FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20552
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period Ended December 31, 1995
( ) 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 of other jurisdiction (I.R.S. Employer
of Incorporation or organization) Identification Number)
101 N. Third Street
Vincennes, Indiana 47591
- --------------------------------- ---------------------------------
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including are code: (812) 882-4528
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES_____X_________NO______________
As of February 13, 1996, there were 665,731 Shares of the Registrant's Common
Stock issued and outstanding.
1
<PAGE>
1ST BANCORP AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION: Number
Item 1. Financial Statements
Consolidated Condensed Statements
of Financial Condition,
December 31, 1995 and June 30,
1995 (Unaudited) 3
Consolidated Condensed Statements
of Earnings, Three Months and
Six Months Ended December 31, 1995
And 1994 (Unaudited) 4
Consolidated Condensed Statements of
Cash Flows, Six Months Ended
December 31, 1995 and 1994
(Unaudited) 5
Notes to Consolidated Condensed
Financial Statements (Unaudited) 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8-15
PART II. OTHER INFORMATION 16
SIGNATURES 18
2
<PAGE>
1ST BANCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Unaudited and in Thousands)
December 31, June 30,
1995 1995
------------ --------
ASSETS
Cash and cash equivalents:
Interest bearing deposits $12,800 $15,978
Non-interest bearing deposits 286 1,354
-------- --------
Cash and cash equivalents 13,086 17,332
-------- --------
Investment securities held to maturity
(market value of $29,144 at December 31, 1995
and $70,281 at June 30, 1995) 29,536 72,005
Investment securities available for sale 9,209 -
Loans receivable, net 172,863 201,819
Loans held for sale 8,931 5,104
Accrued interest receivable:
Investment securities 602 1,394
Mortgage-backed securities and loans 1,058 1,174
Stock in FHLB of Indianapolis, at cost 4,376 3,876
Office premises and equipment 3,031 3,989
Real estate owned 143 145
Prepaid expenses and other assets 5,702 5,921
-------- --------
TOTAL ASSETS $248,537 $312,759
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $125,350 $209,805
Advances from FHLB and other borrowings 94,902 79,387
Advance payments by borrowers for taxes
and insurance 728 2,321
Accrued interest payable on deposits 773 504
Accrued expenses and other liabilities 5,409 4,039
Deferred income taxes 7 370
-------- --------
Total Liabilities $227,169 $296,426
-------- --------
Stockholders' Equity:
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 665,731 at December 31, 1995 and
665,989 at June 30, 1995 (Note 2) $634 $634
Paid-in capital 2,752 2,825
Retained earnings, substantially restricted 18,007 13,064
Unrealized depreciation on securities (25) (190)
-------- --------
Total Stockholders' Equity $21,368 $16,333
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $248,537 $312,759
======== ========
See Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
1ST BANCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited and in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and mortgage-backed securities $4,209 $3,804 $8,447 $7,227
Investment securities 1,014 1,023 2,186 1,901
Other short-term investments and
interest bearing deposits 221 165 438 292
----- ----- ----- -----
Total Interest Income 5,444 4,992 11,071 9,420
----- ----- ----- -----
INTEREST EXPENSE:
Deposits 2,497 2,117 5,269 4,135
Short-term borrowings 32 155 56 199
FHLB advances and other borrowings 1,314 950 2,477 1,655
----- ----- ----- -----
Total Interest Expense 3,843 3,222 7,802 5,989
----- ----- ----- -----
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 1,601 1,770 3,269 3,431
Provision for loan losses 20 35 45 50
----- ----- ----- -----
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,581 1,735 3,224 3,381
----- ----- ----- -----
NON-INTEREST INCOME:
Fees and service charges 84 391 224 758
Net gain (loss) on sales of investment securities
and trading account investments (123) 1 (122) 1
Net gain on sales of loans and
mortgage-backed securities 340 98 652 150
Net gain on sale of branch offices 7,274 -- 7,274 --
Other 357 1,194 934 1,371
----- ----- ----- -----
Total Non-Interest Income 7,932 1,684 8,962 2,280
----- ----- ----- -----
NON-INTEREST EXPENSE:
Compensation and employee benefits 1,206 1,022 2,240 2,111
Net occupancy 198 214 403 418
Federal insurance premiums 132 119 268 238
Other 660 615 1,175 1,147
----- ----- ----- -----
Total Non-Interest Expense 2,196 1,970 4,086 3,914
----- ----- ----- -----
Earnings Before Income Taxes 7,317 1,449 8,100 1,747
Income Taxes 2,735 527 3,030 632
----- ----- ----- -----
NET EARNINGS $4,582 $922 $5,070 $1,115
===== ===== ===== =====
EARNINGS PER SHARE: $6.84 $1.43 $7.56 $1.73
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
1ST BANCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------
1995 1994
---- ----
Net Cash Flow From Operating Activities:
<S> <C> <C>
Net earnings $5,070 $1,115
Adjustments to reconcile net cash provided by operating activities:
Depreciation and amortization 165 48
Amortization of purchased and originated servicing premium 69 274
Originated mortgage servicing rights capitalized (344) --
Gain on sale of loans and mortgage-backed securities (651) (150)
Gain on sale of investment securities 122 --
Gain on sale of loans - branch sales (553) --
Gain on sale of office premises and equipment - branch sales (453) --
Gain on sale of deposits - branch sales (6,715) --
Net change in loans held for sale (3,827) 404
Provision for loan losses 45 50
Decrease (increase) in accrued interest receivable 908 (449)
Decrease (increase) in prepaid expenses and other assets 223 (1,639)
Increase (decrease) in accrued expenses and other liabilities 1,166 (482)
Undistributed loss of investment in limited partnership 183 --
-------- -------
NET CASH USED BY OPERATING ACTIVITIES ($4,592) ($829)
-------- -------
Cash Flows From Investing Activities:
Purchases of investment securities ($16,120) (13,228)
Purchases of investment securities - available for sale (2,000) --
Proceeds from sales of investment securities 38,078 --
Proceeds from maturities and calls of investment securities 13,421 --
Principal collected on loans and mortgage-backed securities,
net of originations 1,890 (18,920)
Purchases of stock of FHLB of Indianapolis (500) (1,375)
Purchases of office premises and equipment (92) (151)
Purchases of limited partnership investment -- (2,500)
Proceeds from sale of office premises and equipment - branch sales 1,316 --
Proceeds from sale of loans - branch sales 28,369 --
Sale of deposits - branch sales (78,473) --
Other (1,591) (242)
-------- -------
NET CASH USED BY INVESTING ACTIVITIES ($15,702) ($36,416)
-------- -------
Cash Flows From Financing Activities:
Net increase in deposits $733 $12,559
Proceeds from FHLB advances and other borrowings 73,014 99,080
Repayment of FHLB advances and other borrowings (57,499) (66,983)
Proceeds from issuance of common stock 109 71
Payment of dividends on common stock (128) (56)
Purchase and retirement of common stock (181) --
-------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES $16,048 $44,671
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ($4,246) $7,426
Cash and Cash Equivalents at Beginning of Period 17,332 7,651
-------- -------
Cash and Cash Equivalents at End of Period $13,086 $15,077
======== =======
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
1ST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments necessary for a fair
presentation. The results of operations for the interim periods are not
necessarily indicative of the results which may be expected for an entire year.
These financial statements are condensed and do not contain all disclosures
required by generally accepted accounting principles which would be included in
a complete set of financial statements.
Note 2. Stock Dividend
On December 21, 1995, the Board of Directors approved a 5% common stock dividend
with a record date of January 26, 1996 and payment date of February 9, 1996. All
share and per share data have been adjusted to reflect the 5% stock dividend.
Note 3. Earnings Per Share
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 not
exercised during the periods presented using the treasury stock method. The
weighted average number of shares outstanding for use in the computation was
669,525 and 644,320 for the three months ended and 670,227 and 643,461 for the
six months ended December 31, 1995 and 1994, respectively.
Note 4. Stock Option and Purchase Plans
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 have been
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 this 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 have been exercised or canceled as of December
31, 1995.
The Corporation maintains an Employee Stock Purchase Plan whereby full-time
employees of the Bank can purchase its common stock at a discount; 13,125
authorized but unissued shares were reserved for issuance under 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 shares were issued and purchased by employees in the first quarter of
fiscal year 1996 for the fiscal 1995 plan year.
6
<PAGE>
1ST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 5. Stock Repurchase Plan
In November 1993, the Board authorized the repurchase of up to 10% of the
outstanding shares of common stock (635,839 shares were outstanding at the
time), subject to market conditions, over a two year period which expired in
November 1995. During the quarter ended December 31, 1995, 6,358 shares of
common stock were repurchased. Cumulatively, 63,583 shares of common stock were
repurchased through the plan.
Note 6. Branch Sales
On December 16, 1995, 1ST BANCORP completed the sale of certain assets and
certain liabilities of two retail branch offices of its thrift subsidiary, First
Federal Bank, A Federal Savings Bank, to two of STAR Financial Group, Inc.'s
subsidiary banks. The sale produced a pre-tax gain of $7.3 million. The
transaction consisted of the sale of deposits, mortgage and consumer loans, and
office premises and equipment.
Note 7. Investment Reclassification
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 Investments 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.
Note 8. Reclassifications
Certain amounts in the fiscal year 1995 consolidated financial statements have
been reclassified to conform to the fiscal year 1996 presentation.
7
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(a) Financial Condition:
On December 16, 1995, 1ST BANCORP completed the sale of certain assets and
certain liabilities ( the "Branch Sales") of two retail branch offices of its
thrift subsidiary, First Federal Bank, A Federal Savings Bank ("First Federal"
or the "Bank"), to two of STAR Financial Group, Inc.'s subsidiary banks (the
"Purchasers"). STAR Financial Bank, Marion, Indiana ("STAR Marion") purchased
certain assets and assumed certain liabilities of First Federal Bank's retail
branch office located in Kokomo, Indiana. STAR Financial Bank, Indianapolis,
Indiana ("STAR Indianapolis") purchased certain assets and assumed certain
liabilities of First Federal's retail branch office located in Tipton, Indiana.
The sale of the branch offices included approximately $78.5 million in deposits
and $28.4 million in mortgage and consumer loans. The sale also included the
retail branch offices' premises and equipment. The Bank transferred cash
totaling approximately $41.4 million to the Purchasers in connection with the
branch sales. The sale contributed approximately $4.5 million after tax to 1ST
BANCORP's stockholders' equity.
Total assets at December 31, 1995, were $248,537,000, a decrease of $64,220,000,
or 20.53%, from total assets of $312,759,000 at June 30, 1995. The decline in
total assets is primarily attributable to the Branch Sales.
Cash and cash equivalents declined by $4,246,000, or 24.50%, to $13,086,000 at
December 31, 1995, from $17,332,000 at June 30, 1995. The decreased cash
accounts were attributable primarily to increased mortgage loan production and
the funding of normal business operations.
Investment securities consist primarily of U.S. Agency securities. The majority
of securities have either a "call" or "step-up" feature, which provides the Bank
with flexibility under varying interest rate scenarios. In a falling interest
rate environment, the securities with a "call" feature would be called by the
issuer. The rates paid on the "step-up" securities increase after a period of
time. Generally, the rates increase on the securities several times prior to
maturity.
The level of investment securities held to maturity (including mortgage-backed
securities) decreased to $29,536,000, a decline of $42,469,000, or 58.99%, at
December 31, 1995, from $72,005,000 at June 30, 1995. The most significant cause
for the decline was the reclassification of investment securities from the held
to maturity portfolio to the available for sale portfolio. The 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 Investments 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. Other activity within the investment securities held to
maturity portfolio during the six months ended December 31, 1995, included the
exercise of the call feature on securities totaling $12,750,000 and purchases of
securities totaling $16,120,000.
8
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Investment securities available for sale totaled $9,209,000 at December 31,
1995, compared with no investment securities available for sale at June 30,
1995. The primary cause of the increased level of investment securities
available for sale was the reclassification of investment securities from the
held to maturity portfolio to the available for sale portfolio. A total of
$45,838,000 of securities were reclassified to the available for sale portfolio
and $38,078,000 of these securities were sold during the quarter ended December
31, 1995. The most significant factor in the reclassification and subsequent
sale of securities was to provide cash to fund the deposits sold in conjunction
with the Branch Sales.
Net loans receivable declined by $28,956,000, or 14.35%, to $172,863,000 at
December 31, 1995, from $201,819,000 at June 30, 1995. The primary cause for the
reduced level of net loans receivable was the Branch Sales. Loans sold as part
of the Branch Sales totaled $28,369,000. These loans consisted primarily of
loans secured by one-to-four family dwellings and secured and unsecured consumer
loans. Loans held for sale increased by $3,827,000 to $8,931,000 at December 31,
1995 from $5,104,000 at June 30, 1995.
Loan production during the six months ended December 31, 1995 increased compared
to the same period of the prior year as interest rates trended downward. During
the six months ended December 31, 1995, the Bank funded $82.4 million of loans
compared to $66.2 million of loans during the six months ended December 31,
1994. As the economic environment has changed, the Bank has continued to develop
new mortgage loan products to serve its customers. During fiscal 1995, the Bank
developed a wholesale nonconforming mortgage loan network as a means of
augmenting its traditional conforming loan markets.
During the three months ended September 30, 1995, a retail non-conforming
mortgage loan program was implemented within the Bank's loan origination
network. The Bank has continued its expansion into new markets for both the
wholesale and retail non-conforming mortgage loan segments. During the six
months ended December 31, 1995, non-conforming mortgage lending constituted
$18.4 million, or 22.33%, of total loans funded during the period. A majority of
these loans are sold on a non-recourse basis in the non-conforming secondary
market. However, a segment of the highest quality loans are retained in
portfolio to increase interest income, and in the case of adjustable rate
product, to reduce interest rate risk. Continued emphasis is also being placed
on consumer lending for the same reasons.
Asset quality remains strong. At December 31, 1995, non-performing assets
totaled $1,088,000, or .44% of total assets. This compares to $545,000 of
non-performing assets, or .17% of total assets, at June 30, 1995. The increase
in non-performing assets was the result of single family loans becoming 90 days
or more past due. The increase in non-performing assets represents a net
increase of only seven additional loans that were placed on non-accrual status
due to delinquency. All of these loans are consumer loans or mortgage loans
secured by one-to-four family dwellings.
9
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The table below sets forth the amounts and categories of 1ST BANCORP's
non-performing assets (non-accrual loans and other non-performing assets) for
the balance sheet dates presented. Loans are reviewed regularly and are placed
on non-accrual status when they become contractually past due 90 days or more.
December 31, June 30,
1995 1995
---- ----
(In Thousands)
Non-performing assets:
Non-accrual loans $ 945 $ 400
Other non-performing assets (1) 143 145
Restructured loans -- --
------------------ ------- ------
Total non-performing assets $1,088 $ 545
Non-performing assets to total assets .44% .17%
(1) Certain assets acquired through foreclosures or deeds in lieu of
foreclosure, which are included in the Statement of Financial Condition
as real estate owned.
During the six months ended December 31, 1995, the Bank established, through
operations, provisions for loan losses totaling $45,000. In addition, the Bank
realized net charge-offs through its allowance for loan loss accounts of
$35,000. The Bank's allowance for loan loss was $888,000 at December 31, 1995
and $878,000 at June 30, 1995.
Prepaid expenses and other assets decreased by $219,000, or 3.70%, to $5,702,000
at December 31, 1995, from $5,921,000 at June 30, 1995. The largest decrease in
this category, purchased mortgage servicing rights ("PMSR"), decreased by
$1,306,000 to $126,000 at September 30, 1995, from $1,432,000 at June 30, 1995.
Offsetting the decrease in PMSR were increases in various other prepaid expenses
and other asset accounts. The most significant increase was approximately
$1,008,000 in accounts receivable which represented payments due from brokers
from the sale of investment securities.
The majority of the decrease of PMSR was due to a $161.1 million sale of
mortgage servicing rights. PMSR had been previously recognized on a significant
portion of the servicing rights sold. The sale of servicing rights was executed
primarily to mitigate prepayment risk. Mortgage loans serviced for other owners
decreased by $130,548,000, to $61,741,000 at December 31, 1995, from
$192,289,000 at June 30, 1995.
10
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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. For the six months ended December 31, 1995, and
in conjunction with the adoption of SFAS 122, the Bank recognized $335,000 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 Statement of
Financial Condition.
Total deposits decreased by $84,455,000, or 40.25%, to $125,350,000 at December
31, 1995 from deposits of $209,805,000 at June 30, 1995. The primary cause for
the reduced level of deposits was the Branch Sales. Deposits sold as part of the
Branch Sales totaled $78,473,000. In addition, in the months prior to
consummation of the Branch Sales, the Bank allowed a run-off of public funds at
its former Tipton and Kokomo branch offices.
Advances from the Federal Home Loan Bank ("FHLB") and other borrowings increased
by $15,515,000, or 19.54%, to $94,902,000 at December 31, 1995 from $79,387,000
at June 30, 1995. The increase in borrowed money was used primarily to fund the
portion of the deposits sold as part of the Branch Sales that the sales of
assets did not cover.
Advance payments by borrowers for taxes and insurance decreased by $1,593,000,
or 68.63%, to $728,000 at December 31, 1995 from $2,321,000 at June 30, 1995.
The sale of servicing rights during the six months ended December 31, 1995 was
primarily responsible for the declined level of escrow held by the Bank. The
sale of mortgage loans as part of the Branch Sales also contributed to the
decline.
Accrued expenses and other liabilities increased by $1,370,000, or 33.92%, to
$5,409,000 at December 31, 1995, from $4,039,000 at June 30, 1995. Primarily
responsible for the increased accrued expenses were income taxes payable. The
increased income taxes payable were attributable to significantly higher
earnings during the six months ended December 31, 1995 as compared with the same
period of the prior year.
(b) Results of Operations:
During the three months ended December 31, 1995, 1ST BANCORP had net earnings of
$4,582,000, or $6.84 per share, compared to net earnings of $922,000, or $1.43
per share, for the three months ended December 31, 1994. During the six months
ended December 31, 1995, 1ST BANCORP had net earnings of $5,070,000, or $7.56
per share, compared to net earnings of $1,115,000, or $1.73 per share, for the
six months ended December 31, 1994. The increased three and six months earnings
were the result of increased non-interest income, and more specifically the
Branch Sales.
11
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Net interest income before provision for loan losses was $1,601,000 for the
three months ended December 31, 1995, compared to $1,770,000 for the three
months ended December 31, 1994. Net interest income before provision for loan
losses was $3,269,000 for the six months ended December 31, 1995, compared to
$3,431,000 for the six months ended December 31, 1994. The interest rate margin
was 2.24% for the three months ended December 31, 1995 compared to 2.59% for the
three months ended December 31, 1994. The interest rate margin was also 2.24%
for the six months ended December 31, 1995 compared to 2.61% for the six months
ended December 31, 1994. The narrowed interest rate margin is primarily
responsible for the decreased net interest income. The accumulation of cash to
fund the deposits sold as part of the Branch Sales throughout the three months
ended December 31, 1995 contributed to the Bank's lower net interest margin. The
funds were invested at overnight funds rates and therefore decreased the yield
which could have been realized through alternative investments. A higher level
of interest-earning assets and interest-bearing liabilities during the first
three months of fiscal year 1996 as compared to fiscal year 1995 allowed net
interest income to remain stable during that period, partially offsetting the
declined margin for the six months ended December 31, 1995.
Non-interest income for the three months ended December 31, 1995 totaled
$7,932,000 compared to $1,684,000 for the three months ended December 31, 1994.
Non-interest income for the six months ended December 31, 1995 totaled
$8,962,000 compared to $2,280,000 for the three months ended December 31, 1994.
The higher level of non interest income for both the three and six month periods
ended December 31, 1995, as compared to the same periods of the prior year, was
directly attributable to the Branch Sales.
Fee and service charge income for the three months ended December 31, 1995
totaled $84,000 compared to $391,000 for the three months ended December 31,
1994. Fee and service charge income for the six months ended December 31, 1995
totaled $224,000 compared to $758,000 for the three months ended December 31,
1994. A significant decline in the Bank's mortgage loan servicing portfolio,
which resulted in reduced loan servicing fee income, was the primary factor that
contributed to the lower fee and service charge income. The reduced servicing
portfolio resulted from sales of servicing during the fourth quarter of fiscal
year 1995 and the first quarter of fiscal year 1996.
The net loss on the sale of investment securities and trading account
investments for the three months ended December 31, 1995 totaled $123,000
compared to a net gain of $1,000 for the three months ended December 31, 1994.
The net loss on the sale of investment securities and trading account
investments for the six months ended December 31, 1995 totaled $122,000 compared
to a net gain of $1,000 for the six months ended December 31, 1994. The net loss
for the three and six months ended December 31, 1995 resulted primarily from the
sale of $38.1 million of investment securities classified as available for sale.
These securities were sold in order to fund the sale of deposits that was a part
of the Branch Sales. There was only minimal activity in the investment trading
account during the six months ended December 31, 1995.
The net gain on the sale of loans (excluding loans sold as part of the Branch
Sales) for the three months ended December 31, 1995 totaled $340,000 compared
to $98,000 for the three months ended December 31, 1994. The net gain on the
12
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
sale of loans (excluding loans sold as part of the Branch Sales) for the six
months ended December 31, 1995 totaled $652,000 compared to $150,000 for the six
months ended December 31, 1994. The increased gain on sale of loans was
attributable to a higher volume of loan originations and subsequent loan sales.
Also contributing to the higher gain on sale of loans was the Bank's continuing
emphasis on origination and sale of non-conforming loans.
The largest increase in total non-interest income was the net gain on the sale
of branch offices. The Branch Sales produced a pre-tax net gain of $7,274,000
for the three and six month period ending December 31, 1995. The gain was
derived from the deposit premium, gain on sale of mortgage and consumer loans,
and gain on the sale of the branch offices' real estate. "Other" non-interest
income for the three months ended December 31, 1995 totaled $357,000 compared to
$1,194,000 for the three months ended December 31, 1994. "Other" non-interest
income for the six months ended December 31, 1995 totaled $934,000 compared to
$1,371,000 for the six months ended December 31, 1994.
The primary component of "other" non-interest income is the gain on sale and
capitalization of mortgage loan servicing rights. "Other" non-interest income
was lower for the three and six month periods ending December 31, 1995 due
primarily to the lower gain on sale of servicing rights. There were no sales of
servicing rights during the three months ended December 31, 1995. For the same
period one year earlier, the Bank completed a bulk sale of servicing rights
resulting in a gain of $988,000. For the six months ended December 31, 1995, the
gain on sale of servicing totaled $237,000 compared with $988,000 for the six
months ending December 31, 1994. However, mitigating the reduced gain on sale of
servicing was the capitalization of servicing rights for loans originated by the
Bank in accordance with SFAS 122 which was adopted by the Bank as of July 1,
1995. The Bank capitalized $173,000 and $344,000 of servicing rights on
originated loans during the three and six month periods ended December 31, 1995,
respectively.
Non-interest expense was $2,196,000 for the three months ended December 31,
1995, compared to $1,970,000 for the three months ended December 31, 1994.
Non-interest expense was $4,086,000 for the six months ended December 31, 1995,
compared to $3,914,000 for the six months ended December 31, 1994. The primary
reason for the increase in non-interest expense in the three and six months
ended December 31, 1995 as compared with the same periods for the prior year was
higher compensation and employee benefit expense.
(c) Capital Resources and Liquidity:
The Corporation is subject to regulation as a savings and loan holding company
by the Office of Thrift Supervision ("OTS"). First Federal Bank, A Federal
Savings Bank, as a subsidiary of a savings and loan holding company, is subject
13
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
to certain restrictions in its dealings with the Corporation. The Bank is
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 8.0% of risk-weighted assets. At December 31, 1995, the
Bank met all current capital requirements.
The following is a summary of the Bank's regulatory capital and capital
requirements at December 31, 1995:
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
Regulatory Capital $22,541,000 $22,541,000 $22,914,000
Minimum Capital Requirement $ 3,719,000 $ 7,439,000 $10,490,000
----------- ----------- -----------
Excess Capital $18,822,000 $15,102,000 $12,424,000
Regulatory Capital Ratio 9.07% 9.07% 17.48%
Required Capital Ratio 1.50% 3.00% 8.00%
During the quarter ended December 31, 1995, 1ST BANCORP paid a $0.10 dividend
per share to shareholders. This is the thirteenth consecutive quarterly dividend
1ST BANCORP has paid to shareholders.
Liquidity measures the Bank's ability to meet savings withdrawals and lending
commitments. Management believes that liquidity is adequate to meet current
requirements, including the funding of $11,434,000 in loan commitments and
$1,151,000 of loans in process outstanding at December 31, 1995. The majority of
these commitments are expected to be funded within the three month period ending
March 31, 1996. At December 31, 1995, the Bank had $3,878,000 in outstanding
commitments to sell mortgage loans and mortgage-backed securities. The Bank
maintains liquidity of at least 5% of net withdrawable assets. The liquidity
ratio at December 31, 1995 was 13.71%.
(d) Proposed Legislation
Because of the differing reserve of the SAIF and the BIF, deposit insurance
assessments paid by healthy commercial banks were recently reduced significantly
below the level paid the healthy savings associations. Assessments paid by
healthy savings associations exceeded those paid by healthy commercial banks by
approximately $.19 per $100 in deposits in late 1995 and will exceed them by
$.23 per $100 in deposits beginning in 1996. Congress is considering legislation
14
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
to recapitalize the SAIF and to eliminate the significant premium disparity
between the BIF and the SAIF. Currently, the recapitalization plan provides for
the payment, during the first calender quarter of 1996, of a special assessment
of approximately $.85 per $100 of SAIF deposits held at March 31, 1995, in order
to increase SAIF reserves to the level required by law. Certain 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 healthy savings associations would be set at a
significantly lower level after the special assessment is paid by all SAIF
institutions and could never be reduced below the level set for healthy BIF
institutions.
The recapitalization plan also provides for the merger of the SAIF and BIF on
January 1, 1998. However, the SAIF recapitalization legislation currently
provides for an elimination of the federal thrift charter or of the separate
federal regulation of thrifts prior to the merger of the deposit insurance
funds. First Federal would be regulated under federal law as a bank, and, as a
result, would become subject to the more restrictive activity limitations
imposed on national banks. Under current tax laws, savings associations meeting
certain requirements have been able to deduct from income for tax purposes
amounts designated as reserved for bad debts. Currently, upon the conversion of
a savings association to a bank, certain amounts of such association's bad debt
reserve must be recaptured as taxable income over a six-year period if the
association has used the percentage of taxable income method to compute its
reserve. Congress is considering legislation requiring, generally, that even if
a savings association does not convert to a bank, bad debt reserves taken after
1987 using the percentage of taxable income method must be included in future
taxable income of the association over a six-year period, although a two-year
delay may be permitted for institutions meeting a residential mortgage loan
origination test.
No assurances can be given that the SAIF recapitalization plan will be enacted
into law or in what form it may be enacted. In addition, 1ST BANCORP can give no
assurances that the disparity between BIF and SAIF assessments will be
eliminated and cannot be certain of the impact of its being regulated as a bank
holding company, First Federal being regulated as a bank or the change in tax
accounting for bad debt reserves until the legislation requiring such change is
enacted. Any such legislation could have a material effect on the liquidity,
capital reserves or operation of 1ST BANCORP.
There are no other known trends, events, or uncertainties, including current
recommendations by regulatory authorities, that should have, or that are
reasonably likely to have, a material effect on the liquidity, capital
resources, or operations of 1ST BANCORP.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Bank and Amcore Mortgage, Inc. have been named as defendants in a lawsuit
filed on March 2, 1995 in the United States District Court for the Northern
District of Illinois. The plaintiffs have sued on their own behalf and on behalf
of purported classes. In their multiple count complaint, the plaintiffs allege
that the defendants have assessed escrow deposits in excess of the amount
allowed by mortgage contracts and in violation of the law and have failed to
disclose to their borrowers material information pertaining to private mortgage
insurance ("PMI"). The plaintiffs have sued for damages, punitive damages,
attorney fees, costs, and declaratory and injunctive relief. With respect to
escrow deposits, the plaintiffs have alleged that Bank practices breached the
terms of mortgage contracts, constituted unfair and deceptive trade practices in
violation of state laws, and violated the Racketeer Influenced and Corrupt
Organization statute ("RICO"). With respect to private mortgage insurance, the
plaintiffs have alleged that Bank practices constituted unfair and deceptive
trade practices. The plaintiffs seek to represent nationwide classes of
borrowers who allegedly were damaged by these practices. Management believes
adequate provisions have been made in the consolidated financial statements for
this contingency.
The Bank and the plaintiffs have entered into an agreement to settle the
mortgage escrow claims with a defined class. The court has given preliminary
approval to the settlement and a date for final hearing, following notice to the
defined class, is set for May 6, 1996. The settlement agreement provides for the
dismissal with prejudice of the mortgage escrow claims asserted by the defined
class against the Bank. It also provides that the PMI claims, which were not
being settled, will be dismissed without prejudice. The settlement is for an
amount less than that which has been reserved by the Bank.
First Federal is involved in two other lawsuits that are not in the ordinary
course of business. The first involves a discrimination complaint filed with the
U.S. Department of Housing and Urban Development pursuant to the Fair Housing
Act. The second lawsuit 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, and 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. It is the
opinion of management that, based on current information available, 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.
16
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
On October 21, 1995, the Annual Meeting of Shareholders was held and the results
of which follow. The meeting was held prior to the declaration of the 5% stock
dividend, therefore, the voting results do not reflect any effects of the stock
dividend.
Against or Broker
For Withheld Abstain Non-votes
--- -------- ------- ---------
Election of Donald G. Bell
as Director for term expiring
in 1998 499,805 500 0 0
Election of Ruth Mix Carnahan
as Director for term expiring
in 1998 499,649 656 0 0
Election of Rahmi Soyugenc
as Director for term expiring
in 1998 499,774 531 0 0
Item 6. Exhibits and Reports on Form 8-K
a) The following Exhibit is filed herewith: Exhibit 27 Financial Data
Schedule.
b) The Registrant filed a Report on Form 8-K on December 28, 1995 to report
that on December 16, 1995, it completed the sale of certain assets and
certain liabilities of two retail branch offices of its thrift subsidiary,
First Federal Bank, A Federal Savings Bank, to two of STAR Financial Group,
Inc.'s subsidiary banks. STAR Financial Bank, Marion, Indiana purchased
certain assets and assumed certain liabilities of First Federal Bank's
retail branch office located in Kokomo, Indiana. STAR Financial Bank,
Indianapolis, Indiana purchased certain assets and assumed certain
liabilities of First Federal Bank's retail branch office located in Tipton,
Indiana.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1ST BANCORP
Date: February 13, 1996 By: /s/ C. James McCormick
--------------------------
C. James McCormick, Chairman
and Chief Executive Officer
Date: February 13, 1996 By: /s/ Frank D. Baracani
--------------------------
Frank D. Baracani,
President
Date: February 13, 1996 By: /s/ Mary Lynn Stenftenagel
---------------------------
Mary Lynn Stenftenagel,
Secretary-Treasurer and
Chief Accounting Officer
18
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Condensed Balance Sheet of 1ST BANCORP as at December 31, 1995 and
the Consolidated Condensed Statement of Income of 1ST BANCORP for the six months
then ended 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> 6-mos
<FISCAL-YEAR-END> Jun-30-1995
<PERIOD-START> Jul-1-1995
<PERIOD-END> Dec-31-1995
<EXCHANGE-RATE> 1.000
<CASH> 286
<INT-BEARING-DEPOSITS> 12,800
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,209
<INVESTMENTS-CARRYING> 29,536
<INVESTMENTS-MARKET> 29,144
<LOANS> 182,682
<ALLOWANCE> 888
<TOTAL-ASSETS> 248,537
<DEPOSITS> 125,350
<SHORT-TERM> 6,074
<LIABILITIES-OTHER> 6,917
<LONG-TERM> 88,828
<COMMON> 634
0
0
<OTHER-SE> 20,734
<TOTAL-LIABILITIES-AND-EQUITY> 248,537
<INTEREST-LOAN> 8,447
<INTEREST-INVEST> 2,186
<INTEREST-OTHER> 438
<INTEREST-TOTAL> 11,071
<INTEREST-DEPOSIT> 5,269
<INTEREST-EXPENSE> 7,802
<INTEREST-INCOME-NET> 3,269
<LOAN-LOSSES> 45
<SECURITIES-GAINS> (122)
<EXPENSE-OTHER> 4,086
<INCOME-PRETAX> 8,100
<INCOME-PRE-EXTRAORDINARY> 5,070
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,070
<EPS-PRIMARY> $7.56
<EPS-DILUTED> $7.56
<YIELD-ACTUAL> 2.24
<LOANS-NON> 945
<LOANS-PAST> 321
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 878
<CHARGE-OFFS> 38
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 888
<ALLOWANCE-DOMESTIC> 515
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 373
</TABLE>
