
</TABLE>
The investment in limited partnership of $172,000 and $226,000 at June 30, 2000
and 1999 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 $55,000, $51,000
and $53,000, the Bank has recorded the benefit of low-income housing tax credits
of $73,000 for each of the years ended June 30, 2000, 1999 and 1998.
Note 7 - Deposits
June 30 2000 1999
------------------------------------------------------------------------------
Demand deposits $12,196 $12,335
Savings deposits 9,001 9,601
Certificates of deposit of $100,000 or more 8,109 7,728
Other certificates of deposit 56,668 57,058
--------------------------------
Total deposits $85,974 $86,722
================================
(11)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Certificates maturing in years ending June 30:
2001 $33,556
2002 24,244
2003 5,104
2004 985
2005 607
Thereafter 281
---------------
$64,777
===============
Note 8 - Long-Term Debt
June 30 2000 1999
--------------------------------------------------------------------------
Federal Home Loan Bank advances
Fixed rate of 6.465%, due in January 2005 $5,000 $0
=======================
The Federal Home Loan Bank advances are secured by first-mortgage loans and
investment securities totaling $7,576,000. Advances are subject to penalties in
the event of prepayment.
(12)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 9 - Income Tax
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999 1998
------------------------------------------------------------------------------------------------------------------
Income tax
<S> <C> <C> <C>
Currently payable
Federal $436 $229 $332
State 119 90 125
Deferred
Federal (52) (92) (32)
State 15 (17) (10)
-------------------------------------------------
Total income tax expense $518 $210 $415
=================================================
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $566 $266 $440
State income taxes, net of federal benefit 88 48 76
Cash surrender value of life insurance (32) (33) (30)
Tax credits (73) (73) (73)
Other (31) 2 2
-------------------------------------------------
Actual tax expense $518 $210 $415
=================================================
</TABLE>
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
<TABLE>
<CAPTION>
June 30 2000 1999
------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Differences in accounting for loan losses $ 142 $ 101
Differences in accounting for loan fees 19 28
Deferred compensation and directors fees 256 242
Other 44 53
-------------------------------
Total assets 461 424
-------------------------------
Liabilities
Differences in depreciation methods (81) (77)
Federal Home Loan Bank dividends (51) (55)
Unrealized gain on securities available for sale (23) (19)
-------------------------------
Total liabilities (155) (151)
-------------------------------
$ 306 $ 273
===============================
</TABLE>
(13)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Retained earnings at June 30, 2000 and 1999 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 was approximately $1,395,000.
Note 10 - Other Comprehensive Income
<TABLE>
<CAPTION>
2000
-----------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Expense Amount
----------------------------------------------------------------------------------------------------------------------------
Unrealized gains on securities:
<S> <C> <C> <C>
Unrealized holding gains arising during the year $9 $(4) $ 5
=====================================================
1999
-----------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Benefit Amount
----------------------------------------------------------------------------------------------------------------------------
Unrealized losses on securities:
Unrealized holding losses arising during the year $(35) $12 $(23)
=====================================================
1998
-----------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Expense Amount
----------------------------------------------------------------------------------------------------------------------------
Unrealized gains on securities:
Unrealized holding gains arising during the year $24 $(8) $16
=====================================================
</TABLE>
(14)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 11 - 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.
June 30
-------------------------
2000 1999
-------------------------
Loan commitments
At variable rates $3,299 $2,766
At fixed rates ranging from 6.75% to 8.375% 230 460
-------------------------
$3,529 $3,226
=========================
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 Company 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 Company.
Note 12 - Dividends and Capital Restrictions
Without prior approval, current regulations allow the Bank to pay dividends to
the Company not exceeding net income for the current year plus those for the
preceding two years. The Bank normally restricts dividends to a lesser amount
because of the need to maintain an adequate capital structure.
At the time of conversion, a liquidation account was established in an amount
equal to the Bank's net worth as reflected in the latest statement of condition
used in its final conversion offering circular. The liquidation account is
maintained for the benefit of eligible deposit account holders who maintain
their deposit account in the Bank after conversion. In the event of a complete
liquidation, and only in such event, each eligible deposit account holder will
be entitled to receive a liquidation distribution from the liquidation account
in the amount of the then-current adjusted subaccount balance for deposit
accounts then held, before any liquidation distribution may be made to
stockholders. Except for the repurchase of stock and payment of dividends, the
existence of the liquidation account will not restrict the use or application of
net worth. The initial balance of the liquidation account was $15,268,982.
(15)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 13 - 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.
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 June 30, 2000 and 1999, the
Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since June 30, 2000 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
-------------------------------------------------------------------------------
As of June 30, 2000
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital* (to risk-
weighted assets) $25,661 38.38% $5,349 8.00% $6,686 10.00%
Tier 1 capital* (to risk-weighted assets) 25,265 38.31 2,674 4.00 4,012 6.00
Core capital* (to adjusted total assets) 25,265 19.94 5,070 4.00 6,368 5.00
Core capital* (to adjusted tangible
assets) 25,265 19.94 2,535 2.00 N/A N/A
Tangible capital* (to adjusted total
assets) 25,265 19.94 1,901 1.50 N/A N/A
As of June 30, 1999
Total risk-based capital* (to risk-
weighted assets) $25,357 40.95% $4,954 8.00% $6,192 10.00%
Tier 1 capital* (to risk-weighted assets) 25,083 40.51 2,477 4.00 3,715 6.00
Core capital* (to adjusted total assets) 25,083 20.47 4,902 4.00 6,127 5.00
Core capital* (to adjusted tangible
assets) 25,083 20.47 2,450 2.00 N/A N/A
Tangible capital* (to adjusted total
assets) 25,083 20.47 1,838 1.50 N/A N/A
</TABLE>
*As defined by regulatory agencies
(16)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 14 - Employee Benefit Plans
Pension Plan
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. Pension
expense was $19,300, $2,200 and $1,700 for 2000, 1999 and 1998. This plan
provides pension benefits for substantially all of the Bank's employees.
401(k) Plan
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 $22,900, $23,400 and $21,500 for 2000, 1999 and 1998.
Supplemental Retirement Plan
The Bank also has supplemental retirement plan 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
$50,100, $45,100 and $40,600 for the years ended June 30, 2000, 1999 and 1998.
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. The Bank's expense
for the plan was $51,200, $43,900 and $33,100 for the years ended June 30, 2000,
1999 and 1998.
Employee Stock Ownership Plan
In connection with the conversion, the Bank established an employee stock
ownership plan for the benefit of substantially all of its employees. At June
30, 1999, the ESOP had borrowed $874,000 from the Company and used those funds
to acquire 87,400 shares of the Company's stock at $10 per share. During 2000,
the ESOP borrowed an additional $980,411 from the Company and used those funds
to acquire 94,392 shares of the Company's stock at an average price of $10.39
per share.
Shares issued to the ESOP are allocated to ESOP participants based on principal
repayments made by the ESOP on the loan from the Company. The loan is secured by
shares purchased with the loan proceeds and will be repaid by the ESOP with
funds from the Bank's discretionary contributions to the ESOP and earnings on
ESOP assets. Dividends on unallocated ESOP shares will be applied to reduce the
loan. Principal payments are scheduled to occur in even annual amounts over a
12-year period. However, in the event contributions exceed the minimum debt
service requirements, additional principal payments will be made.
(17)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Stock totaling 17,866 and 4,856 shares for 2000 and 1999 with an average fair
value of $9.65 and $9.62 per share were committed to be released, resulting in
ESOP compensation expense of approximately $172,500 and $46,700. Shares held by
the ESOP at June 30 are as follows:
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
Allocated shares 17,866 4,856
Shares distributed to participants 0 0
Unallocated shares 163,926 82,544
---------------------------------
Total ESOP shares 181,792 87,400
=================================
Fair value of unallocated shares at June 30 $1,944,766 $835,758
=================================
</TABLE>
Management Recognition Plan
On April 25, 2000, the Company established a Management Recognition Plan (MRP)
to enable the Company to retain executive personnel of experience and ability in
key positions of responsibility. The plan is authorized to acquire and grant
90,896 shares of the Company's common stock. The funds used to acquire these
shares will be contributed by the Bank. Participants vest in the plan over five
years at the rate of 20% per year. As of June 30, 2000, all 90,896 shares
authorized under the plan had been acquired and granted. No shares had been
distributed or forfeited as of June 30, 2000. For the year ended June 30, 2000,
approximately $27,600 was recorded as compensation expense under the plan.
Note 15 - Stock Option Plan
The Company has an incentive stock option plan in which 227,240 shares have been
reserved for future issuance by the Company to directors and employees of the
Company and its subsidiary. The plan provides for a term of ten years, after
which no awards may be made, unless earlier terminated by the Board of
Directors. At June 30, 2000, options to purchase 204,516 shares had been granted
at $9.125 per share.
Under the Company's incentive stock option plan, which is accounted for in
accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, and related interpretations, the Company grants
selected executives and other key employees stock option awards which vest
according to a schedule fixed by a committee made up of two or more
"disinterested" directors of the Company. The options become fully exercisable
upon vesting.
(18)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share as if the Company had
accounted for its employee stock options under that Statement. The fair value of
each option grant was estimated using an option-pricing model with the following
assumptions:
2000
--------------
Risk-free interest rate 6.0%
Dividend yield 2.5%
Volatility factor of expected market price of common stock 19.9%
Weighted-average expected life of the options 10 years
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement are as follows:
2000
-------------------
Net income As reported $1,146
Pro forma 924
Basic earnings per share As reported $0.56
Pro forma 0.45
Diluted earnings per share As reported $0.56
Pro forma 0.45
The following is a summary of the status of the Company's stock option plan and
changes in that plan as of and for the year ended June 30, 2000.
<TABLE>
<CAPTION>
Year Ended June 30 2000
------------------------------------------------------------------------------------------------
Weighted-
Average
Options Shares Exercise Price
------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, beginning of year 0
Granted 204,516 $9.125
Exercised 0
Forfeited/expired 0
--------------
Outstanding, end of year 204,516 $9.125
==============
Options exercisable at year end 45,448 $9.125
==============
Weighted-average fair value of options granted
during the year $ 3.91
</TABLE>
As of June 30, 2000, the 204,516 options outstanding have an exercise price of
$9.125 and a remaining contractual life of 9.8 years.
(19)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 16 - Earnings Per Share
Earnings per share were computed as follows:
<TABLE>
<CAPTION>
Year Ended June 30, 2000
-------------------------------------------------
Weighted
Average Per Share
Income Shares Amount
-------------------------------------------------
<S> <C> <C> <C>
Net Income $1,146
------------
Basic Earnings Per Share
Income available to common stockholders $1,146 2,045,964 $0.56
Effect of Dilutive Securities
Stock options 7,307
------------------------------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions $1,146 2,053,271 $0.56
=================================================
</TABLE>
Note 17 - 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 FRB.
Cash Surrender Value of Life Insurance--The fair values of cash surrender values
of life insurance approximate carrying values.
(20)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
Off-Balance Sheet Commitments--Commitments include commitments to purchase and
originate mortgage loans, commitments to sell mortgage loans and standby letters
of credit 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.
(21)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------
Carrying Fair Carrying Fair
June 30 Amount Value Amount Value
-----------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 6,393 $ 6,393 $16,698 $16,698
Interest-bearing deposits 1,188 1,188 2,079 2,079
Investment securities available for sale 8,541 8,541 2,973 2,973
Investment securities held to maturity 38,492 37,442 40,003 39,709
Loans, net 66,377 64,354 56,308 54,714
Interest receivable 745 745 582 582
FHLB stock 727 727 727 727
Cash surrender value of life insurance 2,057 2,057 2,158 2,158
Liabilities
Deposits 85,974 84,051 86,722 85,576
Long-term debt 5,000 4,935
Interest payable 354 354 258 258
</TABLE>
(22)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 18 - Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
Condensed Balance Sheet
<TABLE>
<CAPTION>
June 30 2000 1999
-------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash $ 124
Interest-bearing demand deposits $ 1,007 2,439
----------------------------------
Total cash and cash equivalents 1,007 2,563
Investment in common stock of subsidiary 25,296 25,108
Loans to First Federal Savings Bank 8,649 8,861
Other assets 7 47
----------------------------------
Total assets $ 34,959 $ 36,579
==================================
Liabilities--Other liabilities $ 47 $ 51
Stockholders' Equity 34,912 36,528
----------------------------------
Total liabilities and stockholders' equity $ 34,959 $ 36,579
==================================
</TABLE>
(23)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Income--Other income $ 505 $113
Expense--Other expenses 185 20
--------------------------------
Income before income tax and equity in undistributed
income of subsidiary 320 93
Income tax expense 127 39
--------------------------------
Income before equity in undistributed income of subsidiary 193 54
Equity in undistributed income of subsidiary 953 519
--------------------------------
Net Income $1,146 $573
================================
</TABLE>
(24)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30 2000 1999
----------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C>
Net income $1,146 $ 573
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed income of subsidiary (953) (519)
Net change in
Other assets 40 (47)
Other liabilities (4) 51
----------------------------------
Net cash provided by operating activities 229 58
----------------------------------
Investing Activities
Net change in loans to subsidiary 212 (8,861)
Purchase of subsidiary stock (9,616)
----------------------------------
Net cash provided (used) by investing activities 212 (18,477)
----------------------------------
Financing Activities
Issuance of common stock, net of offering costs 20,982
Cash dividends (147)
Purchase of treasury stock (1,861)
Refund of conversion expenses 11
----------------------------------
Net cash provided (used) by financing activities (1,997) 20,982
----------------------------------
Net Change in Cash and Equivalents (1,556) 2,563
Cash and Cash Equivalents, Beginning of Year 2,563 0
----------------------------------
Cash and Cash Equivalents, End of Year $1,007 $ 2,563
==================================
</TABLE>
(25)
<PAGE>
FIRST BANCORP OF INDIANA, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 19 - Quarterly Financial Data
The following is a summary of selected quarterly results of operations for the
years ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Quarter Ended
(unaudited)
-------------------------------------------------------------------------
Fiscal 2000 June 30 March 31 December 31 September 30
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $1,145 $1,120 $1,079 $1,025
Provision for loan losses 45 45 49 45
Noninterest income 240 182 226 220
Noninterest expense 851 823 952 763
Income before income tax 489 434 304 437
Net income 358 287 211 290
Quarter Ended
(unaudited)
-------------------------------------------------------------------------
Fiscal 1999 June 30 March 31 December 31 September 30
--------------------------------------------------------------------------------------------------------
Net interest income $976 $661 $655 $647
Provision for loan losses 13 11
Noninterest income 90 77 81 74
Noninterest expense 750 608 590 506
Income before income tax 303 119 146 215
Net income 210 97 111 155
</TABLE>
Note 20 - Subsequent Event
Subsequent to June 30, 2000, the Company entered into an agreement to purchase
certain assets and assume certain liabilities of two financial institution
branches located in Evansville, Indiana. It is anticipated that this transaction
will be consummated during the second quarter of fiscal 2001 and be accounted
for using the purchase method of accounting.
(26)
