UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended June 30, 1996 or [ ]Transition report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For
the transition period from _______________to__________________
Commission File Number : 0-17915
1ST BANCORP
(Exact name of registrant as specified in its charter)
Indiana 35-1775411
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
101 North Third Street
Vincennes, Indiana 47591
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812)885-2255
Securities registered pursuant to Section 12(b) of
the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($1.00 par value)
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months 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 Regulations S-K (Para. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K. |__|
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant: $13,599,127 as of September 16, 1996.
Number of shares of Common Stock outstanding as of September 16, 1996: 670,131
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June
30, 1996 are incorporated into Part II. Portions of the Proxy Statement for the
1995 Annual Meeting of Stockholders are incorporated into Part I and Part III.
<PAGE>
1ST BANCORP
FORM 10-K
INDEX
Part I Page No.
Item 1. Business........................................................ 3
Item 2. Properties...................................................... 38
Item 3. Legal Proceedings............................................... 39
Item 4. Submission of Matters to a Vote of Security Holders ............ 39
Item 4.5 Executive Officers of the Corporation........................... 39
Part II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters.......................................... 40
Item 6. Selected Financial Data......................................... 40
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 40
Item 8. Financial Statements and Supplementary Data..................... 40
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures......................... 40
Part III
Item 10. Directors and Executive Officers of the Registrant.............. 41
Item 11. Executive Compensation.......................................... 41
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................... 41
Item 13. Certain Relationships and Related Transactions.................. 41
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................................... 42
Signatures................................................................ 45
2
<PAGE>
PART I
Item 1. Business
General
1ST BANCORP, an Indiana Corporation (the "Corporation" or "1ST
BANCORP"), is a nondiversified, unitary savings and loan holding company. The
principal asset of the Corporation is the outstanding stock of First Federal
Bank, A Federal Savings Bank, ("First Federal" or the "Bank") and the Bank's
subsidiary, Financial Services of Southern Indiana Corporation. Other
subsidiaries of the Corporation include First Financial Insurance Agency, Inc.
("First Financial"), a full service insurance agency, and First Title Company
("First Title"), a currently inactive company incorporated for the purpose of
providing title search services for mortgage lenders.
First Federal is a federally-chartered stock savings bank that was
converted to the stock form of ownership and to a federal savings bank in May,
1987. The Bank is primarily engaged in attracting deposits from the general
public and applying these funds, together with borrowings, to the origination of
residential mortgage loans and consumer loans.
First Federal's revenue is primarily derived from interest on, and fees
received in connection with, real estate and other loans. During fiscal 1996,
income was recognized on the sale of the two branch offices. The Bank also
experienced gains on the sale of its mortgage loans as part of its continuing
operations and asset/liability management efforts. The Bank's principal expenses
are interest on deposits and borrowings and general and administrative expenses.
The principal sources of funds for First Federal's lending activities
are its deposits, amortization and prepayments of outstanding loans, sales of
mortgage loans and borrowings from the Federal Home Loan Bank of Indianapolis
("FHLB" or "FHLB of Indianapolis").
The Bank's deposits are insured by the full faith and credit of the
United States government by the Federal Deposit Insurance Corporation's ("FDIC")
Savings Association Insurance Fund ("SAIF"). Deposit accounts in First Federal
are generally insured by the SAIF to a maximum of $100,000 for each insured
depositor. The Bank is a member of the FHLB of Indianapolis and is subject to
comprehensive regulation, examination, and supervision by the Office of Thrift
Supervision ("OTS") and the FDIC.
First Federal offers a full range of banking services through its
banking office located in Vincennes, Indiana. Additionally, the Bank operates
loan origination offices in Indianapolis and Evansville, Indiana, Louisville,
Kentucky, and suburbs of Cincinnati, Dayton, and Cleveland, Ohio. The
Corporation's insurance subsidiary, First Financial, operates from its main
office in Vincennes, Indiana.
On December 16, 1995, the Corporation completed the sale of certain
assets and certain
3
<PAGE>
liabilities of the Bank's two full service retail branch offices in Tipton and
Kokomo, Indiana resulting in a pre-tax gain of $7,274,000. Included in the
transaction were the sale of certain mortgage and consumer loans, office
premises and equipment and certain deposit liabilities.
The Bank's principal market area is Knox County in Indiana. The Bank's
deposits are obtained primarily from persons who are residents of its primary
market area. However, to supplement local deposits, the Bank also makes use of
brokered deposits which range in original maturity from one to three years with
rates ranging from 5.0% to 6.2%. The program serves as an alternative source of
funds to compliment the borrowing program and retail savings programs offered in
the Bank's local market. The brokered funds enabled the Bank to manage
maturities of its deposits in its effort to manage interest rate risk. The
brokered funds were used to fund increases in the mortgage loan portfolio and
the held for sale portfolio, as well as the cash position at year end.
Lending Activities
General
First Federal has traditionally concentrated its lending activities on
conventional first mortgage loans secured by residential property. Conventional
loans are neither insured by the Federal Housing Administration ("FHA") nor
partially guaranteed by the Veteran's Administration ("VA"). At June 30, 1996,
First Federal's net loan portfolio aggregated $150.7 million, representing 57.2%
of total assets at that date. This compares to the Bank's net loan portfolio of
$201.8 million at June 30, 1995 representing 64.5% of total assets.
The Bank has historically concentrated on the origination and purchase
of conforming conventional mortgage lending. This market is represented by loans
conforming to documentation and underwriting standards dictated by the Federal
Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC") and the Federal
National Mortgage Association ("Fannie Mae" or "FNMA"). The Bank continues to
originate conforming loan product but in the past fiscal year has also
concentrated on the origination of nonconforming mortgage loans. Nonconforming
loans meet alternative documentation and underwriting requirements dictated by a
secondary market made up of companies smaller than FHLMC and FNMA. Such loans
are made to a broader customer base and are graded "A" through "D".
Creditworthiness, collateral, equity, and other factors are weighed in the
grading of the nonconforming loans and interest rates charged are commensurate
with risk.
The Bank offers both fixed rate and adjustable rate ("AML") loans. The
majority of fixed rate loans with maturities in excess of fifteen years are sold
in the secondary market. In addition to residential real estate lending, as part
of its asset and liability management strategy, First Federal continues its
lending activities in other shorter-term interest rate sensitive loans,
including consumer loans, which accounted for 6.6% of the total loan portfolio
at June 30, 1996 as compared to 8.3% of the total loan portfolio at June 30,
1995.
4
<PAGE>
The following table (which excludes the loans held for sale portfolio)
sets forth the composition of the Bank's loan portfolio by type of loan at the
dates indicated:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(in thousands)
Real estate loans:
<S> <C> <C> <C> <C> <C>
Conventional $ 141,247 $ 181,676 $ 153,251 $ 140,140 $ 133,621
Construction 2,171 7,364 12,460 4,862 2,386
Consumer loans 5,839 10,203 9,285 8,765 4,634
Other Loans 4,171 6,859 6,775 4,889 7,972
--------- --------- --------- --------- ---------
153,428 206,102 181,771 158,656 148,613
--------- --------- --------- --------- ---------
Undisbursed loans funds (1,297) (3,038) (7,707) (1,495) (1,663)
Unamortized premiums and discounts, net 125 (16) (122) (162) (176)
Allowance for loan losses (896) (878) (817) (892) (808)
Deferred loan fees (611) (360) (328) (357) (464)
Deferred futures losses -- 9 20 31 54
--------- --------- --------- --------- ---------
(2,679) (4,283) (8,954) (2,875) (3,057)
--------- --------- --------- --------- ---------
Net loans receivable $ 150,749 $ 201,819 $ 172,817 $ 155,781 $ 145,556
========= ========= ========= ========= =========
</TABLE>
Contractual Maturities of Loans
The following table summarizes the contractual maturities of First
Federal's loan portfolio due for the fiscal periods indicated as of June 30,
1996 by type of loan:
<TABLE>
<CAPTION>
Balance
Outstanding More More More More More
at than 1 than 2 than 3 than 5 than 10
June 30, One Year Year to Years to Years to Years to Years to More than
1996 or less 2 Years 3 Years 5 Years 10 Years 15 Years 15 Years
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Conventional $141,247 $ 2,062 $ 890 $ 1,709 $ 17,769 $ 34,069 $ 28,885 $ 55,863
Construction 2,171 2,171 -- -- -- -- -- --
Consumer and Other Loans 10,010 2,790 423 879 3,741 1,658 519 --
-------- -------- -------- -------- -------- -------- -------- --------
Total $153,428 $ 7,023 $ 1,313 $ 2,588 $ 21,510 $ 35,727 $ 29,404 $ 55,863
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Contractual maturities of loans do not reflect the average life of the
Bank's loan portfolio. The average life of mortgage loans is substantially less
than their contractual terms because of loan prepayments and refinancings.
Scheduled principal amortization also reduces the average maturity of the loan
portfolio. The average life of mortgage loans tends to increase, however, when
current mortgage rates substantially exceed rates on existing mortgages.
5
<PAGE>
Adjustable- and Fixed-Rate Loans
The following table sets forth by type of loan the amount of First
Federal's fixed-rate loans and AMLs included in its gross loans receivable:
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
One-to-Four Family Residential Mortgage Loans
Fixed Rates $54,212 $71,772 $64,294 $44,963 $38,388
Adjustable Rates 81,051 107,849 92,492 90,957 86,017
-------- -------- -------- -------- --------
Total $135,263 $179,621 $156,786 $135,920 $124,405
Commercial Real Estate Loans
Fixed Rates 3,511 2,996 4,062 4,468 6,148
Adjustable Rates 4,644 6,423 4,863 4,614 5,454
-------- -------- -------- -------- --------
Total $8,155 $9,419 $8,925 $9,082 $11,602
Total Real Estate Loans
Fixed Rates 57,723 74,768 68,356 49,431 44,536
Adjustable Rates 85,695 114,272 97,355 95,571 91,471
-------- -------- -------- -------- --------
Total $143,418 $189,040 $165,711 $145,002 $136,007
Consumer & Other Loans
Fixed Rates 6,671 11,438 10,011 8,841 8,047
Adjustable Rates 3,339 5,624 6,049 4,813 4,559
-------- -------- -------- -------- --------
Total $10,010 $17,062 $16,060 $13,654 $12,606
Total Loans Receivable
Fixed Rates 64,394 86,206 78,367 58,272 52,583
Adjustable Rates 89,034 119,896 103,404 100,384 96,030
-------- -------- -------- -------- --------
Total $153,428 $206,102 $181,771 $158,656 $148,613
</TABLE>
Residential Mortgage Loans
To the extent deemed appropriate, in view of market forces, First
Federal intends to continue to originate AMLs in order to reduce the impact of
rapid increases in market rates of interest on its operations and the market
value of its equity. Although critical to maintaining an asset/liability
matching program and a reasonable interest rate risk posture, adjustable-rate
loans generally do not adjust as rapidly as changes in the Bank's cost of funds.
The Bank also continues to be an originator of fixed-rate mortgage
loans. Fixed-rate residential mortgages currently originated by the Bank
generally are made with 15- and 30-year amortization schedules. The Bank also
originates fixed-rate residential mortgages with balloon payments, with the
balloon payment being due generally in five or seven years, although
occasionally the period may be longer. The majority of the conforming fixed-rate
residential mortgage loans currently being originated by First Federal are sold
to FNMA or FHLMC. A portion of the nonconforming mortgage loans are sold on a
non-recourse basis in the
6
<PAGE>
nonconforming secondary market. However, the highest quality nonconforming loans
are being retained in portfolio in order to increase interest income.
Of the $144.9 million loans originated in fiscal year 1996, $65.8
million were nonconforming mortgage loan originations. This compares to the
origination of $10.6 million nonconforming mortgage loans of the total $111.0
million loan originations during fiscal year 1995. At June 30, 1996, $23.3
million nonconforming loans were included in the loan portfolio as compared to
$4.8 million in portfolio at June 30, 1995.
The Bank also originates second mortgages, the majority of which are on
real estate in which it also holds the first mortgage. The loans have either
adjustable rate or fixed rate features with terms similar to first mortgage
loans. The second mortgage, when combined with the balance of the first
mortgage, normally does not exceed 80% of the value of the real estate, but may,
in certain cases, be granted at 100% of the value of the real estate.
First Federal offers residential construction loans to both individuals
and builders. Such loans accounted for approximately 10.7% of the total amount
of loans originated by the Bank in fiscal year 1996. The construction loans are
generally for a period of 6 to 12 months, and the Bank may receive personal
guarantees from the principals. An independent appraiser inspects all sites
prior to origination of the loans as required by OTS regulations.
The Bank also provides the permanent financing on construction projects
for residential housing. The Bank normally grants a commitment for permanent
financing concurrent with the origination of the construction loan. Such
commitments are generally market rate commitments and require the borrower to
satisfy the Bank's normal underwriting criteria at the time the loan is made.
Terms are similar to those established for other first mortgage loans. Interest
rates are generally adjustable and are set at the time of the origination of the
construction loan. In the case of an AML, the construction period is included in
the time frame upon which the interest rate adjustment is based.
In many instances, construction loans have a commitment for permanent
financing either from the Bank or another financial institution prior to closing
the construction loan. In other cases, the Bank does grant "spec" residential
construction loans to builders on a limited basis. Each builder is limited by
amount and number of projects that are in process at any one time. These limits
are established and monitored by the Board of Directors regularly.
Under policies adopted by the Bank's Board of Directors, the Bank limits
the loan-to-value ratio to 100% on residential mortgage loans. The Bank
generally requires all conventional loans with loan-to-value ratios in excess of
80% to carry private mortgage insurance which insures First Federal against
default on a portion of the principal amount of the loan. Commercial real estate
loans generally may not exceed 75% of the value of the secured property.
Construction loans generally may not exceed 80% of the value of the secured
property and generally are made for 80% or less of the appraised value of the
property upon completion.
7
<PAGE>
It is the Bank's policy to obtain title insurance policies insuring that
First Federal has a valid lien on mortgaged real estate. Borrowers also must
obtain hazard insurance policies prior to closing and, when required by the
Department of Housing and Urban Development, flood insurance policies.
Commercial Real Estate Loans
At June 30, 1996, First Federal's commercial real estate loan portfolio
(including loans on nonresidential property, land, and five or more dwelling
units) aggregated $8.2 million, or 5.4% of the total loan portfolio. During the
early 1980s, First Federal originated and purchased a number of commercial real
estate loans. Such activity has been very limited in the past several years.
Land development loans are generally limited to less than 75% of the market
value of the improved land and are granted as revolving lines of credit.
Interest rates generally are 2% above the prime rate, recalculated on a monthly
basis. As lot sales occur, the Bank generally requires a payment equal to 75% of
the gross sale proceeds. The land development loans have been granted in
communities served by various First Federal offices.
Consumer Lending
The Bank also originates consumer loans, which include savings account
loans, student loans, automobile loans, property improvement loans, home equity
loans, mobile home loans, credit card loans, and other secured and unsecured
consumer loans. Applicable laws and regulations permit the Bank to make secured
and unsecured consumer loans up to 35% of the institution's total assets. At
June 30, 1996, such loans constituted $10.0 million, or 6.6% of the total loan
portfolio.
The maximum term of automobile loans is generally five years, with the
rate and term dependent upon whether the vehicle is new or used. Home equity
loans are variable rate and are treated as revolving lines of credit. At June
30, 1996, home equity loans aggregated $3.1 million, available balances averaged
$14,344, and approved credit line balances averaged $26,146. Savings account
loans generally do not exceed 90% of the savings account balance which
collateralizes the loan and demand an interest rate generally equal to 2.0%
above the rate paid on the savings account.
Origination, Purchase and Sale of Loans and Participations
As a federally-chartered savings institution, First Federal has general
authority to make real estate loans secured by properties located throughout the
United States. At June 30, 1996, most of First Federal's total loans receivable
were secured by real estate located in its primary market. Through the loan
origination office network, however, the Bank's lending market is expanded
beyond the traditional areas.
During the mid-1980's, First Federal purchased a limited number of
participations in loans
8
<PAGE>
originated by other financial institutions. In such instances, First Federal
purchased a portion of a loan from a lead lender which services the loan and
remits to the Bank its pro-rata share of interest and principal payments
received from the borrower. First Federal pays a fee from .25% to .50% of the
interest earned on the loan to the lead lender for servicing the loan. This
operating strategy was undertaken because of an inadequate supply of loans in
the Bank's primary lending area. Since that time, few participations have been
purchased. The Bank has expanded its origination and purchasing operations for
mortgage loans and currently has an adequate supply of loans in its market
areas. The Bank is continually looking for new market areas into which it can
expand.
Historically, mortgage loans have been originated by the Bank primarily
through referrals from real estate brokers, builders and walk-in customers, as
well as through refinancing for existing customers. The Bank carefully monitors
interest rates in its market areas and believes that it is competitive in such
areas. During fiscal 1996, the Bank originated $132.2 million of residential
real estate loans (including construction loans) as compared to $95.3 million of
residential real estate loans in 1995 and $189.9 million of residential real
estate loans in 1994. First Federal continues to obtain its market share of
loans in its communities. In addition, through mortgage banking services,
additional loans are granted in other surrounding communities. This increase in
volume in 1996 was due to the increased production of the loan origination
offices. The decreased volume of originations in 1995 resulted from the
increasing interest rates from those interest rates experienced during fiscal
1994. Loans purchased through a wholesale correspondent network increased to
$27.6 million during fiscal 1996 as compared to $13.7 million during 1995 and
$81.0 million during fiscal 1994. The increase in loan purchases during 1996 can
be attributed to a program designed to replace the loan production from the
branches sold during the year. Additionally, the Bank originates and sells FHA
and VA loans in the secondary mortgage market.
During 1996, the Bank sold $67.6 million in loans to FHLMC and FNMA as
compared to the sale of $25.7 million in loans to FHLMC and FNMA in fiscal year
1995. The Bank continues to service most of the loans sold in 1996 and retains a
portion of the interest received (.250% to .375%) as a servicing fee. An
additional $28.4 in million loans were sold in conjunction with the branch sales
during fiscal 1996 and $37.5 million in conforming loans were sold to private
investors. An aggregate of $27.9 million in nonconforming loans were sold to
various investors during 1996 as compared to $7.1 million in nonconforming loan
sales in 1995. These loans are generally sold servicing released.
9
<PAGE>
The following table shows total loan originations, purchases, sales and
repayment activities of the Bank during the periods indicated:
<TABLE>
<CAPTION>
Years Ended June 30,
(Dollars in thousands)
-----------------------------------
1996 1995 1994
--------- --------- ---------
Loans Originated
Real estate loans
<S> <C> <C> <C>
Construction (1) $ 15,466 $ 14,169 $ 16,913
Land -- 740 1,027
Loans for purchase or refinance
of existing property:
One-to-four units 116,783 81,117 172,947
Over four units -- 143 --
Commercial 215 313 249
Consumer loans (2) 12,394 14,537 13,494
--------- --------- ---------
Total loans originated $ 144,858 $ 111,019 $ 204,630
Participations and whole loans purchased $ 27,583 $ 13,695 $ 81,039
Participations and whole loans sold ($161,421) ($ 32,835) ($206,691)
Loan principal repayments (63,694) (67,548) (55,863)
--------- --------- ---------
Change in loan portfolio ($ 52,674) $ 24,331 $ 23,115
</TABLE>
- -------------
(1) Construction loans originated are residential.
(2) Consumer loans consist primarily of home equity, savings account,
signature, automobile, and property improvement loans.
Income from Lending Activities
Interest rates charged by First Federal on mortgage loans are primarily
determined by competitive loan rates offered in its market areas. Mortgage loan
rates reflect factors such as general interest rate levels, the supply of money
available to the savings industry and the demand for such loans. These factors
are, in turn, affected by general economic conditions, the monetary policies of
the federal government, (including the Board of Governors of the Federal Reserve
Board), the general supply of money in the economy, tax policies and
governmental budget matters.
In addition to interest earned on loans and the income from servicing of
loans, the Bank receives income through fees in connection with late payments,
changes of property ownership and for miscellaneous services related to its
loans. Income from these activities varies from period to period with the volume
and type of loans originated, modified, sold or purchased, which in turn is
dependent on prevailing mortgage interest rates and their effect on the demand
for loans in markets serviced by the Bank.
In its lending, the Bank may charge loan origination fees which are
calculated as a percentage of the amount borrowed. Loan origination fees and
certain related direct loan origination costs are offset and the resulting net
amount is deferred and amortized over the lives of the related loans as an
adjustment to the yield of such related loans. However, in the event the related
loan is sold, any net deferred loan fees remaining with respect to such loans
are taken into income. In addition, commitment fees are offset against related
direct costs and recognized over the life of the related loans as an adjustment
of yield, if the commitment is exercised, or, if the commitment expires
unexercised, the commitment fees are recognized in income upon expiration of the
commitment.
10
<PAGE>
The following table sets forth certain information concerning loan
origination and commitment fees and deferred loan origination and commitment
fees on First Federal's mortgage loan portfolio for each of the periods or as of
the dates indicated.
1996 1995 1994
------ ------ ------
(Dollars in Thousands)
Loan origination, commitment
fees and service fees earned
during the year ended June 30 $140 $780 $700
Net deferred loan origination and
commitment fees on mortgage
loans at end of year $611 $360 $328
Purchased and originated mortgage
servicing rights at end of year $591 $1,432 $1,440
Asset Quality
Collection Practices
When a borrower fails to make a required payment on a loan, the Bank
attempts to cause the deficiency to be cured by contacting the borrower and
seeking payment. Contacts are generally made after a payment is more than 30
days past due and a late charge is assessed at such time. In most cases,
deficiencies are cured promptly. If the delinquency exceeds 120 days and is not
cured through the Bank's normal collection procedures, the Bank will generally
institute measures to remedy the default, including commencing a foreclosure
action or accepting from the mortgagor a voluntary deed of the secured property
in lieu of foreclosure. If a foreclosure action is instituted and the loan is
not reinstated, paid in full, or refinanced, the property is sold pursuant to
statutory requirements after obtaining a judgement of foreclosure from the
appropriate court. The property is then included in the Bank's "real estate
owned" account until it is sold. The Bank is permitted by federal regulations to
finance the sales of these properties by loans or contracts to facilitate the
sale of real estate owned, which involve a lower down payment or a longer term
than would be generally allowed by the Bank's underwriting standards.
Non-Performing Assets
The table below sets forth the amounts and categories of First
Federal's non-performing assets (nonaccrual loans and other non-performing
assets) for the last five years. It is the policy of the Bank to review loans
regularly and loans are placed on nonaccrual status when the loans become
contractually past due 90 days or more. Two commercial mortgage loans with
outstanding principal balances of $975,000 at June 30, 1994 and $1,000,000 at
June 30, 1993 in which the Bank
11
<PAGE>
purchased participating interests became nonperforming in fiscal year 1993, and
are included in the schedule below for 1994 and 1993. The participation loans
were disposed of during fiscal year 1995 at no loss to the Bank.
Year Ended June 30,
----------------------------------------------
1996 1995 1994 1993 1992
(Dollars in thousands)
Non-performing assets:
Non-accrual loans (1) $ 555 $ 400 $1,635 $1,647 $ 776
Other non-performing assets (2) 177 145 160 168 423
Restructured loans -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing assets $ 732 $ 545 $1,795 $1,815 $1,199
Non-performing assets to
total assets 0.29% 0.17% 0.71% 0.79% 0.57%
- -----------
(1) Approximately $48,000 in gross interest income would have been recorded in
the year ended June 30, 1996 if the loans had been current in accordance
with their original terms and had been outstanding throughout the year, or
since origination if held for part of the period. Approximately $26,000 in
interest income was actually recognized in the year.
(2) Troubled loans acquired through foreclosure or deed-in-lieu of foreclosure
are included in the Statement of Financial Condition as real estate owned.
Loss and Delinquency Experience
During the year ended June 30, 1996, the Bank realized net charge-offs
on loans and sales of real estate owned aggregating $65,000. At June 30, 1996,
1.14% of the outstanding principal balance of loans in the Bank's portfolio was
delinquent between 61 and 90 days and .62% was delinquent 91 days or more. The
Bank's loss experience on its loan portfolio for the years shown is summarized
in the following tables:
Year Ended June 30,
-----------------------------------------
1996 1995 1994
-------- --------- ---------
(Dollars in thousands)
Loans receivable, net $150,749 $201,819 $172,817
Net losses (charge-offs) $ 65 $ 39 $ 150
Percent delinquent 61 days
or more at end of year 1.76% 1.14% 1.77%
Total dollar amount
foreclosed $ 180 $ 691 $ 244
Percent foreclosed 0.12% 0.34% 0.14%
Analysis of the Allowance for Loan Losses
Year Ended June 30,
------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of year $878 $817 $892 $808 $756
Charge-offs
Loans
Real estate mortgages 30 15 138 85 78
Consumer loans 52 32 23 30 21
Recoveries
Loans
Real estate mortgages 13 -- 1 73 1
Consumer loans 4 8 10 11 8
---- ---- ---- ---- ----
Net charge-offs 65 39 150 31 90
Additional provision to operations 83 100 75 115 142
---- ---- ---- ---- ----
Balance at end of year $896 $878 $817 $892 $808
==== ==== ==== ==== ====
Ratio of net charge-offs during the
year to average loans outstanding
during the year 0.04% 0.02% 0.09% 0.03% 0.06%
12
<PAGE>
Additional information regarding the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
At June 30, 1996
---------------------------------------------------------------------------
% of Loans in Allowance as a
Amount of Each Category to Allowance as a % of Loans
Type of Loan Allowance Loans Receivable % of Loan Type Receivable
------------ --------- ---------------- -------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-Four Family Mortgage Loans $267 88.16% 0.20% 0.17%
Commercial Real Estate Loans 536 5.32% 6.57% 0.35%
Consumer & Other Loans 93 6.52% 0.93% 0.06%
---- ------ ----
$896 100.00% 0.58%
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1995
---------------------------------------------------------------------------
% of Loans in Allowance as a
Amount of Each Category to Allowance as a % of Loans
Type of Loan Allowance Loans Receivable % of Loan Type Receivable
------------ --------- ---------------- -------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-Four Family Mortgage Loans $214 87.29% 0.12% 0.10%
Commercial Real Estate Loans 559 4.52% 5.93% 0.27%
Consumer & Other Loans 105 8.19% 0.62% 0.05%
---- ------ ----
$878 100.00% 0.42%
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1994
---------------------------------------------------------------------------
% of Loans in Allowance as a
Amount of Each Category to Allowance as a % of Loans
Type of Loan Allowance Loans Receivable % of Loan Type Receivable
------------ --------- ---------------- -------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-Four Family Mortgage Loans $228 86.25% 0.15% 0.13%
Commercial Real Estate Loans 566 4.91% 6.34% 0.31%
Consumer & Other Loans 23 8.84% 0.14% 0.01%
---- ------ ----
$817 100.00% 0.45%
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1993
---------------------------------------------------------------------------
% of Loans in Allowance as a
Amount of Each Category to Allowance as a % of Loans
Type of Loan Allowance Loans Receivable % of Loan Type Receivable
------------ --------- ---------------- -------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-Four Family Mortgage Loans $227 85.67% 0.17% 0.14%
Commercial Real Estate Loans 642 5.72% 7.07% 0.40%
Consumer & Other Loans 23 8.61% 0.17% 0.02%
---- ------ ----
$892 100.00% 0.56%
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1992
---------------------------------------------------------------------------
% of Loans in Allowance as a
Amount of Each Category to Allowance as a % of Loans
Type of Loan Allowance Loans Receivable % of Loan Type Receivable
------------ --------- ---------------- -------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-Four Family Mortgage Loans $180 83.71% 0.14% 0.12%
Commercial Real Estate Loans 613 7.81% 5.28% 0.41%
Consumer & Other Loans 15 8.48% 0.12% 0.01%
---- ----- ----
$808 100.00% 0.54%
</TABLE>
14
<PAGE>
First Federal regularly reviews the status of non-performing assets to
evaluate the adequacy of the allowances for loan and real estate owned losses.
The allowance for loan losses is maintained through the provision for loan
losses, which is charged to earnings.
In addition to the general loan loss allowance, specific reserves have
been established for loans and contracts. An asset would warrant such reserve
because the loan balance exceeds the appraised value or because of other reasons
to anticipate a loss. At June 30, 1996, specific reserve balances were $504,000.
All of the specific reserves are for one loan contract acquired in a merger with
United Savings Association of Central Indiana, F.A., in 1989. The loan balance
at June 30, 1996 was $1.4 million. This specific reserve was established at the
time the loan was acquired; the loan is current in its payments and as the loan
continues to pay down the specific reserve is released.
Investment Activities
The Bank is required under federal regulations to maintain a minimum
amount of liquid assets which may be invested in specified short-term securities
and the Bank is also permitted to make certain other securities investments.
Investment decisions are made by authorized officers of First Federal within
policies established by First Federal's Board of Directors.
At June 30, 1996, First Federal's investment securities portfolio
aggregated $43.6 million, consisting primarily of U.S. Treasury and agency
obligations. See Note 3 of Notes to Consolidated Financial Statements for a
description of investment securities owned at June 30, 1996.
The current investment policy of the Bank includes the use of both
long-term and short-term U.S. government obligations to protect against interest
rate fluctuations. The short-term portfolio is managed by the Bank to maximize
the earnings on investable funds while also maintaining an adequate level of
liquidity. The Bank has the ability and intention to hold its current investment
portfolio to maturity.
15
<PAGE>
The following tables set forth the values of the investment securities
as of the dates indicated. Maturities of each category of securities are also
indicated.
Investment Securities Portfolio
<TABLE>
<CAPTION>
At June 30, At June 30, At June 30,
1996 1995 1994
Amortized Market Wtd. Ave. Amortized Amortized
Investment Type (1) Maturity Cost Value Yield Cost Cost
- -------------------- ------------------- ----------- ------ --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
agency obligations less than 1 year -- -- --
including mortgage- 1 - 5 years 24,405 23,671 5.31%
backed securities 5 - 10 years 13,162 12,609 6.62%
more than 10 years 6,057 5,904 7.62%
$43,624 $42,184 6.03% $72,005 $51,119
------- -------
Federal Home Loan Bank
stock N/A 4,864 4,864 7.50% 3,876 2,498
------- ------- ---- ------- -------
Total Investment Securities $48,488 $47,048 6.17% $75,881 $53,617
======= ======= ==== ======= =======
</TABLE>
(1) There are no tax-exempt securities included in the above totals.
Available for Sale Portfolio
<TABLE>
At June 30, At June 30, At June 30,
1996 1995 1994
Amortized Market Wtd. Ave. Amortized Amortized
Investment Type (1) Maturity Cost Value Yield Cost Cost
- -------------------- ------------------ ----------- ------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
agency obligations less than 1 year - - -
including mortgage- 1 - 5 years 2,961 2,879 5.13%
backed securities 5 - 10 years 3,548 3,404 6.69%
more than 10 years 4,398 4,216 6.61%
$10,907 $10,499 6.23% $0 $4,974
------- ------- ---- -- ------
Total Available for Sale Securities $10,907 $10,499 6.23% $0 $4,974
======= ======= ==== == ======
</TABLE>
(1) There are no tax-exempt securities included in the above totals.
16
<PAGE>
The following table sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in rates (change
in rate multiplied by old volume), (ii) changes in volume (change in volume
multiplied by old rate), and (iii) changes in rate/volume.
<TABLE>
<CAPTION>
Year Ended June 30, Year Ended June 30,
1995 vs. 1996 1994 vs. 1995
-------------------------------------------- --------------------------------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
---- ------ ------ ----- ---- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loan Portfolio (A)(B)(C) $1,062 ($100) ($27) $935 $513 $1,650 $66 $2,229
Investment securities,
trading account investments
and other short-term
deposits (D) 346 (300) (8) 38 560 1,603 5 2,168
------ ----- ---- ---- ------ ------ --- ------
Total $1,408 ($400) ($35) $973 $1,073 $3,253 $71 $4,397
------ ----- ---- ---- ------ ------ --- ------
Interest-bearing liabilities:
Savings accounts $1,626 ($1,527) ($3) $96 $970 $849 ($5) $1,814
Short-term borrowings (96) (129) -- (225 20 159 (1 178
Advances from FHLB and other
borrowings 77 1,156 (3) 1,230 602 1,355 514 2,471
------ ----- ---- ---- ------ ------ --- ------
Total $1,607 ($500) ($6) $1,101 $1,592 $2,363 $508 $4,463
------ ----- ---- ---- ------ ------ --- ------
Net Change in interest
income (expense) ($199) $100 ($29) ($128) ($519) $890 ($437) ($66)
====== ===== ==== ==== ====== ====== === ======
</TABLE>
- ---------------
(A) The effect of nonaccrual loans on net interest-earning assets is not
material.
(B) Out-of-period items and adjustments excluded are not material.
(C) Loan fees included in interest income are not material.
(D) All taxable (no tax-exempt investments held).
17
<PAGE>
Yields Earned and Rates Paid; Certain Ratios
The following table sets forth for First Federal the weighted average
yields earned on its interest-earning assets, average cost of interest-bearing
liabilities and the spread between yields earned and rates paid as of June 30,
1996 and for each of the years ended June 30, 1996, 1995, and 1994. Average
balances are based on quarter-end balances.
<TABLE>
<CAPTION>
Year Ended June 30,
As of June 30, ---------------------------
1996 1996 1995 1994
-------------- ----- ----- ----
<S> <C> <C> <C> <C>
Weighted average yield on
loan portfolio 8.23% 8.36% 7.82% 7.52%
Weighted average yield on
investment securities, trading
account investments, and
other short-term deposits 5.98% 6.25% 5.83% 4.82%
Weighted average yield on all
interest-earning assets 7.49% 7.75% 7.22% 6.87%
Weighted average rate paid on
savings accounts 5.46% 5.54% 4.69% 4.13%
Weighted average rate paid on
FHLB advances and other
borrowings 5.60% 5.89% 5.86% 4.35%
Weighted average rate on all
interest-bearing liabilities 5.52% 5.67% 5.02% 4.18%
Net interest margin 2.30% 2.36% 2.35% 2.89%
</TABLE>
18
<PAGE>
Sources of Funds
General
Savings accounts and other types of deposits have traditionally been the
principal source of the Bank's funds for use in lending and for other general
business purposes. In addition to deposits, the Bank derives funds from loan
repayments, loan sales, FHLB advances, and reverse repurchase agreements.
Borrowings may be used on a short-term basis to compensate for seasonal or other
reductions in deposits or inflows at less than projected levels, as well as on a
longer-term basis to support expanded lending activities.
Deposits
The Bank has a wide variety of deposit programs designed to attract both
short-term and long-term deposits from the general public. These deposit
accounts include passbook accounts, NOW accounts, and money market accounts
(Super NOW accounts), as well as fixed-rate certificates and money market
accounts.
The following table sets forth information regarding the types of
accounts offered by First Federal at June 30, 1996:
<TABLE>
<CAPTION>
Interest Rates
Type of Deposit Accounts at June 30, 1996 Compounding Minimum
------------------------ ---------------- ----------- -------------------------
<S> <C> <C> <C>
NOW 2.90 - 3.29% Simple Varies by type of account
MMDA 2.70 - 5.11% Simple Varies by type of account
Passbook/Statement Savings 2.70 - 4.06% Daily Varies by type of account
Certificates of Deposit:
30 days 3.75% Simple $1,000
91 days 4.00% Simple 1,000
182 days 4.75% Simple 500
11 months 5.25% Simple 1,000
1 year 5.00% Daily 500
1 1/2 years 5.10% Daily 500
1 1/2 year stepped-rate 5.21% Simple 1,000
2 1/2 years 5.25% Daily 500
3 year stepped-rate 5.60% Simple 1,000
3 1/2 years 5.50% Simple 500
5 years 5.60% Simple 500
10 years 5.75% Simple 500
IRA Certificates:
1 1/2 years 5.10% Daily 100
2 1/2 years 5.25% Daily 100
3 1/2 years 5.50% Simple 100
5 years 6.00% Simple 100
Negotiable Certificates:
Jumbos generally, 4.00 - 6.00% Simple 100,000
normal rate + .25%
</TABLE>
19
<PAGE>
The large variety of savings accounts offered by the Bank has increased
the Bank's ability to retain deposits and allowed it to be more competitive in
obtaining new funds; but, it has not eliminated the threat of disintermediation
(the flow of funds away from savings institutions into direct investment
vehicles such as government and corporate securities). As customers have become
more rate conscious and willing to move funds into higher yielding accounts, the
ability of the Bank to attract and maintain deposits and the Bank's cost of
funds have been, and will continue to be, significantly affected by money market
conditions.
The following table shows the distribution and weighted average rate of
First Federal's deposits by type of deposits as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------ --------------------------------
% of Wtd. Avg. % of Wtd. Avg. % of Wtd. Avg.
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
-------- -------- --------- ------- -------- --------- ------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of account:
Passbook/NOW/Super NOW
Variable Rate
Savings Accounts(1) $ 17,170 12.5% 3.2% $ 38,712 18.5% 2.9% $ 49,429 28.6% 3.1%
MMDAs 3,089 2.3% 3.9% 11,120 5.3% 3.0% 5,959 3.5% 2.9%
Certificates of Deposit(2) 116,889 85.2% 5.8% 159,973 76.2% 5.8% 117,403 67.9% 4.6%
-------- ----- --- -------- ----- --- -------- ----- ---
Total $137,148 100.0% 5.5% $209,805 100.0% 5.1% $172,791 100.0% 4.1%
======== ===== === ======== ===== === ======== ===== ===
</TABLE>
- ---------------
(1) Includes noninterest-bearing accounts.
(2) Includes negotiated rate certificates of deposit and IRAs.
The following table shows the average amount of, and average rate paid
on, First Federal's deposits by type of deposit for the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------ --------------------------------
% of Wtd. Avg. % of Wtd. Avg. % of Wtd. Avg.
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
-------- -------- --------- ------- -------- --------- ------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of account:
Passbook/NOW/Super NOW
Variable Rate
Savings Accounts(1) 26,636 16.2% 2.9% $ 47,455 24.7% 3.1% $ 49,567 28.2% 3.1%
MMDAs 4,098 2.5% 3.1% 5,406 2.8% 2.8% 6,734 3.8% 2.9%
Certificates of Deposit(2) 133,059 80.9% 6.2% 138,489 72.2% 5.3% 119,531 67.9% 4.7%
Accrued Interest 769 0.4% -- 504 0.3% -- 193 0.1% --
-------- ----- --- -------- ----- --- -------- ----- ---
Total $164,562 100.0% 5.5% $191,854 100.0% 4.7% $176,025 100.0% 4.1%
======== ===== === ======== ===== === ======== ===== ===
</TABLE>
(1) Includes noninterest-bearing accounts.
(2) Includes negotiated rate certificates of deposit and IRAs.
20
<PAGE>
The following table sets forth information relating to the Bank's
deposit flows during the years indicated.
Year Ended June 30,
-----------------------------------
1996 1995 1994
---------- --------- ----------
(Dollars in thousands)
Increase (decrease) in deposits
before interest credited ($ 77,909) $ 31,318 ($ 4,692)
Interest credited 5,252 5,696 5,070
--------- --------- ---------
Net increase (decrease)
in deposits ($ 72,657) $ 37,014 $ 378
--------- --------- ---------
Total deposits at end
of period $ 137,148 $ 209,805 $ 172,791
========= ========= =========
The principal methods used by First Federal to attract deposits include
the offering of a wide variety of services and accounts, competitive interest
rates, and convenient office locations and service hours. The Bank uses
traditional marketing methods to attract new customers and deposits, including
mass media advertising and direct mailings. The development of new deposit
accounts and services within the past several years has enhanced the Bank's
ability to attract deposits.
During the fiscal year ended June 30, 1996, the Bank increased its
brokered deposits from $24.7 million to $34.1 million. The program serves as an
alternative source of funds to compliment the borrowing programs and retail
savings programs offered in the Bank's local market. The brokered funds enabled
the Bank to manage maturities of its deposits in its effort to manage interest
rate risk.
The following table presents, by various interest rate categories, the
contractual maturity of certificates of deposits as of June 30, 1996.
Maturing in the 12 months Ending
<TABLE>
<CAPTION>
Balances at
June 30, 1996 1997 1998 1999 Thereafter
------------- -------- -------- ------ ----------
(Dollars in thousands)
Certificates of deposit:
<S> <C> <C> <C> <C> <C>
Less than 4.00% $269 $269 $0 $0 $0
4.00% to 4.99% 7,235 6,510 525 200 0
5.00% to 5.99% 70,495 51,129 12,837 4,840 1,689
6.00% to 6.99% 25,612 11,292 8,670 2,682 2,968
7.00% to 7.99% 12,030 2,157 5,007 1,333 3,533
8.00% to 9.99% 1,081 25 483 537 36
10.00% or more 167 0 0 0 167
-------- ------- ------- ------ ------
Total certificates of deposit $116,889 $71,382 $27,522 $9,592 $8,393
======== ======= ======= ====== ======
</TABLE>
21
<PAGE>
As of June 30, 1996, First Federal had $12.6 million of time deposits
with balances over $100,000. Maturity of these deposits is as follows:
(Dollars in thousands)
--------------------
3 months or less $3,362
Over 3 months through 6 months 3,727
Over 6 months through 12 months 1,110
Over 12 months 4,420
-------
Total $12,619
=======
Borrowings
First Federal obtains advances from the FHLB of Indianapolis
collateralized by the security of mortgage loans and investment securities it
owns. Such advances are made pursuant to several different credit programs, each
of which has its own interest rate and range of maturities. Advances from the
FHLB are generally available to member institutions to meet seasonal and other
withdrawals of savings accounts and to expand lending, as well as to aid the
efforts of member institutions to establish better asset/liability management by
extending the maturities of liabilities. The Bank had $97.3 million in
outstanding advances from the FHLB at June 30, 1996.
1ST BANCORP had a $1.7 million loan outstanding from Ambank, Vincennes,
Indiana at June 30, 1996. 1ST BANCORP originally borrowed $1.5 million in June,
1991, of which, $1.0 million was used as a capital infusion to First Federal. An
additional $1.0 million was borrowed in December, 1994, all of which was used as
a capital infusion to First Federal.
First Federal also obtains short-term financing through reverse
repurchase agreements. These obligations provide another source to meet
short-term demands for additional funds. At June 30, 1996, there was $1.9
million of reverse repurchase agreements outstanding.
22
<PAGE>
The following table sets forth certain information regarding advances from
the FHLB and other borrowings, excluding reverse repurchase agreements, by the
Corporation at the end of and during the years indicated.
At June 30,
-------------------------------------
1996 1995 1994
---------- ------ ------
Weighted average rate on
advances from the Federal
Home Loan Bank and other
borrowings 5.56% 6.01% 4.96%
Year Ended June 30,
------------------------------------
1996 1995 1994
---------- ------ ------
(Dollars in thousands)
Maximum amount of advances
from the Federal Home
Loan Bank and other
borrowings outstanding
at any month end $99,054 $91,617 $ 59,520
Approximate average advances
from the Federal Home
Loan Bank and other
borrowings outstanding $89,103 $68,771 $ 37,619
Approximate weighted average
rate paid on advances
from the Federal Home
Loan Bank and other
borrowings 5.94% 5.92% 4.23%
The weighted average rates in the previous table were computed using the
average balance based upon quarter end balances and total interest expense.
Effects of Inflation
The primary assets and liabilities of savings institutions such as First
Federal are monetary in nature. As a result, interest rates have a more
significant impact on First Federal's performance than the effects of general
levels of inflation. Interest rates, however, do not necessarily move in the
same direction
23
<PAGE>
or with the same magnitude as the price of goods and services, since such prices
are affected by inflation. In a period of rapidly rising interest rates, the
liquidity and maturity structures of First Federal's assets and liabilities are
critical to the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest
rates, on First Federal's earnings is in the area of other expense. Such expense
items as employee compensation, employee benefits, and occupancy and equipment
costs may be subject to increases as a result of inflation. An additional effect
of inflation is the possible increase in the dollar value of the collateral
securing loans made by First Federal. First Federal is unable to determine the
extent, if any, to which the properties securing its loans have appreciated in
dollar value due to inflation.
Regulation
General
First Federal, as a federally chartered stock savings bank, is a member
of the Federal Home Loan Bank System (the "FHLB System") and its deposits are
insured by the Savings Association Insurance Fund ("SAIF"), which is
administered by the FDIC. First Federal is subject to extensive regulation by
the OTS. Federal associations may not enter into certain transactions unless
certain regulatory tests are met or they obtain prior governmental approval and
the associations must file reports with these governmental agencies about their
activities and their financial condition. Periodic compliance examinations of
the Bank are conducted by the OTS which has, in conjunction with the FDIC in
certain situations, enforcement powers. This supervision and regulation is
intended primarily for the protection of depositors and federal deposit
insurance funds. First Federal is also subject to certain reserve requirements
under the Board of Governors of the Federal Reserve System ("FRB" or "Federal
Reserve Board") regulations.
Congress is considering legislation that would consolidate the
supervision and regulation of all U.S. financial institutions in one
administrative body (the "Legislation"). It cannot be predicted with certainty
whether or when the Legislation will be enacted or the extent to which First
Federal would be affected thereby.
An OTS regulation establishes a schedule for the assessment of fees upon
all savings associations to fund the operations of the OTS. The regulation also
establishes a schedule of fees for the various types of applications and filings
made by savings associations with the OTS. The general assessment, to be paid on
a semi-annual basis, is based upon the savings association's total assets,
including consolidated subsidiaries, as reported in a recent quarterly thrift
financial report. Currently, the assessment rates range from .0172761% of assets
for associations with $67 million in assets or less to .0045864% for
associations with assets in excess of $35 billion. First Federal's current
semi-annual assessment, based upon its March 31, 1996 total assets of $272.4
million, was $36,592.
24
<PAGE>
The Bank is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
their own securities, and limitations upon other aspects of banking operations.
In addition, the activities and operations of the Bank are subject to a number
of additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust
laws.
Federal Home Loan Bank System
First Federal is a member of the FHLB System, which consists of 12
regional banks. The Federal Housing Finance Board ("FHFB"), an independent
agency, controls the FHLB System, including the FHLB of Indianapolis. The FHLB
System provides a central credit facility primarily for member savings
associations and savings banks and other member financial institutions. First
Federal is required to hold shares of capital stock in the FHLB of Indianapolis
in an amount at least equal to the greater of 1% of the aggregate principal
amount of its unpaid residential mortgage loans, home purchase contracts and
similar obligations at the end of each calendar year, .3% of its assets or 1/20
(or such greater fraction established by the FHLBank) of outstanding FHLB
advances, commitments, lines of credit and letters of credit. First Federal is
currently in compliance with this requirement. At June 30, 1996, First Federal's
investment in FHLB of Indianapolis stock was $4,864,000.
In past years, First Federal received dividends on its FHLBank stock.
Certain provisions of The Financial Institution Reform, Recovery, and
Enforcement Act of 1989, as amended ("FIRREA"), require all 12 FHLBanks to
provide funds for the resolution of troubled savings associations and to
establish affordable housing programs through direct loans or interest subsidies
on advances to members to be used for lending at subsidized interest rates for
low-and-moderate-income, owner-occupied housing projects, affordable rental
housing, and certain other community projects. These contributions and
obligations have reduced the level of FHLB dividends paid and could adversely
affect the value of FHLB stock in the future. For the year ended June 30, 1996,
dividends paid to First Federal totalled $354,000, for an annual rate of 8.1%. A
reduction in value of such stock may result in a corresponding reduction in
First Federal's capital.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB system. It makes
advances to members in accordance with policies and procedures established by
the FHLB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. FIRREA prescribes eligible collateral as first mortgage
loans less than 90 days delinquent or securities evidencing interests therein,
securities (including mortgage-backed securities) issued,
25
<PAGE>
insured or guaranteed by the federal government or any agency thereof, FHLB
deposits and, to a limited extent, real estate with readily ascertainable value
in which a perfected security interest may be obtained. Other forms of
collateral may be accepted as overcollateralization or, under certain
circumstances, to renew advances. All long-term advances are required to provide
funds for residential home financing and the FHLB has established standards of
community service that members must meet to maintain access to long-term
advances. Currently First Federal has $83.6 million of mortgage loans and $40.0
million investment securities pledged as collateral for FHLB Advances.
Interest rates charged for advances vary depending upon maturity, the
cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.
Under current law, savings associations which cease to be Qualified Thrift
Lenders are ineligible to receive advances from their FHLB.
Liquidity
For each calendar month, First Federal is required to maintain an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, specified United States Government, state or federal agency
obligations, shares of certain mutual funds and certain corporate debt
securities and commercial paper) equal to an amount not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings
during the preceding calendar month. This liquidity requirement may be changed
from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member institutions,
and is currently 5%. OTS regulations also require each member savings
institution to maintain an average daily balance of short-term liquid assets at
a specified percentage (currently 1%) of the total of its net withdrawable
deposit accounts and short-term borrowings during the preceding calendar month.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The monthly average liquidity of First Federal for June, 1996 was
18.69% and its average short-term liquidity ratio at June 30, 1996 was 16.63%.
First Federal has never been subject to monetary penalties for failure to meet
its liquidity requirements.
Real Estate Lending Standards
OTS regulations require savings institutions to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
associations's real estate lending policies.
The Bank's written real estate lending policies must be reviewed and
approved by the associations's board of directors at least annually. Further,
each Bank is expected to monitor
26
<PAGE>
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. Additional standards on earnings and classified assets are expected
to be issued in the near future.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of banks and thrifts
and safeguards the safety and soundness of the banking and thrift industries.
The FDIC administers two separate insurance fund, the BIF for commercial banks
and state savings banks, and the SAIF for savings associations and banks that
have acquired deposits from savings associations. The FDIC is required to
maintain designated levels of reserves in each fund. The reserves of the SAIF
are currently below the level required by law, primarily because a significant
portion of the assessments paid into the SAIF have been used to pay the cost of
prior thrift failures, while the reserves of the BIF met the level required by
law in May, 1995. Thrifts are generally prohibited from converting from one
insurance fund to the other until the SAIF meets its designated reserve level,
except with the prior approval of the FDIC in certain limited cases, and
provided certain fees are paid. The insurance fund conversion provisions do not
prohibit a SAIF member from converting to a bank charter or merging with a bank
during the moratorium as long as the resulting bank continues to pay the
applicable insurance assessments to the SAIF during such period and as long as
certain other conditions are met.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. Such risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
Because of the differing reserve levels of the SAIF and the BIF,
deposit insurance assessments paid by well-capitalized BIF- insured institutions
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were recently reduced significantly below the level paid by well-capitalized
SAIF-insured institutions. Assessments paid by well-capitalized SAIF-insured
institutions exceeded those paid by well-capitalized BIF-insured institutions by
approximately $.19 per $100 in deposits in late 1995 and exceeded them by $0.23
per $100 in deposits beginning in 1996. Such premium disparity could have a
negative competitive impact on the Bank and other institutions with SAIF
deposits.
Congress has recently considered many proposals designed to recapitalize
the SAIF and eliminate the significant premium disparity between the BIF and the
SAIF. Among those considered is a recapitalization plan providing for a special
assessment, estimated at approximately $0.85 per $100 of SAIF deposits held at
some time in 1995, in order to increase SAIF reserves to the level required by
law. Certain BIF-insured banks holding SAIF-insured deposits would pay a lower
special assessment. In addition, the cost of prior thrift failures would be
shared by both the SAIF and the BIF. Such cost sharing might increase BIF
assessments by $.02 to $.025 per $100 in deposits. SAIF assessments for well-
capitalized SAIF-insured institutions would be set at a significantly lower
level after the legislation is adopted and could never by reduced below the
level set for well-capitalized BIF-insured institutions. The recapitalization
plan also provides for the merger of the SAIF and the BIF on January 1, 1998,
subject to certain conditions. It has also been proposed that the savings
association charter be eliminated in connection with the proposed merger of the
BIF and SAIF.
The Bank had $137.1 million in deposits at June 30, 1996. If the
one-time special assessment in the legislative proposal is enacted into law, the
Bank will pay an additional after-tax assessment of approximately $1.2 million
(based upon deposits at June 30, 1996) which will reduce capital and earnings
for the quarter in which any such assessment is recorded. However, it is
expected that quarterly SAIF assessments would be reduced significantly sometime
after adoption of the legislation.
No assurances can be given that the SAIF recapitalization plan discussed
above or any other plan will be enacted into law or in which form it may be
enacted. In addition, the Company can give no assurances that the disparity
between BIF and SAIF assessments will be eliminated. If the proposed legislation
is not adopted, SAIF premiums may increase and the disparity between BIF and
SAIF premiums may become greater, with a resulting adverse effect on the
Company's operations.
Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common stockholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill (on a declining basis until 1995), purchased mortgage
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servicing rights (which may be included in an amount up to 50% of core capital,
but which are to be reported on an association's balance sheet at the lesser of
90% of their fair market value, 90% of their original purchase price, or 100% of
their remaining unamortized book value), and purchased credit card relationships
(which may be included in an amount up 25% of core capital) less nonqualifying
intangibles. Under the tangible capital requirement, a savings association must
maintain tangible capital (core capital less all intangible assets except
purchased mortgage servicing rights which may be included after making the
above-noted adjustments) of at least 1.5% of total assets. Under the risk-based
capital requirements, a minimum amount of capital must be maintained by a
savings association to account for the relative risks inherent in the type and
amount of assets held by the saving association. The risk-based capital
requirement requires a savings association to maintain capital (defined
generally for these purposes as core capital plus general valuation allowances
and permanent or maturing capital instruments such as preferred stock and
subordinated debt less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories
(0-100%) with a credit risk-free asset such as cash requiring no risk-based
capital and an asset with a significant credit risk such as a delinquent
commercial loan being assigned a factor of 100%. At June 30, 1996, based on the
capital standards then in effect, First Federal was in compliance with the fully
phased-in capital requirements.
The OTS has delayed implementation of a rule which sets forth the
methodology for calculating an interest rate risk component to be incorporated
into the OTS regulatory capital rule. Under the rule, only savings associations
with "above normal" interest rate risk (institutions whose portfolio equity
would decline in value by more than 2% of assets in the event of a hypothetical
200 basis point move in interest rates) will be required to maintain additional
capital for interest rate risk under the risk-based capital framework. An
institution with an "above normal" level of exposure will have to maintain
additional capital equal to one-half the difference between its measured
interest rate risk (the most adverse change in the market value of its portfolio
resulting from a 200 basis point move in interest rates divided by the estimated
market value of its assets) and 2%, multiplied by the market value of its
assets. That dollar amount of capital is in addition to an institutions's
existing risk-based capital requirement. The OTS has stated that it intends to
reduce or eliminate the leverage ratio capital requirements once the interest
rate risk component rule is implemented. Although the OTS has decided to delay
implementation of this rule, it will continue to closely monitor the level of
interest rate risk at individual institutions and it retains the authority, on a
case-by-case basis, to impose additional capital requirements for individual
institutions with significant interest rate risk.
In periods of rapidly changing interest rates, the Bank's balance sheet
is subject to significant fluctuations in market value (interest rate risk
exposure). However, as the delayed interest rate risk rules proposed by the OTS
currently read, the Bank at June 30, 1996, would have no additional capital
requirement. The Bank's management remains cognizant of the proposed rules and
continues to monitor its interest rate risk position.
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The following is a summary of First Federal's regulatory capital and
capital requirements at June, 30 1996:
Tangible Core Risk-based
Capital Capital Capital
--------- ------- ----------
(Dollars in thousands)
Regulatory Capital $23,015 $23,015 $23,407
Minimum capital requirement 3,955 7,909 10,308
Excess capital $19,060 $15,106 $13,099
Regulatory capital ratio 8.7% 8.7% 17.9%
Minimum capital ratio 1.5% 3.0% 8.0%
If an association is not in compliance with its capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements, which actions may include restrictions on operations and banking
activities, the imposition of a capital directive, a cease and desist order,
civil monetary penalties or harsher measures such as the appointment of a
receiver or conservator or a forced merger into another institution.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, federal bank regulatory authorities to
take "prompt corrective action" with respect to institutions that do not meet
minimum capital requirements. For these purposes, FedICIA establishes five
capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At June 30,
1996, the Bank was categorized as "well capitalized."
An institution is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier I risk- based capital ratio
of 6% or greater, and a leverage ratio of 5% or greater, and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure. An institution is deemed to be "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier
I risk-based capital or 4% or greater, and generally a leverage ratio of 4% or
greater. An institution is deemed to be "undercapitalized" if it has a total
risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of
less than 4%, or generally a leverage ratio of less than 4%. An institution is
deemed to be "significantly undercapitalized" if it has a total risk-based
capital ratio of less than 6%, a Tier I risk-based capital ratio of less than
3%, or a leverage ratio of less than 3%. An institution is deemed to be
"critically undercapitalized" if it has a ratio of tangible equity (as defined
in the regulations) to total assets that is equal to or less than 2%.
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"Undercapitalized" institutions are subject to growth limitations and
are required to submit a capital restoration plan. If an "undercapitalized"
institution fails to submit, or fails to implement in a material respect, an
acceptable plan, it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" institutions are subject to one or more of a
number of requirements and restrictions, including an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks, and
restrictions on compensation of executive officers. "Critically
undercapitalized" institutions may not, beginning 60 days after becoming
"critically undercapitalized," make any payment of principal or interest on
certain subordinated debt or extend credit for a highly leveraged transaction or
enter into any transaction outside the ordinary course of business. In addition,
"critically undercapitalized" institutions are subject to appointment of a
receiver or conservator.
Capital Distribution Regulations
An OTS regulation imposes limitations upon all "capital distributions"
by savings institutions, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash- out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized institutions. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution. An institution
that has total capital at least equal to its minimum capital requirements, but
less than its fully phased-in capital requirements, would be a Tier 2
institution. An institution having total capital that is less than its minimum
capital requirements would be a Tier 3 institution. However, an institution
which otherwise qualifies as a Tier 1 institution may be designated by the OTS
as a Tier 2 or Tier 3 institution if the OTS determines that the institution is
"in need of more than normal supervision." First Federal is currently a Tier 1
institution.
A Tier 1 Institution could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to 100% of its
net income to date during the calendar year plus an amount that would reduce by
one-half its "surplus capital ratio" (the excess over its fully phased-in
capital requirements) at the beginning of the calendar year. Any additional
amount of capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a prior notice with the OTS
concerning such dividend declaration.
Federal Reserve System
Under FRB regulations, First Federal is required to maintain reserves
against its transaction
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accounts (primarily checking and NOW accounts), and non-personal money market
deposit accounts. The effect of these reserve requirements is to increase First
Federal's cost of funds. First Federal is in compliance with its reserve
requirements. A federal savings association, like other depository institutions
maintaining reservable accounts, may borrow from the Federal Reserve Bank
"discount window," but the FRB's regulations require the savings association to
exhaust other reasonable alternative sources, including borrowing from its
regional FHLB, before borrowing from the Federal Reserve Bank. FedICIA imposes
certain limitations on the ability of undercapitalized depository institutions
to borrow from Federal Reserve Banks.
Holding Company Regulations
The Corporation is a savings and loan holding company within the meaning
of the Home Owners' Loan Act, as amended ("HOLA"), and is subject to regulatory
oversight of the Director of the OTS. As such, the Corporation is registered
with the OTS and is subject to OTS regulations, examinations, supervision and
reporting requirements. As a subsidiary of a savings and loan holding company,
First Federal is subject to certain restrictions in its dealings with the
Corporation and with other companies affiliated with the Corporation.
HOLA generally prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from (i) acquiring control of any
other savings institution or savings and loan holding company or controlling the
assets thereof or (ii) acquiring or retaining more than 5 percent of the voting
shares of a savings institution or holding company thereof which is not a
subsidiary. Additionally, under certain circumstances, a savings and loan
holding company is permitted to acquire, with the approval of the Director of
OTS, up to 15 percent of previously unissued voting shares of an
under-capitalized savings association for cash without that savings association
being deemed controlled by the holding company. Except with the prior approval
of the Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock may also acquire control of any savings institution, other
than a subsidiary institution, or any other savings and loan holding company.
The Corporation currently is a unitary savings and loan holding company,
and there are generally no restrictions on the activities of a unitary savings
and loan holding company. However, if the Director of the OTS determines that
there is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness, or stability of its subsidiary savings association, the
Director of the OTS may impose such restrictions as deemed necessary to address
such risk and limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to
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meet the Qualified Thrift Lender ("QTL") test, then such unitary holding company
shall also presently become subject to the activities restrictions applicable to
multiple holding companies. (Additional restrictions on securing advances from
the Federal Home Loan Bank also apply). See "-- Qualified Thrift Lender." At
June 30, 1996, First Federal's asset composition was in excess of that required
to qualify First Federal as a Qualified Thrift Lender.
If the Corporation were to acquire control of another savings
institution other than through merger or other business combination with First
Federal, the Corporation would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
institution meets the QTL test, the activities of the Corporation and any of its
subsidiaries (other than First Federal or other subsidiary savings institutions)
would thereafter be subject to further restrictions. HOLA provides that, among
other things, no multiple savings and loan holding company or subsidiary thereof
which is not a savings association shall commence, or continue for a limited
period of time after becoming a multiple savings and loan holding company or
subsidiary thereof, any business activity other than (i) furnishing or
performing management services for a subsidiary savings association, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution,
(iv) holding or managing properties used or occupied by a subsidiary savings
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by the FSLIC by regulation as of March 5, 1987 to
be engaged in by multiple holding companies or (vii) those activities authorized
by the FRB as permissible for bank holding companies, unless the Director of the
OTS by regulation prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above must also be
approved by the Director of the OTS prior to being engaged in by a multiple
holding company.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state, if the multiple savings and loan holding
company involved controls a savings institution which operated a home or branch
office in the state of the institution to be acquired as of March 5, 1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state- chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
institutions in more than one state in the case of certain emergency thrift
acquisitions.
No subsidiary savings association of a savings and loan holding company
may declare or pay dividends on its permanent or nonwithdrawable stock unless it
first gives the Director of OTS thirty days advance notice of such declaration
and payment. Any dividend declared during such period, or without the giving of
such notice, shall be invalid.
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Federal Securities Law
The shares of Common Stock of the Corporation are registered with the
Securities and Exchange Commission (the "SEC") under the 1934 Act. The
Corporation is therefore subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the SEC under the 1934 Act and
the rules of the SEC thereunder.
Shares of Common Stock held by persons who are affiliates of the
Corporation may not be resold without registration or unless sold in accordance
with the resale restrictions of Rule 144 under the 1933 Act. If the Corporation
meets the current public information requirements under Rule 144, each affiliate
of the Corporation who complies with the other conditions of Rule 144 (including
a two-year holding period and conditions that require the affiliate's sale to be
aggregated with those of certain other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Corporation or (ii) the average weekly volume of trading in such share during
the preceding four calendar weeks.
Qualified Thrift Lender
Under current OTS regulations, the QTL test requires that a savings
association have at least 65% of its portfolio assets invested in "qualified
thrift investments" on a monthly average basis in nine out of every twelve
months. Qualified thrift investments under the QTL test include: (i) loans made
to purchase, refinance, construct, improve or repair domestic residential
housing or manufactured housing; (ii) home equity loans; (iii) mortgage-backed
securities; (iv) direct or indirect existing obligations of either the FDIC or
the FSLIC for ten years from the date of issuance, if issued prior to July 1,
1989; (v) obligations of the FDIC, FSLIC Resolution Fund and the Resolution
Trust Corporation for a five year period from July 1, 1989, if issued after such
date; (vi) FHLB stock; (vii) 50% of the dollar amount of residential mortgage
loans originated and sold within 90 days or origination; (viii) investments in
service corporations that derive at least 80% of their gross revenues from
activities directly related to purchasing, refinancing, constructing, improving
or repairing domestic residential real estate or manufacturing housing; (ix)
200% of the dollar amount of loans and investments made to acquire, develop and
construct one-to four-family residences that are valued at no more than 60% of
the median value of homes constructed in the area; (x) 200% of the dollar amount
of loans for the acquisition or improvement of residential real property,
churches, schools, and nursing homes located within, and loans for any purpose
to any small business located within, an area where credit needs of its low and
moderate income residents are determined not to have been adequately met; (xi)
loans for the purchase, construction, improvement or upkeep of churches,
schools, nursing homes and hospitals not qualified under (x); (xii) up to 10% of
portfolio assets held in consumer loans or loans for educational purposes; and
(xiii) FHLMC and FNMA stock. However, the aggregate amount of investments in
categories (vii)-(xiii) which may be taken into account for the purpose of
whether an institution meets the QTL test cannot exceed 15% of portfolio assets.
Portfolio assets under the QTL test include all of an association's assets less
(i) goodwill and other intangibles, (ii) the value of property used by the
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association to conduct its business, and (iii) its liquid assets as required to
be maintained under law up to 20% of total assets.
A savings association that fails to meet the QTL test must either
convert to a bank (although its deposit insurance assessments will continue to
be those of, and payments will continue to be made to, the SAIF) or be subject
to the following penalties: (i) it may not enter into any new activity except
for those permissible for a national bank and for a savings association; (ii)
its branching activities shall be limited to those of a national bank; (iii) it
shall not be eligible for any new FHLB advances; and (iv) it shall be bound by
regulations applicable to national banks respecting payment of dividends. Three
years after failing the QTL test the association must (i) dispose of any
investment or activity not permissible for a national bank and a savings
association and (ii) repay all outstanding FHLB advances. If such a savings
association is controlled by a savings and loan holding company, then the
holding company must within a prescribed time period become registered as a bank
holding company and become subject to all rules and regulations applicable to
bank holding companies (including restrictions as to the scope of permissible
business activities).
A savings association failing to meet the QTL test may requalify as a
QTL if it thereafter meets the QTL test. In the event of such requalification,
it shall not be subject to the penalties described above. A savings association
which subsequently again fails to qualify under the QTL test shall become
subject to all of the described penalties without application of any waiting
period.
At June 30, 1996, 75.0% of First Federal's portfolio assets (as defined
on that date) were invested in qualified thrift investments (as defined on that
date), and therefore First Federal's asset composition was in excess of that
required to qualify First Federal as a QTL. First Federal does not expect to
significantly change its lending or investment activities in the near future;
and, therefore it expects to continue to qualify as a QTL, although there can be
no such assurance.
Community Reinvestment Act Matters
Under current law, ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") must be disclosed. The disclosure
will include both a four-unit descriptive rating using terms such as
satisfactory and unsatisfactory - and a written evaluation of each institution's
performance. Each FHLB is required to establish standards of community
investment or service that its members must maintain for continued access to
long-term advances from the FHLBs. The standards take into account a member's
performance under the Community Reinvestment Act and its record of lending to
first-time home buyers. The FHLBs have established an "Affordable Housing
Program" to subsidize the interest rate of advances to member associations
engaged in lending for long-term, low- and moderate-income, owner-occupied and
affordable rental housing at subsidized rates. First Federal has participated in
such programs in the past and has plans to participate in the future. The
examiners have determined that First Federal has a outstanding record of meeting
community credit needs.
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Taxation
Federal Taxation
Historically, savings associations, such as First Federal, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, the Bank will no longer be able to use the percentage of
taxable income method of computing its allocable tax bad debt deduction. The
Bank will be required to compute its allocable deduction using the experience
method. As a result of the repeal of the percentage of taxable income method,
reserves taken after 1987 using the percentage of taxable income method
generally must be included in future taxable income over a six-year period,
although a two-year delay may be permitted for institutions meeting a
residential mortgage loan origination test. In addition, the pre-1988 reserve,
in which no deferred taxes have been recorded, will not have to be recaptured
into income unless (i) the Bank no longer qualifies as a bank under the Code, or
(ii) excess dividends are paid out by the Bank.
Depending on the composition of its items of income and expense, a
savings institution may be subject to the alternative minimum tax. A savings
institution must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid that
is attributable to most preferences (although not to post-August 7, 1986
tax-exempt interest) can be credited against regular tax due in later years.
The Corporation and its subsidiaries file a consolidated federal income
tax return, which has the effect of eliminating intercompany distributions,
including dividends, in the computation of consolidated taxable income. Income
of the Corporation generally would not be taken into account in determining the
bad debt deduction allowed to First Federal, regardless of whether a
consolidated tax return is filed. However, certain "functionally related" losses
of the Corporation would be required to be taken into account in determining the
permitted bad debt deduction.
The Corporation's federal income tax returns have not been audited in
the last five years.
State Taxation
For its taxable year beginning January 1, 1990, First Federal became
subject to Indiana's Financial Institutions Tax ("FIT"), which is imposed at a
flat rate of 8.5% on "adjusted gross
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income." "Adjusted gross income," for purposes of FIT, begins with taxable
income as defined by Section 63 of the Code and, thus, incorporates federal tax
law to the extent that it affects the computation of taxable income. Federal
taxable income is then adjusted by several Indiana modifications. Other
applicable state taxes include generally applicable sales and use taxes plus
real and personal property taxes.
Competition
The Bank's primary market area consists of Knox County, Indiana. A
majority of the Bank's savings deposits are received from residents of its
primary market area, and a majority of its loans are secured by properties in
this area.
First Federal faces substantial competition both in the attraction of
deposits and in the making of mortgage and other loans in its primary market
area. Competition for the origination of real estate loans principally comes
from other savings institutions, commercial banks, and mortgage banking
companies located in its primary market area.
Under current law, bank holding companies may acquire savings
associations. Savings associations may also acquire banks under federal law. To
date, several bank holding company acquisitions of healthy savings associations
in Indiana have been completed. Affiliations between banks and healthy savings
associations based in Indiana may also increase the competition faced by the
Bank and the Corporation.
In addition, the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire
banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of- state branches either through
merger or de novo expansion. The State of Indiana recently passed a law
establishing interstate branching provisions for Indiana state chartered banks
consistent with those established by the Riegle-Neal Act (the "Indiana Branching
Law"). The Indiana Branching Law authorizes Indiana banks to branch interstate
by merger or de novo expansion and authorizes out-of-state banks meeting certain
requirements to branch into Indiana by merger or de novo expansion. The Indiana
Branching Law became effective March 15, 1996, provided that prior to June 1,
1997, interstate mergers and de novo branches are not permitted to out-of-state
banks unless the laws of their home states permit Indiana banks to merge or
establish de novo branches on a reciprocal basis. This new legislation may also
result in increased competition for the Corporation and the Bank.
Because of recent changes in Federal law, interstate acquisitions of
banks are less restricted than they were under prior law. Savings associations
have certain powers to acquire savings associations based in other states, and
Indiana law expressly permits reciprocal acquisition of Indiana savings
associations. In addition, Federal savings associations are permitted to branch
on an interstate basis.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. The Bank competes for loan
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originations primarily through the efficiency and quality of services it
provides borrowers and through interest rates and loan fees it charges.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels, and other factors that are not readily predictable.
Current Accounting Issues
In fiscal 1996, the Corporation adopted Statement of Financial
Accounting Standards No. 122 ("SFAS 122"), "Accounting for Mortgage Servicing
Rights." This statement amends FASB Statement No. 65, "Accounting for Certain
Mortgage Banking Activities," to require that a mortgage banking enterprise
recognize, as separate assets, rights to service mortgage loans for others
however those servicing rights are acquired. As discussed in Notes 1 and 5 to
the financial statements, the application of SFAS 122 had a significant positive
impact on the Bank's Statement of Financial Condition and Statement of Earnings.
Statement of Financial Accounting Standards No. 114 ("SFAS 114"),
"Accounting by Creditors for Impairment of a Loan," was adopted in 1996. This
Statement, which establishes certain framework for the evaluations of loan
losses did not have any impact on the Corporation based on the condition of the
loan portfolio and management's existing policies concerning the allowance for
loan losses.
Employees
As of September 16, 1996, 1ST BANCORP and its subsidiaries had 143
full-time and 19 part-time employees. None of these employees is represented by
a collective bargaining agent or union, and the Corporation believes it enjoys
harmonious relations with its personnel.
Item 2. Properties.
At June 30, 1996, 1ST BANCORP and First Federal conducted their business
and operations from the main office located at 101 North Third Street,
Vincennes, Indiana and its office annex at 102 North Fifth Street, Vincennes,
Indiana. The property and buildings are owned by the Bank with a net book value
of $1.9 million at June 30, 1996. First Financial conducted its business from
its office located at 626 Veterans Drive, Vincennes, Indiana. This property had
a net book value of $421,000 at June 30, 1996. A portion of the First Financial
building is leased to an independent third party.
38
<PAGE>
Item 3. Legal Proceedings.
First Federal is involved in three lawsuits that are not in the ordinary
course of business. The first is a class action suit alleging escrow violations.
This suit has been settled and restitution has been made to all parties. The
second suit was filed by a title company involved in providing closing services
for a mortgage loan that was purchased by First Federal from a third party
mortgage company subsequent to closing; the suit alleges the mortgage company
was acting as an agent for First Federal and failed to provide funds for closing
the transaction in exchange for the note and deed of trust. The third lawsuit
alleges discrimination in the bank's lending practices. It is the opinion of
management based upon the current information available, that the ultimate
resolutions of these matters will not have a material adverse affect on the
Corporation's financial position.
Other than the above, neither 1ST BANCORP nor First Federal is involved
in any legal proceedings, other than routine proceedings occurring in the
ordinary course of its business.
Item 4. Submission of Matters to Vote of Security Holders.
No matter was submitted to the Corporations's shareholders during the
quarter ended June 30, 1996.
Item 4.5 Executive Officers of the Corporation.
Presented below is certain information regarding the executive officers
of the Corporation or the Corporation's wholly owned subsidiary, First Federal
Bank, A Federal Savings Bank:
Frank Baracani (age 54) has been President and Director of the
Corporation and First Federal during the past five years.
Donald G. Bell (age 66) has been Vice President and Director of the
Corporation; Director of First Federal; and Partner with the law firm of Hart,
Bell, Cummings, Ewing & Stuckey, Vincennes, Indiana during the last five years.
Carroll C. Hamner (age 61) has been Senior Vice President of First
Federal during the last five years.
C. James McCormick (71) has been Chairman of the Board, Director and
Chief Executive Officer of the Corporation, and Chairman of the Board and
Director of First Federal, during the last five years.
Mary Lynn Stenftenagel (42) has been Director and Secretary- Treasurer
of the Corporation and Director and Chief Financial Officer of First Federal
during the last five years. Ms. Stenftenagel has been Executive Vice President
and Secretary of First Federal since October, 1993 and for the two years prior
she served as Senior Vice President of First Federal.
39
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information required herein is incorporated by reference from
"Market Information" on page 42 of 1ST BANCORP's 1996 Annual Report to
Shareholders (the "Annual Report to Shareholders").
Item 6. Selected Financial Data.
The information required herein is incorporated by reference from
"Selected Financial Highlights" on page 3 of the Annual Report to Shareholders.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required herein is incorporated by reference from pages
8 to 16 of the Annual Report to Shareholders.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages
17 to 40 of the Annual Report to Shareholders.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
There were no such changes or disagreements during the applicable
period.
40
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required herein with respect to directors is
incorporated by reference from the definitive proxy statement of 1ST BANCORP,
dated September 26, 1996 (the "Proxy Statement") under "Proposal I - Election of
Directors" on pages 3 to 5 of the Proxy Statement. Information required herein
pursuant to Item 405 of Regulation S-K (Para. 229.405 of this chapter) is
incorporated by reference from page 11 of the Proxy Statement. Information
concerning the Corporation's executive officers is included in Item 4.5 in Part
I of this report.
Item 11. Executive Compensation.
The information required herein is incorporated by reference from pages
6 to 7 of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference from pages
1 to 5 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from Page
6 of the Proxy Statement.
41
<PAGE>
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
(a) Documents Filed as Part of this Report
The following financial statements are incorporated by reference (see Exhibit
13):
Page in the
1996 Annual
Report to
Financial Statements Shareholders
Independent Auditors' Report 17
Consolidated Statements of Financial Condition
as of June 30, 1996, and 1995. 18
Consolidated Statements of Earnings for the
Years Ended June 30, 1996, 1995, and 1994. 19
Consolidated Statements of Stockholders'
Equity for the Years Ended June 30, 1996,
1995, and 1994. 20
Consolidated Statements of Cash Flows for the
Years Ended June 30, 1996, 1995, and 1994. 21
Notes to Consolidated Financial Statements. 22
(b) There were no reports on Form 8-K filed during the quarter ended
June 30, 1996.
(c) The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit Index on page 44.
(d) All schedules are omitted as the required information either is not
applicable or is included in the consolidated Financial Statements or
related notes.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
1ST BANCORP
Date: September 27, 1996 By: /s/ C. James McCormick
-----------------------------------
C. James McCormick
Chief Executive Officer
Date: September 27, 1996 By: /s/ Frank D. Baracani
-----------------------------------
Frank D. Baracani
Director and President
Each person whose individual signature appears below hereby authorizes
Frank D. Baracani as attorney-in-fact with full power of substitution to execute
in the name and on behalf of each person, individually and in each capacity
stated below, and to file any and all amendments to this Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the dates:
/s/ C. James McCormick Date: September 27, 1996
- --------------------------------
C. James McCormick, Chairman of the Board
and Chief Executive Officer
/s/ John J. Summers Date: September 27, 1996
- --------------------------------
John J. Summers, Vice Chairman of the Board
/s/ Frank D. Baracani Date: September 27, 1996
- --------------------------------
Frank D. Baracani, Director, President
/s/ Donald G. Bell Date: September 27, 1996
- --------------------------------
Donald G. Bell, Director, Vice President
/s/ Mary Lynn Stenftenagel Date: September 27, 1996
- --------------------------------
Mary Lynn Stenftenagel, Director,
Secretary/Treasurer
(Principal Financial Officer)
/s/ R. William Ballard Date: September 27, 1996
- --------------------------------
R. William Ballard, Director
/s/ Rahmi Soyugenc Date: September 27, 1996
- --------------------------------
Rahmi Soyugenc, Director
/s/ Ruth Mix Carnahan Date: September 27, 1996
- --------------------------------
Ruth Mix Carnahan, Director
/s/ James W. Bobe Date: September 27, 1996
- --------------------------------
James W. Bobe, Director
43
<PAGE>
EXHIBIT INDEX
No. Exhibits Page
3a Certificate of Incorporation (incorporated
by reference to Exhibit 3.1 to Registrant's
Registration Statement on Form S-4,
Registration No. 33-24587, filed September
28, 1988 (the "Registration Statement") *
3b Restated By-Laws of 1ST BANCORP (incorporated
by reference to Exhibit 3b to the
Registrant's Form 10-K for the year
ended June 30, 1994). *
10a Incentive Stock Option Plan (incorporated
by reference from Exhibit 10a-1 to the
Registrant's Form 10-K for the year
ended June 30, 1991). *
10b 1ST BANCORP Stock Option Plan (incorporated
by reference from Exhibit 10b-1 to the
Registrant's Form 10-K for the year
ended June 30, 1991). *
10c First Federal Management Incentive Plan for Fiscal Year
1994 (incorporated by reference to Exhibit 10c to the
Registrant's Form 10-K for the year
ended June 30, 1994). *
10d Form of Director Deferred Compensation
Agreement, dated July 1, 1993, between
First Federal and each of C. James
McCormick, John J. Summers, Frank D.
Baracani, Mary Lynn Stenftenagel, Robert W.
Ballard, Ruth Mix Carnahan, Donald G. Bell,
Rahmi Soyugenc, and James W. Bobe
(incorporated by reference to Exhibit 10d
to the Registrant's Form 10-K for the year
ended June 30, 1994). *
44
<PAGE>
10e Form of Executive Supplemental Retirement
Income Agreement, dated July 1, 1993,
between First Federal and each of C. James
McCormick, Frank D. Baracani, Mary Lynn
Stenftenagel, Robert W. Ballard, Carroll C.
Hamner, Wayne P. Kaufman, and Ronald E.
McGill (incorporated by reference to
Exhibit 10d to the Registrant's Form 10-K
for the year ended June 30, 1994). *
10f 1ST Bancorp 1997 Employee Stock Purchase
Plan (incorporated by reference to Exhibit A
of Registrant's Proxy Statement for its
October 24, 1996 Annual Meeting of Shareholders
filed with the Securities and Exchange
Commission on September 27, 1996). *
13 Annual Report to Shareholders __
22 Subsidiaries of the Registrant __
23a Independent Auditors' Consent __
23b Independent Auditors' Consent __
23c Independent Auditors' Consent __
27 Financial Data Schedule (to be filed electronically)
- ---------------
(*) Previously filed with the SEC and by this reference incorporated into
this Annual Report.
45
[FRONT COVER]
1996
[GRAPHIC OMITTED]
1ST BANCORP
ANNUAL
REPORT
<PAGE>
Table of Contents
1ST BANCORP AND SUBSIDIARIES
Message to the Shareholders................................................. 2
Selected Financial Highlights............................................... 3
Board of Directors.......................................................... 4
Business Discussion......................................................... 5
Management's Discussion and Analysis of Results
of Operations and Financial Condition.................................. 8
Independent Auditors' Report................................................ 16
Consolidated Statements of Financial Condition.............................. 17
Consolidated Statements of Earnings......................................... 18
Consolidated Statements of Stockholders' Equity............................. 19
Consolidated Statements of Cash Flows....................................... 20
Notes to Consolidated Financial Statements.................................. 21
Management and Office Locations............................................. 40
Corporate Information....................................................... 41
<PAGE>
Message to the Shareholders:
We are very pleased to report record earnings of $5,762,000, or $8.63
per share, during fiscal year 1996! This represents a 137 percent increase over
net earnings of $2,430,000, or $3.72 per share, during fiscal 1995 which had
previously been the record earnings year for 1ST BANCORP.
1ST BANCORP's return on average equity was 29.45% during the year as
compared to 16.62% last year. Return on average assets was 2.05% during the year
as compared to .84% last year.
These outstanding financial statistics for the year were greatly
enhanced as a result of the sale of the Bank's two branch offices in Tipton and
Kokomo, Indiana. These branch sales provided earnings and additional capital to
the Bank and to the Corporation. The sales also allowed management to focus on
increased involvement in the Vincennes market area and on growth in the
nonconforming mortgage market through the Bank's loan production offices.
We provide mortgages to customers located in Indiana, Ohio, and
Kentucky through nonconforming loan products offered by our loan production
offices in these states. During fiscal 1996, these offices produced $65.9
million in nonconforming loans as compared to $10.6 million in such loans during
the preceding year. At June 30, 1996, the Bank held $39.9 million of
nonconforming mortgage loans. Origination of these loans contributes to income
through gain on sale, if sold, and through yield enhancement, if held. Primarily
due to the higher interest yield of these loans, our average yield on loans
increased by 54 basis points during the year to 8.36% at June 30, 1996 from
7.82% at June 30, 1995. This yield increase should enhance our interest rate
margin in future years.
Our continued and renewed focus on meeting the credit and banking needs
of the Vincennes market resulted in an "Outstanding" CRA (Community Reinvestment
Act) rating by our regulators. We are proud of this achievement which amplifies
our commitment to serving the financial needs of the Vincennes community.
We remain committed to maintaining superior asset quality and therefore
only high quality mortgage loans are placed in portfolio. At June 30, 1996,
nonperforming assets aggregated $.8 million, or .3% of total assets, as compared
to $.5 million, or .2% of assets, at June 30, 1995. We take great pride in our
asset quality and pledge to continue the efforts that have proven successful in
this regard.
1ST BANCORP continues to focus on maximizing earnings and shareholder
value. During the year, a five percent stock dividend was declared.
Additionally, the quarterly cash dividend was doubled from five cents to ten
cents per share. In August 1996, we announced a stock repurchase plan whereby up
to five percent of the Corporation's stock may be repurchased during the next
two years. This will provide flexibility to the Board to further enhance book
value per share and the potential for growth in earnings per share of the
Corporation's remaining outstanding shares.
As always, we wish to thank our shareholders, associates, and customers
for their continued loyalty and support.
Sincerely,
/s/ C. James McCormick
C. James McCormick
Chairman of the Board and CEO
/s/ Frank Baracani
Frank Baracani
President
<PAGE>
Selected Financial Highlights
1ST BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Summary of Earnings (Dollars in thousands except per share amounts)
- ------------------- ---------------------------------------------------
(for the year ended June 30):
<S> <C> <C> <C> <C> <C>
Interest Income ................................... 20,875 19,903 15,506 16,149 18,501
Interest Expense .................................. 14,520 13,419 8,955 9,405 12,169
Provision for Loan Losses ......................... 83 100 75 115 142
Non-Interest Income ............................... 10,391 5,384 3,434 3,705 2,301
Non-Interest Expense .............................. 7,528 7,898 7,459 6,836 5,306
Income Taxes ...................................... 3,373 1,440 808 1,222 1,244
Net Earnings ...................................... 5,762 2,430 1,643 2,276 1,941
- ----------------------------------------------------- ------- ------- ------- ------- -------
Earnings Per Share (1)
Primary ......................................... $ 8.63 $ 3.72 $ 2.43 $ 3.59 $ 3.39
Fully-Diluted ................................... $ 8.63 $ 3.71 $ 2.43 $ 3.58 $ 3.25
===================================================== ======= ======= ======= ======= =======
Financial Condition (as of June 30):
Total Assets ...................................... 263,483 312,759 253,560 230,293 209,816
Securities Available for Sale ..................... 10,499 -- 5,758 1,307 1,853
Securities Held to Maturity ....................... 43,624 72,005 51,119 25,990 27,493
Loans ............................................. 169,339 206,923 176,181 178,004 167,436
Deposits .......................................... 137,148 209,805 172,791 172,413 185,509
Borrowings ........................................ 100,885 79,387 59,520 37,200 8,840
Stockholders' Equity .............................. 21,729 16,333 13,520 12,854 9,791
- ----------------------------------------------------- ------- ------- ------- ------- -------
Stockholders' Equity Per Share (1)(2) ............. $ 32.60 $ 24.52 $ 22.80 $ 21.18 $ 18.19
Supplemental Data (At or for the year ended June 30):
Yield on Interest-Earning Assets .................. 7.75% 7.22% 6.87% 7.78% 9.21%
Cost of Interest-Earning Liabilities .............. 5.67% 5.02% 4.18% 4.76% 6.21%
Net Interest-Rate Spread .......................... 2.08% 2.20% 2.69% 3.02% 3.00%
Net Interest-Rate Margin .......................... 2.36% 2.35% 2.89% 3.25% 3.16%
Return on Average Total Assets .................... 2.05% 0.84% 0.70% 1.03% 0.93%
Return on Average Shareholders' Equity ............ 29.45% 16.62% 12.24% 20.10% 22.35%
Equity to Assets Ratio ............................ 8.25% 5.22% 5.33% 5.58% 4.67%
Cash Dividends Per Share (1) ...................... $ 0.39 $ 0.19 $ 0.19 $ 0.14 --
Dividend Payout Ratio ............................. 4.52% 5.13% 7.81% 3.99% --
===================================================== ======= ======= ======= ======= =======
- -----------------------
</TABLE>
(1) All per share calculations adjusted for the 5-for-4 stock split effective
July 15, 1992 and the 5% stock dividend issued February 9, 1996.
(2) Calculated by dividing total equity by number of shares of common stock
outstanding at year end.
<PAGE>
BOARD OF DIRECTORS
1ST BANCORP
1ST BANCORP AND SUBSIDIARIES
[PHOTO OF ALL DIRECTORS]
Front row, left to right:
C. James McCormick, Chairman & CEO *
Chairman of the Board-
McCormick, Inc., Bestway Express, Inc.,
and President of JAMAC Corp.
Ruth Mix Carnahan
Secretary-Treasurer, Carnahan Grain, Inc.
Arthur L. Hart, Chairman Emeritus
Retired Counsel - Hart, Bell, Cummings
Ewing & Stuckey, Attorneys-at-Law
Frank Baracani, President *
President and Chief Executive Officer,
First Federal Bank,
A Federal Savings Bank
Back row, left to right:
James W. Bobe
Farmer and County Commissioner
R. William Ballard
Senior Vice President
First Federal Bank,
A Federal Savings Bank
Donald G. Bell, Vice President
Senior Partner - Hart, Bell, Cummings
Ewing, & Stuckey, Attorneys-at-Law
Lynn Stenftenagel, Secretary/Treasurer
Executive Vice President, Secretary and
Chief Financial Officer,
First Federal Bank,
A Federal Savings Bank
Rahmi Soyugenc
Chairman of the Board and President-
Evansville Metal Products, Inc.,
and President - National Anodizing &
Plating, Keller Street Corporation
John J. Summers, Vice Chairman
Retired President,
Hamilton Glass Products, Inc.
All of the above directors of 1ST BANCORP are also directors of First Federal
Bank, A Federal Savings Bank.
*Also director and officer of First Financial Insurance Agency, Inc. and First
Title Company.
<PAGE>
BUSINESS DISCUSSION
1ST BANCORP, an Indiana corporation formed in 1988 (the "Corporation"),
is a nondiversified, unitary savings and loan holding company whose principal
subsidiary is First Federal Bank, A Federal Savings Bank ("First Federal" or the
"Bank"). The Bank operates a retail banking office in Vincennes, Indiana and
loan production offices in Indianapolis and Evansville, Indiana, suburbs of
Cincinnati, Dayton, and Cleveland, Ohio, and Louisville, Kentucky.
Other Corporation subsidiaries include First Financial Insurance
Agency, Inc. ("First Financial" or the "Agency"), a full service insurance
agency, and First Title Company, a currently inactive corporation.
Lending
First Federal is committed to remaining a residential mortgage lender.
During the Bank's sixty year history, the focus has always been to satisfy the
housing needs of targeted communities. First Federal has grown and prospered
during this time, and has always put mortgage lending in the forefront of its
business opportunities. A proven track record indicates success in this field
and although ancillary types of lending are offered for customer convenience,
the focus will continue to be in residential real estate lending.
First Federal funded $172.4 million in loans during fiscal 1996, an
increase from the $124.7 million in loans closed in fiscal 1995. This represents
an increase of 38.3% in loan volume during 1996 as compared to 1995.
Conforming mortgage loan volume has remained relatively stable during
the year, even with the substantially reduced lending area resulting from the
sale of the two branch offices during December, 1995. In order to maintain the
mortgage volume after the branch sales, a wholesale correspondent program was
established and administered from the Vincennes retail office. This program has
since been discontinued, but did provide the additional mortgage volume
anticipated. Total conforming mortgage loan volume of $106.5 million during
fiscal 1996 compares favorably to the conforming loan volume of $114.1 million
during 1995.
First Federal is committed to efficiently providing the credit needs of
the Vincennes community and has done well in this endeavor as evidenced by the
"Outstanding" CRA (Community Reinvestment Act) rating it received from Bank
regulators. However, with the increasing number of mortgage professionals in the
conforming mortgage market and the decreasing profits provided by such lending,
the Bank is also focussing efforts on the nonconforming mortgage market. This
market provides loans to a wider group of qualifying mortgage customers.
During fiscal 1996, $65.9 million of nonconforming mortgage loans were
funded as compared to $10.6 million of nonconforming loans funded in 1995. These
loans are generated by the loan production offices located in Indiana, Ohio, and
Kentucky.
In order to maintain high asset quality, all except the highest quality
nonconforming mortgage loans are sold, servicing released, to other companies.
High quality nonconforming mortgage loans are retained in portfolio for yield.
Most of the conforming mortgage loans were sold in the secondary market with
servicing retained by the Bank; however, a portion of the new conforming lending
was placed in portfolio to enhance yield and/or decrease interest rate risk.
During the year, First Federal sold $161.4 million of residential mortgage
loans.
<PAGE>
At June 30, 1996, the Bank maintained a high quality portfolio with a
concentration in residential real estate as follows:
Real Estate Loans:
Construction Loans on:
1-4 family dwelling units $ 2,171,000 1.4%
Permanent Mortgages on:
1-4 family dwelling units 133,092,000 86.8%
5 or more dwelling units 1,091,000 .7%
Nonresidential property 3,850,000 2.5%
Land 3,214,000 2.1%
Consumer Loans 10,010,000 6.5%
- ----------------------------- ------------ -----
Total Loans $153,428,000 100.0%
============================= ============ =====
Over 95% of the total loan portfolio at June 30, 1996 consisted of
residential real estate or consumer loans. Of the total $172.4 million loans
processed during fiscal year 1996, over 98% was for residential or consumer
purposes.
Loan quality continues to be outstanding. With the entry into
nonconforming lending, controls are in place to ensure continued strong asset
quality. Nonperforming assets totalled only $.8 million, or .3% of total assets
at June 30, 1996. This compares to nonperforming assets of $.5 million, or .2%
of total assets, at June 30, 1995. This level of nonperforming assets continues
to be one of the lowest in the industry.
Total allowance for loan losses at June 30, 1996 aggregated $896,000,
or .6% of the net loan portfolio. This compares to $878,000, or .4% of the net
loan portfolio, at June 30, 1995. Although loans were sold as part of the branch
sales transactions, the allowance for loan losses was not reduced, thus this
allowance now constitutes a larger percentage of the net loan portfolio.
Management believes the reserves are adequate to absorb potential future losses.
Retail Banking
The Bank operates one banking office located in Vincennes, Indiana.
Plans have been announced to open a branch drive-in facility at 1700 Willow
Street in Vincennes.
During the year, the branch offices in Tipton and Kokomo, Indiana were
sold and retail banking efforts were concentrated in the Vincennes area.
A variety of savings products and conveniences are offered by First
Federal. Varying checking, money market deposit accounts (MMDA), and savings
certificates are offered at competitive interest rates. New savings and checking
products are continually being evaluated. Wire services, travelers' checks,
money orders, savings bonds, ATM services, bank by mail, and automatic transfers
are offered for customer convenience.
An extensive array of loan products is also offered. Fixed rate,
adjustable rate, and balloon mortgages, as well as consumer loan products,
credit cards, and overdraft and home equity lines of credit are available.
Nonconforming mortgage loans are also offered, thus providing mortgage service
for all segments of the communities being served.
Insurance
First Financial Insurance Agency, Inc. continues to grow in insurance
volume and in the number of companies represented. At June 30, 1996, the Agency
represented 15 property and casualty insurance companies. First Financial
provides a full line of insurance products, including home, auto, farm and
commercial coverages. The Agency also markets various health and life insurance
products through its affiliation with six additional companies.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations and Financial Condition
1ST BANCORP achieved record net earnings in each of the past two fiscal
years. During the year ended June 30, 1996, net earnings were $5,762,000 as
compared to $2,430,000 for the year ended June 30, 1995 and $1,643,000 for the
year ended June 30, 1994. Earnings per share, on a fully-diluted basis, were
$8.63 during 1996, $3.71 during 1995, and $2.43 during 1994. Dividends per
common share were $.40 in 1996, $.20 in 1995, and $.20 in 1994.
1ST BANCORP's assets decreased to $263,483,000 at June 30, 1996 as
compared to $312,759,000 at June 30, 1995. This decrease occurred because of the
sale of the two branch offices during the fiscal year. Stockholders' equity at
June 30, 1996 was $21,729,000, an increase of 33.0% over stockholders' equity of
$16,333,000, at June 30, 1995.
Interest Rate Environment and Corporate Strategic Planning
The interest rate environment plays an important role in the strategic
planning, new business, and earnings of the Corporation. The bank experienced
another fluctuating interest rate environment during fiscal year 1996 which made
strategic planning very challenging.
With the expanding loan production office network and increased volume
in nonconforming mortgage originations, the effect of the interest rate
fluctuations was somewhat mitigated because rates do not move as quickly in the
nonconforming mortgage market.
Net Interest Income
NET INTEREST INCOME
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- ---------------------------- ---------------------------
Average Yield Average Yield Average Yield
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------------------------- ---------------------------- ---------------------------
(Dollars in Thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Short-Term Investments and
Interest Bearing Deposits $17,825 $955 5.36% $12,332 $666 5.40% $13,726 $407 2.97%
Investment and Trading
Account Securities 59,777 3,893 6.51% 70,067 4,144 5.91% 41,169 2,235 5.43%
Loans 191,735 16,027 8.36% 193,020 15,093 7.82% 171,073 12,864 7.52%
--------------------------- ---------------------------- ---------------------------
Total Interest Earning Assets 269,337 20,875 7.75% 275,419 19,903 7.22% 225,968 15,506 6.87%
Allowance for Loan Losses (886) (855) (855)
Other Assets 13,221 15,383 11,101
Total Assets $281,672 $289,947 $236,214
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest Bearing Liabilities:
Deposits 163,793 9,073 5.54% 191,350 8,977 4.69% 173,238 7,162 4.13%
Short-Term Borrowings 3,368 154 4.57% 6,186 379 6.13% 3,600 201 5.58%
Federal Home Loan Bank Advances
and Other Borrowings 89,103 5,293 5.94% 69,645 4,063 5.83% 37,619 1,592 4.23%
--------------------------- ---------------------------- ---------------------------
Total Interest Bearing Liabilities 256,264 14,520 5.67% 267,181 13,419 5.02% 214,457 8,955 4.18%
Other Liabilities 5,842 8,149 8,336
Stockholders' Equity 19,566 14,617 13,421
Total Liabilities and
Stockholders' Equity 281,672 289,947 236,214
======== ======== ========
Net Interest Income / Spread 6,355 2.08% 6,484 2.20% 6,551 2.69%
============== ============== =============
Net Interest Margin 2.36% 2.35% 2.89%
==== ==== ====
</TABLE>
Net interest income is affected by both the volume and rates of
interest-earnings assets and interest-bearing liabilities. Net interest income
before provision for loan losses was $6,355,000 in 1996 as compared to
$6,484,000 in 1995 and $6,551,000 in 1994. The decrease in 1996 from the level
in 1995 is due to a lower volume of interest earning assets and interest bearing
liabilities. The decrease in 1995 over 1994 was due to the decreased interest
rate margin, a product of the increasing interest rates during the year, which
was not fully offset by the increased levels of interest earning assets and
interest bearing liabilities.
<PAGE>
Interest income has fluctuated during the past three years and reached
a record level of $20,875,000 in 1996 as compared to $19,903,000 in 1995 and
$15,506,000 in 1994. Likewise, interest expense increased to $14,520,000 in 1996
as compared to $13,419,000 in 1995 and $8,955,000 in 1994. These levels are
reflective of the interest rate fluctuations and the various operating
strategies implemented during the three year period as discussed below.
The annualized average yield on interest earning assets has increased
during the past three years because of changes in the economic environment and
because of the increased volume of high yielding nonconforming mortgage loans
being placed in portfolio. The average yield on interest earning assets
increased to 7.75% during 1996 from 7.22% during 1995, and 6.87% in 1994.
Likewise, the annualized average cost of interest bearing liabilities has
increased to 5.67% during 1996 from 5.02% in 1995, and 4.18% in 1994. The net
interest spread has decreased to 2.08% during 1996 from 2.20% in 1995 and from
2.69% during 1994.
Fiscal 1996 vs. fiscal 1995
Because of the branch sales in December 1995, cash management was an
increased strategic concern during fiscal 1996. As can be seen on the Net
Interest Income chart, the average yield on short-term investments and interest
bearing deposits remained relatively stable at 5.36% during 1996 as compared to
5.40% during 1995, however the average balance increased to $17,825,000 during
1996 from $12,332,000 during 1995. Alternative cash sources were necessary to
fund the cash outflow resulting from the branch sales. Funds were obtained
through increased borrowing and brokered funds as well as through the sale of
loans and securities. However, these funds were not immediately reinvested
because strategic planning called for investing in high yielding nonconforming
loans as such loans became available. Therefore, this cash was generating income
at overnight funds rates until invested in loans.
Because of the opportunity allowed by the FASB Special Report on
implementation of Statement 115, the investment portfolio was restructured in
December 1995. This resulted in the sale of securities which decreased the
average balance in investment and trading account securities to $59,777,000 in
1996 as compared to $70,067,000 in 1995. These investment securities had a
substantially improved yield of 6.51% during 1996 as compared to 5.91% during
1995.
The Net Interest Income chart also indicates the Corporation's average
loan balance stayed relatively constant at $191,735,000 during 1996 compared to
$193,020,000 during 1995. However, the yield increased by 54 basis points to
8.36% during 1996 from 7.82% during 1995. This increase in yield resulted from
the sale of lower yielding loans during the year and the replacement of these
loans in portfolio by the higher yielding nonconforming loans. This increase in
yield is considered substantial by management, is expected to lead to increased
earnings, and will be the focus of future strategic decisions.
While all the restructuring on the asset side resulted in an increased
yield on earning assets, the restructuring of the liability side resulted in an
offsetting larger increase in the cost of interest bearing liabilities. With the
outflow of savings occurring as a result of the branch sales, cash was obtained
through brokered savings and through increased borrowings.
The average deposits during 1996 decreased to $163,793,000 from
$191,350,000 during 1995 because of the deposit outflow associated with the
branch sales, offset somewhat by an increase in brokered deposits. Because the
deposits that were sold included transaction accounts and passbook funds, the
average cost of these transferred deposits was relatively low. Thus, the average
cost of interest bearing deposits rose to 5.54% in 1996 as compared to 4.69%
during 1995. Although not reflected in net interest income, the decrease in
deposits resulted in a decreased federal deposit insurance premium expense. This
is reflected in non-interest expense.
<PAGE>
To supplement cash flow, additional funds were borrowed during 1996.
The average balance of Federal Home Loan Bank advances and other borrowings
increased to $89,103,000 in 1996 from $69,645,000 in 1995. Even though the
average cost of such borrowings remained relatively constant at 5.94% during
1996 as compared to 5.83% during 1995, the increased volume contributed to the
increased cost of interest bearing liabilities.
The increased liability cost coupled with the excessive funds invested
at the overnight funds rate while being held for future investment in higher
yielding loans has resulted in a decreased net interest spread during the year.
The reinvestment of funds at higher yields will be a major focus in the upcoming
fiscal year and should be accomplished readily.
Fiscal 1995 vs. fiscal 1994
During years of increasing interest rates, as experienced in fiscal
year 1995, the cost of interest bearing liabilities, which normally have shorter
term maturities, generally outpaces the increased income generated from interest
earning assets. During 1995, there was a substantial increase in yield on
interest earning assets over that experienced in 1994. This resulted from
placing higher fixed rate mortgage loans in portfolio as well as the upward
repricing in rate of the adjustable rate loan portfolio. However, a larger cost
was incurred with the upward repricing of a large portion of interest-bearing
liabilities.
Net interest margin
Another factor that must be considered is the contribution of interest
free funds on the interest rate spread, which is the basis of the interest rate
margin. Average interest earning assets exceeded average interest bearing
liabilities by $13,073,000 in 1996, by $8,238,000 in 1995, and by $11,511,000 in
1994. An excess of interest earning assets effectively contributes interest free
funds as an integral part of the interest rate margin. Thus, the Corporation's
net interest margin exceeded the spread by 28 basis points in 1996, by 15 basis
points in 1995, and by 20 basis points in 1994.
Non-Interest Income
Non-interest income has increased in 1996 to $10,391,000 from
$5,384,000 in 1995 and from $3,434,000 in 1994. The major reason for the
increase in 1996 was the $7,274,000 gain on sale of the branch offices.
Net gain on sales of loans increased to $2,026,000 in 1996 from
$582,000 in 1995 and from $942,000 in 1994. In 1996, this income was a result of
the gain on sale of loans sold in the conforming and nonconforming secondary
market. The Bank adopted FAS 122 for fiscal year 1996 which resulted in
increased gain on sale of loans due to the capitalization of $454,000 of
originated mortgage servicing rights. Total loan sales aggregated $161,421,000
in 1996, $32,835,000 in 1995, and $206,691,000 in 1994. Included in the loan
sales during 1996 was $26,200,000 in nonconforming loan paper, which generates a
strong gain on sale and is not as rate sensitive in the market. In previous
years, mostly conforming loan paper was sold and the gains generated were
dependent on volume sold.
A $111,000 net loss on the sales of securities was recognized during
1996 as compared to net gains of $16,000 in 1995 and $196,000 in 1994. This loss
in 1996 was incurred because of the opportunity afforded by the issuance of the
FASB Special Report, "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities," to restructure the
investment portfolio. Lower yielding securities were sold to improve investment
yield on the remaining portfolio.
<PAGE>
Income from fees and service charges decreased to $296,000 in 1996 from
$981,000 in 1995 and from $858,000 in 1994. The level of fees is significantly
affected by servicing fee income on loans serviced for other owners. The Bank
retains .25% servicing fee on fixed rate loans and .375% servicing fee on
adjustable rate loans that have been sold in the secondary market. Loans sold to
others, with servicing retained by the Bank, totalled $81,353,000 at June 30,
1996, $193,058,000 at June 30, 1995, and $392,593,000 at June 30, 1994. The
total amount of loans serviced by the Bank for the benefit of others decreased
substantially during 1996 and therefore the fees also decreased accordingly
during the year. At June 30, 1995, the amount of loans serviced by the Bank also
decreased considerably as compared to the previous fiscal year end, however much
of the decrease occurred in June 1995. Therefore fees were collected throughout
most of the fiscal year, resulting in the increase in servicing fees collected.
Other non-interest income decreased to $906,000 in 1996 as compared to
$3,805,000 in 1995 and $1,438,000 in 1994. Of this income, $237,000 during 1996,
$2,980,000 during 1995, and $700,000 during 1994 resulted from the sale of FHLMC
and FNMA servicing rights. These servicing rights were sold to minimize
prepayment risk associated with the projected lowering long term interest rate
scenario. Additionally, in years prior to 1996, these servicing rights were sold
to recognize currently the value in net income; with the adoption of FAS 122,
this is no longer necessary, as the value of the servicing rights is recognized
currently.
Non-Interest Expense
Non-interest expense decreased to $7,528,000 in 1996 as compared to
$7,898,000 in 1995 and $7,459,000 in 1994. The decrease in 1996 can be directly
attributed to the branch sales, offset somewhat by increased costs associated
with loan production offices. The increase in 1995 over 1994 was the result of
the increase in loan production offices.
Compensation and employee benefits, the major component of non-interest
expense, decreased to $4,273,000 in 1996 from $4,442,000 in 1995 and $4,225,000
in 1994. The decrease in 1996 was from the decrease in employees resulting from
the sale of the branches, offset somewhat by pay adjustments during the year,
increased cost of employee benefits, and increased staffing of the loan
production offices. The increase during 1995 was due, in part, to pay
adjustments during the year for employees, both for merit and cost of living,
and to bonus and commission payouts, as well as increased staffing of the loan
production offices.
Net occupancy decreased to $746,000 in 1996 from $815,000 during 1995
and $749,000 during 1994. This is also due to the sale of the branch offices,
offset by increased loan production offices.
<PAGE>
Financial Condition
The Corporation's total assets decreased to $263,483,000 at June 30,
1996 from $312,759,000 at June 30, 1995.
Total cash and cash equivalents increased by $7,767,000 to $25,099,000
at June 30, 1996 from $17,332,000 at June 30, 1995. This was an increase over an
already high cash level at the previous fiscal year end when cash was being
accumulated for repayment of borrowings maturing in early fiscal year 1996. Cash
proceeds from borrowings and brokered certificates as well as from the sale of
loans and investments during 1996 were placed in overnight funds accounts for
reinvestment in higher yielding loans. Such reinvestment is expected to occur in
fiscal 1997 as the loans become available.
Securities available for sale totaled $10,499,000 at June 30, 1996
compared with no securities available for sale at June 30, 1995. Securities held
to maturity decreased to $43,624,000 at June 30, 1996 from $72,005,000 at June
30, 1995. This overall decrease in investments occurred because of the
opportunity afforded by the issuance of the FASB Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities," to restructure the securities portfolio and sell low
yielding investment securities.
Net loans receivable decreased to $150,749,000 at June 30, 1996 from
$201,819,000 at June 30, 1995. Part of this decrease was the sale of loans in
conjunction with the branch sales. In addition, the decision was made during
1996 to sell an increased number of adjustable rate mortgage loans to enhance
the yield of the loan portfolio. Adjustable rate mortgage loans had been held
for interest rate risk purposes, however with the increased capital position,
the decision was made to concentrate on current yield which in turn should
mitigate interest rate risk. Loans held for sale increased to $18,590,000 at
June 30, 1996 from $5,104,000 at June 30, 1995. This increase was due to
management of the mortgage loans held for sale.
Because of the branch sales, total deposits decreased to $137,148,000
at June 30, 1996 from $209,805,000 at June 30, 1995. Brokered deposits are used
to supplement savings accounts obtained in the Vincennes area. Total brokered
savings increased to $34,058,000 at June 30, 1996 from $24,696,000 at June 30,
1995.
Advances from Federal Home Loan Bank and other borrowings increased to
$100,885,000 at June 30, 1996 from $79,387,000 at June 30, 1995. The use of
borrowings avoids payment of Federal insurance premiums and has been an integral
component in the strategic plans of the Corporation.
Capital Resources
At June 30, 1996, stockholders' equity was $21,729,000, an increase of
$5,396,000, or 33.0%, over total stockholders' equity of $16,333,000 at June 30,
1995. This increase resulted from the sale of the branch offices as well as from
the Corporation's profitable operations.
<PAGE>
The Corporation is subject to regulation as a savings and loan holding
company by the Office of Thrift Supervision. The Bank, as a subsidiary of a
savings and loan holding company, is subject to certain restrictions in its
dealings with the Corporation. The Bank is also subject to the regulatory
requirements applicable to a federal savings bank.
Current capital regulations require savings institutions to have
minimum tangible capital equal to 1.5% of total assets and a minimum 3% core
capital ratio. Additionally, savings institutions are required to meet a
risk-based capital ratio equal to 8% of risk-weighted assets. At June 30, 1996,
the Bank exceeded all capital requirements.
Minimum capital standards place savings institutions into one of five
categories, from "critically undercapitalized" to "well-capitalized," depending
on levels of three measures of capital. A well-capitalized institution, as
defined by the regulations, would have a total risk-based capital ratio of at
least 10%, a Tier 1 (core) risk-based capital ratio of at least 6%, and a
leverage (core) risk-based capital ratio of at least 5%. At June 30, 1996, First
Federal was classified as "well- capitalized."
The following is a summary of the Bank's regulatory capital and
capital requirements at June 30, 1996:
<TABLE>
<CAPTION>
Core/ Tier 1 Total
GAAP Tangible Tangible Leverage Risk-Based Risk-Based
Capital Capital Equity Capital Capital Capital
------------ ---------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1ST BANCORP GAAP Capital $21,729,000
First Federal GAAP Capital $22,770,000 $22,770,000 $22,770,000 $22,770,000 $22,770,000 $22,770,000
Additional Capital Items -
Unrealized Loss on Investment Securities 245,000 245,000 245,000 245,000 245,000
General Valuation Allowance 392,000
------------------------------------------------------------------------
Regulatory Computed Capital 23,015,000 23,015,000 23,015,000 23,015,000 23,407,000
========================================================================
Total Assets:
Adjusted Total Assets 263,645,000 263,645,000 263,645,000 -- --
Risk-Weighted Assets -- -- -- 128,848,000 128,848,000
------------------------------------------------------------------------
Regulatory Computed Assets 263,645,000 263,645,000 263,645,000 128,848,000 128,848,000
========================================================================
Regulatory Capital Ratio 8.73% 8.73% 8.73% 17.86% 18.17%
==== ==== ==== ===== =====
Regulatory Capital Category:
OTS Minimum Requirements 1.50% 3.00% 8.00%
==== ==== ====
Prompt Corrective Action Requirements:
Not Critically Undercapitalized Equal to 2.00%
====
Well Capitalized Equal to or Greater Than 5.00% 6.00% 10.00%
==== ==== =====
</TABLE>
Asset and Liability Management
Thrift institutions are subject to interest rate risk to the degree
that interest-bearing liabilities, primarily deposits and borrowings with
relatively short-term maturities, mature or reprice more rapidly, or on a
different basis, than interest-earning assets. While having liabilities that
mature or reprice more frequently on average than assets will be beneficial in
times of declining interest rates, such an asset/liability structure will result
in lower net income or net losses during periods of rising interest rates,
unless offset by other factors such as non-interest income. Thus, the
Corporation's operating results are affected by changes in the level of market
rates of interest.
<PAGE>
An asset/liability management program has been designed and implemented
to stabilize and improve earnings by managing interest rate risk without
adversely affecting asset quality. This program involves the coordination of
sources and uses of funds and the evaluation of changing market rate
relationships. In this process, the Corporation's interest rate risk is analyzed
using gap analysis and simulation analysis produced in-house and by the OTS.
Management closely monitors the asset/liability mix and adjusts
policies and strategies to manage the impact of fluctuating interest rates on
operating results. The following table sets forth the repricing of the
Corporation's interest earning assets and interest bearing liabilities at June
30, 1996. Prepayment assumptions and decay rates have been applied to more
accurately reflect the asset/liability gap.
<TABLE>
<CAPTION>
At June 30, 1996
Maturing or Repricing Within
-----------------------------------------------------------------------
Average 1 Year 1 to 3 3 to 5 More than
Rate Total Or Less Years Years 5 Years
-----------------------------------------------------------------------
(Dollars in Thousands)
Rate Sensitive Assets
Loans Receivable (1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate Mortgage loans 7.88% $94,765 $67,779 $10,970 $12,068 $3,948
Fixed Rate Mortgage loans 8.44% 65,954 13,380 19,230 12,410 20,934
Nonmortgage Loans 10.10% 10,002 5,576 2,821 1,192 413
Investments 5.98% 83,676 32,245 13,369 13,915 24,147
-------------------------------------------------------------------------------------
Total Rate Sensitive Assets 7.49% $254,397 $118,980 $46,390 $39,585 $49,442
==============================================================================================================================
Rate Sensitive Liabilities
Deposits
Fixed Maturity Deposits 5.83% $116,889 $71,382 $37,114 $6,137 $2,256
Other Deposits (2) 3.20% 19,330 11,150 2,408 1,754 4,018
FHLB Advances and Other Borrowings 5.60% 100,885 47,128 52,447 396 914
------------------------------------------------------------------------------------
Total Rate Sensitive Liabilities 5.52% $237,104 $129,660 $91,969 $8,287 $7,188
==============================================================================================================================
Total Asset/Liability Gap $17,293 ($10,680) ($45,579) $31,298 $42,254
Cumulative Asset/Liability Gap $17,293 ($10,680) ($56,259) ($24,961) $17,293
Cumulative Gap as a Percentage of
Total Assets - 1996 -4.05% -21.35% -9.47% 6.56%
Cumulative Gap as a Percentage of
Total Assets - 1995 -9.02% -34.11% -22.43% 3.46%
</TABLE>
- ---------------
(1) The distribution of fixed rate loans is based upon contractual maturity
and scheduled contractual repayments adjusted for estimated
prepayments. For adjustable rate loans, interest rates adjust at
intervals of six months to seven years.
(2) A portion of these transaction account balances has been included in
the More Than 5 Years category to reflect management's assumption that
these accounts are not rate sensitive.
<PAGE>
Liquidity
The Corporation conducts substantially all its business through its
thrift subsidiary. The main source of funds for 1ST BANCORP is dividends from
the Bank.
The Corporation's primary sources of funds are the Bank's deposits,
which totaled $137,148,000 at June 30, 1996, and borrowings, which totaled
$100,885,000 at June 30, 1996. During the year, cash flow needs were also
supplied by loan payments, proceeds from sales of loans and securities, and
securities sold under agreement to repurchase.
Scheduled loan payments are a relatively stable source of funds, but
loan payoffs, the sale of loans, and deposit inflows and outflows fluctuate
significantly, depending on market interest rates and economic conditions.
Management does not expect any of these items to occur in amounts that would
exert pressure on the Corporation's ability to meet consumer demand for
liquidity or the regulatory liquidity requirements.
Historically, the Bank has maintained its liquid assets above the
minimum requirements imposed by OTS regulations and at a level believed by
management adequate to meet requirements of normal daily activities. Regulations
require thrift institutions to maintain minimum levels of certain liquid
investments, as defined in the regulations, of at least 5% of net withdrawable
assets. At June 30, 1996, First Federal's regulatory liquidity ratio was 18.69%.
<PAGE>
<PAGE>
Independent Auditors' Report
The Board of Directors
1ST BANCORP:
We have audited the accompanying consolidated statements of financial condition
of 1ST BANCORP and subsidiaries as of June 30, 1996 and 1995 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three year period ended June 30, 1996. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of 1ST BANCORP and
subsidiaries as of June 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three year period ended June
30, 1996 in conformity with generally accepted accounting principles.
As discussed in notes 1 and 5 to the financial statements, the Bank adopted the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No 122, Accounting for
Mortgage Servicing Rights in 1996.
/s/ KPMG Peat Marwick LLP
Indianapolis, Indiana
July 22, 1996
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ------------- --------------
<S> <C> <C>
Cash and cash equivalents:
Interest bearing deposits $ 24,689,000 15,978,000
Non-interest bearing deposits 410,000
1,354,000 17,332,000
Securities available for sale (note 2) 10,499,000 --
Securities held to maturity (market value of $42,184,000
and $70,790,000) (note 3) 43,624,000 72,005,000
Loans receivable, net (notes 4 and 8) 150,749,000 201,819,000
Loans held for sale 18,590,000 5,104,000
Accrued interest receivable:
Securities 1,036,000 1,397,000
Loans 1,179,000 1,171,000
Stock in FHLB of Indianapolis, at cost 4,864,000 3,876,000
Office premises and equipment (note 6) 2,950,000 3,989,000
Real estate owned 177,000 145,000
Prepaid expenses and other assets 4,716,000 5,921,000
$ 263,483,000 312,759,000
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 7) 137,148,000 209,805,000
Advances from FHLB and other borrowings (note 8) 100,885,000 79,387,000
Advance payments by borrowers for taxes and insurance 492,000 2,321,000
Accrued interest payable on deposits 816,000 504,000
Accrued expenses and other liabilities 2,413,000 4,409,000
241,754,000 296,426,000
Stockholders' equity (note 9):
Preferred stock, no par value; shares authorized
of 2,000,000, none outstanding -- --
Common stock, $1 par value; shares authorized of 5,000,000;
shares issued and outstanding of 666,561 and 634,275 667,000 634,000
Paid-in capital 2,747,000 2,825,000
Retained earnings, substantially restricted 18,560,000 13,064,000
Unrealized depreciation on securities available for sale
(notes 1 and 2) (245,000) (190,000)
21,729,000 16,333,000
Commitments (note 14)
$ 263,483,000 312,759,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
Interest income:
<S> <C> <C> <C>
Loans $ 16,027,000 15,093,000 12,864,000
Securities 3,890,000 4,136,000 2,234,000
Trading account securities 3,000 8,000 1,000
Other short-term investments and
interest bearing deposits 955,000 666,000 407,000
---------- ---------- ----------
Total interest income 20,875,000 19,903,000 15,506,000
---------- ---------- ----------
Interest expense:
Deposits (note 7) 9,073,000 8,977,000 7,162,000
Short-term borrowings 154,000 379,000 201,000
FHLB advances and other borrowings 5,293,000 4,063,000 1,592,000
---------- ---------- ----------
Total interest expense 14,520,000 13,419,000 8,955,000
---------- ---------- ----------
Net interest income before
provision for loan losses 6,355,000 6,484,000 6,551,000
Provision for loan losses (note 4) 83,000 100,000 75,000
---------- ---------- ----------
Net interest income after
provision for loan losses 6,272,000 6,384,000 6,476,000
---------- ---------- ----------
Non-interest income:
Fees and service charges 296,000 981,000 858,000
Net gain (loss) on sales of securities available
for sale and trading account securities (note 3) (111,000) 16,000 196,000
Net gain on sales of loans (note 5) 2,026,000 582,000 942,000
Net gain on sale of branch offices (note 13) 7,274,000 -- --
Other (note 5) 906,000 3,805,000 1,438,000
---------- ---------- ----------
Total non-interest income 10,391,000 5,384,000 3,434,000
---------- ---------- ----------
Non-interest expense:
Compensation and employee benefits 4,273,000 4,442,000 4,225,000
Net occupancy 746,000 815,000 749,000
Federal insurance premiums 469,000 494,000 472,000
Other 2,040,000 2,147,000 2,013,000
---------- ---------- ----------
Total non-interest expense 7,528,000 7,898,000 7,459,000
---------- ---------- ----------
Earnings before income taxes 9,135,000 3,870,000 2,451,000
Income taxes (note 12) 3,373,000 1,440,000 808,000
---------- ---------- ----------
Net earnings $ 5,762,000 2,430,000 1,643,000
============ ========= =========
Earnings per share (note 10):
Primary $ 8.63 3.72 2.43
============ ============ ============
Fully-diluted $ 8.63 3.71 2.43
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Unrealized Total
depreciation on stock-
Common Paid-in Retained securities avail- holders'
stock capital earnings able for sale equity
-------- ----------- ---------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1993 $578,000 3,052,000 9,224,000 -- 12,854,000
Issuance of 6,835 shares of common stock
through employee stock purchase plan 7,000 77,000 -- -- 84,000
Exercise of options for 22,619 shares of common
stock (note 9) 23,000 115,000 -- -- 138,000
Issuance of 1,574 shares of common stock through
dividend reinvestment and shareholder stock
purchase plan (note 9) 2,000 32,000 -- -- 34,000
Tax benefit of stock options exercised -- 37,000 -- -- 37,000
Dividends ($.20 per share) -- -- (118,000) -- (118,000)
Purchase and retirement of 54,500 shares of
common stock (55,000 (1,074,000) -- -- (1,129,000)
Issuance of 10,000 shares in connection with
acquisition of insurance agency 10,000 190,000 -- -- 200,000
Change in net unrealized depreciation on securities
available for sale (notes 1 and 2) -- -- -- (223,000) (223,000)
Net earnings -- -- 1,643,000 -- 1,643,000
-------- --------- ---------- -------- ----------
Balance at June 30, 1994 565,000 2,429,000 10,749,000 (223,000) 13,520,000
Issuance of 2,391 shares of common stock through
employee stock purchase plan (note 9) 2,000 37,000 -- -- 39,000
Exercise of options for 66,376 shares of common
stock (note 9) 66,000 338,000 -- -- 404,000
Issuance of 904 shares of common stock through
dividend reinvestment and shareholder stock
purchase plan (note 9) 1,000 21,000 -- -- 22,000
Dividends ($.20 per share) -- -- (115,000) -- (115,000)
Change in net unrealized depreciation on securities
available for sale (notes 1 and 2) -- -- -- 33,000 33,000
Net earnings -- -- 2,430,000 -- 2,430,000
-------- --------- ---------- -------- ----------
Balance at June 30, 1995 634,000 2,825,000 13,064,000 (190,000) 16,333,000
Issuance of 4,965 shares of common stock through
through employee stock purchase plan (note 9) 5,000 77,000 -- -- 82,000
Issuance of 1,843 shares of common stock through
dividend reinvestment and shareholder stock
purchase plan (note 9) 2,000 53,000 -- -- 55,000
Purchase and retirement of 6,056 shares of
common stock (6,000) (176,000) -- -- (182,000)
Issuance of 31,534 shares of common stock
at par value for 5% stock dividend
plus cash in lieu of
fractional shares 32,000 (32,000) (5,000) -- (5,000)
Dividends ($ .40 per share) -- -- (261,000) -- (261,000)
Change in net unrealized depreciation on securities
available for sale (notes 1 and 2) -- -- -- (55,000) (55,000)
Net earnings -- -- 5,762,000 5,762,000
-------- --------- ---------- -------- ----------
Balance at June 30, 1996 $667,000 2,747,000 18,560,000 (245,000) 21,729,000
======== ========= ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
Net cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 5,762,000 2,430,000 1,643,000
Adjustments to reconcile net cash provided (used) by operating activities:
Depreciation and amortization 300,000 188,000 427,000
Amortization of mortgage servicing rights 107,000 486,000 487,000
Gain on sale of loans (2,026,000) (582,000) (942,000)
Loss (gain) on sale of securities 111,000 (196,000)
Gain on sale of branch (7,274,000) -- --
Net change in loans held for sale (13,486,000) (1,740,000) 18,859,000
Provision for loan losses 83,000 100,000 75,000
Decrease (increase) in accrued interest receivable 107,000 (702,000) (536,000)
Decrease (increase) in prepaid expenses and other assets 635,000 21,000 (1,611,000)
Increase (decrease) in accrued expenses and other liabilities (1,646,000) 443,000 (22,000)
Provision in lieu of federal income taxes -- -- 120,000
Undistributed loss of investment in limited partnership 263,000 146,000 --
------------- ------------- -------------
Net cash provided (used) by operating activities (17,064,000) 774,000 18,304,000
------------- ------------- -------------
Cash flows from investing activities:
Purchases of investments and mortgage-backed securities (34,262,000) (15,989,000) (44,114,000)
Proceeds from maturities of investment securities 21,670,000 -- 9,002,000
Purchases of investments and mortgage -backed securities
available for sale (46,074,000) -- (40,558,000)
Proceeds from maturity and sales of investments and mortgage-
backed securities available for sale 76,159,000 693,000 45,833,000
Principal collected on loans, net of originations (12,802,000) (28,227,000) (16,111,000)
Purchase of life insurance policies -- -- (1,258,000)
Purchase of stock of FHLB of Indianapolis (988,000) (1,378,000) (698,000)
Purchases of office premises and equipment (154,000) (187,000) (780,000)
Investment in limited partnership -- (2,500,000) --
Proceeds from sale of office premises and equipment-branch sales 1,316,000 -- --
Proceeds from sale of loans-branch sales 28,875,000 -- --
Sale of deposits-branch sales (78,473,000) -- --
Proceeds from bulk sale of loans 37,937,000 -- --
Other 185,000 225,000 8,000
------------- ------------- -------------
Net cash used by investing activities (6,611,000) (47,363,000) (48,676,000)
------------- ------------- -------------
Cash flows from financing activities:
Net increase in deposits 12,084,000 37,014,000 378,000
Proceeds from FHLB advances and other borrowings 202,544,000 193,031,000 123,358,000
Repayment of FHLB advances and other borrowings (181,046,000) (173,164,000) (101,038,000)
Proceeds from issuance of common stock 137,000 465,000 256,000
Purchase and retirement of common stock (182,000) -- (1,129,000)
Payment of dividends on common stock (266,000) (115,000) (118,000)
Decrease in advance payments by borrowers for interest and taxes (1,829,000) (961,000) (10,000)
Net cash provided by financing activities 31,442,000 56,270,000 21,697,000
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 7,767,000 9,681,000 (8,675,000)
Cash and cash equivalents at beginning of year 17,332,000 7,651,000 16,326,000
------------- ------------- -------------
Cash and cash equivalents at end of year $ 25,099,000 17,332,000 7,651,000
============= ============= =============
Additional disclosures:
Interest paid $ 14,170,000 13,028,000 8,921,000
============= ============= =============
Income taxes paid $ 4,700,000 584,000 126,000
============= ============= =============
Transfer of investment securities to held for sale account $ 45,838,000 -- 9,993,000
============= ============= =============
Transfer of mortgage-backed securities available for sale to held
to maturity account $ -- 231,000 --
============= ============= =============
Transfer of investment securities available for sale to held
to maturity account $ -- 4,598,000 --
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of 1ST BANCORP
(the "Corporation") and its subsidiaries, First Federal Bank, A Federal
Savings Bank and subsidiary (the "Bank"), First Financial Insurance
Agency, Inc. and First Title Company. All significant intercompany
transactions and balances have been eliminated in consolidation.
The accounting and reporting policies of the Corporation and the Bank
conform to generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as
of the date of the consolidated statement of financial condition and
consolidated statement of earnings for the period. Actual results could
differ from those estimates.
The Bank is subject to competition from other financial institutions and
is regulated by certain federal agencies and undergoes periodic
examination by those regulatory authorities.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and certificates of deposit with
original maturities of three months or less.
Securities Held to Maturity and Available for Sale
Securities classified as available for sale are securities that the
Corporation intends to hold for an indefinite period of time, but not
necessarily until maturity, and include securities that management might
use as part of its asset-liability strategy, or that may be sold in
response to changes in interest rates, changes in prepayment risk, the
need to increase regulatory capital or other similar factors, and which
are carried at market value. Unrealized holding gains and losses, net of
tax, on available for sale securities are reported as a net amount in a
separate component of stockholders' equity until realized. Securities
classified as held to maturity are securities that the Corporation has
both the ability and positive intent to hold to maturity and are carried
at cost adjusted for amortization of premium or accretion of discount.
Gains and losses on securities are computed on a specific identification
basis.
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Loans Receivable and Real Estate Owned
Loans receivable are considered long-term investments, and accordingly,
are carried at historical cost.
The Bank provides specific valuation allowances for estimated losses on
loans and real estate owned when a significant and permanent decline in
value occurs. As of July 1, 1995, the Bank adopted Statement of Financial
Accounting Standard No. 114, "Accounting by Creditor for Impairment of a
Loan". Under this standard, loans considered to be impaired are reduced
to the present value of expected future cash flows or to fair value of
collateral by allocating a portion of the allowance for loan losses to
such loans. If these allocations cause the allowance for loan losses to
require an increase, allocations are considered in relation to the
overall adequacy of the allowance for loan losses and subsequent
adjustment to the loss provision. Adopting this standard did not have an
impact on the 1996 financial statements. In providing valuation
allowances, through a charge to operations, the estimated net realizable
value of the underlying collateral and the costs of holding real estate
are considered. Non-specific valuation allowances for estimated losses
are established based on management's judgment of current economic
conditions and the credit risk of the loan portfolio and real estate
owned.
Management believes the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in
economic conditions and borrower circumstances. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based on
their judgments about information available to them at the time of their
examination.
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations
are periodically performed by management and the real estate is carried
at the lower of carrying amount or fair value less cost to sell.
Loan Fees and Related Costs
Loan origination and commitment fees and certain direct loan origination
costs are deferred, and the net amount is amortized over the contractual
life of the related loan as an adjustment of the loan's yield using the
interest method.
Mortgage Banking Activities
The Bank originates and purchases certain mortgage loans for sale in the
secondary market. During the origination and purchase period, mortgage
loans are designated as held either for investment purposes or for sale.
Mortgage loans held for sale are carried at the lower of amortized cost
or market value determined on an aggregate basis.
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Gains and losses on the sale of loans are reflected in operations at the
time of sale and are determined by the difference between net sales
proceeds and the carrying value of the loans, adjusted for normal
servicing fees. As of July 1, 1995, the Bank adopted the Statement of
Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting for
Mortgage Servicing Rights." This statement amended FASB Statement No. 65,
"Accounting for Certain Mortgage Banking Activities," to require that a
mortgage banking enterprise recognize, as separate assets, rights to
service mortgage loans for others however those servicing rights are
acquired.
The Bank hedges its interest rate risk on fixed rate loan commitments
expected to close and the inventory of mortgage loans held for sale.
Related hedging gains and losses are recognized at the time gains or
losses are recognized on the related loans sold. The Bank does not
anticipate any loss on open commitments at June 30, 1996.
Servicing rights are amortized over the period of estimated net servicing
income.
Office Premises and Equipment
Office premises and equipment are stated at cost, less accumulated
depreciation provided on the straight-line basis over the estimated
useful lives of the various classes of assets.
FHLB Stock
Federal law requires a member institution of the Federal Home Loan Bank
System to hold common stock of its district FHLB according to a
predetermined formula. This investment is stated at cost, which
represents redemption value.
Pension Plan
Pension expense for the Bank's defined benefit pension plan is computed
on the basis of accepted actuarial methods. It is the Bank's policy to
fund pension costs accrued.
Income Taxes
The Corporation and its subsidiaries file consolidated income tax
returns. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rate is
recognized in income in the period that includes the enactment date.
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Reclassifications
Certain amounts in the 1995 and 1994 consolidated financial statements
have been reclassified to conform to the 1996 presentation.
(2) Securities Available for Sale
Securities available for sale consist of the following at June 30, 1996:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FHLMC $ 2,402,000 -- (47,000) 2,355,000
Investments:
U.S. Treasury and agency
obligations 8,505,000 -- (361,000) 8,144,000
----------- ----------- -------- ----------
$10,907,000 -- (408,000) 10,499,000
=========== =========== ======= ==========
</TABLE>
A reclassification of investment securities from the held to maturity
portfolio to the available for sale portfolio occurred during the quarter
ended December 31, 1995, in accordance with the FASB Special Report, "A
Guide to Implementation of Statement 115 on Accounting for Certain
Investment in Debt and Equity Securities," which was issued November 15,
1995. The investment securities that were reclassified had a carrying
value of $45,838,000 and a market value of $46,061,000 at the time of
transfer.
For the year ended June 30, 1996, gross realized gains and gross realized
losses on sales of investment securities available for sale were $118,000
and $294,000, respectively. For the year ended June 30, 1996, gross
realized gains and gross realized losses from the sales of
mortgage-backed securities available for sale were $57,000 and $4,000,
respectively. For the year ended June 30, 1995, gross realized gains and
gross realized losses from the sales of mortgage-backed securities
available for sale were $5,000 and $7,000, respectively.
For the year ended June 30, 1996, gross realized gains and gross realized
losses on sales of trading account securities were $13,000 and $1,000,
for the year ended June 30, 1995, gross realized gains were $18,000; and
for the year ended June 30, 1994, gross realized gains and gross realized
losses were $206,000 and $10,000, respectively.
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Securities Held to Maturity
Securities held to maturity at June 30 consist of:
<TABLE>
<CAPTION>
1996
--------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ---------- ----------
U.S. Treasury and agency
<S> <C> <C> <C> <C>
obligations $43,242,000 -- (1,441,000) 41,801,000
Mortgage-backed se 382,000 3,000 (2,000) 383,000
----------- ----------- ---------- ----------
$43,624,000 3,000 (1,443,000) 42,184,000
=========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ---------- ----------
U.S. Treasury and agency
<S> <C> <C> <C> <C>
obligations $71,501,000 331,000 (1,551,000) 70,281,000
Mortgage-backed securities 504,000 6,000 (1,000) 509,000
----------- ---------- ---------- ----------
$72,005,000 337,000 (1,552,000) 70,790,000
=========== ========== ========== ==========
</TABLE>
<PAGE>
At June 30, 1996, securities held to maturity mature as follows:
<TABLE>
<CAPTION>
Amortized Market
cost value
----------- -----------
Due in one year or less $ -- --
<S> <C> <C>
Due after one year through five years 24,405,000 23,671,000
Due after five years through ten years 13,162,000 12,609,000
Due after ten years through fifteen years 5,720,000 5,565,000
Due after fifteen years through twenty years -- --
Due after twenty years through twenty-five years 337,000 339,000
----------- ----------
$43,624,000 42,184,000
=========== ==========
</TABLE>
(4) Loans Receivable
Loans receivable at June 30 consist of:
1996 1995
------------- -------------
Real estate loans:
Conventional first mortgage $ 141,247,000 181,676,000
Construction 2,171,000 7,364,000
Consumer and other loans 10,010,000 17,062,000
------------- -----------
153,428,000 206,102,000
------------- -----------
Less:
Undisbursed loan funds (1,297,000) (3,038,000)
Unamortized premiums and discounts, net 125,000 (16,000)
Allowance for loan losses (896,000) (878,000)
Deferred futures losses -- 9,000
Deferred loan fees (611,000) (360,000)
------------- -----------
(2,679,000) (4,283,000)
------------- -----------
$ 150,749,000 201,819,000
============= =============
Weighted average interest rate 8.23% 7.88%
============= =============
At June 30, 1996, the majority of the Bank's residential and consumer
loans receivable are located in Vincennes, Indiana, and surrounding
communities.
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Activity in the allowance for loan losses for the years ended June 30
consists of:
1996 1995 1994
--------- --------- ---------
Balance at beginning of year $ 878,000 817,000 892,000
Provision charged to operations 83,000 100,000 75,000
Loans charged off, net of recoveries (65,000) (39,000) (150,000)
--------- --------- ---------
Balance at end of year $ 896,000 878,000 817,000
========= ======= =======
The Bank makes loans to its officers and directors in the normal course
of business. These loans are made on substantially the same terms,
including interest rate and collateral, as those prevailing at the time
for comparable transactions with other customers and do not involve more
than the normal risk of collectibility. Activity in these loans for the
year ended June 30, 1996 consists of:
Balance at beginning of the year $ 593,000
Loans originated 98,000
Repayments (283,000)
--------
Balance at end of year $ 408,000
=========
(5) Mortgage Banking
The amount of loans serviced by the Bank for the benefit of others was
$81,353,000, $193,058,000 and $392,593,000 at June 30, 1996, 1995 and
1994, respectively.
The cost of acquiring the right to service mortgage loans is capitalized
and amortized in proportion to, and over the period of, estimated net
servicing income. At June 30, 1996 and 1995, the unamortized cost to
acquire servicing rights totaled $184,000 and $1,432,000, respectively,
and is included in prepaid expenses and other assets in the consolidated
statement of financial condition.
For the year ended June 30, 1996, the Bank capitalized $454,000 of
servicing rights on loans that were originated through its loan
origination network and retail banking offices. The Bank had definitive
plans to sell these mortgage loans and retain the servicing rights. These
servicing rights are included in the prepaid expenses and other assets
category on the consolidated statement of financial condition.
During the year ended June 30, 1996, the Bank sold approximately
$161,082,000 of its FHLMC and FNMA loan servicing portfolio which
resulted in a gain of $237,000. During the year ended June 30, 1995, the
Bank sold approximately $380,462,000 of its FHLMC loan servicing
portfolio which resulted in a gain of $2,980,000. During the year ended
June 30, 1994, the Bank sold approximately $146,261,000 of its FHLMC and
FNMA loan servicing portfolio which resulted in a gain of $700,000. All
such gains and losses are included in other non-interest income in the
consolidated statements of earnings.
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Office Premises and Equipment
Office premises and equipment at June 30 consist of:
1996 1995
---------- ----------
Land and improvements $ 315,000 531,000
Buildings and improvements 2,773,000 3,815,000
Furniture and equipment 1,756,000 2,236,000
4,844,000 6,582,000
Less accumulated depreciation 1,894,000 2,593,000
---------- ---------
$2,950,000 3,989,000
========== =========
(7) Deposits
Deposits at June 30 consist of:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
Passbook accounts (2.91% and 3.05% at
<S> <C> <C> <C> <C> <C>
June 30, 1996 and 1995) $ 4,592,000 16,571,000
Variable rate savings accounts (5.75% at June 30, 1996) 3,015,000 --
NOW and Super NOW accounts (0%-3.26% and
0%-3.14% at June 30, 1996 and 1995) 9,563,000 22,141,000
Money market accounts (weighted average rate of
3.93% and 2.95% at June 30, 1996 and 1995) 3,089,000
-- 11,120,000
20,259,000 49,832,000
Certificates:
Less than 4% 269,000 3,106,000
4% - 4.99% 7,235,000 28,722,000
5% - 5.99% 70,495,000 58,100,000
6% - 6.99% 25,612,000 48,487,000
7% - 7.99% 12,030,000 17,581,000
8% - 9.99% 1,081,000 3,679,000
10% or more 167,000 298,000
116,889,000 159,973,000
$137,148,000 209,805,000
Weighted average cost of all deposits 5.46% 5.10%
============ ============
</TABLE>
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Scheduled maturities of certificates at June 30, 1996 are
summarized as follows:
Year ending June 30,
1997 $ 71,382,000
1998 27,523,000
1999 9,591,000
2000 4,366,000
2001 1,771,000
Thereafter 2,256,000
-------------
$ 116,889,000
Included in certificates at June 30, 1996 and 1995 are approximately
$12,619,000 and $23,293,000, respectively, of certificates greater than
$100,000.
Eligible savings accounts are insured by the full faith and credit of
the United States government up to $100,000 under the Federal Deposit
Insurance Corporation's Savings Association Insurance Fund (SAIF) at June
30, 1996.
Interest expense by type of deposit for the years ended June 30
follows:
1996 1995 1994
---------- ---------- ----------
Passbook and variable rate savings
accounts $ 392,000 525,000 577,000
NOW, Super NOW and Money Market 652,000 947,000 1,081,000
Certificates 8,029,000 7,505,000 5,504,000
--------- --------- ---------
$9,073,000 8,977,000 7,162,000
========== ========= =========
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Advances From FHLB and Other Borrowings
Advances from FHLB and other borrowings at June 30 consist of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Advances from FHLB collateralized by qualifying
mortgages, investment securities and mortgage-backed
securities (as defined) equal to 125% of FHLB advances $ 97,276,000 77,511,000
Promissory note with interest payable at prime rate (as defined) plus
1% with principal payments of $37,000 due quarterly through
December 30, 1994. Since December 30, 1994, interest is payable at
prime rate (as defined) plus 1/2% (8.75% at June 30, 1996) with
principal payments of $49,375 due quarterly through December 30,
2004. Collateralized by 100%
of the common stock of the Bank 1,679,000 1,876,000
Securities sold under agreement to repurchase with a weighted average
interest rate of 4.85% at June 30, 1996
1996 maturing July 10, 1996 1,930,000 --
------------- ----------
$ 100,885,000 79,387,000
============= ==========
</TABLE>
The interest rates on the advances from FHLB at June 30, 1996 were as
follows: $10,000,000 at 5.46%, $10,000,000 at 5.78%, $10,000,000 at
5.80%, $13,000,000 at 5.66%, $5,000,000 at 5.43%, $5,000,000 at 5.71%,
$4,051,000 at 4.96%, $10,000,000 at 5.62%, $10,000,000 at 5.39%, $225,000
at 5.91%, and $20,000,000 of variable rate advances with a rate at June
30, 1996 of 5.48%. The interest rates on the advances from FHLB at June
30, 1995 were as follows: $23,000,000 at 6.17%, $10,000,000 at 5.84%,
$5,000,000 at 5.71%, $5,000,000 at 5.46%, $5,000,000 at 5.43%, $4,511,000
at 4.96%, and $25,000,000 of variable rate advances with a rate at June
30, 1995 of 6.13%. The weighted average interest rate of all borrowings
was 5.56% and 5.92% at June 30, 1996 and 1995, respectively.
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During 1995, the Bank exercised the call feature on $20,000,000 and
$8,000,000 of FHLB advances due to mature in 1995 and 1996.
Securities sold under agreements to repurchase ("Reverse Repurchases")
represent an indebtedness of the Bank secured by U.S. treasury and agency
obligations, to be repurchased upon maturity. Reverse repurchases
averaged $2,956,000, $5,299,000 and $5,039,000 for the years ended June
30, 1996, 1995 and 1994, respectively, with maximum amounts outstanding
at any month-end of $8,838,000, $12,186,000 and $14,226,000 during the
years ended June 30, 1996, 1995 and 1994, respectively.
Advances from FHLB and other borrowings at June 30, 1996 are scheduled to
mature as follows:
FHLB Other
Maturity Advances Borrowings Total
1997 $35,000,000 2,128,000 37,128,000
1998 38,000,000 198,000 38,198,000
1999 24,051,000 198,000 24,249,000
2000 -- 198,000 198,000
2001 -- 198,000 198,000
Thereafter 225,000 689,000
-- -- 914,000
$97,276,000 3,609,000 100,885,000
=========== =========== ===========
(9) Stockholders' Equity
The Corporation is subject to regulation as a savings and loan holding
company by the Office of Thrift Supervision ("OTS"). The Bank, as a
subsidiary of a savings and loan holding company, is subject to certain
restrictions in its dealings with the Corporation. The Bank is further
subject to the regulatory requirements applicable to a federal savings
bank.
Thrift institutions are required to maintain risk-based capital of 8.0%
of risk-weighted assets. At June 30, 1996, the Bank's risk-based capital
exceeded the required amount. Risk-based capital is defined as the Bank's
core capital adjusted by certain items. Risk weighting of assets is
derived from assigning one of four risk-weighted categories to an
institution's assets, based on the degree of credit risk associated with
the asset. The categories range from zero percent for low-risk assets
(such as United States Treasury securities) to 100% for high-risk assets
(such as real estate owned). The carrying value of each asset is then
multiplied by the risk weighting applicable to the asset category. The
sum of the products of the calculation equals total risk-weighted assets.
Savings institutions are also required to maintain a minimum leverage
ratio under which core capital must equal at least 3% of total assets,
but no less than the minimum required by the Office of the Comptroller of
the Currency ("OCC") for national banks which minimum currently stands
between 4% and 5% for other than the highest rated institutions. The
Bank's primary regulator, the Office of Thrift Supervision, is expected
to adopt the OCC minimum. The components of core capital are the same as
those set by the OCC for national banks, and consist of common equity
plus non-cumulative preferred stock and minority interests in
consolidated subsidiaries, minus certain intangible assets. At June 30,
1996, the Bank's core capital and leverage ratio were in excess of the
required amounts.
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The OTS has minimum capital standards that place savings institutions
into one of five categories, from "critically undercapitalized" to
"well-capitalized," depending on levels of three measures of capital. A
well-capitalized institution as defined by the regulations has a total
risk-based capital ratio of at least 10 percent, a Tier 1 (core)
risk-based capital ratio of at least six percent, and a leverage (core)
risk-based capital ratio of at least five percent. At June 30, 1996, the
Bank was classified as well-capitalized.
The OTS has regulations governing dividend payments, stock redemptions,
and other capital distributions, including upstreaming of dividends by a
savings institution to a holding company. Under these regulations, the
Bank may, without prior OTS approval, make capital distributions to the
Corporation of up to 100% of its net earnings during the calendar year,
plus an amount that would reduce by half its excess capital over its
fully phased-in capital requirement at the beginning of the calendar
year. The Corporation is not subject to any regulatory restrictions
regarding payments of dividends to its shareholders, other than
restrictions under Indiana law.
At the time of conversion, the Bank established a liquidation account
which equaled the Bank's retained earnings as of the date of the latest
statement of financial condition included in the offering document. The
liquidation account will be maintained for the benefit of depositors, as
of the eligibility record date, who continue to maintain their deposits
in the Bank after conversion. In the event of a complete liquidation (and
only in such event), each eligible depositor will be entitled to receive
a liquidation distribution from the liquidation account, in the
proportionate amount to the then current adjusted balance for deposits
then held, before liquidation distribution may be made with respect to
the shareholders. Except for the repurchase of stock and payment of
dividends by the Bank, the existence of the liquidation account does not
restrict the use or application of such retained earnings.
On December 21, 1995, the Board of Directors approved a 5% common stock
dividend. All share and per share data have been retroactively restated
to reflect the 5% stock dividend.
The Corporation has an Incentive Stock Option Plan whereby 49,220 shares
of authorized but unissued common stock were reserved for issuance upon
the exercise of stock options granted to key employees. Stock options
were granted for 49,220 shares under the plan at an option price of $5.71
per share. The Corporation also has a stock option plan under which
157,500 shares of authorized but unissued common stock were reserved.
Under the plan, 91,875 non-qualified stock options were granted at $5.71
per share to outside directors, and 39,375 incentive stock options and
9,844 non-qualified stock options were granted at $5.71 and $5.86 per
share, respectively, to certain key employees. All options granted had
been exercised or canceled as of June 30, 1996.
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Shares reserved and options outstanding under the plans are as follows:
<TABLE>
<CAPTION>
Shares reserved Options Price per
for future grant outstanding share
---------------- ----------- -----------
<S> <C> <C> <C>
Balance at June 30, 1993 16,406 95,020 5.71 - 5.86
Exercised -- (23,750) 5.71 - 5.86
Balance at June 30, 1994 16,406 71,270 5.71 - 5.86
Exercised -- (69,695) 5.71 - 5.86
Canceled -- (1,575) --
Balance at June 30, 1995 and 1996 16,406 -- --
======= ======= ===========
</TABLE>
The Corporation also maintains an Employee Stock Purchase Plan whereby
full-time employees of the Bank may purchase its common stock at a
discount; 13,125 authorized but unissued shares were reserved for this
plan. The purchase price of these shares is 85% of the fair market value
of such stock at the beginning or end of the offering period, whichever
is lesser. A total of 5,213 and 2,511 shares were issued to employees in
1996 and 1995, respectively, under this plan. In 1994, a total of 7,177
shares were issued under a previous Employee Stock Purchase Plan.
The Financial Accounting Standards Board has issued Statement No. 123,
"Accounting for Stock-Based Compensation" which defines a "fair value
method" of accounting for stock options. The statement is effective for
fiscal years beginning after December 15, 1995, and encourages the use of
the fair value method but permits the current method with additional
pro-forma disclosures. The Corporation intends to continue the current
practice with pro-forma disclosures of net income and net income per
share as if the "fair value method" had been applied.
(10) Earnings Per Share
Primary earnings per share and fully-diluted earnings per share have been
computed on the basis of the weighted average number of common shares
outstanding and the dilutive effect of stock options during the years
presented using the treasury stock method. The weighted average number of
shares outstanding used in the primary computation was 667,879, 650,691
and 673,350 in 1996, 1995 and 1994, respectively. The weighted average
number of shares outstanding used in the fully-dilutive computation was
667,879, 654,309 and 673,351 in 1996, 1995 and 1994, respectively.
(11) Employee Benefit Plans
Substantially all employees are covered under a noncontributory defined
benefit pension plan. Net periodic pension expense for the years ended
June 30 consists of the following:
1996 1995 1994
--------- --------- ---------
Service cost $ 177,000 170,000 132,000
Interest cost 124,000 123,000 84,000
Actual return on assets (87,000) (234,000) 35,000
Net amortization and deferral (34,000) 139,000 (153,000)
--------- --------- ---------
Net periodic pension expense $ 180,000 198,000 98,000
========= ========= =========
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Prior service cost is being amortized over the average remaining service
period of active employees at the effective date of the amendment.
Accumulated plan benefit information for the Bank's plan is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
Actuarial present value of projected benefit obligations:
<S> <C> <C>
Vested benefit obligation $ 754,000 1,109,000
Nonvested benefit obligation 87,000 86,000
----------- -----------
Total accumulated benefit obligation 841,000 1,195,000
Additional benefits based upon
estimated future salary levels 157,000 469,000
----------- -----------
Total projected benefit obligation 998,000 1,664,000
Fair market value of plan assets 1,257,000 1,538,000
----------- -----------
Fair market value of plan assets over (under)
projected benefit obligation 259,000 (126,000)
Unrecognized prior service cost (31,000) (48,000)
Unrecognized gain (291,000) (1,000)
Unrecognized transition asset 6,000 9,000
----------- -----------
Accrued pension cost $ (57,000) (166,000)
=========== ===========
</TABLE>
The weighted-average assumed rate of return used in determining the net
periodic pension cost for 1996 was 8.0% and in determining the actuarial
present value of accumulated benefit obligations at June 30, 1996 was
7.5%, and the weighted-average rate of increase in future compensation
levels used was 5.0%.
The Bank has an Incentive Bonus Plan for certain salaried employees. The
bonus pool for the years ended June 30, 1996, 1995 and 1994 was $300,000,
$345,000 and $144,000, respectively.
Effective July 1, 1993, the Board of Directors approved a supplemental
retirement plan (Officer Plan) for certain key officers. The Officer Plan
provides a target benefit to eligible employees based on their projected
salary at time of retirement. Effective July 1, 1993, the Board of
Directors also approved a deferred compensation agreement for the
directors (Directors Plan). The Directors Plan allows the directors to
defer their monthly director fee. The deferred fees accrue interest and
will be paid out over a ten-year period once the director retires. Both
plans provide certain additional survivor benefits in the case of death
before retirement. In connection with the plans, on July 1, 1993 the Bank
purchased life insurance policies on certain of the officers and
directors participating in the plans. During the years ended June 30,
1996, 1995 and 1994, the Bank expensed $99,000, $100,000 and $86,000,
respectively, under both plans and recognized $41,000, $79,000 and
$73,000, respectively, related to life insurance policy cash surrender
values. In addition to the expense for the year ended June 30, 1996,
$133,000 related to benefits for officers terminated as a result of the
branch sales was charged against the gain on sale of branches.
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Income Taxes
The components of the provision for income taxes for the years ended
June 30 consist of:
1996 1995 1994
----------- ----------- -----------
Current:
Federal $ 2,881,000 1,090,000 330,000
Provision in lieu of Federal taxes -- -- 83,000
State income taxes 843,000 339,000 183,000
Deferred (351,000) 11,000 212,000
----------- ----------- -----------
$ 3,373,000 1,440,000 808,000
=========== =========== ===========
The provision in lieu of Federal taxes for 1994, includes the tax that
would have been payable if the Bank did not have acquired net operating
loss carryforwards to offset the current taxable income. All of the net
operating loss carryforwards were fully utilized in 1994. As the acquired
carryforwards were used, goodwill was reduced or a payment due FSLIC or
its successor was accrued in accordance with the assistance agreement
related to the acquisition of United Savings Association of Central
Indiana, F.A. in September 1988. During 1996 and 1995, $410,000 and
$907,000, respectively, was paid in accordance with the assistance
agreement. As of June 30, 1996, the Bank has accrued $82,000, which will
be paid in 1997 and will satisfy all amounts due under the assistance
agreement.
The differences between the effective income tax rate and the statutory
Federal corporate rate consist of:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Statutory Federal income tax rate 34.0% 34.0 34.0
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit 6.1 5.8 4.9
Change in valuation allowance for deferred tax asset -- -- (1.8)
Increase in cash surrender value of life insurance
policies (0.2) (0.7) (1.0)
Other (3.0) (1.9) (3.1)
------ ------ ------
Effective tax rate 36.9% 37.2 33.0
====== ====== ======
</TABLE>
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at June 30 consist
of:
1996 1995
---------- ----------
Deferred tax assets:
Deferred loan fees $ 61,000 81,000
Securities available for sale 163,000 126,000
Allowance for loan losses for
financial reporting purposes 157,000 140,000
Deferred compensation and benefits 224,000 161,000
Other 82,000 138,000
687,000 646,000
Deferred tax liabilities:
Purchased mortgage servicing 74,000 573,000
Originated mortgage servicing 163,000 --
Excess tax depreciation 144,000 118,000
FHLB stock dividend 52,000 52,000
Allowance for loan losses for tax purposes in
excess of base year allowance 156,000 151,000
Other 80,000 122,000
669,000 1,016,000
Net deferred tax asset (liability) $ 18,000 (370,000)
========== ==========
Under the Internal Revenue Code, the Bank is allowed a special bad debt
deduction related to additions to tax bad debt reserves established for
the purpose of absorbing losses. Subject to certain limitations, the
applicable provisions of the current law permit the Bank to deduct from
taxable income an allowance for bad debts based on a percentage of
taxable income before such deductions or actual loss experience. The Bank
has generally computed its annual addition to its bad debt reserves using
the percentage of taxable income method; however, due to certain
limitations in 1996, the Bank will only be allowed a deduction based on
actual loss experience. Retained earnings at June 30, 1996, includes
approximately $2,300,000 for which no provision for federal income taxes
has been made. This amount represents allocations of income for allowable
bad debt deductions. Reduction of amounts so allocated for purposes other
than tax bad debt losses will create taxable income which will be subject
to the then current corporate income tax rate. It is not contemplated
that amounts allocated to bad debt deductions will be used in any manner
to create taxable income.
Financial Services of Southern Indiana Corp. ("Financial Services"), a
subsidiary of the Bank, became a limited partner in House Investments,
Shady Oak, L.P. during 1994. Under the terms of the partnership
agreement, Financial Services contributed capital of $2,500,000 in 1995.
The Partnership owns and operates an apartment complex which qualifies
for affordable housing tax credits. The investment is being accounted for
using the equity method.
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Sale of Branches
On December 16, 1995, the Corporation completed the sale of certain
assets and certain liabilities of two of the Bank's full-service retail
branch offices in Tipton and Kokomo, Indiana resulting in a pre-tax gain
of $7,274,000. The transaction consisted of the sale of certain mortgage
and consumer loans, office premises and equipment and certain deposit
liabilities.
(14) Commitments and Contingencies
The Bank had outstanding commitments to originate and sell loans and
mortgage-backed securities of $30,112,000 and $4,059,000, and $11,147,000
and $7,119,000 at June 30, 1996 and 1995, respectively. Outstanding
commitments to purchase loans, mortgage-backed securities, and
investments, amounted to $1,573,000 and $2,270,000 at June 30, 1996 and
1995, respectively. These commitments, which are subject to certain
limitations, extend over varying periods of time with the majority to be
fulfilled over a 12-month period. The Bank does not project any losses
will be incurred as a result of these commitments. The majority of the
commitments to originate loans are for fixed rate mortgage loans at rates
ranging from 6.75% to 15.55% and adjustable rate mortgage loans at rates
ranging from 5.50% to 10.83% at June 30, 1996.
Various legislative proposals have been made, but not enacted, that would
affect the Savings Association Insurance Fund ("SAIF") premium
assessment, including a one-time special assessment for SAIF deposits. It
is not clear when such legislation will be passed if at all. Based on
current proposals, the Bank may be subject to a special assessment of up
to $1.7 million. The special assessment is not anticipated to adversely
affect the Bank's well-capitalized rating.
(15) Parent Company Financial Information
Following is condensed financial information of the Corporation:
Condensed Statements of Financial Condition
Assets June 30, 1996 June 30, 1995
Cash $ 281,000 349,000
Investment in subsidiaries 23,104,000 17,811,000
Due from subsidiary 21,000 46,000
Other assets 19,000 20,000
$23,425,000 18,226,000
Liabilities and Stockholders' Equity
Long-term debt 1,679,000 1,876,000
Accounts payable and accrued expenses 17,000 17,000
1,696,000 1,893,000
Stockholders' equity 21,729,000 16,333,000
$23,425,000 18,226,000
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Condensed Statements of Earnings
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
1996 1995 1994
------------ ----------- ----------
<S> <C> <C> <C>
Dividend from bank subsidiary $ 550,000 100,000 300,000
Other operating income 38,000 105,000 154,000
Operating expenses (263,000) (249,000) (221,000)
----------- --------- ---------
325,000 (44,000) 233,000
Income tax benefit 89,000 75,000 19,000
----------- --------- ---------
Income before equity in undistributed
earnings of subsidiaries 414,000 31,000 252,000
Equity in undistributed earnings of subsidiaries 5,348,000 2,399,000 1,391,000
----------- --------- ---------
Net earnings $ 5,762,000 2,430,000 1,643,000
=========== ========= =========
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
Net cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 5,762,000 2,430,000 1,643,000
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiaries (5,348,000) (2,399,000) (1,391,000)
Change in accounts payable and accrued expenses -- 11,000 (3,000)
Change in due from subsidiary 25,000 (33,000) (13,000)
Change in other assets 1,000 (6,000) 310,000
----------- ----------- -----------
Net cash provided by operating activities 440,000 3,000 546,000
----------- ----------- -----------
Cash flows from investing activities:
Capital contributions to subsidiaries -- (1,000,000) (155,000)
----------- ----------- -----------
Net cash used by investing activities -- (1,000,000) (155,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt -- 1,000,000 --
Repayment of long-term debt (197,000 (174,000) (150,000)
Dividends to stockholders (266,000) (115,000) (118,000)
Purchase of common shares (182,000) -- (1,129,000)
Tax benefit of options exercised -- -- 37,000
Proceeds from issuance of common stock 137,000 465,000 256,000
----------- ----------- -----------
Net cash provided (used) by financing
activities (508,000) 1,176,000 (1,104,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (68,000) 179,000 (713,000)
Cash and cash equivalents at beginning of year 349,000 170,000 883,000
----------- ----------- -----------
Cash and cash equivalents at end of year $ 281,000 349,000 170,000
=========== =========== ===========
</TABLE>
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Fair Value of Financial Instruments
The following disclosure of fair value information is made in accordance
with the requirements of Statement of Financial Accounting Standards No.
107, "Disclosures About Fair Value of Financial Instruments." SFAS No.
107 requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it
is practicable to estimate value. The estimated fair value amounts have
been determined by the Corporation using available market information and
other appropriate valuation techniques. These techniques are
significantly affected by the assumptions used, such as the discount rate
and estimates of future cash flows. Accordingly, the estimates made
herein are not necessarily indicative of the amounts 1ST BANCORP could
realize in a current market exchange and the use of different market
assumptions and/or estimation methods may have a material effect on the
estimated fair value amount.
The following schedule includes the book value and estimated fair value
of all financial assets and liabilities, as well as certain off balance
sheet items, at June 30, 1996.
Carrying Estimated
(In thousands) amount fair value
Assets
Cash and cash equivalents $ 25,099 25,099
Securities including securities available for sale 54,123 52,683
Loans receivable including loans held for sale, net 169,339 168,849
Accrued interest receivable 2,215 2,215
Stock in FHLB of Indianapolis 4,864 4,864
Residential mortgage loan servicing 591 792
Liabilities
Deposits 137,148 136,416
Borrowings:
FHLB advances 97,276 96,032
Long-term borrowing 1,679 1,679
Reverse repurchase agreements 1,930 1,930
Advance payments by borrowers for taxes and insurance 492 492
Accrued interest payable 816 816
The following valuation methods and assumptions were used by the
Corporation in estimating the fair value of its financial instruments.
Cash and Cash Equivalents. The fair value of cash and cash equivalents
approximates carrying value.
Securities. Fair values are based on quoted market prices.
(Continued)
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Loans Receivable Including Loans Held for Sale, Net. The fair value of
loans is estimated by discounting the estimated future cash flows using
market rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. Contractual
cash flows were adjusted for prepayment estimates consistent with those
used by the Office of Thrift Supervision at June 30, 1996.
Accrued Interest Receivable. The fair value of these financial
instruments approximates carrying value.
Stock in FHLB of Indianapolis. Fair value of FHLB stock is based on the
price at which it may be resold to the FHLB.
Residential Mortgage Loan Servicing. The fair value of residential loan
servicing rights is determined based on an internal valuation using the
estimated discounted net cash flows to be received less the estimated
cost of servicing.
Deposits. The fair values for demand deposits (i.e., interest bearing and
non-interest bearing checking, passbooks savings and money market
accounts) are equal to the amount payable on demand at the reporting
date. Fair values for fixed-maturity certificates of deposit are
calculated using a discounted cash flow analysis that applies interest
rates currently offered on certificates.
FHLB Advances. Fair values for fixed maturity FHLB advances are
calculated using a discounted cash flow analysis that applies FHLB
advance rates available to the Bank at June 30, 1996.
Long-term Borrowing. The long-term borrowing is an adjustable instrument
tied to the prime interest rate. Fair value approximates carrying value.
Reverse Repurchase Agreements. The fair value is estimated to approximate
carrying value due to the short-term nature of the agreements.
Advance Payments by Borrowers for Taxes and Insurance. The fair value
approximates carrying value.
Accrued Interest Payable. The fair value of these financial instruments
approximates carrying value.
<PAGE>
Management and Office Locations
1ST BANCORP AND SUBSIDIARIES
Officers of First Federal Bank, A Federal Savings Bank
C. James McCormick, Chairman of the Board
Frank Baracani, President and Chief Executive Officer
Lynn Stenftenagel, Executive Vice President, CFO
and Secretary
Ruth Mix Carnahan, Treasurer
R. William Ballard, Senior Vice President
Carroll C. Hamner, Senior Vice President
Wayne P. Kaufman, Senior Vice President
Gerald R. Belanger, Vice President
Laura E. Bogard, Vice President
Cheryl A. Otten, Vice President
John J. Periatt, Vice President
Paula J. Pesch, Vice President
Bradley M. Rust, Vice President/Controller
Jay A. Baker, Assistant Vice President
Doris J. Blackburn, Assistant Vice President
Jodi L. Chesser, Assistant Vice President
Kathy L. Clinkenbeard, Assistant Vice President
Lynn Elliott, Assistant Vice President
Dianne M. Frisk, Assistant Vice President
Kelly J. Gay, Assistant Vice President
Christina A. Glover, Assistant Vice President
Ruth Etta Hunter, Assistant Vice President
Rana M. Lee, Assistant Vice President
Bradley A. Lichte, Assistant Vice President
Debra J. McShanog, Assistant Vice President
Terri L. Tatum, Assistant Vice President
Carol A. Witshork, Assistant Vice President
Glenda L. Berryman, Assistant Secretary
Officers of First Financial Insurance Agency, Inc.
C. James McCormick, Chairman of the Board
Frank Baracani, President and Chief Executive Officer
J. Timothy Tresslar, Vice President and General Manager
Lynn Stenftenagel, Secretary and Treasurer
<PAGE>
Office Locations
1ST BANCORP
Corporate Headquarters:
101 N. Third Street
Vincennes, Indiana 47591
(812) 885-2255
(800) 688-3865
First Federal Bank, A FSB
Main Office:
101 N. Third Street
Vincennes, Indiana 47591 812) 882-4528
(800) 688-4528
Main Office Annex:
102 N. Fifth Street
Vincennes, Indiana 47591
(812) 885-2255
(800) 688-3865
Indianapolis Loan Origination Office:
6239 South East Street
Indianapolis, Indiana 46227
(317) 781-7500
Evansville Loan Origination Office:
125 N. Weinbach, Suite 730
Evansville, Indiana 47711
(812) 476-4441
Cincinnati Loan Origination Office:
6279 Tri Ridge Blvd.
Loveland, Ohio 45140
(513) 248-8044
Dayton Loan Origination Office:
761 Miamisburg-Centerville Rd.
Centerville, Ohio 45459
(513) 434-8382
Cleveland Loan Origination Office:
4401 Rockside Rd.
Suite 401
Independence, Ohio 44131
(216) 520-6290
Louisville Loan Origination Office:
Hurstbourne Park
9200 Shelbyville Rd. Suite 102
Louisville, KY 40222
(502) 326-0531
First Financial Insurance Agency, Inc.
626 Veterans Drive
Vincennes, Indiana 47591
(812) 886-7283
<PAGE>
Corporate Information
1ST BANCORP AND SUBSIDIARIES
Corporate Headquarters
101 North Third Street, Vincennes, Indiana 47591
Annex - 102 North Fifth Street, Vincennes, Indiana 47591
(812) 885-2255
General Counsel
Hart, Bell, Cummings, Ewing & Stuckey, Vincennes, Indiana
Special Counsel
Barnes & Thornburg, Indianapolis, Indiana
Transfer Agent
Fifth Third Bank
Corporate Trust Operations
38 Fountain Square Plaza
MD#1O5OF5
Cincinnati, Ohio 45202
(800) 837-2755
Independent Public Accountants
KPMG Peat Marwick LLP, Indianapolis, Indiana
Statement of Policy
1ST BANCORP is an equal opportunity employer.
Form 1O-K Report
Forms 1O-K and 1O-Q, as filed with the SEC, are available without charge by
writing to Lynn Stenftenagel, 1ST BANCORP, 101 North Third Street, Vincennes,
Indiana 47591 or by calling (812) 885-2255.
Shareholder Information
At August 19, 1996, there were 409 shareholders of record and 670,131
shares of common stock outstanding.
Market Information
1ST BANCORP common stock is traded on NASDAQ under the symbol FBCV. The
following table sets forth the high and low bid prices per share of common stock
for the periods indicated. This information was furnished by the NASD.
Quarter Ended High Low
June 1996 28.00 26.00
March 1996 29.75 29.00
December 1995 31.75 30.50
September 1995 35.00 33.00
June 1995 34.00 26.50
March 1995 34.50 18.00
December 1994 20.50 19.00
September 1994 19.75 19.25
Internet Address
http://www.businesswire.com/cnn/fbcv.htm
<PAGE>
[COMPANY LOGO]
Third & Busseron Streets * P.O. Box 1417 * Vincennes, Indiana 47591
Exhibit 22
Subsidiaries of 1ST BANCORP
The following chart indicates the corporate structure, including
subsidiaries of 1ST BANCORP:
[FLOW CHART OMITTED]
An organizational chart shows that 1ST BANCORP directly owns 100% of three
subsidiaries: (1) First Federal Bank, A FSB; (ii) First Financial Insurance
Agency Inc.; and (iii) First Title Company. The chart then indicates that First
Federal Bank, A FSB directly owns 100% of Financial Services of Southern Indiana
Corporation.
EXHIBIT 23(a)
Independent Auditors' Consent
The Board of Directors
1ST BANCORP:
We consent to incorporation by reference in the registration statement (No.
33-38404) on Form S-8 of 1ST BANCORP of our report dated July 22, 1996, relating
to the consolidated statements of financial condition of 1ST BANCORP and
subsidiaries as of June 30, 1996 and 1995 and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
years in the three-year period ended June 30, 1996, which report appears in the
June 30, 1996 annual report on Form 10-K of 1ST BANCORP.
/s/ KPMG Peat Marwick LLP
Indianapolis, Indiana
September 25, 1996
EXHIBIT 23(b)
Independent Auditors' Consent
The Board of Directors
1ST BANCORP:
We consent to incorporation by reference in the registration statement (No.
33-60162) on Form S-3 of 1ST BANCORP of our report dated July 22, 1996, relating
to the consolidated statements of financial condition of 1ST BANCORP and
subsidiaries as of June 30, 1996 and 1995 and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
years in the three-year period ended June 30, 1996, which report appears in the
June 30, 1996 annual report on Form 10-K of 1ST BANCORP.
/s/ KPMG Peat Marwick LLP
Indianapolis, Indiana
September 25, 1996
EXHIBIT 23(c)
Independent Auditors' Consent
The Board of Directors
1ST BANCORP:
We consent to incorporation by reference in the registration statement (No.
33-65340) on Form S-8 of 1ST BANCORP of our report dated July 22, 1996, relating
to the consolidated statements of financial condition of 1ST BANCORP and
subsidiaries as of June 30, 1996 and 1995 and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
years in the three-year period ended June 30, 1996, which report appears in the
June 30, 1996 annual report on Form 10-K of 1ST BANCORP.
/s/ KPMG Peat Marwick LLP
Indianapolis, Indiana
September 25, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1ST
BANCORP AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000840458
<NAME> 1st Bancorp
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-1-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1.000
<CASH> 410
<INT-BEARING-DEPOSITS> 24,689
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,499
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0
0
<OTHER-SE> 21,062
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<SECURITIES-GAINS> (111)
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<EPS-PRIMARY> 8.63
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<ALLOWANCE-CLOSE> 896
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<ALLOWANCE-UNALLOCATED> 392
</TABLE>
