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, 1997
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: $17,022,704 as of September 9, 1997.
Number of shares of Common Stock outstanding as of September 9, 1997: 691,460
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June
30, 1997 are incorporated into Part II. Portions of the Proxy Statement for the
1997 Annual Meeting of Stockholders are incorporated into Part I and Part III.
<PAGE>
1ST BANCORP
FORM 10-K
INDEX
Page No.
Forward Looking Statement.............................................. 3
Part I
Item 1. Business..................................................... 3
Item 2. Properties................................................... 37
Item 3. Proceedings.................................................. 37
Item 4. Submission of Matters to a Vote of Security Holders.......... 37
Item 4.5 Executive Officers of the Corporation........................ 37
Part II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters....................................... 38
Item 6. Selected Financial Data..................................... 38
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 38
Item 7A. Quantitative and Qualitative Disclosures
about Market Risks...................................... 38
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
Ownership 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..................................... 41
Signatures............................................................. 43
2
<PAGE>
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Corporation (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Corporation. Readers of this Form 10-K are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-K identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other savings and financial institutions; substantial changes in financial
markets; changes in real estate values and the real estate market; regulatory
changes; or the deterioration in the financial strength of the Corporation's
loan customers.
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. 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.
3
<PAGE>
First Federal offers a full range of banking services through its two
banking offices located in Vincennes, Indiana. Additionally, the Bank operates
one loan origination office in Evansville Indiana. During the fourth quarter of
fiscal year 1997, the Bank closed loan origination offices in Indianapolis,
Indiana, Louisville, Kentucky, and suburbs of Cincinnati and Dayton, Ohio. One
additional loan origination office located in a suburb of Cleveland, Ohio was
closed earlier in fiscal year 1997. The office closures were undertaken to
centralize all administrative loan functions in the Vincennes offices, to afford
more standardized procedures and controls, and to decrease overhead expenses in
the nonconforming loan operations.
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 5.5% to 6.4%. 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 enable the Bank to manage maturities
of its deposits in its effort to manage interest rate risk.
During fiscal 1997, First Financial purchased the book of business of an
existing independent insurance agency. The book of business was merged with the
existing customer base of First Financial. As a result of the acquisition, First
Financial opened a full service insurance office in Princeton, Indiana in
addition to its existing full service office in Vincennes, Indiana.
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, 1997,
First Federal's net loan portfolio aggregated $146.8 million, representing 54.3%
of total assets at that date. This compares to the Bank's net loan portfolio of
$150.7 million at June 30, 1996 representing 57.2% 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 two fiscal years 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 other 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.
4
<PAGE>
The Bank offers both fixed rate mortgage and adjustable rate mortgage
("AML") loans. 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 8.7% of the total loan portfolio at June 30,
1997 as compared to 6.6% of the total loan portfolio at June 30, 1996.
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,
- -----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Real estate loans:
Mortgage $135,189 $141,247 $181,676 $153,251 $140,140
Construction 2,038 2,171 7,364 12,460 4,862
Consumer loans 7,277 5,839 10,203 9,285 8,765
Other Loans 5,471 4,171 6,859 6,775 4,889
----------------------------------------------------------------------------
149,975 153,428 206,102 181,771 158,656
----------------------------------------------------------------------------
Undisbursed loans funds (1,536) (1,297) (3,038) (7,707) (1,495)
Deferred loan fees and unamortized
premiums and discounts, net (441) (486) (367) (430) (488)
Allowance for loan losses (1,158) (896) (878) (817) (892)
----------------------------------------------------------------------------
(3,135) (2,679) (4,283) (8,954) (2,875)
----------------------------------------------------------------------------
Net loans receivable $146,840 $150,749 $201,819 $172,817 $155,781
============================================================================
</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,
1997 by type of loan:
Fiscal Periods Indicated as of June 30, 1997
<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
1997 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:
Mortgage $135,189 $1,813 $1,974 $2,148 $4,884 $16,531 $25,258 $82,581
Construction 2,038 2,038 - - - - - -
Consumer and Other Loans 12,748 1,429 1,570 1,726 3,981 4,042 - -
---------------------------------------------------------------------------------------------------
Total $149,975 $5,280 $3,544 $3,874 $8,865 $20,573 $25,258 $82,581
===================================================================================================
</TABLE>
5
<PAGE>
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.
Adjustable- and Fixed-Rate Loans
The following table sets forth by type of loan the amount of First
Federal's fixed-rate loans and adjustable rate mortgage loans ("AML") included
in its gross loans receivable:
<TABLE>
<CAPTION>
At June 30,
- -----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
One-to-Four Family
Residential Mortgage Loans
Fixed Rates $67,310 $54,212 $71,772 $64,294 $44,963
Adjustable Rates 60,767 81,051 107,849 92,492 90,957
----------------------------------------------------------------------------
Total $128,077 $135,263 $179,621 $156,786 $135,920
Commercial Real Estate Loans
Fixed Rates 5,901 3,511 2,996 4,062 4,468
Adjustable Rates 3,249 4,644 6,423 4,863 4,614
----------------------------------------------------------------------------
Total $9,150 $8,155 $9,419 $8,925 $9,082
Total Real Estate Loans
Fixed Rates 73,211 57,723 74,768 68,356 49,431
Adjustable Rates 64,016 85,695 114,272 97,355 95,571
----------------------------------------------------------------------------
Total $137,227 $143,418 $189,040 $165,711 $145,002
Consumer & Other Loans
Fixed Rates 8,168 6,671 11,438 10,011 8,841
Adjustable Rates 4,580 3,339 5,624 6,049 4,813
----------------------------------------------------------------------------
Total $12,748 $10,010 $17,062 $16,060 $13,654
Total Loans Receivable
Fixed Rates 81,379 64,394 86,206 78,367 58,272
Adjustable Rates 68,596 89,034 119,896 103,404 100,384
----------------------------------------------------------------------------
Total $149,975 $153,428 $206,102 $181,771 $158,656
</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 conforming residential mortgages currently originated by the
Bank generally are made with 15 and 30 year amortization schedules. Fixed rate
nonconforming residential mortgages currently originated by the Bank generally
are made with 15 year or less 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 for conforming loans and 15 years for
nonconforming loans.
6
<PAGE>
A portion of the conforming fixed rate and adjustable rate residential
mortgage loans currently being originated by First Federal is sold to FHLMC.
These loans are typically sold with the servicing rights retained by the Bank. A
portion of the fixed rate nonconforming mortgage loans is also sold on a
non-recourse basis in the nonconforming secondary market. The nonconforming
loans are typically sold with the servicing rights released. However, the
highest quality nonconforming loans are being retained in portfolio in order to
enhance the net interest margin. Adjustable rate nonconforming mortgage loans
are currently originated and placed in the held for sale portfolio. Sales of
adjustable rate nonconforming loans was limited during fiscal year 1997.
Of the $115.0 million loans originated in fiscal year 1997, $70.2
million were nonconforming mortgage loan originations. This compares to the
origination of $65.9 million of nonconforming mortgage loans of the total $144.9
million loan originations during fiscal year 1996. At June 30, 1997, $66.5
million nonconforming loans were included in the loan portfolio as compared to
$23.3 million in portfolio at June 30, 1996. The increased level of
nonconforming loans in portfolio is an integral part of the Bank's strategy to
expand the net interest margin in an orderly manner.
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. During
fiscal year 1997, the Bank discontinued a program of granting second mortgage
loans up to 100% of appraised value. The program was discontinued due to the
inherent credit risk associated with that type of lending. The Bank offers 100%
financing programs with the first mortgage retained by the Bank, and a
concurrent second mortgage being closed and retained at another financial
institution.
First Federal offers residential construction loans to both individuals
and builders. Such loans accounted for approximately 3.2% of the total amount of
loans originated by the Bank in fiscal year 1997. 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. The number of "spec" loans to
each builder is limited by the amount and number of projects that such builder
has in process at any one time. These limits are established and regularly
monitored by the Board of Directors.
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. Nonconforming mortgage
loans generally may not exceed 85% of the value of the secured property.
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, 1997, First Federal's commercial real estate loan portfolio
(including loans secured by nonresidential property, land, and five or more
dwelling units) aggregated $9.2 million, or 6.1% 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 currently or previously 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, 1997, such loans constituted $12.7 million, or 8.7% 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. During fiscal
year 1997, the Bank initiated an indirect auto lending program through a
selected number of new and used automobile dealers in its primary market area.
The indirect auto lending program will serve to augment the traditional auto
lending program of the Bank. Terms are similar for the traditional and indirect
auto programs. Home equity loans are variable rate and are treated as revolving
lines of credit. At June 30, 1997, home equity loans aggregated $4.2 million,
available balances averaged $10,271, and approved credit line balances averaged
$20,255. 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.
8
<PAGE>
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. Through its loan origination office network, the Bank's lending
market was expanded beyond its traditional areas. However, at June 30, 1997, a
majority of First Federal's total loans receivable were secured by real estate
located in central and southern Indiana and southern Illinois.
During the mid-1980s, First Federal purchased a limited number of
participations in loans 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, conforming 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. First Federal continues to obtain its market share of
loans in its primary market area. In addition, through mortgage banking
services, additional loans are granted in other communities. The mortgage
banking services for the past three fiscal years have been primarily
concentrated in the nonconforming loan markets.
During fiscal 1997, the Bank originated $104.7 million of residential
real estate loans (including construction loans) as compared to $132.2 million
of residential real estate loans in 1996 and $95.3 million of residential real
estate loans in 1995. The decreased volume of residential real estate loan
originations during fiscal 1997 resulted from reduced retail conforming loan
originations. The decreased conforming loan originations were largely
attributable to the sale of two retail banking branches in Tipton and Kokomo,
Indiana during December 1995 (the "Branch Sales"). In addition, the decline was
attributable to the general economic conditions which depressed loan activity in
the Bank's primary lending area during fiscal 1997. However, nonconforming loan
originations increased slightly during fiscal year 1997. Volume increased in
fiscal 1996 as compared with fiscal 1995 primarily due to the increased
production of nonconforming loans from the Bank's loan origination office
network .
Conforming loans purchased through a wholesale correspondent network
decreased to $2.0 million during fiscal 1997 as compared to $27.6 million during
1996 and $13.7 million during fiscal 1995. The conforming wholesale
correspondent loan program was discontinued during fiscal 1997 due to pricing
constraints. The increase in loan purchases during 1996 was attributable to a
program designed to replace the loan production from the branches sold during
the year. Additionally, the Bank originated and sold FHA and VA loans in the
secondary mortgage market.
During 1997, the Bank sold $32.1 million in conforming loans to FHLMC as
compared to the sale of $67.6 million in loans to FHLMC in fiscal year 1996. The
Bank continues to service most of the loans sold in fiscal 1997 and retains a
portion of the interest received (.250% to .375%) as a servicing fee. A total of
$6.4 million in FHA/VA loans were sold to private investors during fiscal year
1997. These loans were sold servicing released. During fiscal 1996, $28.4
million in loans were sold in conjunction with the Branch Sales and $37.5
million in conforming loans and FHA/VA loans were sold to private investors. An
aggregate of $37.7 million in nonconforming loans were sold to various investors
during fiscal 1997 as compared to $27.9 million in nonconforming loan sales in
fiscal 1996. These loans are generally sold servicing released.
9
<PAGE>
The following table shows total loan originations, purchases, sales and
repayment activities (including loans held for sale) of the Bank during the
periods indicated:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------
1997 1996 1995
------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Loans Originated
Real estate loans
Construction (1) $ 3,623 $ 15,466 $ 14,169
Land -- -- 740
Loans for purchase or refinance
of existing property:
One-to-four units 101,047 116,783 81,117
Over four units -- -- 143
Commercial 383 215 313
Consumer loans (2) 9,926 12,394 14,537
--------- --------- ---------
Total loans originated $ 114,979 $ 144,858 $ 111,019
Participations and whole loans purchased $ 2,042 $ 27,583 $ 13,695
Participations and whole loans sold ($ 76,202) ($161,421) ($ 32,835)
Loan principal repayments (35,093) (50,208) (56,854)
--------- --------- ---------
Change in loan portfolio $ 5,726 ($ 39,188) $ 35,025
</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.
1997 1996 1995
----------------------------
(in thousands)
Loan origination, commitment
fees and service fees earned
during the year ended June 30 $137 $140 $780
Net deferred loan origination and
commitment fees on mortgage
loans at end of year $476 $611 $360
Purchased and originated mortgage
servicing rights at end of year $819 $591 $1,432
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 16
days past due and a late charge is assessed at such time for conforming mortgage
loans. In the case of nonconforming mortgage loans, contact is generally made
after a payment is five days past due. For nonconforming loans, as with
conforming loans, late charges are assessed at which time a payment is more than
16 days past due. 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 judgment 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.
11
<PAGE>
Nonaccrual Loans and Real Estate Owned
At June 30, 1997, nonaccrual loans and real estate owned totaled $2.7
million, or 1.01% of total assets. The increased delinquencies are attributable
to several factors including general economic conditions and the abundance of
consumer bankruptcies being experienced throughout the Bank's lending areas. The
upward trend in nonaccrual loans is largely attributable to one-to-four family
mortgage loans becoming more than 90 days past due. The upward trend in loan
delinquencies relates to both conforming and nonconforming mortgage loans. Loan
quality continues to be of major importance to the Bank and strong efforts are
being made to ensure loan quality. In an effort to mitigate potential losses and
reduce non-performing assets mortgage loan collection personnel have been
expanded, more stringent collection practices have been implemented, and certain
higher risk lending programs have been discontinued. In addition, loan loss
allowances have been increased to prepare for potential future losses in the
loan portfolio.
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
purchased participating interests became non-performing 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.
12
<PAGE>
The table below sets forth the amounts and categories of First Federal's
nonaccrual loans and real estate owned 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 more than 90 days.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and real estate owned:
Non-accrual loans(1) $2,330 $ 846 $ 400 $1,635 $1,647
Real estate owned(2) 397 177 145 160 168
Restructured loans -- -- -- -- --
------------------------------------------------------
Total nonaccrual loans and real estate owned $2,727 $1,023 $ 545 $1,795 $1,815
Nonaccrual loans and real estate owned to
total assets 1.01% 0.39% 0.17% 0.71% 0.79%
</TABLE>
- ---------------------
(1) Approximately $200,000 in gross interest income would have been recorded in
the year ended June 30, 1997 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 $99,000 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, 1997, the Bank realized net charge-offs
on loans aggregating $111,000. At June 30, 1997, 1.04% of the outstanding
principal balance of loans in the Bank's portfolio was delinquent between 61 and
90 days and 1.63% 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,
---------------------------------------------
1997 1996 1995
--------------------------------------------
(Dollars in thousands)
Loans receivable, net $146,840 $150,749 $201,819
Net losses (charge-offs) $111 $65 $39
Percent delinquent 61 days
or more at end of year 2.67% 1.76% 1.14%
Total dollar amount
foreclosed $686 $180 $691
Percent foreclosed 0.47% 0.12% 0.34%
Analysis of the Allowance for Loan Losses
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $896 $878 $817 $892 $808
Charge-offs
Loans
Real estate mortgages 81 30 15 138 85
Consumer loans 38 52 32 23 30
Recoveries
Loans
Real estate mortgages 1 13 - 1 73
Consumer loans 7 4 8 10 11
----------------------------------------------------
Net charge-offs 111 65 39 150 31
Provisions charged to operations 373 83 100 75 115
----------------------------------------------------
Balance at end of year $1,158 $896 $878 $817 $892
====================================================
Ratio of net charge-offs during the
year to average loans outstanding
during the year 0.07% 0.04% 0.04% 0.09% 0.03%
</TABLE>
13
<PAGE>
Additional information regarding the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
At June 30, 1997
------------------------------------------------------------------
% 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 $ 520 85.31% 0.41% 0.35%
Commercial Real Estate Loans 508 6.19% 5.47% 0.34%
Consumer & Other Loans 130 8.50% 1.02% 0.09%
------ ------ ----
$1,158 100.00% 0.78%
</TABLE>
<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>
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 valuation
allowances have been established for loans and contracts. An asset would warrant
such an allowance because the loan balance exceeds the appraised value or
because of other reasons to anticipate a loss. At June 30, 1997, specific
valuation allowance balances were $508,000 of which approximately 95% was for
one real estate contract acquired in a merger with United Savings Association of
Central Indiana, F.A., in 1989. The loan balance at June 30, 1997 was $1.3
million. This specific valuation allowance 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 valuation allowance is released. The remainder of the
specific valuation allowances are for single family residential mortgage loans
in which the Bank anticipates losses to be realized in the future.
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, 1997, First Federal's investment securities portfolio
aggregated $44.1 million, consisting exclusively of U.S. agency obligations. See
Note 3 of the Notes to the Consolidated Financial Statements for a description
of investment securities owned at June 30, 1997. At June 30, 1997, the Bank's
investment securities available for sale portfolio aggregated $11.6 million,
consisting of U.S. Treasury and agency obligations. See Note 2 of the Notes to
the Consolidated Financial Statements for a description of investment securities
available for sale owned at June 30, 1997.
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,
1997 1996 1995
-------------------------------------------- -------------- ------------
Amortized Market Wtd. Ave. Amortized Amortized
Investment Type (1) Maturity Cost Value Yield Cost Cost
- --------------------------------- ------------------------------------------------------------------ -------------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
agency obligations less than 1 year - - -
including mortgage- 1 - 5 years 24,215 23,912 5.58%
backed securities 5 - 10 years 11,351 11,159 6.77%
more than 10 years 8,499 8,485 7.73%
-------------------------------
$44,065 $43,556 6.30% $43,624 $72,005
Federal Home Loan Bank
stock N/A 4,941 4,941 7.85% 4,864 3,876
------------------------------- --------- ----------
Total Investment Securities $49,006 $48,497 6.46% $48,488 $75,881
=============================== ========= ==========
- ----------------------------------
</TABLE>
(1) There are no tax-exempt securities included in the above totals.
Available for Sale Portfolio
<TABLE>
<CAPTION>
At June 30, At June 30, At June 30,
1997 1996 1995
----------------------------------- ------------------------------
Amortized Market Wtd. Ave. Amortized Amortized
Investment Type (1) Maturity Cost Value Yield Cost Cost
- ------------------------------------- --------------------------------------------------------- -------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
agency obligations less than 1 year - - -
including mortgage- 1 - 5 years 1,005 994 6.25%
backed securities 5 - 10 years 4,560 4,491 7.20%
more than 10 years 6,204 6,103 7.07%
----------------------
$11,769 $11,588 7.05% $10,907 -
---------------------- ------- --------
Total Available for Sale Securities $11,769 $11,588 6.23% $10,907 -
====================== ======= ========
- ----------------
</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,
--------------------------------------------------------------------------
1996 vs. 1997
(in thousands)
Rate/
Rate Volume Volume Total
----------------- ---------------- ---------------- ----------------
Interest earning assets:
<S> <C> <C> <C> <C>
Loan portfolio (1)(2)(3) $211 ($1,086) ($5) ($880)
Investment securities,
trading account investments
and other short-term
deposits (4) (132) (169) (301) -
----------- ------------- ----------- ------------
Total $79 ($1,255) ($5) ($1,181)
Interest-bearing liabilities: ------------ ------------- ----------- ------------
Savings accounts ($65) ($1,326) ($4) ($1,395)
Short-term borrowings 31 (132) - (101)
Advances from FHLB and other
borrowings (302) 565 5 268
Total ($336) ($893) $1 ($1,228)
Net change in interest
income (expense) $415 ($362) ($6) $47
=========== ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------
1995 vs. 1996
(in thousands)
Rate/
Rate Volume Volume Total
----------------- ---------------- ---------------- ----------------
Interest earning assets:
<S> <C> <C> <C> <C>
Loan portfolio (1)(2)(3) $1,062 ($100) ($27) $935
Investment securities,
trading account investments
and other short-term
deposits (4) 346 (300) (8) 38
----------- ------------- ----------- ------------
Total $1,408 ($400) ($35) $973
----------- ------------- ----------- ------------
Interest-bearing liabilities:
Savings accounts $1,626 ($1,527) ($3) $96
Short-term borrowings (96) (129) - (225)
Advances from FHLB and other 77 1,156 (3) 1,230
borrowings
Total $1,607 ($500) ($6) $1,101
----------- ------------- ----------- ------------
Net change in interest
income (expense) ($199) $100 ($29) ($128)
=========== ============ =========== ============
</TABLE>
- ---------------------------------
(1) The effect of nonaccrual loans on net interest-earning assets is not
material.
(2) Out-of-period items and adjustments excluded are not material.
(3) Loan fees included in interest income are not material.
(4) 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,
1997 and for each of the years ended June 30, 1997, 1996, and 1995. Average
balances are based on quarter-end balances.
<TABLE>
<CAPTION>
As of June 30, Year Ended June 30,
------------------ --------------------------------------
1997 1997 1996 1995
------------------ --------------------------------------
<S> <C> <C> <C> <C>
Weighted average yield on
loan portfolio 8.53% 8.47% 8.36% 7.82%
Weighted average yield on
investment securities, trading
account investments, and
other short-term deposits 6.36% 6.08% 6.25% 5.83%
Weighted average yield on all
interest-earning assets 7.86% 7.77% 7.75% 7.22%
Weighted average rate paid on
savings accounts 5.49% 5.50% 5.54% 4.69%
Weighted average rate paid on
FHLB advances and other
borrowings 5.67% 5.60% 5.89% 5.86%
Weighted average rate on all
interest-bearing liabilities 5.57% 5.54% 5.67% 5.02%
Net interest margin 2.58% 2.52% 2.36% 2.35%
</TABLE>
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.
18
<PAGE>
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
deposit accounts offered by First Federal at June 30, 1997 in its primary market
area:
<TABLE>
<CAPTION>
Interest Rates
Type of Deposit Accounts at June 30, 1997 Compounding Minimum
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW 2.90 - 3.29% Simple Varies by type of account
MMDA 2.70 - 5.37% Simple Varies by type of account
Passbook/Statement Savings 2.70 - 4.00% Daily Varies by type of account
Certificates of Deposit:
91 days 4.00% Simple 1,000
182 days 4.85% Simple 500
7-11 months 5.75% Simple 1,000
1 year 5.00% Daily 500
1 1/2 years 5.10% Daily 500
1 1/2 year stepped-rate 6.09% Simple 1,000
2 years 5.25% Simple 1,000
2 1/2 years 5.35% Daily 500
3 year stepped-rate 6.00% Simple 1,000
3 1/2 years 5.50% Simple 500
5 years 5.75% Simple 500
10 years 6.00% Simple 500
IRA Certificates:
1 1/2 years 5.25% Daily 100
2 1/2 years 5.40% Daily 100
3 1/2 years 5.65% Simple 100
5 years 6.00% Simple 100
Negotiable Certificates:
Jumbos generally, 4.25 - 6.25% Simple 100,000
normal rate + .25%
</TABLE>
The large variety of savings accounts offered by the Bank has increased
the Bank's ability to retain retail deposits and has 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.
19
<PAGE>
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,
-----------------------------------------------------------------------------------
1997 1996
--------------------------------------- ------------------------------------------
% of Wtd. Avg. % of Wtd. Avg.
Balance Deposits Rate Balance Deposits Rate
--------------------------------------- ------------------------------------------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of account:
Passbook/NOW/Super NOW
Variable Rate Savings Accounts(1) $20,193 14.0% 3.8% $17,170 12.5% 3.2%
MMDAs 3,015 2.1% 4.1% 3,089 2.3% 3.9%
Certificates of Deposit(2) 121,108 83.9% 5.8% 116,889 85.2% 5.8%
--------------------- ----------------------
Total $144,316 100.0% 5.5% $137,148 100.0% 5.5%
===================== ======================
</TABLE>
<TABLE>
<CAPTION>
June 30, 1995
------------------------------------------
% of Wtd. Avg.
Balance Deposits Rate
------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Type of account:
Passbook/NOW/Super NOW
Variable Rate Savings Accounts(1) $38,712 18.5% 2.9%
MMDAs 11,120 5.3% 3.0%
Certificates of Deposit(2) 159,973 76.2% 5.8%
----------------------------
Total $209,805 100.0% 5.1%
============================
</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,
---------------------------------------------------------------------------------------------
1997 1996
------------------------------------------ ------------------------------------------
Average % of Wtd. Avg. Average % of Wtd. Avg.
Balance Total Rate Balance Total Rate
------------------------------------------ ------------------------------------------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of account:
Passbook/NOW/Super NOW
Variable Rate Savings Accounts(1) 17,627 12.5% 3.7% 26,636 16.2% 2.9%
MMDAs 3,172 2.3% 4.0% 4,098 2.5% 3.1%
Certificates of Deposit(2) 118,875 84.5% 5.8% 133,059 80.9% 6.2%
Accrued Interest 1,039 0.7% - 769 0.4% -
------------------------ ------------------------
Total $140,713 100.0% 5.5% $164,562 100.0% 5.5%
======================== ========================
</TABLE>
Years Ended June 30,
------------------------------------------
1995
------------------------------------------
Average % of Wtd. Avg.
Balance Total Rate
------------------------------------------
(Dollars in thousands)
Type of account:
Passbook/NOW/Super NOW
Variable Rate Savings Accounts(1) $47,455 24.7% 3.1%
MMDAs 5,406 2.8% 2.8%
Certificates of Deposit(2) 138,489 72.2% 5.3%
Accrued Interest 504 0.3% -
------------------------
Total $191,854 100.0% 4.7%
========================
- --------------------------
(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.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------
1997 1996 1995
---------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Increase (decrease) in deposits
before interest credited $2,734 ($77,909) $31,318
Interest credited 4,434 5,252 5,696
------------- ---------------- ----------------
Net increase (decrease)
in deposits $7,168 ($72,657) $37,014
------------- ---------------- ----------------
Total deposits at end
of period $144,316 $137,148 $209,805
============= ================ ================
</TABLE>
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. In an effort to better
serve its primary market area and expand and retain its retail deposit base, the
Bank opened a new branch office during fiscal 1997 in Vincennes, Indiana. The
primary focus of the new branch office is to better serve the Bank's retail
deposit customers. 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, 1997, the Bank increased its
brokered deposits to $45.1 million from $34.1 million. The brokered deposit
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 enable 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, 1997.
<TABLE>
<CAPTION>
Maturing in the 12 months ending June 30:
Balances at
June 30, 1997 1998 1999 2000 Thereafter
---------------------------------------------------------------------------
(in thousands)
Certificates of deposit:
<S> <C> <C> <C> <C> <C>
Less than 4.00% $ 19 $ 184 $ 6 $ 1 $ -
4.00% to 4.99% 4,435 4,410 - 25 -
5.00% to 5.99% 77,581 67,292 7,360 1,754 1,175
6.00% to 6.99% 25,478 12,924 7,029 2,918 2,607
7.00% to 7.99% 12,228 6,355 2,172 2,274 1,427
8.00% to 9.99% 1,055 458 560 24 13
10.00% or more 140 - - - 140
--------------------------------------------------------------------------
Total certificates of deposit $121,108 $91,623 $ 17,127 $ 6,996 5,362
==========================================================================
</TABLE>
As of June 30, 1997, First Federal had $8.8 million of time deposits
with balances over $100,000. Maturity of these deposits is as follows:
21
<PAGE>
(in thousands)
3 months or less $2,568
Over 3 months through 6 months 322
Over 6 months through 12 months 3,370
Over 12 months 2,568
----------------
Total $8,828
================
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 withdrawals
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 strategies. The Bank had $98.8 million in outstanding advances from
the FHLB at June 30, 1997.
1ST BANCORP had a $1.5 million loan outstanding from Ambank, Vincennes,
Indiana at June 30, 1997. 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. However, at June 30, 1997, there were
no 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,
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
Weighted average rate on
advances from the Federal
Home Loan Bank and other
borrowings 5.67% 5.56% 6.01%
Year Ended June 30,
------------------------------------------------
1997 1996 1995
------------------------------------------------
(Dollars in thousands)
Maximum amount of advances
from the Federal Home
Loan Bank and other
borrowings outstanding
at any month end $100,346 $99,054 $91,617
Approximate average advances
from the Federal Home
Loan Bank and other
borrowings outstanding $99,218 $89,103 $69,645
Approximate weighted average
rate paid on advances
from the Federal Home
Loan Bank and other
borrowings 5.60% 5.94% 5.83%
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 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.
23
<PAGE>
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 require all federal
savings associations, such as First Federal, either to convert to a national
bank or a state-chartered bank by a specified date to be determined. In
addition, under the legislation, the Corporation likely would no longer be
regulated as a savings and loan holding company, but rather as a bank holding
company. This proposed legislation would abolish the OTS and transfer its
functions among the other federal banking regulators. It cannot be predicted
with certainty whether or in what form the legislation will be enacted.
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 quarterly assessment rates range from .01164%
of assets for associations with $67 million in assets or less to .00308% for
associations with assets in excess of $35 billion. First Federal's current
semi-annual assessment, based upon its March 31, 1997 total assets of $273.2
million, was $36,660.
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
its 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.
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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, 1997, First Federal's
investment in FHLB of Indianapolis stock was $4,941,000.
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, 1997,
dividends paid to First Federal totaled $382,000, for an annual rate of 7.8%. 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, 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 $87.5
million of mortgage loans and $41.3 million of 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.
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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% although the OTS has proposed a reduction of the percentage
to 4%. OTS regulations also require each member savings association 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. The OTS has proposed
abolishing this latter requirement. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The monthly average liquidity of
First Federal for June, 1997 was 10.44% and its average short-term liquidity
ratio at June 30, 1997 was 6.95%. First Federal has never been subject to
monetary penalties for failure to meet its liquidity requirements.
Real Estate Lending Standards
OTS regulations require savings associations 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 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. On August 27, 1996, the federal banking agencies added asset
quality and earnings standards to the safety and soundness guidelines.
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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. As of September 30, 1996,
the reserves of the SAIF were below the level required by law, primarily because
of 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
levels required by law in May, 1995. However, on September 30, 1996, provisions
designed to recapitalize the SAIF and eliminate the premium disparity between
the BIF and the SAIF were signed into law. See "--Assessments" below.
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 these rates if the 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. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
On September 30, 1996, President Clinton signed into law legislation
which included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and SAIF. Under the new law, First
Federal was charged a one-time special assessment equal to $0.657 per $100 in
assessable deposits at March 31, 1995. First Federal recognized this one-time
assessment as a non-recurring operating expense of $1,330,000 before tax during
the three-month period ending September 30, 1996, and First Federal paid the
assessment on November 27, 1996. The assessment was fully deductible for both
federal and state income tax purposes. Beginning January 1, 1997, First
Federal's annual deposit insurance premium was reduced from .23% to .0644% of
total assessable deposits. BIF institutions pay lower assessments than
comparable SAIF institutions because BIF institutions pay only 20% of the rate
paid by SAIF institutions on their deposits with respect to obligations issued
by the federally-chartered corporation which provided some of the financing to
resolve the thrift crisis in the 1980's ("FICO"). The 1996 law also provides for
the merger of the SAIF and the BIF by 1999, but not until such time as bank and
thrift charters are combined. Until the charters are combined, savings
associations with SAIF deposits may not transfer deposits into the BIF system
without paying various exit and entrance fees, and SAIF institutions will
continue to pay higher FICO assessments. Such exit and entrance fees need not be
paid if a SAIF institution converts to a bank charter or merges with a bank, as
long as the resulting bank continues to pay applicable insurance assessments to
the SAIF, and as long as certain other conditions are met.
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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, purchased mortgage servicing rights, and purchased credit
card relationships (subject to certain limitations) 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 in an amount up to 100% of tangible capital) 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, 1997,
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. A savings
association 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 a savings association's
existing risk-based capital requirement. Although the OTS has decided to delay
implementation of this rule, it will continue to monitor closely the level of
interest rate risk at individual savings associations and it retains the
authority, on a case-by-case basis, to impose additional capital requirements
for individual savings associations 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, 1997, 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 1997:
Tangible Core Risk-based
Capital Capital Capital
--------------- -------------- -----------
(Dollars in thousands)
Regulatory Capital $22,436 $22,436 $23,086
Minimum capital requirement 4,059 8,117 11,555
------------------------------------------
Excess capital $18,377 $14,319 $11,531
Regulatory capital ratio 8.3% 8.3% 16.0%
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,
1997, the Bank was categorized as "well capitalized" meaning that the Bank's
total risk-based capital ratio exceeded 10%, its Tier I risk-based ratio
exceeded 6%, and its leverage ratio exceeded 5%, and the Bank was not subject to
a regulatory order, agreement or directive to meet and maintain a specific
capital level for any capital measure.
Capital Distribution Regulations
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by a savings
association 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. A savings association 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. A savings association having total
capital that is less than its minimum capital requirements would be a Tier 3
institution. However, a savings association 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 savings association is "in need of more than normal
supervision." First Federal is currently a Tier 1 institution.
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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 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.
The 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 association 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 association 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 association, other
than a subsidiary association, or any other savings and loan holding company.
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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 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, 1997, 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
association 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
association meets the QTL test, the activities of the Corporation and any of its
subsidiaries (other than First Federal or other subsidiary savings associations)
would thereafter be subject to further restrictions. The 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 association,
(iv) holding or managing properties used or occupied by a subsidiary savings
association, (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
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
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 associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
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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.
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 one-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
Savings associations must meet a QTL test which requires a savings
association to 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
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).
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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, 1997, 76.2% 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
change significantly 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 satisfactory 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 is no longer be able to use the percentage of
taxable income method of computing its allocable tax bad debt deduction. The
Bank is 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. First Federal will recapture approximately $440,000 over a six
year period beginning in fiscal 1997. 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.
34
<PAGE>
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 income." "Adjusted gross income," for
purposes of FIT, begins with taxable income as defined by Section 63 of the
Internal Revenue 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 enacted legislation
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. This new legislation may also
result in increased competition for the Corporation and the Bank.
35
<PAGE>
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. The Bank competes for loan
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 February 1997, the FASB issued SFAS No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 provides computation, presentation, and disclosure
requirements for earnings per share. The requirements for the presentation of
primary and fully diluted earnings per share will be replaced with basic and
diluted earnings per share. SFAS 128 Statement is effective for financial
statements for both interim and annual periods ending after December 15, 1997,
and earlier application is not permitted. Due to the Corporation's current
capital structure and limited common stock equivalents, the Statement is not
expected to have a material impact on the financial statements or results of
operations of the Corporation.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"). SFAS 129 was issued in
connection with SFAS 128 and establishes standards for disclosing information
about an entity's capital structure. SFAS 129 is effective for periods ending
after December 15, 1997. The adoption of SFAS 129 is not expected to have any
impact on the financial statements or results of operations of the Corporation.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and displaying
comprehensive income and its components in the financial statements.
Comprehensive income is the total of net income and all nonowner changes in
shareholders' equity. SFAS 130 is effective for fiscal years beginning after
December 15, 1997, with earlier application permitted. The Statement will
require new disclosures by the Corporation, but is not expected to have a
material impact on the financial statements or results of operations of the
Corporation.
In June 1997, The FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information" ("SFAS 131"), which introduces new
guidance on segment reporting. SFAS 131 is effective for fiscal years beginning
after December 15, 1997, with earlier application encouraged. The Statement is
not expected to have a material impact on the financial statements or results of
operations of the Corporation.
Employees
As of September 9, 1997, 1ST BANCORP and its subsidiaries had 81
full-time and 6 part-time employees. None of these employees is represented by a
collective bargaining agreement or union, and the Corporation believes it enjoys
harmonious relations with its personnel.
36
<PAGE>
Item 2. Properties.
At June 30, 1997, 1ST BANCORP and First Federal conducted their business
and operations from the main office located at 101 North Third Street,
Vincennes, Indiana; a drive-up branch facility at 1700 Willow 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 $2.0
million at June 30, 1997. First Financial conducted its business from its office
located at 626 Veterans Drive, Vincennes, Indiana. This property and building
are owned by First Financial and had a net book value of $412,000 at June 30,
1997. A portion of the First Financial building is leased to an independent
third party.
Item 3. Legal Proceedings.
Neither 1ST BANCORP, First Federal, nor First Financial 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 Corporation's shareholders during the
quarter ended June 30, 1997.
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 55) has been President and Director of the
Corporation and First Federal during the past five years.
Donald G. Bell (age 67) 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.
C. James McCormick (72) 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.
37
<PAGE>
Mary Lynn Stenftenagel (43) 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 one year prior she
served as Senior Vice President of First Federal.
John J. Summers (67) has been Vice Chairman of the Board and Director of
the Corporation and Vice Chairman of the Board and Director of First Federal
during the last five years.
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 40 of 1ST BANCORP's 1997 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
7 to 14 of the Annual Report to Shareholders.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
Because the majority of the Corporation's balance sheet consists of
interest earning assets and interest bearing liabilities, it is exposed to
interest rate risk. Therefore, additional information is being provided
regarding the exposure to this interest rate risk.
The OTS requires all regulated thrift institutions to calculate the
estimated change in the institution's net portfolio value ("NPV") assuming
instantaneous, parallel shifts in the Treasury yield curve of 100 to 400 basis
points, either up or down, and in 100 basis point increments. The NPV is defined
as the present value of expected cash flows from existing assets less the
present value of expected cash flows from existing liabilities plus the present
value of net expected cash inflows from existing off-balance sheet contracts.
38
<PAGE>
The OTS provides all institutions that file a schedule entitled the
Consolidated Maturity & Rate schedule ("CMR") as a part of their quarterly
Thrift Financial Report with an interest rate sensitivity report of NPV. The OTS
simulation model uses a discounted cash flow analysis and an option-based
pricing approach to measuring the interest rate sensitivity of NPV. The OTS
model estimates the economic value of each type of asset, liability, and
off-balance sheet contract under the assumption that the Treasury yield curve
shifts instantaneous and parallel up and down 100 to 400 basis points in 100
basis point increments. The OTS allows thrifts under $500 million in total
assets to use the results of their interest rate sensitivity model, which is
based on information provided by the institution, to estimate the sensitivity of
NPV.
The OTS model utilizes an option-based pricing approach to estimate the
sensitivity of mortgage loans. The most significant embedded option in these
types of assets is the prepayment option of the borrowers. The OTS model uses
various price indications and prepayment assumptions to estimate sensitivity of
mortgage loans. At June 30, 1997, the price indications for adjustable rate
mortgage loans ranged from 87% to 108% of the underlying mortgage balances. The
price indications for fixed rate mortgage loans securities varied from 69% to
120% of the underlying mortgage balances. Prepayment rates for mortgage loans
ranged from 4% to 76% Constant Prepayment Rate ("CPR") as of June 30, 1997.
The NPV sensitivity of the structured securities segment of the
investment securities portfolio is provided by the Bank to the OTS and is not
simulated by the OTS model. The sensitivity to interest rate changes of the
Bank's structured securities is obtained by simulation analysis performed by
independent third party investment brokers. The remaining investment securities
are valued by the OTS model based upon a discounted cash flow approach which
assumes semi-annual interest cash flows with principal repaid at maturity. The
cash flows are discounted based upon Treasury security yields with similar
maturities.
In the OTS model, the value of deposit accounts appears on the asset
and liability side of the NPV analysis. In estimating the value of certificates
of deposit ("CD") accounts, the liability portion of the CD is represented by
the implied value when comparing the difference between the CD face rate and
available wholesale CD rates. On the asset side of the NPV calculation, the
value of the "customer relationship" due to the rollover of retail CD deposits
represents an intangible asset in the NPV calculation.
39
<PAGE>
Other deposit accounts such as transaction accounts, money market
deposit accounts, passbook accounts, and noninterest bearing accounts also are
included on the asset and liability side of the NPV calculation in the OTS
model. These accounts are valued at 100% of the respective account balances on
the liability side. On the asset side of the analysis, the value of the
"customer relationship" of the various types of deposit accounts is reflected as
a deposit intangible.
The NPV sensitivity of borrowed funds is estimated by the OTS model
based on a discounted cash flow approach. The cash flows are assumed to consist
of monthly or semi-annual interest payments with principal paid at maturity
(dependent upon the type of borrowing). These cash flows are discounted based
upon London Interbank Offered Rates ("LIBOR").
The OTS model is based only on the Bank level balance sheet. Various
asset and liability categories were adjusted to reflect the consolidated NPV of
the Corporation. These adjustments were not material to the outcome of the
simulation analysis of NPV. The following table sets forth the Corporation's
interest rate sensitivity of NPV as of June 30, 1997.
<TABLE>
<CAPTION>
Net Portfolio Value
Net Portfolio as a % of Present Value
Value of Assets
----------------------------------------------------------------------------------
(Dollars in thousands)
Change
in Rates $ Amount $ Change % Change NPV Ratio Change
- --------- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
+400 bp 9,894 (20,683) -68% 3.98% (705)bp
+300 bp 15,536 (15,041) -49% 6.06% (496)bp
+200 bp 21,103 (9,474) -31% 8.00% (302)bp
+100 bp 26,342 (4,235) -14% 9.72% (131)bp
0 bp 30,577 11.03%
- -100 bp 33,701 3,124 10% 11.92% 90 bp
- -200 bp 35,986 5,409 18% 12.53% 151 bp
- -300 bp 38,593 8,016 26% 13.22% 219 bp
- -400 bp 41,940 11,363 37% 14.09% 306 bp
</TABLE>
Various strategies are in place to control the Corporation's exposure
to interest rate risk. The Corporation has an Asset/Liability Committee ("ALCO")
comprised of senior management personnel which is primarily responsible for
management of the Corporation's exposure to interest rate risk. The ALCO
actively monitors the interest rate risk position and develops strategies to
minimize its potential negative effects on the Corporation's financial
condition. As its primary strategy to control the potential negative effects of
the Corporation's market risk exposure, the ALCO actively adjusts its interest
earning asset and interest bearing liability composition and pricing.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages
16 to 37 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, 1997 (the "Proxy Statement") under "Proposal I - Election of
Directors" on pages 4 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 10 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
7 to 9 of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference from pages
3 to 6 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from page
10 of the Proxy Statement.
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
1997 Annual
Report to
Financial Statements Shareholders
Independent Auditors' Report 15
Consolidated Statements of Financial Condition
as of June 30, 1997, and 1996. 16
Consolidated Statements of Earnings for the
Years Ended June 30, 1997, 1996, and 1995. 17
Consolidated Statements of Stockholders'
Equity for the Years Ended June 30, 1997,
1996, and 1995. 18
Consolidated Statements of Cash Flows for the
Years Ended June 30, 1997, 1996, and 1995. 19
Notes to Consolidated Financial Statements. 20
(b) There were no reports on Form 8-K filed during the quarter ended
June 30, 1997.
(c) The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit Index on page 43.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
41
<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 24, 1997 By:/s/ C. James McCormick
---------------------------------
C. James McCormick
Chief Executive Officer
Date: September 24, 1997 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 set forth below:
/s/ C. James McCormick Date: September 24, 1997
- ------------------------------------------
C. James McCormick, Chairman of the Board
and Chief Executive Officer
/s/ John J. Summers Date: September 24, 1997
- ------------------------------------------
John J. Summers, Vice Chairman of the Board
/s/ Frank D. Baracani Date: September 24, 1997
- ------------------------------------------
Frank D. Baracani, Director, President
/s/ Donald G. Bell Date: September 24, 1997
- ------------------------------------------
Donald G. Bell, Director, Vice President
/s/ Mary Lynn Stenftenagel Date: September 24, 1997
- ------------------------------------------
Mary Lynn Stenftenagel, Director,
Secretary/Treasurer (Principal Accounting
and Financial Officer)
/s/ R. William Ballard Date: September 24, 1997
- ------------------------------------------
R. William Ballard, Director
/s/ Rahmi Soyugenc Date: September 24, 1997
- ------------------------------------------
Rahmi Soyugenc, Director
/s/ Ruth Mix Carnahan Date: September 24, 1997
- ------------------------------------------
Ruth Mix Carnahan, Director
/s/ James W. Bobe Date: September 24, 1997
- ------------------------------------------
James W. Bobe, Director
<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). *
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 to the
Registrant's 1996 Proxy Statement).
13 Annual Report to Shareholders __
21 Subsidiaries of the Registrant __
23.1 Independent Auditors' Consent __
23.2 Independent Auditors' Consent __
23.3 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.
1997
[COVER]
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.............................. 7
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................................. 20
Management and Office Locations............................................ 38
Senior Management.......................................................... 39
Corporate Information...................................................... 40
<PAGE>
[PHOTO OF C. JAMES MCCORMICK
AND FRANK BARACANI]
Message to the Shareholders:
During each of the past two fiscal years, the occurrence of one-time events
conversely affected the Corporation's earnings. 1ST BANCORP's earnings dropped
to $821,000 during fiscal 1997 because of a special industry-wide assessment to
recapitalize the Savings Association Insurance Fund (SAIF) which resulted in a
$1,330,000 charge to Bank earnings. This compares to record net earnings of
$5,762,000 during fiscal 1996 when two branch banking offices were sold, thereby
greatly enhancing earnings for the year. Earnings per share were $1.17 during
1997 as compared to $8.22 during 1996.
Although the recapitalization of the SAIF negatively impacted fiscal 1997
earnings, it was a positive event for the future of the industry. The SAIF
recapitalization will positively impact the future earnings of the Corporation
when the ongoing annual deposit insurance assessments will be greatly reduced.
In addition to dealing with the SAIF assessment, it was a busy year for First
Federal Bank, A Federal Savings Bank. All loan administrative functions were
relocated to Vincennes in June, 1997, affording more standardized procedures and
control, as well as substantially decreased overhead expenses. Only one
nonconforming mortgage loan production office, in Evansville, Indiana, remains
in operation. Overhead for the three loan production offices that were closed in
the consolidation process exceeded $2.0 million annually. Therefore, operations
in fiscal 1998 should reflect this cost savings. On the retail side, we opened a
branch office in Vincennes during the fiscal year, thereby affording greater
customer service in our primary market area.
First Financial Insurance Agency, Inc. had a busy year as well. An office was
opened in Princeton, Indiana, which has already proven to be successful. The
size of the agency doubled with the purchase of the book of insurance business
of a local insurance agency. This purchase also expanded the Agency's market
share of business and provided additional insurance products to Agency
customers. Currently, First Financial represents 26 insurance companies.
In addition to the restructuring of the loan offices which will reduce operating
expenses, we also accomplished the goal of increasing the net interest margin.
The margin increased to 2.52% during fiscal 1997 as compared to 2.36% during
fiscal 1996. This is the highest net interest margin experienced by the
Corporation since fiscal year 1994. We have chosen to increase the margin in an
orderly manner and therefore this process is ongoing. A major factor in the
increased interest rate margin has been placing higher rate nonconforming
mortgage loan product in portfolio thereby increasing the yield on loans to
8.47% in 1997 from 8.36% in 1996, during a time of decreasing interest rates in
the market as a whole.
Although collection efforts are strong, nonperforming assets increased to $2.5
million, or .9% of assets at June 30, 1997 as compared to $.8 million, or .3% of
assets at June 30, 1996. This increase was due to an increase in both conforming
and nonconforming loan delinquencies, mostly attributed to customer
bankruptcies. Acknowledging this increase in substandard assets, we have
increased our general valuation allowance to $650,000 at June 30, 1997 from
$392,000 at June 30, 1996, an increase of over 65%. Total allowance for loan
losses at June 30, 1997 aggregated $1.2 million, or .8% of net loans receivable.
This compares to $.9 million, or .6% of net loans receivable at June 30, 1996.
We also have discontinued some high risk programs, such as the 100% loan
program, after evaluation indicated the reward did not offset the risk.
We wish to acknowledge the contributions of R. William "Bill" Ballard and
Carroll C. Hamner who retired from the Bank with over 75 years combined
experience in the financial industry, including a combined 53 years at First
Federal. We are pleased that Bill will remain on the Board of Directors and
Carroll will continue employment with the Bank on a part-time basis so we will
have the benefit of their counsel and experience.
1ST BANCORP continues to focus on maximizing earnings and shareholder value. We
feel the strategies put in place in regard to overhead reduction and yield
enhancement, coupled with the reduction in the SAIF premium, have positioned the
Corporation for a successful fiscal 1998.
As always, we wish to thank our shareholders, associates, and customers for
their continued loyalty and support.
Sincerely,
/s/ C. James McCormick /s/ Frank Baracani
C. James McCormick Frank Baracani
CEO and Chairman of the Board President
<PAGE>
Selected Financial Highlights
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Summary of Earnings (Dollars in thousands except per share amounts)
(For the year ended June 30):
Interest Income 19,694 20,875 19,903 15,506 16,149
Interest Expense 13,292 14,520 13,419 8,955 9,405
Provision for Loan Losses 373 83 100 75 115
Non-Interest Income 3,098 10,391 5,384 3,434 3,705
Non-Interest Expense 8,555 7,528 7,898 7,459 6,836
Income Taxes (249) 3,373 1,440 808 1,222
Net Earnings 821 5,762 2,430 1,643 2,276
- ----------------------------------------------------------------------------------------------------
Earnings Per Share (1) $ 1.17 $ 8.22 $ 3.54 $ 2.31 $ 3.42
====================================================================================================
Financial Condition
(As of June 30):
Total Assets 270,490 263,483 312,759 253,560 230,293
Securities Available for Sale 11,588 10,499 -- 5,758 1,307
Securities Held to Maturity 44,065 43,624 72,005 51,119 25,990
Loans 174,609 169,339 206,923 176,181 178,004
Deposits 144,316 137,148 209,805 172,791 172,413
Borrowings 100,296 100,885 79,387 59,520 37,200
Stockholders' Equity 22,333 21,729 16,333 13,520 12,854
- ----------------------------------------------------------------------------------------------------
Stockholders' Equity Per Share (1)(2) $ 32.00 $ 31.05 $ 23.36 $ 21.71 $ 20.17
====================================================================================================
Supplemental Data
(At or for the year ended June 30):
Yield on Interest-Earning Assets 7.77% 7.75% 7.22% 6.87% 7.78%
Cost of Interest-Earning Liabilities 5.54% 5.67% 5.02% 4.18% 4.76%
Net Interest-Rate Spread 2.23% 2.08% 2.20% 2.69% 3.02%
Net Interest-Rate Margin 2.52% 2.36% 2.35% 2.89% 3.25%
Return on Average Total Assets 0.31% 2.05% 0.84% 0.70% 1.03%
Return on Average Shareholders' Equity 3.79% 29.45% 16.62% 12.24% 20.10%
Equity to Assets Ratio 8.26% 8.25% 5.22% 5.33% 5.58%
Cash Dividends Per Share (1) $ 0.39 $ 0.37 $ 0.18 $ 0.18 $ 0.13
Dividend Payout Ratio 33.37% 4.52% 5.13% 7.81% 3.99%
====================================================================================================
</TABLE>
(1) All per share calculations have been adjusted for the 5-for-4 stock split
effective July 15, 1992 and the 5% stock dividends issued February 9, 1996
and January 10, 1997.
(2) Calculated by dividing total equity by number of shares of common stock
outstanding at year end.
<PAGE>
BOARD OF DIRECTORS
[PHOTO OF BOARD OF DIRECTORS]
Front row, left to right:
John J. Summers, Vice Chairman
Retired President
Hamilton Glass Products, Inc.
C. James McCormick, Chairman & CEO*
Chairman of the Board -
McCormick, Inc., Bestway Express, Inc.,
and President of JAMAC Corp.
Frank Baracani, President*
President and Chief Executive Officer,
First Federal Bank,
A Federal Savings Bank
Lynn Stenftenagel, Secretary/Treasurer*
Executive Vice President, Secretary,
Chief Financial Officer,
First Federal Bank,
A Federal Savings Bank
Back row, left to right:
James W. Bobe
Farmer and County Commissioner
Rahmi Soyugenc
Chairman of the Board and President -
Evansville Metal Products, Inc.,
President - National Anodizing &
Plating, Keller Street Corporation
Ruth Mix Carnahan
Secretary-Treasurer, Carnahan Grain, Inc.
Donald G. Bell, Vice President
Retired Senior Partner - Hart, Bell, Cummings,
Ewing & Stuckey, Attorneys-at-Law
R. William Ballard
Retired Senior Vice President,
First Federal Bank,
A Federal Savings Bank
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 two retail banking offices in Vincennes, Indiana and
a loan production office in Evansville, Indiana.
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 continues its commitment to residential mortgage lending, but at
the same time, offers ancillary types of lending for customer convenience and to
diversify the loan portfolio. The Bank has always put mortgage lending in the
forefront of its business opportunities and has a successful track record in
efficiently satisfying the housing needs of targeted communities.
First Federal funded $117.0 million in loans during fiscal 1997 as compared to
$172.4 million in loans during fiscal 1996. The decreased loan volume resulted
from reduced conforming retail loan volume during 1997 as compared to 1996.
Nonconforming loan volume increased slightly during the year.
Conventional conforming mortgage and consumer loan fundings aggregated $46.8
million during fiscal 1997 as compared to $106.5 million during 1996. The Bank
maintained its market share of mortgage loans in its designated lending area
during 1997 as compared to 1996. This decrease in fundings is attributed to the
sales of the Tipton and Kokomo branch offices in December, 1995, the
discontinuance of the wholesale correspondent mortgage program in the first
quarter of fiscal year 1997, and the general economic conditions which resulted
in decreased mortgage and consumer loan activity in the Bank's lending area
during 1997.
First Federal is committed to efficiently providing the credit needs of the
Vincennes and surrounding communities. However, with the decreased volume in
conventional mortgage lending and the decreasing profits provided by such
lending, the Bank continues its focus on the nonconforming mortgage market. This
market provides loans to a wider range of qualifying mortgage customers.
During fiscal 1997, $70.2 million of nonconforming loans were funded as compared
to $65.9 million of nonconforming mortgage loans in 1996. These loans were
generated during the year by loan production offices located in Indiana, Ohio,
and Kentucky. Toward the end of fiscal 1997, nonconforming loan production had
decreased substantially because of the influx of new mortgage companies and
mortgage brokers into the nonconforming loan business, so the decision was made
to restructure the Bank's nonconforming loan division. Only the Evansville,
Indiana loan production office remains open, and all administrative functions
are conducted from the home office. This restructuring resulted in a substantial
decrease in overhead and operating expenses.
A portion of the high quality nonconforming mortgage loans are retained in the
portfolio for yield. The remainder of the nonconforming loans are sold,
servicing released, to other companies, in order to preserve asset quality and
to generate non-interest income. During the year, 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 the
portfolio. Retaining conforming mortgage loans in portfolio served to balance
the loan portfolio and also enhanced yield since the rates were higher than for
alternative investments. During the year, First Federal sold $76.2 million of
residential mortgage loans as compared to the sale of $161.4 million of
residential mortgage loans during fiscal 1996.
<PAGE>
At June 30, 1997, the Bank maintained a high quality loan portfolio with a
concentration in residential real estate as shown in the following table:
Real Estate Loans:
Construction Loans on:
1-4 family dwelling units $ 2,038,000 1.4%
Permanent Mortgages on:
1-4 family dwelling units 126,039,000 84.0%
5 or more dwelling units 2,969,000 2.0%
Nonresidential property 3,619,000 2.4%
Land 2,562,000 1.7%
Consumer Loans 12,748,000 8.5%
- ------------------------------------------------------------
Total Loans $149,975,000 100.0%
============================================================
Over 94% of the total loan portfolio at June 30, 1997 consisted of residential
real estate or consumer loans. Of the total $117.0 million loans processed
during fiscal year 1997, over 99% was for residential or consumer purposes.
At June 30, 1997, nonperforming assets totaled $2.5 million, or .9% of total
assets. This compares to $.8 million, or .3% of assets at June 30, 1996. This
increase is attributed to several factors, including general economic conditions
and the abundance of consumer bankruptcies being experienced throughout the
country and in our primary lending area. Loan quality continues to be of major
importance and strong effort is being made to ensure a quality portfolio.
General valuation allowances have been increased to prepare for potential future
losses in the portfolio.
Total allowance for loan losses at June 30, 1997 aggregated $1.2 million, or .8%
of net loans receivable. This compares to $.9 million, or .6% of net loans
receivable at June 30, 1996. The provision for loan losses was $373,000 during
fiscal 1997 as compared to $83,000 during fiscal 1996. Management believes the
allowance is adequate to absorb potential future losses.
Retail Banking
The Bank operates two banking offices in Vincennes, Indiana. A variety of
savings products and conveniences are offered by First Federal. Checking
accounts, money market deposit accounts, and savings certificates are offered at
competitive interest rates. 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. has offices in Vincennes and Princeton,
Indiana. The Agency continues to grow in insurance volume and in the number of
companies represented. During fiscal 1997, the Agency purchased the book of
business of a local insurance agency, thereby doubling the premium base. At June
30, 1997, the Agency represented 18 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 8 additional companies.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
This report contains certain forward looking statements that inherently involve
a number of risks and uncertainties. Among the factors that could cause actual
results to differ materially are the following: general economic conditions in
the Corporation's market area, the deterioration in the financial strength of
the Corporation's loan customers, and increased competition in the nonconforming
lending arena.
Results of Operations and Financial Condition
1ST BANCORP's net earnings during fiscal year 1997 were $821,000 as compared to
$5,762,000 during fiscal 1996 and $2,430,000 during 1995. Earnings per share
were $1.17 during 1997, $8.22 during 1996, and $3.54 during 1995. Dividends per
common share were $.39 in 1997, $.37 in 1996, and $.18 in 1995.
1ST BANCORP's assets increased to $270,490,000 at June 30, 1997 as compared to
$263,483,000 at June 30, 1996. Stockholders' equity at June 30, 1997 was
$22,333,000, an increase of $604,000 from stockholders' equity of $21,729,000 at
June 30, 1996.
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. This year, interest rates
fluctuated less than in previous years and the trend was one of slightly
declining rates overall.
With the increased volume in nonconforming mortgage originations, the effect of
interest rate fluctuations to the Corporation is somewhat mitigated because
rates do not move as quickly in the nonconforming mortgage market as in the
conforming mortgage market.
<PAGE>
Net Interest Income
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ------------------------- ------------------------
Average Yield Average Yield Average Yield
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Assets:
Short-Term Investments and
Interest Bearing Deposits $12,579 $677 5.38% $17,825 $955 5.36% $12,332 $666 5.40%
Investment and Trading
Account Securities 62,237 3,870 6.22% 59,777 3,893 6.51% 70,067 4,144 5.91%
Loans 178,746 15,147 8.47% 191,735 16,027 8.36% 193,020 15,093 7.82%
---------------------------- ------------------------- ------------------------
Total Interest Earning Assets 253,562 19,694 7.77% 269,337 20,875 7.75% 275,419 19,903 7.22%
Allowance for Loan Losses (979) (886) (855)
Other Assets 12,764 13,221 15,383
------- ------- -------
Total Assets 265,347 281,672 289,947
======= ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest Bearing Liabilities:
Deposits 139,674 7,678 5.50% 163,793 9,073 5.54% 191,350 8,977 4.69%
Short-Term Borrowings 964 53 5.50% 3,368 154 4.57% 6,186 379 6.13%
Federal Home Loan Bank Advances
and Other Borrowings 99,218 5,561 5.60% 89,103 5,293 5.94% 69,645 4,063 5.83%
---------------------------- ------------------------- ------------------------
Total Interest Bearing Liabilities 239,856 13,292 5.54% 256,264 14,520 5.67% 267,181 13,419 5.02%
Other Liabilities 3,821 5,842 8,149
Stockholders' Equity 21,670 19,566 14,617
------- ------- -------
Total Liabilities and
Stockholders' Equity 265,347 281,672 289,947
======= ======= =======
Net Interest Income / Spread 6,402 2.23% 6,355 2.08% 6,484 2.20%
============== ============== =============
Net Interest Margin 2.52% 2.36% 2.35%
==== ==== ====
</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 $6,402,000 in 1997 as compared to $6,355,000 in
1996 and $6,484,000 in 1995. The increase in 1997 from the level in 1996 is due
to the increase in the net interest spread and net interest margin during a time
in which the volume of interest earning assets and interest bearing liabilities
decreased. The decrease in 1996 from the level in 1995 is due to a lower volume
of interest earning assets and interest bearing liabilities which was not offset
by a substantially increased net interest margin as was the case during 1997.
Interest income was $19,694,000 in 1997 as compared to $20,875,000 in 1996 and
$19,903,000 in 1995. Interest expense was $13,292,000 in 1997 as compared to
$14,520,000 in 1996 and $13,419,000 in 1995. 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 the portfolio. The average yield on interest earning assets increased to
7.77% during 1997 from 7.75% during 1996 and 7.22% during 1995. The annualized
average cost of interest bearing liabilities has fluctuated during the period,
decreasing to 5.54% during 1997 from 5.67% during 1996 and as compared to 5.02%
during 1995. The net interest spread has increased to 2.23% in 1997 as compared
to 2.08% during 1996 and 2.20% in 1995.
<PAGE>
Fiscal 1997 vs. Fiscal 1996
The average levels of interest earning assets and interest bearing liabilities
decreased substantially during 1997 as compared to 1996. This was caused by the
branch sales which took place in December, 1995. Yet, net interest income
actually increased during the period.
Cash management was challenging during 1997 because of the fluctuating level of
loan fundings on a monthly basis and the timing of loan sales. The average
balance of short-term investments and interest bearing deposits decreased to
$12,579,000 during 1997 as compared to $17,825,000 in 1996 because of less
necessity to keep cash on hand during a time of decreased loan volume. The
average yield stayed relatively stable at 5.38% during 1997 as compared to 5.36%
in 1996.
Average investment and trading account securities increased during 1997 to
$62,237,000 from $59,777,000 in 1996. The average interest rate decreased to
6.22% during 1997 from 6.51% during 1996. This occurred because reinvestment of
excess cash and proceeds from called investment securities was at lower interest
rates due to the decline in interest rates during the year.
Average loans decreased to $178,746,000 during 1997 from $191,735,000 during
1996. Offsetting this decline was an increase in the average yield on loans to
8.47% during 1997 from 8.36% during 1996. The decline in the average loan volume
resulted from the branch sales, and the increased yield resulted from placing
higher yielding nonconforming loans in portfolio during the year.
With the increased loan yield, offset by the decline in the yield on investment
and trading account securities, the overall yield on total interest earning
assets increased to 7.77% during 1997 as compared to 7.75% during 1996. More
importantly, however, for net interest income purposes, was the decrease in the
average cost of interest bearing liabilities during the year.
With the declining interest rate environment, the cost of average deposits
decreased to 5.50% during 1997 as compared to 5.54% during 1996. The average
balance of deposits also declined during the year to $139,674,000 during 1997
from $163,793,000 during 1996, because of the branch sales in December 1995 and
the use of borrowings in lieu of higher cost brokered deposits.
Likewise, the cost of Federal Home Loan Bank advances and other borrowed money
decreased to 5.60% during the year as compared to 5.94% during 1996 because of
the declining interest rate environment. The level of average borrowings
increased to $99,218,000 during 1997 as compared to $89,103,000 during 1996
because the price of such borrowings was less than the price of brokered
deposits with similar terms.
Fiscal 1996 vs. Fiscal 1995
Because of the branch sales in December 1995, cash management was an increased
strategic concern during fiscal 1996. 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
yield 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.
<PAGE>
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.
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.
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.
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 $13,706,000 in 1997, by $13,073,000 in 1996, and by $8,238,000 in
1995. 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 29 basis points in 1997, by 28 basis
points in 1996, and by 15 basis points in 1995.
Non-Interest Income
Non-interest income decreased in 1997 to $3,098,000 from $10,391,000 in 1996,
and as compared to $5,384,000 in 1995. The major reason for the $7,293,000
decrease during 1997 was the $7,274,000 gain on sale of the branch offices
during 1996.
Net gain on sales of loans stayed relatively constant at $2,124,000 during 1997
as compared to $2,026,000 during 1996. Net gains on sales of loans during 1995
was $582,000. The increases in 1996 and 1997 were because of the sale of
nonconforming loans which generate a strong gain on sale and are not as rate
sensitive as conforming mortgage loans. The adoption of FAS 122 for fiscal years
1996 and later, resulted in increased gain on sale of loans due to the
capitalization of originated mortgage servicing rights ($366,000 during 1997 and
$454,000 during 1996.) Total loan sales aggregated $76,202,000 in 1997,
$161,422,000 in 1996, and $32,835,000 in 1995. Included in the loan sales during
1997 and 1996, respectively, were $37,709,000 and $27,910,000 in nonconforming
loans.
A $29,000 net loss on sales of securities was recognized during 1997 as compared
to a net loss of $111,000 during 1996 and net gains of $16,000 in 1995. The 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 increased to $341,000 during 1997 from
$296,000 in 1996, and as compared to $981,000 in 1995. 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, totaled
$112,642,000 at June 30, 1997, $81,353,000 at June 30, 1996, and $193,058,000 at
June 30, 1995.
Other non-interest income decreased to $662,000 in 1997 from $906,000 in 1996
and from $3,805,000 in 1995. Of this income, $237,000 during 1996 and $2,980,000
during 1995 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. Accordingly, no servicing
rights were sold during 1997.
Non-Interest Expense
Non-interest expense increased to $8,555,000 in 1997 from $7,528,000 in 1996, as
compared to $7,898,000 in 1995. The increase in 1997 is attributed to the
one-time pre-tax charge of $1,330,000 to federal insurance premiums for an
industry-wide special assessment by the FDIC to recapitalize the SAIF. As a
result of this one-time assessment, the Bank's deposit insurance premiums will
be reduced in the future.
Compensation and employee benefits, the major component of non-interest expense,
decreased to $4,195,000 in 1997 from $4,273,000 in 1996 and from $4,442,000 in
1995. The decreases during 1997 and 1996 were from the decrease in employees
resulting from the branch sales in December 1995.
Net occupancy decreased to $719,000 in 1997 from $746,000 in 1996 and from
$815,000 during 1995. This is also due to the sale of the branch offices.
Income Taxes
The Corporation generated an income tax expense of ($249,000) in fiscal 1997 as
compared to $3,373,000 in fiscal 1996 and $1,440,000 in fiscal 1995. The
negative tax expense in fiscal 1997 resulted from the Corporation's investment
in an affordable housing senior citizen project that produces tax credits.
Because of the SAIF assessment which lowered earnings, the total amount of tax
credits could not be used as related to fiscal 1997 income, however, tax laws
allowed the credits to be carried back to the prior year when income was
sufficient for the Corporation to use the full fiscal 1997 allocated credit.
<PAGE>
Financial Condition
The Corporation's total assets increased to $270,490,000 at June 30, 1997 from
$263,483,000 at June 30, 1996. Total cash and cash equivalents decreased by
$4,805,000 to $20,294,000 at June 30, 1997 from $25,099,000 at June 30, 1996.
This decrease was due to less necessity for cash to fund a decreasing pipeline
of mortgage loans.
Net loans receivable decreased to $146,840,000 at June 30, 1997 from
$150,749,000 at June 30, 1996. This decrease resulted from the decreased
mortgage volume, the continued decision to sell lower grade nonconforming loans
to mitigate credit risk, and the continued decision to sell conforming loans to
mitigate interest rate risk. The loans held for sale increased to $27,769,000
from $18,590,000 at June 30, 1996 because adjustable rate loans are currently
being placed in the held for sale portfolio for liquidity purposes.
Prepaid expenses and other assets increased by $4,475,000 during the year mainly
because of the pending settlement of a $4,111,000 loan sale. Total deposits
increased to $144,316,000 at June 30, 1997 from $137,148,000 at June 30, 1996.
Brokered deposits are used to supplement savings deposits obtained in the
Vincennes area. Total brokered savings increased to $45,100,000 at June 30, 1997
from $34,058,000 at June 30, 1996.
Capital Resources
At June 30, 1997, stockholders' equity was $22,333,000, an increase of $604,000
over total stockholders' equity of $21,729,000 at June 30, 1996.
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, 1997, 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, 1997, First
Federal was classified as "well-capitalized."
<PAGE>
The following is a summary of the Bank's regulatory capital and capital
requirements at June 30, 1997:
<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 $22,333,000
First Federal GAAP Capital $22,367,000 $22,367,000 $22,367,000 $22,367,000 $22,367,000 $22,367,000
Capital Adjustments:
Unrealized Loss on Investment Securities 109,000 109,000 109,000 109,000 109,000
General Valuation Allowance 650,000
Disallowed (40,000) (40,000) (40,000) (40,000) (40,000)
----------------------------------------------------------------------
Regulatory Computed Capital 22,436,000 22,436,000 22,436,000 22,436,000 23,086,000
======================================================================
Total Assets:
Adjusted Total Assets 270,568,000 270,568,000 270,568,000 - -
Risk-Weighted Assets - - - 144,438,000 144,438,000
----------------------------------------------------------------------
Regulatory Computed Assets 270,568,000 270,568,000 270,568,000 144,438,000 144,438,000
======================================================================
Regulatory Capital Ratio 8.29% 8.29% 8.29% 15.53% 15.98%
==== ==== ==== ===== =====
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.
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, 1997.
Prepayment assumptions and decay rates have been applied to more accurately
reflect the asset/liability gap.
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1997
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
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans Receivable (1)
Adjustable Rate Mortgage loans 8.34% $88,757 $67,391 $8,658 $8,767 $3,941
Fixed Rate Mortgage loans 8.55% 76,239 30,399 25,914 9,930 9,996
Nonmortgage Loans 9.73% 12,748 6,514 3,540 1,691 1,003
Investments 6.36% 80,365 24,712 12,407 12,803 30,443
------------------------------------------------------------------
Total Rate Sensitive Assets 7.86% $258,109 $129,016 $50,519 $33,191 $45,383
=====================================================================================================
Rate Sensitive Liabilities
- -----------------------------------------------------------------------------------------------------
Deposits
Fixed Maturity Deposits 5.81% $121,108 $91,623 $24,123 $3,123 $2,239
Other Deposits (2) 3.85% 23,208 16,545 2,501 1,475 2,687
FHLB Advances and Other Borrowings 5.67% 100,296 43,198 46,013 10,396 689
------------------------------------------------------------------
Total Rate Sensitive Liabilities 5.57% $244,612 $151,366 $72,637 $14,994 $5,615
=====================================================================================================
Total Asset/Liability Gap $13,497 ($22,350) ($22,118) $18,197 $39,768
Cumulative Asset/Liability Gap $13,497 ($22,350) ($44,468) ($26,271) $13,497
Cumulative Gap as a Percentage of
Total Assets - 1997 -8.26% -16.44% -9.71% 4.99%
Cumulative Gap as a Percentage of
Total Assets - 1996 -4.05% -21.35% -9.47% 6.56%
</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 one month 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.
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 $144,316,000 at June 30, 1997, and borrowings, which totaled
$100,296,000 at June 30, 1997. 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, 1997, First Federal's regulatory liquidity ratio was 10.44%.
<PAGE>
[KPMG Peat Marwick LLP Letterhead]
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, 1997 and 1996 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, 1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three year period ended June
30, 1997 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwaick LLP
Indianapolis, Indiana
July 17, 1997
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Cash and cash equivalents:
Interest bearing deposits $ 19,771,000 24,689,000
Non-interest bearing deposits 523,000 410,000
------------ ------------
Cash and cash equivalents 20,294,000 25,099,000
------------ ------------
Securities available for sale (note 2) 11,588,000 10,499,000
Securities held to maturity (market value of $43,556,000
and $42,184,000) (note 3) 44,065,000 43,624,000
Loans receivable, net (notes 4 and 8) 146,840,000 150,749,000
Loans held for sale 27,769,000 18,590,000
Accrued interest receivable:
Securities 1,081,000 1,036,000
Loans 1,099,000 1,179,000
Stock in FHLB of Indianapolis, at cost 4,941,000 4,864,000
Office premises and equipment (note 6) 3,225,000 2,950,000
Real estate owned 397,000 177,000
Prepaid expenses and other assets 9,191,000 4,716,000
------------ ------------
$ 270,490,000 263,483,000
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 7) 144,316,000 137,148,000
Advances from FHLB and other borrowings (note 8) 100,296,000 100,885,000
Advance payments by borrowers for taxes and insurance 304,000 492,000
Accrued interest payable on deposits 1,194,000 816,000
Accrued expenses and other liabilities 2,047,000 2,413,000
------------ ------------
248,157,000 241,754,000
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 697,897 and 699,889 698,000 667,000
Paid-in capital 2,642,000 2,747,000
Retained earnings, substantially restricted 19,102,000 18,560,000
Unrealized depreciation on securities available for sale
(note 2) (109,000) (245,000)
------------ ------------
22,333,000 21,729,000
Commitments (note 14)
$ 270,490,000 263,483,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans $ 15,147,000 16,027,000 15,093,000
Securities 3,852,000 3,890,000 4,136,000
Trading account securities 18,000 3,000 8,000
Other short-term investments and
interest bearing deposits 677,000 955,000 666,000
------------ ------------ ------------
Total interest income 19,694,000 20,875,000 19,903,000
---------- ---------- ----------
Interest expense:
Deposits (note 7) 7,678,000 9,073,000 8,977,000
Short-term borrowings 53,000 154,000 379,000
FHLB advances and other borrowings 5,561,000 5,293,000 4,063,000
----------- ----------- -----------
Total interest expense 13,292,000 14,520,000 13,419,000
---------- ---------- ----------
Net interest income before
provision for loan losses 6,402,000 6,355,000 6,484,000
Provision for loan losses (note 4) 373,000 83,000 100,000
------------ ------------- ------------
Net interest income after
provision for loan losses 6,029,000 6,272,000 6,384,000
----------- ----------- -----------
Non-interest income:
Fees and service charges 341,000 296,000 981,000
Net gain (loss) on sales of securities available
for sale and trading account securities (note 2) (29,000) (111,000) 16,000
Net gain on sales of loans 2,124,000 2,026,000 582,000
Net gain on sale of branch offices (note 13) - 7,274,000 -
Other (note 5) 662,000 906,000 3,805,000
------------ ------------ -----------
Total non-interest income 3,098,000 10,391,000 5,384,000
----------- ---------- -----------
Non-interest expense:
Compensation and employee benefits 4,195,000 4,273,000 4,442,000
Net occupancy 719,000 746,000 815,000
Federal insurance premiums (note 7) 1,589,000 469,000 494,000
Other 2,052,000 2,040,000 2,147,000
----------- ----------- -----------
Total non-interest expense 8,555,000 7,528,000 7,898,000
----------- ----------- -----------
Earnings before income taxes 572,000 9,135,000 3,870,000
Income taxes (note 12) (249,000) 3,373,000 1,440,000
------------ ----------- -----------
Net earnings $ 821,000 5,762,000 2,430,000
============ =========== ===========
Earnings per share (note 10) 1.17 8.22 3.54
==== ==== ====
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1997, 1996 and 1995
<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, 1994 $ 565,000 2,429,000 10,749,000 (223,000) 13,520,000
Issuance of common stock through employee
stock purchase plan (note 9) 2,000 37,000 - - 39,000
Exercise of options for common stock (note 9) 66,000 338,000 - - 404,000
Issuance of common stock through dividend re-
investment and shareholder stock purchase plan 1,000 21,000 - - 22,000
Dividends ($.18 per share) - - (115,000) - (115,000)
Change in net unrealized depreciation on securities
available for sale (note 2) - - - 33,000 33,000
Net earnings - - 2,430,000 - 2,430,000
--------------------------- ----------------------- -----------
Balance at June 30, 1995 634,000 2,825,000 13,064,000 (190,000) 16,333,000
Issuance of common stock through employee stock
purchase plan (note 9) 5,000 77,000 - - 82,000
Issuance of common stock through dividend re-
investment and shareholder stock purchase plan 2,000 53,000 - - 55,000
Purchase and retirement of common stock (note 9) (6,000) (176,000) - - (182,000)
Issuance of 33,111 shares of common stock at par
value for 5% stock dividend
plus cash in lieu of
fractional shares 32,000 (32,000) (5,000) - (5,000)
Dividends ($.37 per share) - - (261,000) - (261,000)
Change in net unrealized depreciation on securities
available for sale (note 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
Issuance of common stock through employee stock
purchase plan (note 9) 3,000 76,000 - - 79,000
Issuance of common stock through dividend re-
investment and shareholder stock purchase plan 2,000 52,000 - - 54,000
Purchase and retirement of common stock (note 9) (7,000) (200,000) - - (207,000)
Issuance of 33,013 shares of common stock at par
value for 5% stock dividend
plus cash in lieu of
fractional shares 33,000 (33,000) (5,000) - (5,000)
Dividends ($.39 per share) - - (274,000) - (274,000)
Change in net unrealized depreciation on securities
available for sale (note 2) - - - 136,000 136,000
Net earnings - - 821,000 - 821,000
--------------------------- ------------------------ ------------
Balance at June 30, 1997 $ 698,000 2,642,000 19,102,000 (109,000) 22,333,000
======= ========= ========== ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Net cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 821,000 5,762,000 2,430,000
Adjustments to reconcile net earnings to net cash provided
(used) by operating activities:
Depreciation and amortization 348,000 300,000 188,000
Amortization of mortgage servicing rights 153,000 107,000 486,000
Gain on sale of loans (2,124,000) (2,026,000) (582,000)
Loss (gain) on sale of securities 29,000 111,000 (16,000)
Gain on sale of branch - (7,274,000) -
Loss on sale of equipment 54,000 - -
Net change in loans held for sale (9,179,000) (13,486,000) (1,740,000)
Provision for loan losses 373,000 83,000 100,000
Change in accrued interest receivable 35,000 107,000 (702,000)
Change in prepaid expenses and other assets (476,000) 635,000 21,000
Change in accrued expenses and other liabilities (79,000) (1,646,000) 443,000
Loss on investment in limited partnership 122,000 263,000 146,000
------------ ------------------------------
Net cash provided (used) by operating activities (9,923,000) (17,064,000) 774,000
----------- ------------ ----------------
Cash flows from investing activities:
Purchases of securities held to maturity (3,519,000) (34,262,000) (15,989,000)
Proceeds from maturities of securities held to maturity 3,062,000 16,872,000 -
Purchases of securities available for sale (31,913,000) (46,074,000) -
Proceeds from maturity of securities available for sale 1,192,000 5,015,000 693,000
Proceeds from sale of securities available for sale 29,826,000 76,159,000 -
Principal collected on loans, net of originations 1,379,000 (12,802,000) (28,227,000)
Purchase of life insurance policies (35,000) - -
Purchase of stock of FHLB of Indianapolis (77,000) (988,000) (1,378,000)
Purchases of office premises and equipment (615,000) (154,000) (187,000)
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 - (77,406,000) -
Proceeds from bulk sale of loans - 37,937,000 -
Other (220,000) (32,000) 225,000
------------ -------------- --------------
Net cash used by investing activities (920,000) (5,544,000) (47,363,000)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in deposits 7,168,000 11,017,000 37,014,000
Proceeds from FHLB advances and other borrowings 83,768,000 202,544,000 193,031,000
Repayment of FHLB advances and other borrowings (84,357,000) (181,046,000) (173,164,000)
Proceeds from issuance of common stock 133,000 137,000 465,000
Purchase and retirement of common stock (207,000) (182,000) -
Payment of dividends on common stock (279,000) (266,000) (115,000)
Decrease in advance payments by borrowers for interest and taxes (188,000) (1,829,000) (961,000)
------------ ------------- --------------
Net cash provided by financing activities 6,038,000 30,375,000 56,270,000
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents (4,805,000) 7,767,000 9,681,000
Cash and cash equivalents at beginning of year 25,099,000 17,332,000 7,651,000
---------- ------------ -------------
Cash and cash equivalents at end of year $ 20,294,000 25,099,000 17,332,000
========== ============ ============
Additional disclosures:
Interest paid $ 12,917,000 14,170,000 13,028,000
========== ============ ============
Income taxes paid $ 287,000 4,700,000 584,000
============ ============ ============
Transfer of investment securities
held to maturity to available
for sale account $ - 45,838,000 -
=========== ============ ============
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
============ ============ ============
Transfer of loans receivable to
prepaid expenses and other assets $ 4,111,000 - -
=========== ============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
(Continued)
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
(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 and amounts due from banks.
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.
Loans Receivable and Real Estate Owned
Loans receivable are considered long-term investments, and accordingly,
are carried at historical cost.
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
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 Creditors 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.
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. The Bank recognizes, as separate assets, rights to
service mortgage loans for others however those servicing rights are
acquired.
<PAGE>
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, 1997.
As of July 1, 1995, the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 122, Accounting for Servicing Rights
("SFAS 122"). For servicing retained loan sales, SFAS 122 requires the
capitalization of the cost of mortgage service rights, regardless of
whether those rights were acquired through purchase or origination.
Effective December 31, 1996, SFAS 122 was superseded by Statement of
Financial Accounting Standards No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities ("SFAS
125"). The Bank's accounting for mortgage servicing rights was not
changed by SFAS 125. Prior to the adoption of SFAS 122 and SFAS 125, only
purchased servicing rights were capitalized.
Beginning with the adoption of SFAS 122, the total cost of mortgage
loans, whether originated or purchased, with the intent to sell is
allocated between the loan servicing right and the mortgage loan without
servicing based on their relative fair values at the date of sale. The
capitalized cost of loan servicing rights is amortized in proportion to
and over the period of, estimated net servicing revenue. Mortgage
servicing rights are periodically evaluated for impairment by stratifying
them based on the predominant risk characteristics of the underlying
serviced loan.
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.
<PAGE>
Reclassifications
Certain amounts in the 1996 and 1995 consolidated financial statements
have been reclassified to conform to the 1997 presentation.
(2) Securities Available for Sale
Securities available for sale consist of the following at June 30:
<TABLE>
<CAPTION>
1997
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C>
Mortgage-backed securities:
FHLMC $ 2,206,000 - (33,000) 2,173,000
Investments:
U.S. Treasury and agency obligations 9,563,000 - (148,000) 9,415,000
----------- ---------- ------- -----------
$ 11,769,000 - (181,000) 11,588,000
========== ========== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
1996
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <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, 1997, gross realized losses on sales of
investment securities available for sale were $19,000. For the year ended
June 30, 1996, gross realized gains and gross realized losses from the
sales of investment securities available for sale were $118,000 and
$294,000, respectively, and 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.
<PAGE>
For the year ended June 30, 1997, gross realized gains and gross realized
losses on sales of trading account securities were $13,000 and $23,000,
for the year ended June 30, 1996, gross realized gains and gross realized
losses were $13,000 and $1,000, respectively; and for the year ended June
30, 1995, gross realized gains were $18,000.
At June 30, 1997, the contractual maturity of securities available for
sale follows:
Amortized Market
cost value
Due after one year through five years $ 1,005,000 994,000
Due after five years through ten years 4,560,000 4,491,000
Due after ten years 3,998,000 3,930,000
Mortgage-backed securities 2,206,000 2,173,000
----------- -----------
$ 11,769,000 11,588,000
========== ==========
(3) Securities Held to Maturity
Securities held to maturity at June 30 consist of:
<TABLE>
<CAPTION>
1997
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 43,747,000 41,000 (553,000) 43,235,000
Mortgage-backed securities 318,000 5,000 (2,000) 321,000
------------ ------- --------- ------------
$ 44,065,000 46,000 (555,000) 43,556,000
========== ====== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
1996
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 43,242,000 - (1,441,000) 41,801,000
Mortgage-backed securities 382,000 3,000 (2,000) 383,000
------------ ----- ----------- -----------
$ 43,624,000 3,000 (1,443,000) 42,184,000
========== ===== ========= ==========
</TABLE>
<PAGE>
At June 30, 1997, the contractual maturity of securities held to maturity
follows:
Amortized Market
cost value
Due after one year through five years $ 24,209,000 23,905,000
Due after five years through ten years 11,346,000 11,156,000
Due after ten years 8,192,000 8,174,000
Maturity-backed securities 318,000 321,000
------------ ------------
$ 44,065,000 43,556,000
========== ==========
(4) Loans Receivable
Loans receivable at June 30 consist of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Real estate loans:
Mortgage $ 135,189,000 141,247,000
Construction 2,038,000 2,171,000
Consumer and other loans 12,748,000 10,010,000
------------ -----------
149,975,000 153,428,000
Less:
Undisbursed loan funds (1,536,000) (1,297,000)
Deferred loan fees and unamortized premiums
and discounts, net (441,000) (486,000)
Allowance for loan losses (1,158,000) (896,000)
------------- -------------
(3,135,000) (2,679,000)
$ 146,840,000 150,749,000
=========== ===========
Weighted average interest rate 8.53% 8.23%
==== ====
</TABLE>
At June 30, 1997, the majority of the Bank's residential and consumer
loans receivable are located in central and southern Indiana and southern
Illinois.
Activity in the allowance for loan losses for the years ended June 30
consists of:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 896,000 878,000 817,000
Provision charged to operations 373,000 83,000 100,000
Loans charged off, net of recoveries (111,000) (65,000) (39,000)
---------- -------- --------
Balance at end of year $ 1,158,000 896,000 878,000
========= ======= =======
</TABLE>
<PAGE>
Non accrual loans amounted to $2,330,000 and $846,000 at June 30, 1997
and 1996, respectively.
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, 1997 consists of:
Balance at beginning of the year $ 408,000
Loans originated 435,000
Repayments (229,000)
-------
Balance at end of year $ 614,000
=======
(5) Mortgage Banking
The amount of loans serviced by the Bank for the benefit of others was
$112,642,000, $81,353,000 and $193,058,000 at June 30, 1997, 1996 and
1995, respectively.
At June 30, 1997 and 1996, unamortized loan servicing rights totaled
$819,000 and $591,000, respectively, and are included in prepaid expenses
and other assets in the consolidated statement of financial condition.
For the years ended June 30, 1997 and 1996, the Bank capitalized $366,000
and $454,000, respectively, 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.
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. All such gains and
losses are included in other non-interest income in the consolidated
statements of earnings. No sales of the Bank's loan servicing portfolio
occurred in 1997.
<PAGE>
(6) Office Premises and Equipment
Office premises and equipment at June 30 consist of:
1997 1996
---- ----
Land and improvements $ 345,000 315,000
Buildings and improvements 2,952,000 2,773,000
Furniture and equipment 1,986,000 1,756,000
--------- ---------
5,283,000 4,844,000
Less accumulated depreciation 2,058,000 1,894,000
--------- ---------
$ 3,225,000 2,950,000
========= =========
(7) Deposits
Deposits at June 30 consist of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Passbook accounts (2.86% and 2.91% at
June 30, 1997 and 1996) $ 4,264,000 4,592,000
Variable rate savings accounts (6.00% and 5.75% at
June 30, 1997 and 1996) 6,766,000 3,015,000
NOW and Super NOW accounts (0.00%-3.25% and
0.00%-3.26% at June 30, 1997 and 1996) 9,163,000 9,563,000
Money market accounts (weighted average rate of
4.06% and 3.93% at June 30, 1997 and 1996) 3,015,000 3,089,000
------------- -------------
23,208,000 20,259,000
Certificates:
Less than 4% 191,000 269,000
4% - 4.99% 4,435,000 7,235,000
5% - 5.99% 77,581,000 70,495,000
6% - 6.99% 25,478,000 25,612,000
7% - 7.99% 12,228,000 12,030,000
8% - 9.99% 1,055,000 1,081,000
10% or more 140,000 167,000
-------------- --------------
121,108,000 116,889,000
$ 144,316,000 137,148,000
=========== ===========
Weighted average cost of all deposits 5.49% 5.46%
==== ====
</TABLE>
<PAGE>
Scheduled maturities of certificates at June 30, 1997 are summarized as
follows:
Year ending June 30,
1998 $ 91,623,000
1999 17,127,000
2000 6,996,000
2001 1,824,000
2002 1,299,000
Thereafter 2,239,000
-------------
$ 121,108,000
Included in certificates at June 30, 1997 and 1996 are approximately
$8,828,000 and $12,619,000, 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, 1997.
Interest expense by type of deposit for the years ended June 30 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Passbook and variable rate savings
accounts $ 316,000 392,000 525,000
NOW, Super NOW and Money Market 375,000 652,000 947,000
Certificates 6,987,000 8,029,000 7,505,000
--------- --------- ---------
$ 7,678,000 9,073,000 8,977,000
========= ========= =========
</TABLE>
Net earnings for the year ended June 30, 1997 include a one-time pre-tax
charge of $1,330,000 to federal insurance premiums for an industry-wide
special assessment by the FDIC to recapitalize SAIF, which insures the
Bank's customers' deposits. As a result of this one-time assessment, the
Bank's deposit insurance premiums will be reduced in the future.
<PAGE>
(8) Advances From FHLB and Other Borrowings
Advances from FHLB and other borrowings at June 30 consist of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Advances from FHLB collateralized by qualifying
mortgages, investment securities and mortgage-backed
securities (as defined) equal to 125% of FHLB advances $ 98,815,000 97,276,000
Promissory note with interest payable at prime rate
(as defined) plus 1/2% (9.0% and 8.75% at June 30, 1997
and 1996) with principal payments of $49,375 due quarterly
through December 30, 2004. Collateralized by 100% of the
common stock of the Bank 1,481,000 1,679,000
Securities sold under agreement to repurchase with a
weighted average interest rate of 4.85% at June 30, 1996 - 1,930,000
------------------ -------------
$ 100,296,000 100,885,000
=========== ===========
</TABLE>
The interest rates on the advances from FHLB at June 30, 1997 were as
follows: $5,000,000 at 5.46%, $5,000,000 at 5.43%, $3,617,000 at 4.96%,
$10,000,000 at 5.62%, $13,000,000 at 5.66%, $10,000,000 at 5.39%,
$198,000 at 5.91%, $10,000,000 at 5.50%, $9,000,000 at 5.85%, $3,000,000
at 5.83%, and $30,000,000 of variable rate advances with a rate at June
30, 1997 of 5.775%. 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 weighted average
interest rate of all borrowings was 5.62% and 5.56% at June 30, 1997 and
1996, respectively.
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 $964,000, $2,956,000 and $5,299,000 for the years ended June 30,
1997, 1996 and 1995, respectively, with maximum amounts outstanding at
any month-end of $4,020,000, $8,838,000 and $12,186,000 during the years
ended June 30, 1997, 1996 and 1995, respectively.
<PAGE>
Advances from FHLB and other borrowings at June 30, 1997 are scheduled to
mature as follows:
FHLB Other
Maturity Advances Borrowings Total
-------- -------- ---------- -----
1998 $ 43,000,000 198,000 43,198,000
1999 26,617,000 198,000 26,815,000
2000 19,000,000 198,000 19,198,000
2001 - 198,000 198,000
2002 10,000,000 198,000 10,198,000
Thereafter 198,000 491,000 689,000
------------ ---------- -------------
$ 98,815,000 1,481,000 100,296,000
========== ========= ===========
(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, 1997, the Bank's risk-based capital
ratio of 16.0% 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, OTS, 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, 1997, the Bank's core
capital and leverage ratio of 8.3% were in excess of the required
amounts.
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)
capital ratio of at least five percent. At June 30, 1997, the Bank was
classified as well-capitalized with a total risked based capital ratio of
16.0%, a Tier 1 risked-based capital ratio of 15.5% and a leverage (core)
capital ratio of 8.3%.
<PAGE>
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 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 November 22, 1996, the Board of Directors approved a 5% common stock
dividend. Also, 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 stock dividends.
Stock Option Plans
The Corporation has a stock option plan under which 165,375 authorized
but unissued common stock were reserved. Under the plan, 96,469
non-qualified stock options were granted at $5.44 per share to outside
directors and 41,344 incentive stock options and 10,336 non-qualified
stock options were granted at $5.44 and $5.58 per share, respectively, to
certain key employees. Of the 41,344 incentive stock options granted to
certain key employees, 1,654 options were canceled in 1994. All options
granted had been exercised or canceled as of June 30, 1996. In 1997,
17,000 incentive stock options were granted at $30.03 to certain key
employees.
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> <C>
Balance at June 30, 1994 17,226 74,834 $ 5.44 - 5.58
Exercised in 1994 - (73,180) 5.44 - 5.58
Canceled in 1994 1,654 (1,654) -
------- -------
Balance at June 30, 1995 and 1996 18,880 - -
Granted (17,000) 17,000 30.03
------ ------
Balance at June 30, 1997 1,880 17,000 30.03
======= ======
</TABLE>
<PAGE>
SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair
value method of accounting for stock options and similar equity
instruments. Under the fair value method, compensation cost is measured
at the grant date based on the fair value of the award and is recognized
over the service period which is usually the vesting period. Companies
are encouraged, but not required to adopt the fair value method of
accounting for employee stock-based transactions. Companies are also
permitted to continue to account for such transactions under Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees, but are required to disclose in a note to the financial
statements pro-forma net earnings and earnings per share as if the
company had applied the new method of accounting. The Company applied APB
No. 25 in accounting for its stock-based compensation plans. Had
compensation cost been determined on the basis of fair value pursuant to
SFAS No. 123, for options granted in 1997, net earnings and earnings per
share would have been as follows:
Net earnings:
As reported $ 821,000
=======
Pro forma $ 724,000
=======
Earnings per share:
As reported $ 1.17
==========
Pro forma $ 1.04
==========
The following weighted average assumptions were used in 1997 in the
option pricing model: a risk free interest rate of 6.39%; an expected
life of the options of 5 years; an expected dividend yield of 1.33%; and
a volatility factor of .27. Due to the inclusion of only 1997 option
grants, the effects of applying SFAS No. 123 in 1997 may not be
representative of the pro-forma impact in future years.
Stock Purchase Plans
The Corporation maintains an Employee Stock Purchase Plan whereby
full-time employees of First Federal Bank, A Federal Savings Bank (the
"Bank") and First Financial Insurance Agency, Inc. can purchase the
Corporation's common stock at a discount. The purchase price of the
shares under this plan 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 15,750 authorized but unissued shares were reserved for issuance under
this plan. No shares have been issued under this plan as of June 30,
1997. Under a former plan, with identical terms as the existing plan, a
total of 3,749, 5,474 and 2,636 shares were issued and purchased by
employees in 1997, 1996 and 1995, respectively, with a total of 13,781
shares issued under the former plan.
<PAGE>
Stock Repurchase Plan
In August 1996, the Board authorized the repurchase of up to 5% of the
outstanding shares of common stock (703,638 shares were outstanding at
the time), subject to market conditions, over a two year period which
expires in August 1998. During the year ended June 30, 1997, 7,383 shares
of common stock were repurchased at an average price per share of $28.04.
Under a similar plan, 6,677 shares were repurchased in 1996 at an average
price of $27.21.
(10) 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 during the years presented using the treasury stock method.
The weighted average number of shares outstanding used in the computation
was 699,507, 701,273 and 683,226 in 1997, 1996 and 1995, 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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost $ 128,000 177,000 170,000
Interest cost 79,000 124,000 123,000
Actual return on assets (173,000) (87,000) (234,000)
Net amortization and deferral 76,000 (34,000) 139,000
-------- -------- -------
Net periodic pension expense $ 110,000 180,000 198,000
======= ======= =======
</TABLE>
Prior service cost is being amortized over the average remaining service
period of active employees at the effective date of the amendment.
<PAGE>
Accumulated plan benefit information for the Bank's plan is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of projected benefit obligations:
Vested benefit obligation $ 721,000 754,000
Nonvested benefit obligation 60,000 87,000
----------- -----------
Total accumulated benefit obligation 781,000 841,000
Additional benefits based upon
estimated future salary levels 190,000 157,000
---------- ----------
Total projected benefit obligation 971,000 998,000
Fair market value of plan assets 1,336,000 1,257,000
--------- ---------
Fair market value of plan assets over
projected benefit obligation 365,000 259,000
Unrecognized prior service cost (28,000) (31,000)
Unrecognized gain (355,000) (291,000)
Unrecognized transition asset 6,000 6,000
------------ ------------
Accrued pension cost $ (12,000) (57,000)
=========== ===========
</TABLE>
The weighted-average assumed rate of return used in determining the net
periodic pension cost for 1997 and 1996 was 8.0% and in determining the
actuarial present value of accumulated benefit obligations at June 30,
1997 and 1996 was 7.5%, and the weighted-average rate of increase in
future compensation levels used for 1997 and 1996 was 5.0%.
The Bank has an Incentive Bonus Plan for certain salaried employees. The
bonus pool for the years ended June 30, 1997, 1996 and 1995 was $220,000,
$300,000 and $345,000, 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,
1997, 1996 and 1995, the Bank expensed $102,000, $99,000 and $100,000,
respectively, under the plans and recognized $65,000, $41,000 and
$79,000, 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.
<PAGE>
(12) Income Taxes
The components of the provision (benefit) for income taxes for the years
ended June 30 consist of:
1997 1996 1995
---- ---- ----
Current:
Federal $ (213,000) 2,881,000 1,090,000
State income taxes 71,000 843,000 339,000
Deferred (107,000) (351,000) 11,000
------- ---------- -----------
$ (249,000) 3,373,000 1,440,000
======= ========= =========
The differences between the effective income tax rate and the statutory
Federal corporate rate consist of:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<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 8.2 6.1 5.8
Affordable housing tax credit (60.0) - -
Refund of prior year taxes (26.0) - -
Increase in cash surrender value of life insurance (3.8) (0.2) (0.7)
Other 4.1 (3.0) (1.9)
----- ---- ----
Effective tax rate (43.5)% 36.9 37.2
==== ==== ====
</TABLE>
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at June 30 consist
of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 41,000 61,000
Securities available for sale 72,000 163,000
Allowance for loan losses for financial reporting purposes 260,000 157,000
Deferred compensation and benefits 270,000 224,000
Other 26,000 82,000
-------- --------
669,000 687,000
Deferred tax liabilities:
Purchased mortgage servicing 57,000 74,000
Originated mortgage servicing 270,000 163,000
Excess tax depreciation 85,000 144,000
FHLB stock dividend 52,000 52,000
Allowance for loan losses for tax purposes in
excess of base year allowance 125,000 156,000
Other 46,000 80,000
-------- --------
635,000 669,000
Net deferred tax asset $ 34,000 18,000
======== ========
</TABLE>
Under the Internal Revenue Code, through 1996 the Bank was 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 Bank was permitted 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 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 was only allowed a deduction based on actual loss experience.
Under legislation enacted in 1996, beginning in fiscal 1997, the Bank is
no longer allowed a special bad debt deduction using a percentage of
taxable income method. Also, beginning in 1997, the Bank is required to
recapture its excess bad debt reserve over its 1987 base year reserve
over a six-year period. The amount has been provided in the Bank's
deferred tax liability.
Retained earnings at June 30, 1997, 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.
<PAGE>
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. The Bank also provided a mortgage loan to the
partnership in August 1996 which had a balance of $2,287,000 at June 30,
1997.
(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 the transfer of
certain deposit liabilities.
(14) Commitments and Contingencies
The Bank had outstanding commitments to originate and sell loans and
mortgage-backed securities of $5,255,000 and $30,112,000, and $2,555,000
and $11,147,000 at June 30, 1997 and 1996, respectively. The Bank had no
outstanding commitments to purchase loans, mortgage-backed securities,
and investments at June 30, 1997. 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 7.875% to 13.45% and adjustable rate
mortgage loans at rates ranging from 7.25% to 9.63% at June 30, 1997.
<PAGE>
(15) Parent Company Financial Information
Following is condensed financial information of the Corporation:
Condensed Statements of Financial Condition
June 30,
Assets 1997 1996
------ ---- ----
Cash $ 691,000 281,000
Investment in subsidiaries 23,091,000 23,104,000
Due from subsidiary 33,000 21,000
Other assets 16,000 19,000
------------- -------------
$ 23,831,000 23,425,000
========== ==========
Liabilities and Stockholders' Equity
Long-term debt 1,481,000 1,679,000
Accounts payable and accrued expenses 17,000 17,000
------------- -------------
1,498,000 1,696,000
Stockholders' equity 22,333,000 21,729,000
---------- ----------
$ 23,831,000 23,425,000
========== ==========
Condensed Statements of Earnings
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividend from subsidiaries $ 1,600,000 550,000 100,000
Other operating income 27,000 38,000 105,000
Operating expenses (242,000) (263,000) (249,000)
---------- ---------- ----------
1,385,000 325,000 (44,000)
Income tax benefit 85,000 89,000 75,000
----------- ----------- -----------
Income before equity in undistributed
earnings of subsidiaries 1,470,000 414,000 31,000
Equity in undistributed earnings of subsidiaries (649,000) 5,348,000 2,399,000
---------- --------- ---------
Net earnings $ 821,000 5,762,000 2,430,000
========== ========= =========
</TABLE>
<PAGE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net cash flows from operating activities:
Net earnings $ 821,000 5,762,000 2,430,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries 649,000 (5,348,000) (2,399,000)
Change in accounts payable and accrued expenses - - 11,000
Change in due from subsidiary (12,000) 25,000 (33,000)
Change in other assets 3,000 1,000 (6,000)
------------ ------------ ------------
Net cash provided by operating activities 1,461,000 440,000 3,000
--------- ---------- ------------
Cash flows from investing activities:
Capital contributions to subsidiaries (500,000) - (1,000,000)
---------- --------------- ---------
Net cash used by investing activities (500,000) - (1,000,000)
---------- --------------- ---------
Cash flows from financing activities:
Proceeds from long-term debt - - 1,000,000
Repayment of long-term debt (198,000) (197,000) (174,000)
Dividends to stockholders (279,000) (266,000) (115,000)
Purchase of common shares (207,000) (182,000) -
Proceeds from issuance of common stock 133,000 137,000 465,000
---------- ---------- ----------
Net cash provided (used) by financing
activities (551,000) (508,000) 1,176,000
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents 410,000 (68,000) 179,000
Cash and cash equivalents at beginning of year 281,000 349,000 170,000
---------- ---------- ----------
Cash and cash equivalents at end of year $ 691,000 281,000 349,000
========== ========== ==========
</TABLE>
<PAGE>
(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, 1997.
<TABLE>
<CAPTION>
Carrying Estimated
(In thousands) amount fair value
<S> <C> <C>
Assets
Cash and cash equivalents $ 20,294 20,294
Securities including securities available for sale 55,653 55,144
Loans receivable including loans held for sale, net 174,609 173,651
Accrued interest receivable 2,180 2,180
Stock in FHLB of Indianapolis 4,941 4,941
Residential mortgage loan servicing 819 1,005
Liabilities
Deposits 144,316 143,241
Borrowings:
FHLB advances 98,815 97,599
Long-term borrowing 1,481 1,481
Advance payments by borrowers for taxes and insurance 304 304
Accrued interest payable 1,194 1,194
</TABLE>
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.
<PAGE>
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 similar maturities. Contractual cash flows for
all types of loans were adjusted for prepayment estimates consistent with
those used by the Office of Thrift Supervision at June 30, 1997.
Accrued Interest Receivable. The fair value of these financial
instruments approximates carrying value.
Stock in FHLB of Indianapolis. The 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
mortgage 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 value of deposits is calculated using a discounted
cash flow analysis that applies market interest and decay estimates
consistent with those used by the Office of Thrift Supervision at June
30, 1997, for similar deposit accounts.
FHLB Advances. Fair values for fixed-maturity fixed-rate FHLB advances
and fix-maturity variable rate advances are calculated using a discounted
cash flow analysis applying market interest rates for similar borrowings.
Long-term Borrowing. The long-term borrowing is an adjustable instrument
tied to the prime interest rate. Fair value approximates carrying value.
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
Bradley M. Rust, Senior Vice President/Controller
Gerald R. Belanger, Senior Vice President
Carroll C. Hamner, Senior Vice President
Laura E. Bogard, Vice President
Cheryl A. Otten, Vice President
Paula J. Pesch, Vice President
Jay A. Baker, Assistant Vice President
Doris J. Blackburn, Assistant Vice President
Kathy L. Clinkenbeard, Assistant Vice President
Lynn Elliott, Assistant Vice President
Kelly J. Gay, Assistant Vice President
Ruth E. Hunter, Assistant Vice President
Rana M. Lee, Assistant Vice President
Randall W. Pratt, Assistant Vice President
Carol A. Witshork, Assistant Vice President
Glenda L. Berryman, Assistant Secretary
T. Rene' Buck, Internal Auditor and Compliance Officer
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
Office Locations
1ST BANCORP
Corporate Headquarters:
101 N. Third Street
Vincennes, Indiana 47591
(812) 885-2255
(800) 688-3865
First Federal Bank, A Federal Savings Bank
Main Office:
101 N. Third Street
Vincennes, Indiana 47591
(812) 882-4528
(800) 688-4528
Willow Street Drive Up Branch:
1700 Willow Street
Vincennes, Indiana 47591
(812) 885-6085
Main Office Annex:
102 N. Fifth Street
Vincennes, Indiana 47591
(812) 885-2255
(800) 688-3865
Evansville Loan Origination Office:
125 N. Weinbach, Suite 730
Evansville, Indiana 47711
(812) 476-4441
(888) 476-4441
First Financial Insurance Agency, Inc.
Main Office:
626 Veterans Drive
Vincennes, Indiana 47591
(812) 886-7283
Princeton Office:
108 South 5th Ave.
Princeton, IN 47670
(812) 385-2659
<PAGE>
SENIOR MANAGEMENT
[PHOTO OF SENIOR MANAGEMENT]
Front row, left to right:
Bradley M. Rust
Senior Vice President and Controller
Carroll C. Hamner
Senior Vice President
Lending Services
C. James McCormick
Chairman of the Board
Frank Baracani
President and CEO
Gerald R. Belanger
Senior Vice President
Human Resources
Back row, left to right
J. Timothy Tresslar *
Vice President and General Manager
First Financial Insurance Agency,Inc.
Cheryl A. Otten
Vice President
Savings
Paula J. Pesch
Vice President
Secondary Market
Laura E. Bogard
Vice President
Mortgage Lending
Lynn Stenftenagel
Executive Vice President
Secretary and CFO
*Not an Officer of First Federal Bank, A Federal Savings Bank
<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#1050F5
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 July 31, 1997, there were 390 shareholders of record and 691,461 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 1997 33.25 30.00
March 1997 32.00 28.50
December 1996 31.50 27.25
September 1996 32.00 26.00
June 1996 28.00 26.00
March 1996 29.75 29.00
December 1995 31.75 30.50
September 1995 35.00 33.00
Internet Address
http://www.businesswire.com/cnn/fbcv.htm
<PAGE>
[BACK COVER]
[1ST BANCORP LOGO]
Third & Busseron Streets P.O. Box 1417 Vincennes, Indiana
Exhibit 21
Subsidiaries of 1ST BANCORP
The following chart indicates the corporate structure, including
subsidiaries of 1ST BANCORP:
1ST BANCORP
|
|
|
|
--------------------------------------------------------------
| | |
| | |
First Federal Bank, A FSB First Financial Insurance First Title Company
| Agency Inc.
|
|
|
Financial Services of Southern
Indiana Corporation
[KPMG Peat Marwick LLP letterhead]
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 17, 1997, relating
to the consolidated statements of financial condition of 1ST BANCORP and
subsidiaries as of June 30, 1997 and 1996 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, 1997, which report appears in the
June 30, 1997 annual report on Form 10-K of 1ST BANCORP.
/s/ KPMG Peat Marwick LLP
Indianapolis, Indiana
September 25, 1997
[KPMG Peat Marwick LLP letterhead]
Independent Auditors' Consent
The Board of Directors
1ST BANCORP:
We consent to incorporation by reference in the registration statement (No.
33-13145) on Form S-8 of 1ST BANCORP of our report dated July 17, 1997, relating
to the consolidated statements of financial condition of 1ST BANCORP and
subsidiaries as of June 30, 1997 and 1996 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, 1997, which report appears in the
June 30, 1997 annual report on Form 10-K of 1ST BANCORP.
/s/ KPMG Peat Marwick LLP
Indianapolis, Indiana
September 25, 1997
[KPMG Peat Marwick LLP letterhead]
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 17, 1997, relating
to the consolidated statements of financial condition of 1ST BANCORP and
subsidiaries as of June 30, 1997 and 1996 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, 1997, which report appears in the
June 30, 1997 annual report on Form 10-K of 1ST BANCORP.
/s/ KPMG Peat Marwick LLP
Indianapolis, Indiana
September 25, 1997
<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-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 523
<INT-BEARING-DEPOSITS> 19,771
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,588
<INVESTMENTS-CARRYING> 44,065
<INVESTMENTS-MARKET> 43,556
<LOANS> 175,767
<ALLOWANCE> 1,158
<TOTAL-ASSETS> 270,490
<DEPOSITS> 144,316
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,545
<LONG-TERM> 100,296
<COMMON> 698
0
0
<OTHER-SE> 21,635
<TOTAL-LIABILITIES-AND-EQUITY> 270,490
<INTEREST-LOAN> 15,147
<INTEREST-INVEST> 3,870
<INTEREST-OTHER> 677
<INTEREST-TOTAL> 19,694
<INTEREST-DEPOSIT> 7,678
<INTEREST-EXPENSE> 13,292
<INTEREST-INCOME-NET> 6,402
<LOAN-LOSSES> 373
<SECURITIES-GAINS> (29)
<EXPENSE-OTHER> 8,555
<INCOME-PRETAX> 572
<INCOME-PRE-EXTRAORDINARY> 572
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 821
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.17
<YIELD-ACTUAL> 7.77
<LOANS-NON> 2,330
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,339
<ALLOWANCE-OPEN> 896
<CHARGE-OFFS> 119
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 1,158
<ALLOWANCE-DOMESTIC> 508
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 650
</TABLE>
