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, 1998 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. |X|
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant: $33,353,982 as of September 11, 1998.
Number of shares of Common Stock outstanding as of September 11, 1998: 1,096,189
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1998
are incorporated into Part II.
<PAGE>
1ST BANCORP
FORM 10-K
INDEX
Page No.
Forward Looking Statement......................................................3
Part I
Item 1. Business.............................................................3
Item 2. Properties...........................................................6
Item 3. Legal Proceedings...................................................36
Item 4. Submission of Matters to a Vote of Security Holders.................36
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 Risk...........38
Item 8. Financial Statements and Supplementary Data........................40
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................40
Part III
Item 10. Directors and Executive Officers of the Registrant..................41
Item 11. Executive Compensation..............................................43
Item 12. Security Ownership of Certain Beneficial Ownership and Management...46
Item 13. Certain Relationships and Related Transactions......................47
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....48
Signatures....................................................................49
<PAGE>
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; the deterioration in the financial strength of the Corporation's loan
customers; or the announced acquisition by German American Bancorp.
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 Insurance
Company ("First Title"), which provides title search services, underwrites
mortgage title insurance, and provides mortgage loan closing services.
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.
<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 fiscal year 1997, the
Bank closed loan origination offices in Indianapolis, Indiana, Louisville,
Kentucky, and suburbs of Cincinnati, Cleveland, and Dayton, Ohio. 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 five years with
rates ranging from 5.7% to 6.3%. The program serves as an alternative source of
funds to complement 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 the third quarter of fiscal year 1998, the Corporation acquired
the assets of an existing independent title and abstract company. The assets of
the acquired company were merged into the previously inactive subsidiary, First
Title Insurance Company. First Title sells title insurance as an agent for
Chicago Title Insurance Company, Ticor Title Insurance Company, and Stewart
Title Guaranty Company.
First Financial operates full service insurance offices in Vincennes and
Princeton, Indiana. During fiscal year 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 and resulted in
the establishment of First Financial's Princeton office.
On August 5, 1998 1ST BANCORP and German American Bancorp ("German
American") jointly announced the signing of a definitive agreement (the
"Agreement") pursuant to which the Corporation will be merged with and into
German American (the "Merger"). The Agreement provides that upon the effective
date of the Merger , the shareholders of the Corporation would receive shares of
common stock of German American with an aggregate value of $57,120,000 based on
market prices during a period of 15 days ending on the second trading date
before closing). If the German American share price is less than $28 per share
or more than $33 per share during the valuation period, however, then the number
of shares to be issued in the transaction will be based on a minimum or maximum
share price, as the case may be of $28 or $33. Accordingly, to the extent that
German American's share price during the valuation period is less than $28 or
more than $33, then the market value of the transaction could vary from the
targeted value.
Based on the current number of the Corporation's shares outstanding and
assuming the exercise of stock options for 29,679 shares held by employees and
directors of the Corporation prior to the closing of the merger, each share of
the Corporation's common stock would be exchanged for German American stock with
a value equal to approximately $50.94.
The Corporation has also signed a Stock Option Agreement with German
American, giving German American an option to purchase up to 19.9% of the
Corporation's outstanding shares, exercisable at $50.94 per share upon
occurrence of certain events that create the potential for another party to
acquire control of the Corporation.
<PAGE>
Lending Activities
General
First Federal has traditionally concentrated its lending activities on
first mortgage loans secured by residential property. Typically these loans are
neither insured by the Federal Housing Administration ("FHA") nor partially
guaranteed by the Veteran's Administration ("VA"). At June 30, 1998, First
Federal's net loan portfolio aggregated $185.3 million, representing 71.2% of
total assets at that date. This compares to the Bank's net loan portfolio of
$146.8 million at June 30, 1997 representing 54.3% 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 four 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.
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 11.9% of the total loan portfolio at June
30, 1998 as compared to 8.7% of the total loan portfolio at June 30, 1997.
<PAGE>
The following table (which excludes the loans held for sale portfolio)
sets forth the composition of the Bank's loan portfolio by type of loan at the
dates indicated:
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------------------
(in thousands)
Real estate loans:
<S> <C> <C> <C> <C> <C>
Mortgage $163,457 $135,189 $141,247 $181,676 $153,251
Construction 4,501 2,038 2,171 7,364 12,460
Consumer loans 17,147 7,277 5,839 10,203 9,285
Other Loans 4,986 5,471 4,171 6,859 6,775
----------------------------------------------------------------------------
190,091 149,975 153,428 206,102 181,771
----------------------------------------------------------------------------
Undisbursed loans funds (3,475) (1,536) (1,297) (3,038) (7,707)
Deferred loan fees and unamortized
premiums and discounts, net 139 (441) (486) (367) (430)
Allowance for loan losses (1,465) (1,158) (896) (878) (817)
----------------------------------------------------------------------------
(4,801) (3,135) (2,679) (4,283) (8,954)
----------------------------------------------------------------------------
Net loans receivable $185,290 $146,840 $150,749 $201,819 $172,817
============================================================================
</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,
1998 by type of loan:
Principal Repayments Contracturally Due During the
Fiscal Periods Indicated as of June 30, 1998
<TABLE>
<CAPTION>
More More More More More
Balance than 1 than 2 than 3 than 5 than 10
Outstanding at One Year Year to Years to Years to Years to Years to More than
June, 30 1998 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 $163,457 $4,349 $4,728 $5,141 $11,664 $39,304 $47,859 $50,412
Construction 4,501 4,501 - - - - -
Consumer and Other Loans 22,133 1,982 2,167 2,369 5,424 10,191 - -
------------------------------------------------------------------------------------------------------
Total $190,091 $10,832 $6,895 $7,510 $17,088 $49,495 $47,859 $50,412
======================================================================================================
</TABLE>
<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.
<PAGE>
Adjustable- and Fixed-Rate Loans
The following table sets forth by type of loan the amount of First
Federal's fixed-rate loans and adjustable rate mortgage loans ("AML") included
in its gross loans receivable:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
One-to-Four Family Residential Mortgage Loans
Fixed Rates $84,776 $67,310 $54,212 $71,772 $64,294
Adjustable Rates 75,638 60,767 81,051 107,849 92,492
---------------------------------------------------------------------------
Total $160,414 $128,077 $135,263 $179,621 $156,786
Commercial Real Estate Loans
Fixed Rates 3,970 5,901 3,511 2,996 4,062
Adjustable Rates 3,574 3,249 4,644 6,423 4,863
---------------------------------------------------------------------------
Total $7,544 $9,150 $8,155 $9,419 $8,925
Total Real Estate Loans
Fixed Rates 88,746 73,211 57,723 74,768 68,356
Adjustable Rates 79,212 64,016 85,695 114,272 97,355
---------------------------------------------------------------------------
Total $167,958 $137,227 $143,418 $189,040 $165,711
Consumer & Other Loans
Fixed Rates 17,153 8,168 6,671 11,438 10,011
Adjustable Rates 4,980 4,580 3,339 5,624 6,049
---------------------------------------------------------------------------
Total $22,133 $12,748 $10,010 $17,062 $16,060
Total Loans Receivable
Fixed Rates 105,899 81,379 64,394 86,206 78,367
Adjustable Rates 84,192 68,596 89,034 119,896 103,404
---------------------------------------------------------------------------
Total $190,091 $149,975 $153,428 $206,102 $181,771
</TABLE>
<PAGE>
Residential Mortgage Loans
To the extent deemed appropriate, in view of market forces, First
Federal intends to continue to originate AMLs in order to reduce the impact of
rapid increases in market rates of interest on its operations and the market
value of its equity. Although critical to maintaining an asset/liability
matching program and a reasonable interest rate risk posture, adjustable-rate
loans generally do not adjust as rapidly as changes in the Bank's cost of funds.
The Bank also continues to be an originator of fixed rate mortgage
loans. Fixed rate residential mortgage loans currently originated by the Bank
generally are made with 15 and 30 year amortization schedules. The Bank also
originates fixed-rate residential mortgages with balloon payments, with the
balloon payment being due generally in five or seven years.
A portion of the conforming fixed rate and adjustable rate residential
mortgage loans currently being originated and purchased by First Federal are
sold to FHLMC. These loans are typically sold with the servicing rights retained
by the Bank. The highest quality nonconforming loans are being retained in
portfolio in order to enhance the Bank's net interest margin. However, a portion
of the nonconforming mortgage loans are also sold on a non-recourse basis in the
nonconforming secondary market. The nonconforming loans are typically sold with
the servicing rights released.
Of the $118.1 million loans originated and purchased in fiscal year
1998, $37.5 million were nonconforming mortgage loans. This compares to the
origination and purchase of $70.2 million of nonconforming mortgage loans of the
total $117.0 million loan originated and purchased during fiscal year 1997. The
lower volume of nonconforming loans in fiscal year 1998 compared with fiscal
year 1997 is a result of the restructure of the Bank's loan origination network
in the latter part of fiscal year 1997. At June 30, 1998, $85.9 million
nonconforming loans were included in the loan portfolio as compared to $66.5
million in portfolio at June 30, 1997. The increased level of nonconforming
loans in portfolio is an integral part of the Bank's strategy to expand its 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 90% 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 by another lender.
First Federal offers residential construction loans to both individuals
and builders. 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.
<PAGE>
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 conforming 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.
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, 1998, First Federal's commercial real estate loan portfolio
(including loans secured by nonresidential property, land, and five or more
dwelling units) aggregated $7.5 million, or 4.0% 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. At June 30, 1998, such loans constituted $22.1 million, or 11.6%
of the total loan portfolio.
The maximum term of automobile loans is generally five years, with the
rate and term dependent upon whether the vehicle is new or used. During the
fourth quarter of 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 serves to augment the
traditional auto lending program of the Bank. Terms are similar for the
traditional and indirect auto loan programs. Indirect auto loan fundings during
fiscal year 1998 totaled $10.0 million. The indirect auto loan portfolio totaled
$8.5 million at June 30, 1998.
Home equity loans are variable rate and are treated as revolving lines
of credit. At June 30, 1998, home equity loans aggregated $4.6 million,
available balances averaged $10,300, and approved credit line balances averaged
$19,900. 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.
<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, 1998, 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 four fiscal years have been primarily concentrated
in the nonconforming loan markets. However, during fiscal year 1998 conforming
mortgage banking operations increased.
During fiscal 1998, the Bank originated $85.7 million of residential
real estate loans (including construction loans) as compared to $104.7 million
of residential real estate loans in 1997 and $132.2 million of residential real
estate loans in 1996. The decreased volume during fiscal 1998 was primarily a
decline in nonconforming mortgage loan originations which resulted largely from
the closure of the Bank's loan origination offices in fiscal 1997. The decreased
volume of residential real estate loan originations during fiscal 1997 compared
with fiscal 1996 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.
During fiscal year 1998, $13.3 million in loans were purchased through a
wholesale correspondent network compared with $2.0 million purchased during
fiscal year 1997. The increase in loans purchased from correspondents was
designed to replace a portion of the decreased loan production due to the
closure of the majority of the Bank's loan origination offices in fiscal year
1997. The loans purchased in fiscal year 1998 included conforming and
nonconforming loans.
<PAGE>
During 1998, the Bank sold $46.1 million in conforming loans to FHLMC as
compared to the sale of $32.1 million in loans to FHLMC in fiscal year 1997. The
Bank continues to service most of the loans sold in fiscal 1998 and retains a
portion of the interest received (.250% to .375%) as a servicing fee. A total of
$871,000 in FHA/VA loans were sold to private investors during fiscal year 1998
as compared with $6.4 million in fiscal year 1997. These loans were sold
servicing released. An aggregate of $8.2 million in nonconforming loans were
sold to various investors during fiscal 1998 as compared to $37.7 million in
nonconforming loan sales in fiscal 1997. These loans were sold servicing
released. The decline in nonconforming loan sales is a part of the Bank's
asset/liability strategy to enhance the net interest margin by retaining a
larger portion of its mortgage loan production in portfolio.
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,
---------------------------------------
1998 1997 1996
---------------------------------------
(in thousands)
<S> <C> <C> <C>
Loans Originated
Real estate loans
Construction (1) $ 2,663 $ 3,623 $ 15,466
Land -- -- --
Loans for purchase or refinance of existing property:
One-to-four units 83,019 101,047 116,783
Over four units -- -- --
Commercial 1,485 383 215
Consumer loans (2)
17,665 9,926 12,394
---------------------------------------
Total loans originated $ 104,832 $ 114,979 $ 144,858
Participations and whole loans purchased $ 13,274 $ 2,042 $ 27,583
Participations and whole loans sold ($ 55,096) ($ 76,202) ($161,421)
Loan principal repayments (48,214) (35,093) (50,208)
---------------------------------------
Change in loan portfolio $ 14,796 $ 5,726 ($ 39,188)
=======================================
- - --------------------------------------
</TABLE>
(1) Construction loans originated are predominantly residential.
(2) Consumer loans consist primarily of home equity, savings account,
signature, automobile, and property improvement loans.
<PAGE>
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.
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.
1998 1997 1996
----------------------------------
(in thousands)
Loan origination, commitment
fees and service fees earned
during the year ended June 30 $91 $137 $140
Net deferred loan origination and
commitment fees on mortgage
loans at end of year $47 $476 $611
Purchased and originated mortgage
servicing rights at end of year $1,012 $819 $591
<PAGE>
Asset Quality
Collection Practices
When a borrower fails to make a required payment on a mortgage loan, the
Bank attempts to cause the deficiency to be cured by contacting the borrower and
seeking payment. Contacts are generally made after a conforming mortgage loan
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.
When a borrower fails to make a required payment on a consumer loan, the
Bank attempts to cause the deficiency to be cured by contacting the borrower and
seeking payment. Contacts are generally made after a consumer loan is more than
10 days past due and a late charge is assessed at such time. If the delinquency
is not cured, the Bank will institute measures to remedy the default. The
remedies include repossession of the non-real estate collateral, foreclosure
action for loans secured by mortgages, and/or pursuing default judgments against
the borrower. In the case of the Bank's auto loan programs, if the delinquency
exceeds 45 days and is not cured through the Bank's normal collection
procedures, the Bank will generally initiate action to repossess the collateral.
The Bank then holds the property for 10 days to allow the borrower to redeem the
collateral. If there is no borrower redemption, the property is included in the
bank's repossessed assets account until it is sold.
Nonaccrual Loans, Real Estate Owned, and Repossessed Assets
At June 30, 1998, nonaccrual loans, real estate owned, and repossessed
assets totaled $4.4 million, or 1.70% of total assets. Overall, the upward trend
in nonaccrual loans is attributable to residential one-to-four family mortgage
loans. In particular, the Bank's nonconforming loan delinquencies have
increased. Over the past four fiscal years the Bank has expanded its residential
one-to-four family nonconforming loan portfolio to increase its net interest
margin. While the larger nonconforming loan portfolio has been successful in
expanding the net interest margin, the credit risk associated with these loans
has contributed to the increased level of delinquencies, nonaccrual loans, and
real estate owned.
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 additional loan collection
personnel have been hired, more stringent collection practices have been
implemented, and the 100% nonconforming second mortgage loan program was
discontinued. In addition, loan loss allowances have been increased to prepare
for potential future losses in the loan portfolio.
<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,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------
(Dollars in thousands)
Nonaccrual loans and real estate owned:
<S> <C> <C> <C> <C> <C>
Non-accrual loans (1) $3,491 $2,330 $846 $400 $1,635
Real estate owned and repossessed assets (2) 930 397 177 145 160
Restructured loans - - - - -
-------------------------------------------------------------------------
Total nonaccrual loans and real estate owned $4,421 $2,727 $1,023 $545 $1,795
Nonaccrual loans and real estate owned to
total assets 1.70% 1.01% 0.39% 0.17% 0.71%
</TABLE>
- - ------------
(1) Approximately $320,000 in gross interest income would have been recorded in
the year ended June 30, 1998 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 $161,000 in
interest income was actually recognized in the year.
(2) Troubled loans acquired through repossession, foreclosure, or deed-in-lieu
of foreclosure are included in the Statement of Financial Condition as real
estate owned.
Loss and Delinquency Experience
<PAGE>
During the year ended June 30, 1998, the Bank realized net charge-offs
on loans aggregating $448,000. At June 30, 1998, 1.06% of the outstanding
principal balance of loans in the Bank's portfolio was delinquent between 61 and
90 days and 1.88% 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,
--------------------------------------------
1998 1997 1996
--------------------------------------------
(Dollars in thousands)
Loans receivable, net $185,290 $146,840 $150,749
Net losses (charge-offs) $448 $111 $65
Percent delinquent 61 days
or more at end of year 2.94% 2.67% 1.76%
Total dollar amount
foreclosed $1,375 $686 $180
Percent foreclosed 0.74% 0.47% 0.12%
Analysis of the Allowance for Loan Losses
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $1,158 $896 $878 $817 $892
Charge-offs
Loans
Real estate mortgages 389 81 30 15 138
Consumer loans 72 38 52 32 23
Recoveries
Loans
Real estate mortgages 2 1 13 - 1
Consumer loans 11 7 4 8 10
-----------------------------------------------------------------------
Net charge-offs 448 111 65 39 150
Provisions charged to operations 755 373 83 100 75
-----------------------------------------------------------------------
Balance at end of year $1,465 $1,158 $896 $878 $817
=======================================================================
Ratio of net charge-offs during the
year to average loans outstanding
during the year 0.27% 0.07% 0.04% 0.04% 0.09%
</TABLE>
<PAGE>
Additional information regarding the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
At June 30, 1998
-------------------------------------------------------------------------------------
% 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 $773 84.39% 0.48% 0.41%
Commercial Real Estate Loans 492 3.97% 6.52% 0.26%
Consumer & Other Loans 200 11.64% 0.90% 0.11%
---------------- ------------------- ---------------------
$1,465 100.00% 0.78%
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)
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%
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)
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%
<PAGE>
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)
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%
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)
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>
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 of $1.0 million at June
30, 1998, 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, 1998, specific valuation allowance balances were $465,000 of which
approximately 99% 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, 1998 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 is for one
single family residential mortgage loan in which the Bank anticipates a loss to
be realized in the future.
Additional information regarding the Bank's allowance for loan losses
and provision for loan losses is contained in the Management's Discussion and
Analysis section of the 1998 Annual Report to Shareholders.
<PAGE>
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, 1998, First Federal's investment securities portfolio
aggregated $19.6 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, 1998. At June 30, 1998, the Bank's
investment securities available for sale portfolio aggregated $15.5 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, 1998.
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 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,
1998 1997 1996
------------------------------------------- ------------ ------------
Amortized Market Wtd. Ave. Amortized Amortized
Investment Type (1) Maturity Cost Value Yield Cost Cost
- - --------------------------------- ---------------------------------------------------------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury and
agency obligations less than 1 year 8,450 8,436 5.27%
including mortgage- 1 - 5 years 8,815 8,783 5.85%
backed securities 5 - 10 years 1,000 1,000 6.54%
more than 10 years 1,288 1,295 7.11%
-------------------------
$19,553 $19,514 5.72% $44,065 $43,624
Federal Home Loan Bank
stock N/A 5,769 5,769 8.00% 4,941 4,864
------------------------- -------------- ---------
Total Investment Securities $25,322 $25,283 6.24% $49,006 $48,488
========================= ============== =========
- - ---------------------------------------
(1) There are no tax-exempt securities included in the above
totals.
<PAGE>
Available for Sale Portfolio
At June 30, At June 30, At June 30,
1998 1997 1996
------------------------------------------- ------------ ------------
Amortized Market Wtd. Ave. Amortized Amortized
Investment Type (1) Maturity Cost Value Yield Cost Cost
- - --------------------------------- ---------------------------------------------------------------- ------------ ------------
(Dollars in thousands)
U.S. Treasury and
agency obligations less than 1 year
- - -
including mortgage- 1 - 5 years 6.17%
1,998 1,994
backed securities 5 - 10 years 8.01%
601 600
more than 10 years 6.23%
12,965 12,910
-------------------------
$15,564 $15,504 6.29% $11,769 $10,907
------------------------- -------------- -------
Total Available for Sale $15,564 $15,504 6.29% $11,769 $10,907
Securities
========================= ============== =======
- - ---------------------------------------
(1) There are no tax-exempt securities included in the above
totals.
</TABLE>
<PAGE>
The following table sets forth certain information regarding changes in interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in rates (change
in rate multiplied by old volume), (ii) changes in volume (change in volume
multiplied by old rate), and (iii) changes in rate/volume.
<TABLE>
<CAPTION>
Year Ended June 30, Year Ended June 30,
--------------------------------- ------------------------------------------------
1997 vs. 1998 1996 vs. 1997
(in thousands) (in thousands)
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
------- ------- ------ ------ -------- ------------ ---------- ------------
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loan portfolio (1)(2)(3) $71 $519 ($2) $588 $211 ($1,086) ($5) ($880)
Investment securities,
trading account investments
and other short-term
deposits (4) 45 (867) (7) (829) (132) (169) 0 (301)
------- ------- ------ ------ -------- ------------ --------- ------------
Total 116 (348) (9) (241) $79 ($1,255) ($5) ($1,181)
------- ------- ------ ------ -------- ------------ --------- ------------
Interest-bearing liabilities:
Savings accounts 140 (504) (6) (370) ($65) ($1,326) ($4) ($1,395)
Short-term borrowings 1 (50) (1) (50) 31 (132) (101)
-
Advances from FHLB and other
borrowings 40 97 (5) 132 (302) 565 5 268
------- ------- ------ ------ -------- ------------ --------- ------------
Total 181 (457) (12) (288) ($336) ($893) $1 ($1,228)
------- ------- ------ ------ -------- ------------ --------- ------------
Net change in interest
income (expense) ($65) $109 $3 $47 $415 ($361) ($6) $47
======= ======= ====== ====== ======== ============ ========= ============
</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).
<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,
1998 and for each of the years ended June 30, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
As of June 30, Year Ended June 30,
-------------------- --------------------------------------
1998 1998 1997 1996
-------------------- --------------------------------------
<S> <C> <C> <C> <C>
Weighted average yield
on loan portfolio 8.46% 8.51% 8.47% 8.36%
Weighted average yield
on investment securities, trading
account investments, and
other short-term deposits 6.06% 6.14% 6.08% 6.25%
Weighted average yield
on all interest-earning assets 7.91% 7.93% 7.77% 7.75%
Weighted average rate
paid on deposit accounts 5.56% 5.60% 5.50% 5.54%
Weighted average rate
paid on FHLB advances and other
borrowings 5.44% 5.64% 5.60% 5.89%
Weighted average rate
on all interest-bearing liabilities 5.50% 5.62% 5.54% 5.67%
Net interest margin 2.77% 2.63% 2.52% 2.36%
</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.
<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, 1998 in its primary market
area:
<TABLE>
<CAPTION>
Interest Rates
Type of Deposit Accounts at June 30, 1998 Compounding Minimum
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW 2.90 - 3.10% Simple Varies by type
of account
MMDA 2.70 - 5.05% Simple Varies by type
of account
Passbook/Statement Savings 2.70 - 4.00% Simple Varies by type
of account
Certificates of Deposit:
91 days 3.90% Simple 1,000
182 days 4.40% Simple 500
7-11 months 5.10% Simple 1,000
1 year 5.00% Simple 500
1 1/2 years 5.25% Simple 500
1 1/2 year stepped-rate 5.57% Simple 1,000
2 years 5.40% Simple 500
2 1/2 years 5.50% Simple 500
3 year stepped-rate 5.74% Simple 1,000
3 1/2 years 5.55% Simple 500
5 years 5.65% Simple 500
10 years 5.65% Simple 500
IRA Certificates:
1 years 5.25% Simple 100
2 years 5.40% Simple 100
2 years - variable rate 2.50% below prime rate Simple 100
3 years 5.65% Simple 100
4 years 5.75% Simple 100
5 years 6.00% Simple 100
Negotiable Certificates:
Jumbo Certificates of Deposit 5.85%-6.45% Simple 99,000
</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 and mutual
funds). 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.
<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,
----------------------------------------------------------------------------------
1998 1997
-------------------------------------- ------------------------------------
% 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:
Statement Savings/NOW/Super NOW
Variable Rate Savings Accounts(1) $19,578 16.6% 3.7% $20,193 14.0% 3.8%
MMDAs 3,447 2.9% 4.3% 3,015 2.1% 4.1%
Certificates of Deposit(2) 94,738 80.5% 6.0% 121,108 83.9% 5.8%
-------------------------- ------------------------
Total $117,763 100.0% 5.6% $144,316 100.0% 5.5%
========================== ========================
</TABLE>
June 30,
------------------------------------
1996
------------------------------------
% of Wtd. Avg.
Balance Deposits Rate
------------------------------------
(Dollars in thousands)
Type of account:
Statement Savings/NOW/Super NOW
Variable Rate Savings Accounts(1) $17,170 12.5% 3.2%
MMDAs 3,089 2.3% 3.9%
Certificates of Deposit(2) 116,889 85.2% 5.8%
------------------------
Total $137,148 100.0% 5.5%
========================
- - ------------
(1) Includes noninterest-bearing accounts.
(2) Includes negotiated rate certificates of deposit and IRAs.
<PAGE>
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,
---------------------------------------------------------------------------------
1998 1997
-------------------------------------- ------------------------------------
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:
Statement Savings/NOW/Super NOW
Variable Rate Savings Accounts(1) 20,777 15.8% 3.8% 17,627 12.5% 3.7%
MMDAs 3,245 2.5% 4.2% 3,172 2.3% 4.0%
Certificates of Deposit(2) 106,480 81.0% 6.0% 118,875 84.5% 5.8%
Accrued Interest 935 0.7% - 1,039 0.7% -
-------------------------- ------------------------
Total $131,437 100.0% 5.6% $140,713 100.0% 5.5%
========================== ========================
</TABLE>
June 30,
-------------------------------------
1996
------------------------------------
Average % of Wtd. Avg.
Balance Total Rate
------------------------------------
(Dollars in thousands)
Type of account:
Statement Savings/NOW/Super NOW
Variable Rate Savings Accounts(1) 26,636 16.2% 2.9%
MMDAs 4,098 2.5% 3.1%
Certificates of Deposit(2) 133,059 80.9% 6.2%
Accrued Interest 769 0.5% -
------------------------
Total $164,562 100.0% 5.5%
========================
- - -----------
(1) Includes noninterest-bearing accounts.
(2) Includes negotiated rate certificates of deposit and IRAs.
<PAGE>
The following table sets forth information relating to the Bank's
deposit flows during the years indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1998 1997 1996
-------------------------------------------
(in thousands)
<S> <C> <C> <C>
Increase (decrease) in deposits
before interest credited ($31,445) $2,734 ($77,909)
Interest credited 4,892 4,434 5,252
---------- ------------ -----------
Net increase (decrease)
in deposits ($26,553) $7,168 ($72,657)
---------- ------------ -----------
Total deposits at end
of period $117,763 $144,316 $137,148
========== ============ ===========
</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, 1998, the Bank decreased its
brokered deposits to $26.2 million from $45.1 million at June 30, 1997. The
lower level of brokered deposits was partially offset by an increased level of
Federal Home Loan Bank ("FHLB") advances. Advances have been a lower cost source
of funds than brokered deposits during the fiscal year. The brokered deposit
program continues to serve 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, 1998.
<TABLE>
<CAPTION>
Maturing in the 12 months ending June 30:
Balances at
June 30, 1998 1999 2000 2001 Thereafter
----------------------------------------------------------------------------------
(in thousands)
Certificates of deposit:
<S> <C> <C> <C> <C> <C>
Less than 4.00% $ 247 $ 247 $ - $ - $ -
4.00% to 4.99% 2,088 2,088 - - -
5.00% to 5.99% 51,675 38,960 7,872 3,324 1,519
6.00% to 6.99% 31,748 14,859 8,324 3,031 5,534
7.00% to 7.99% 8,152 3,893 2,556 481 1,222
8.00% or more 828 659 25 2 142
----------------------------------------------------------------------------------
Total certificates of deposit $94,738 $60,706 $18,777 $6,838 $8,417
==================================================================================
</TABLE>
As of June 30, 1998, First Federal had $7.1 million of time deposits
with balances over $100,000. Maturity of these deposits is as follows:
(in thousands)
3 months or less $1,595
Over 3 months through 6 months 1,508
Over 6 months through 12 months 1,325
Over 12 months 2,622
------
Total $7,050
======
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 $115.4 million in outstanding advances from
the FHLB at June 30, 1998.
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. This borrowing was prepaid in full during
the 1998 fiscal year.
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, 1998, there were
no reverse repurchase agreements outstanding.
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.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
Weighted average rate on
advances from the Federal
Home Loan Bank and other
borrowings 5.44% 5.62% 5.56%
Year Ended June 30,
------------------------------------------------
1998 1997 1996
------------------------------------------------
(Dollars in thousands)
Maximum amount of advances
from the Federal Home
Loan Bank and other
borrowings outstanding
at any month end $115,381 $100,346 $99,054
Approximate average advances
from the Federal Home
Loan Bank and other
borrowings outstanding $100,955 $99,218 $89,103
Approximate weighted average
rate paid on advances
from the Federal Home
Loan Bank and other
borrowings 5.64% 5.60% 5.94%
</TABLE>
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.
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 and what
impact it might have on the powers of the Corporation and First Federal.
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, 1998 total assets of $259.5
million, was $35,425. The OTS has recently proposed a change to its assessment
regulations which would require assessments to be determined generally on the
basis of an institution's size, condition, and complexity of operations.
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.
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, 1998, First Federal's
investment in FHLB of Indianapolis stock was $5,769,000.
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. For the year ended June 30, 1998,
dividends paid to First Federal totaled $414,000, for an annual rate of 8.0%. 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
$130.8 million of mortgage loans and $29.1 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.
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 4%. Monetary penalties may be imposed for failure to meet these
liquidity requirements. The monthly average liquidity of First Federal for June,
1998 was 8.1%. 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
association's real estate lending policies.
The Bank's written real estate lending policies must be reviewed and
approved by the association'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.
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.
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, 1998,
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. The OTS
recently updated its standards regarding the management of interest rate risk to
include summary guidelines to assist savings associations in determining their
exposure to 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, 1998, 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.
The following is a summary of First Federal's regulatory capital and
capital requirements at June, 30 1998:
Tangible Core Risk-based
Capital Capital Capital
---------- ------------------- ----------
(Dollars in thousands)
Regulatory Capital $22,602 $22,602 $23,602
Minimum capital requirement 3,897 7,793 12,633
-------- ------- -------
Excess capital $18,705 $14,809 $10,969
Regulatory capital ratio 8.7% 8.7% 15.0%
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,
1998, 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.
A Tier 1 Institution could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to the greater
of (a) 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, or
(b) 75% of its net income over the most recent four quarter period. Any
additional amount of capital distributions would require prior regulatory
approval.
The OTS has proposed revisions to these regulations which would permit a
savings associations, without filing a prior notice or application with the OTS,
to make a capital distribution to its shareholders in a maximum amount that does
not exceed the association's undistributed net income for the prior two years
plus the amount of its undistributed income from the current year. This proposed
rule would require a savings association, such as First Federal, that is a
subsidiary of a savings and loan holding company to file a notice with the OTS
30 days before making a capital distribution up to the "maximum amount"
described above. The proposed rule would also require all savings associations,
whether under a holding company or not, to file an application with the OTS
prior to making any capital distribution where the association is not eligible
for "expedited processing" under the OTS "Expedited Processing Regulation," or
where the proposed distribution, together with any other distributions made in
the same year, would exceed the "maximum amount" described above.
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
Under current law, 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.
The Corporation currently is a unitary savings and loan holding company,
and under current law 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, 1998, 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.
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 primarily
residential mortgages and related investments, including certain mortgage
related securities. 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).
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, 1998, 83.0% of First Federal's portfolio assets (as defined
on that date) were invested in qualified thrift investments (as defined on that
date), and therefore First Federal's asset composition was in excess of that
required to qualify First Federal as a QTL. First Federal does not expect to
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.
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 which began 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 for fiscal years 1997 and
1996 are currently being audited by the Internal Revenue Service.
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 significant portion 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 provided that
acquisitions or de novo formations of branches by out-of-state banks are not
permitted unless the laws of their home states permit Indiana banks to acquire
or establish branches on a reciprocal basis. The Indiana Branching Law became
effective March 15, 1996.
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 June 1997, the FASB issued Statement of Financial Accounting
Standards 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. The Corporation does not
anticipate the adoption of SFAS 130 in fiscal 1999 will have any impact on its
financial position or results of operations.
In June 1997, The FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), which requires the disclosure of financial and
descriptive information about reportable operating segments. Operating segments
are components of an enterprise about which financial information is available
and is evaluated regularly in deciding how to allocate resources and assess
performance. The Corporation does not anticipate the adoption of SFAS 131 in
fiscal 1999 will have any impact on its financial position or results of
operations.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employer's Disclosures About Pension and Other
Postretirement Benefits ("SFAS 132"), which standardizes disclosure requirements
for pension and other postretirement benefit plans. As this standard does not
change the measurement or recognition of those plans, the Corporation does not
anticipate the adoption of SFAS 132 in 1999 will have any impact on its
financial position or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments" ("SFAS 133"), which
establishes accounting and reporting standards for derivative instruments. SFAS
133 requires all derivatives to be recognized as either assets or liabilities in
the statement of condition at fair value. The accounting for changes in fair
value of the derivative depends on the intended use of the derivative and the
resulting designation. The Corporation does not anticipate the adoption of SFAS
133 in fiscal 2000 will have a material impact on its financial position or
results of operations.
Employees
As of September 9, 1998, 1ST BANCORP and its subsidiaries had 100
full-time and 7 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.
Item 2. Properties.
At June 30, 1998, 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 the 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, 1998. First Title conducted its business from the office
annex located at 102 North Fifth Street, Vincennes, Indiana, at June 30, 1998.
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 $403,000 at June 30, 1998. A portion of
the First Financial building is leased to an independent third party.
Item 3. Legal Proceedings.
Neither 1ST BANCORP, First Federal, First Financial, nor First Title 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, 1998.
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 56) has been President and Director of the
Corporation and First Federal during the past five years.
Donald G. Bell (age 68) 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 (73) has been Chairman of the Board, Director and
Chief Executive Officer of the Corporation, and Chairman of the Board and
Director of First Federal during the last five years.
Mary Lynn Stenftenagel (44) has been Director and Secretary - Treasurer
of the Corporation and Director, Executive Vice President, and Chief Financial
Officer of First Federal during the last five years.
John J. Summers (68) 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.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information required herein is incorporated by reference from
"Shareholder Information" and "Market Information" on page 44 of 1ST BANCORP's
1998 Annual Report to Shareholders (the "Annual Report to Shareholders").
Information concerning dividends paid by 1ST BANCORP is incorporated from
"Selected Financial Highlights" on page 3 of 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 15 of the Annual Report to Shareholders.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
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.
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.
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.
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 most significant changes in the results of the
OTS simulation analysis were primarily due to a downward trend in market
interest rates and a change to a larger portfolio of FHLB putable advances in
fiscal year 1998. There are limitations inherent in any methodology used to
estimate the exposure to changes in market interest rates. Therefore, this
analysis is not necessarily intended to be a forecast of the actual effect of a
change in market interest rates. The following table sets forth the
Corporation's interest rate sensitivity of NPV as measured by the OTS model as
of June 30, 1998 and 1997.
Interest Rate Sensitivity as of June 30,1998
<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>
+200 bp 30,995 (625) -2% 12.10% 19 bp
+100 bp 32,075 455 1% 12.27% 36 bp
0 bp 31,620 11.91%
-100 bp 29,829 (1,791) -6% 11.10% (81) bp
-200 bp 27,576 (4,044) -13% 10.15% (176) bp
</TABLE>
Interest Rate Sensitivity 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>
+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
</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 and directors 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 40 of the Annual Report to Shareholders.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no such changes or disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information about the Corporation's executive officers is included in Item 4.5
in Part I of this report.
The following tables set forth certain information regarding the nominees
for the position of director of the Corporation and each director of the
Corporation whose term continues, including the principal occupations of such
persons during at least the past five years and the number and percent of shares
of Common Stock beneficially owned by such persons as of September 9, 1998. No
nominee for director or director is related to any other nominee for director or
director or executive officer of the Corporation by blood, marriage, or
adoption, and there are no arrangements or understandings between any nominee
and any other person pursuant to which such nominee was selected. The table also
sets forth the number of shares of Corporation Common Stock beneficially owned
by all directors and executive officers as a group.
<TABLE>
<CAPTION>
Common Stock
Principal Director Director Beneficially
Occupation Of the of First Term Owned as of
During the Last Corporation Federal To September 9,
Name and Age Five Years Since Since Expire 1998(1)
- - ------------ ---------- ----- ----- ------ -------
Amount %
------ -
<S> <C> <C> <C> <C> <C> <C>
Donald G. Vice President and Director 1989 1988 1998 50,889 4.64%
Bell of the Corporation; Director
(Age 68) of First Federal; Senior
Partner with the law firm of
Hart, Bell Cummings, Ewing &
Stuckey
Vincennes, Indiana
Ruth Mix Director of the Corporation 1991 1981 1998 5,414 .49%
Carnahan and Director and Treasurer
(Age 79) of First Federal; Secretary-
Treasurer of Carnahan
Grain, Inc.
Edwardsport, Indiana
Rahmi Director of the Corporation 1991 1989 1998 105,112(2) 9.58%
Soyugenc and of First Federal;
(Age 67) President of Evansville Metal
Products, Evansville, Indiana
R. William Director of the Corporation 1991 1971 1999 33,050(3) 3.01%
Ballard and of First Federal Bank;
(Age 64) Retired Sr. Vice President
of First Federal
Frank D. President and Director of 1989 1984 1999 42,612(4) 3.86%
Baracani the Corporation and
(Age 56) President, Chief Executive
Officer and Director of
First Federal
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Principal Director Director Beneficially
Occupation of the of First Term Owned as of
During the Last Corporation Federal To September 9,
Name and Age Five Years Since Since Expire 1998(1)
- - ------------ ---------- ----- ----- ------ -------
Amount %
------ -
<S> <C> <C> <C> <C> <C> <C>
James W. Director of the Corporation 1993 1993 2000 356(5) .03%
Bobe and of First Federal;
(Age 54) President, Bobe Farms, Inc.
(farming)
C. James Chairman of the Board and 1989 1966 2000 39,144(6) 3.55%
McCormick Chief Executive Officer of
(Age 73) the Corporation and Chairman
of the Board of First Federal;
Chairman of McCormick, Inc.
and Commercial Rentals, Inc.
and President of JAMAC Corp., all
located in
Vincennes, Indiana
Mary Lynn Director and Secretary- 1989 1988 2000 34,167(7) 3.09%
Stenftenagel Treasurer of the Corporation;
(Age 44) Director, Executive Vice
President, Secretary and Chief
Financial Officer of
First Federal
John J. Vice Chairman of the Board 1989 1984 1999 28,672(8) 2.61%
Summers of the Corporation and First
(Age 68) Federal; retired President of
Hamilton Glass Products, Inc.,
Vincennes, Indiana
All directors
and executive
Officers as a 339,415(9) 30.43%
group (9 persons)
</TABLE>
<PAGE>
(1) Based upon information furnished by the respective directors. Unless
otherwise indicated, the named beneficial owner has sole voting and
dispositive power with respect to the shares.
(2) These shares include 4,340 shares held solely by Mr. Soyugenc's wife.
(3) Of these shares, 5,909 shares are owned jointly with Mr. Ballard's
wife.
(4) Of these shares, 25,506 shares are owned jointly by Mr. Baracani and
his wife, 51 shares are held in trust for Mr. Baracani's daughter, and
6,300 shares are subject to a stock option granted under the 1ST
BANCORP Stock Option Plan ("the Stock Option Plan").
(5) All shares are owned jointly by Mr. Bobe and his wife. (6) These shares
include 10,037 owned by each of two of McCormick's adult children,
3,544 owned by a third adult child of Mr. McCormick (collectively these
beneficial owners are referred to as the "McCormick Family".) and 6,300
shares subject to a stock option granted under the Stock Option Plan.
Except for the shares owned directly to which Mr. McCormick may be
considered a beneficial owner, each member of the "McCormick Family"
disclaims beneficial ownership of the shares held of record by each
other member.
(7) Includes 6,300 shares subject to a stock option granted under the Stock
Option Plan.
(8) All shares are owned by Mr. Summers' wife.
(9) Includes stock options for 18,900 shares under the Stock Option Plan.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the 1934 Act requires that the Corporation's officers
and directors and persons who own more than 10% of the Corporation's Common
Stock file reports of ownership and changes in ownership with the Securities
and Exchange Commission (the "SEC"). Officers, directors and greater than 10%
shareholders are required by SEC regulation to furnish the Corporation with
copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it,
and/or written representations from certain reporting persons that no Forms 5
were required for those persons, the Corporation believes that during the
fiscal year ended June 30, 1998, all filing requirements applicable to its
officers, directors and greater than 10% beneficial owners with respect to
Section 16(a) of the 1934 Act were satisfied in a timely manner.
Item 11. Executive Compensation.
During the fiscal year ended June 30, 1998, no cash compensation was paid
directly by the Corporation to any of its executive officers. Each of such
officers was compensated by First Federal. However, the corporation reimbursed
First Federal for certain of these compensation expenses.
The following table sets forth information as to annual, long-term and
other compensation for services in all capacities to the Corporation and its
subsidiaries for the last three fiscal years, of (i) the individual who served
as chief executive officer of the Corporation during the fiscal year ended June
30, 1998, and (ii) each executive officer of the Corporation serving as such
during the 1998 fiscal year, who earned over $100,000 in salary and bonuses
during that year (the "Named Executive Officers").
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation
------------------------------------------------------------------------
Awards
---------------------------
Other Annual Restricted Securities All
Name and Principal Fiscal Compensation Stock Underlying Other
Position Year Salary($)(1) Bonus($)(2) ($)(3) Awards($) Options(#) Compensation($)
- - -------- ---- ------------ ------------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
C. James McCormick 1998 $47,218 $33,000 - - 6,300 -
Chairman of the Board 1997 $43,531 $25,000 - - 6,300 -
and Chief Executive 1996 41,865 34,729 - - - -
Officer of the Corporation
and Chairman of the Board
of First Federal
Frank D. Baracani 1998 $113,008 $91,750 - - 6,518 -
President and Director 1997 $105,845 $72,000 - - 6,490 -
of the Corporation 1996 101,626 97,000 - - 171 -
and First Federal and
Chief Executive Officer
of First Federal
Mary Lynn Stenftenagel 1998 77,816 $58,750 - - 7,027 -
Director and Secretary- 1997 72,616 $48,000 - - 6,926 -
Treasurer of the 1996 69,471 64,000 - - 555 -
Corporation, Director,
Executive Vice President,
Secretary, and
Chief Financial Officer
of First Federal
</TABLE>
(1) Salary consists of salary and directors' fees. Directors' fees were
deferred by these individuals pursuant to the Corporation's Director
Deferred Compensation Plan.
(2) The bonus amounts are paid pursuant to First Federal's Management Incentive
Plan and were accrued in fiscal years to which they relate.
(3) The Named Executive Officer of the Corporation receive certain perquisites,
but the incremental cost of providing such perquisites does not exceed the
lesser of $50,000 or 10% of the officer's salary and bonus.
Stock Options
The following table sets forth information related to options granted
during fiscal year 1998 to each of the Named Executive Officers:
Option Grants-Last Fiscal Year
<TABLE>
<CAPTION>
% of Total
Options Granted to Exercise or
Options Employees Base Price
Name Granted (#) in Fiscal Year ($/Share) Expiration Date
- - ---------------------- ------------- ------------------ ------------- ---------------
<S> <C> <C> <C> <C>
C. James McCormick --- ---% $ --- ---
Frank D. Baracani 218 (1) 4.86% $16.59 (1) 6/30/98
Mary Lynn Stenftenagel 727 (1) 16.23% $16.59 (1) 6/30/98
</TABLE>
(1) Options to acquire shares of the Corporation's Common Stock pursuant to
the Corporation's Employee Stock Purchase Plan. The option exercise
price equaled 85% of the lower of the market value of a share of
Corporation Common Stock on July 1, 1997 and on June 30, 1998, which
was $19.52 per share.
The following table shows stock option exercises by the Named
Executive Officers during fiscal 1998, including the aggregate value realized
by such officers on the date of exercise. The following table includes the
number of shares covered by stock options held by the Named Executive
Officers as of June 30, 1998. Also reported are the values for "in-the-money"
options (options whose exercise price is lower than the market value of the
shares at fiscal year end) which represent the spread between the exercise
price of any such existing stock options and the year-end market price of the
stock.
Aggregate Option Exercises in Last Fiscal Year and
Outstanding Stock Option Grants and Value Realized As of 6/30/98
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Value Realized Underlying Unexercised In-the-Money
Acquired on at Exercise Options at Fiscal Year End Options at Fiscal Year End
Name Exercise(#) Date($)(1) Exercisable Unexercisable Exercisable Unexercisable
- - ---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
C. James McCormick - - 6,300 - $147,672 -
Frank D. Baracani 218 $ 5,648 6,300 - $147,672 -
Lynn Stenftenagel 727 $ 18,837 6,300 - $147,672 -
</TABLE>
(1) Aggregate market value of the shares covered by the option less the
aggregate price paid by the Named Executive Officer
(2) Amounts reflecting gains on outstanding option are based on the June
30, 1998 closing price of $42.50 per share.
Director's Fees
Directors of the Corporation are paid $150 for each regular monthly
meeting of the Board of Directors. Directors of First Federal are paid $600 for
each regular monthly meeting of the Board of directors of First Federal and
members of committees of First Federal's Board of Directors who are not
employees of the Corporation subsidiaries are paid $300 per Committee meeting
attended.
Director Deferred Compensation Plan
Effective July 1, 1993, First Federal entered into deferred
compensation agreements with each of its directors. Under the Agreements, First
Federal will defer an amount equal to $600 to which the director would otherwise
be entitled from First Federal for each month of the deferral. The director will
have the option of apportioning the deferral between a guaranteed investment
account which provides a fixed rate of return and a phantom unit account which
provides a return equivalent to the appreciation in the Corporation's Common
Stock during the period of the deferral. At the time the director reaches his or
her normal retirement date, the value of his or her guaranteed account and
phantom stock account will be annuitized and provide him or her with 180 monthly
payments. There are other provisions in the Agreement which provide for earlier
payment in the case of disability or in the case of death. In addition, there is
a one time burial benefit equal to $10,000.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of September 9, 1998, by each person who is
known by the Corporation to own beneficially 5% or more of the outstanding
shares of Common Stock of the Corporation.
<TABLE>
<CAPTION>
Number of Shares of
Name and Address of Common Stock Beneficially Percent of
Beneficial Owner Owned (1)(2) Class
<S> <C> <C>
Rahmi Soyugenc 105,112(3) 9.58%
119 LaDonna
Boulevard
Evansville, Indiana 47711
Investors of America Limited Partnership 99,176 9.04%
(formerly Dierberg Four, L.P.)
c/o First Securities America, Inc.
39 Glen Eagles Drive
St. Louis, Missouri 63124
Joseph H. 91,500 8.34%
Moss
1100 Circle 75 Parkway
Suite 800
Atlanta, Georgia 30339
</TABLE>
(1) Under applicable regulations, shares are deemed to be beneficially
owned by a "person if he or she directly or indirectly has or shares
the power to vote or dispose of the shares. Unless otherwise indicated,
the named beneficial owner has sole voting and dispositive power with
respect to the shares.
(2) The information in this chart is based on Schedule 13D Reports and
amendments thereto filed by the above listed individuals with the
Securities and Exchange Commission (the "SEC") containing information
concerning shares held by them, and written communications from the
shareholders. It does not reflect any changes in those shareholdings
which may have occurred since the date of such filings, amendments, or
communications.
(3) These shares include 4,340 shares held solely by Mr. Soyugenc's wife.
Information concerning the beneficial owners of shares by the
Corporation's management is incorporated from Item 10 of this report.
Item 13. Certain Relationships and Related Transactions.
During fiscal 1998 the Corporation and its subsidiaries retained the
law firm of Hart, Bell, Cummings, Ewing & Stuckey ("Hart, Bell"), of which firm
Mr. Donald G. Bell, director of the Corporation and First Federal, is a retired
partner.
Indebtedness of Management
Since the beginning of its fiscal year ended June 30, 1998, First
Federal had outstanding from time to time loans which were made to the directors
and executive officers of the Corporation and their associates, as defined in
Regulations of the SEC. First Federal offers loans to its directors, officers
and employees. However, all of such loans were made in the ordinary course of
business, at substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
nonaffiliated persons and did not involve more than the normal risk of
collectibility or present other unfavorable features.
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
1998
Annual
Report to
Financial Statements Shareholders
Independent Auditors' Report 16
Consolidated Statements of Financial Condition
as of June 30, 1998, and 1997. 17
Consolidated Statements of Earnings for the
Years Ended June 30, 1998, 1997, and 1996. 18
Consolidated Statements of Stockholders'
Equity for the Years Ended June 30, 1998,
1997, and 1996. 19
Consolidated Statements of Cash Flows for the
Years Ended June 30, 1998, 1997, and 1996. 20
Notes to Consolidated Financial Statements. 21
(b) There were no reports on Form 8-K filed during the quarter ended
June 30, 1998.
(c) The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit Index on page 50.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
<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 28, 1998 By:/s/ C. James McCormick
-------------------------------------
C. James McCormick
Chief Executive Officer
Date: September 28, 1998 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 28, 1998
- - ------------------------------------------
C. James McCormick, Chairman of the Board
and Chief Executive Officer
/s/ John J. Summers Date: September 28, 1998
- - ------------------------------------------
John J. Summers, Vice Chairman of the Board
/s/ Frank D. Baracani Date: September 28, 1998
- - ------------------------------------------
Frank D. Baracani, Director, President
/s/ Donald G. Bell Date: September 28, 1998
- - ------------------------------------------
Donald G. Bell, Director, Vice President
/s/ Mary Lynn Stenftenagel Date: September 28, 1998
- - ------------------------------------------
Mary Lynn Stenftenagel, Director,
Secretary/Treasurer (Principal Accounting and Financial Officer)
/s/ R. William Ballard Date: September 28, 1998
- - ------------------------------------------
R. William Ballard, Director
/s/ Rahmi Soyugenc Date: September 28, 1998
- - ------------------------------------------
Rahmi Soyugenc, Director
/s/ Ruth Mix Carnahan Date: September 28, 1998
- - ------------------------------------------
Ruth Mix Carnahan, Director
/s/ James W. Bobe Date: September 28, 1998
- - ------------------------------------------
James W. Bobe, Director
<PAGE>
EXHIBIT INDEX
No. Exhibits Page
3a Articles 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
1998. *
10d Form of Amended and Restated Director Deferred
Compensation Agreement, restated as of December 31, 1997
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. *
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 (incorporated by reference to Exhibit 10d to
the Registrant's Form 10-K for the year ended June 30,
1994). First Amendments to the foregoing Agreements Frank
D. Baracani and Mary Lynn Stenftenagel are attached. *
13 Annual Report to Shareholders __
21 Subsidiaries of the Registrant __
23a Independent Auditors' Consent __
23b Independent Auditors' Consent __
23c Independent Auditors' Consent __
27 Financial Data Schedule (to be filed electronically)
(*) Previously filed with the SEC and by this reference
incorporated into this Annual Report.
First Federal Bank, A Federal Savings Bank
MANAGEMENT INCENTIVE AWARD PLAN
1998 PLAN YEAR
Effective Date: July 1, 1997
<PAGE>
Management Incentive Award Plan July 1,1997
SECTION I
RESTRICTIONS ON INFORMATION
The contents of this Plan shall be disseminated only to the eligible employees
of the "Bank,, who are Participants as named on Exhibit "A,, and others on a
"need to know" basis.
The President may elect a more limited distribution.
SECTION II
PURPOSE OF THE PLAN
The purpose of the Plan is to provide those employees of the Bank, primarily
responsible for the development and execution of strategies, management of
personnel and programs, innovation, and earning of profits, with an incentive,
beyond their salaries, to strive for the long term production of higher than
average return on equity for the Bank. In general it is the philosophy of the
Board of Directors that base salaries on these employees be held below the
prevailing base salaries on Bank peers but, based on results, the sum of base
and incentive can approach or even exceed the highest peer's total compensation.
This allows a substantial part of compensation to be tied to personal and Bank
performance and provides motivation by --
1. requiring the production of an acceptable level of after-tax profit
for the shareholders before employee participation;
2. requiring the establishment of individual year-end performance
reviews which compliment those of the Chairman and President and serve to
demonstrate the achievement of strategic and personal performance which may
or may not reflect in short-term profit; and
3. providing guidance in an equitable method of allocating individual
awards based on performance, contribution and achievement.
Careful thought has gone into the development of this Plan. It is believed to
provide an effective motivational tool for management participants in a safe and
sound environment to produce better than average return on equity for the
shareholders.
- 1 -
Management Incentive Award Plan July 1, 1997
SECTION III
ADMINISTRATION OF THE PLAN
The Plan will be administered by the Personnel and Pension Committee of the
Board of Directors with the assistance of the Chairman of the Board and the
President.
The Committee shall have the right to interpret the Plan and to approve for
recommendation to the Board of Directors the list of Participants (Exhibit "A").
The Board of Directors may amend, modify or terminate the Plan at any time prior
to the distribution of the incentive payment as set forth in Section VIII. Said
amendment, modification, or termination may be retroactive, and no employee
shall have any vested rights pursuant to this Plan.
The Plan is not and does not become a part of any present or future employment
contract. No earned or anticipated incentive payment may be attached,
transferred, pledged or assigned. Upon clear evidence of such action, the Board
of Directors may, without notification, elect to withhold the payment of all or
any part of any individual's payment.
Incentive awards shall be treated as an expense in the Fiscal Year in which the
awards are earned and not the Fiscal Year in which paid. Proper withholding for
taxes shall be applied to all awards under this Plan.
First Federal Bank, A F.S.B. shall not merge into or consolidate with another
entity or sell all or substantially all of its assets to another entity unless
such other entity becomes obligated to perform the terms and conditions relating
to awards already earned but not yet paid.
SECTION IV
PARTICIPANT ELIGIBILITY
A Participant must be a management employee as provided for in Exhibit "A" of
this Plan and remain in the employ of the Bank through June 30, 1998 for
consideration. Except, if a Participant dies, becomes disabled, retires or is
granted, in writing, a Leave of Absence under 1ST BANCORP's Personnel Policy,
the Chairman of the Board or President may, at their discretion, recommend for
the Committee's review and the Board of Directors ultimate approval, a partial
award based on Participant's performance, contribution and achievement of goals.
Other management employees, such as those employed in branch mortgage
origination offices and First Financial Insurance Agency, Inc. are incentive
compensated on another basis more directly identifiable with their operations
and are not included in this Plan.
- 2 -
<PAGE>
Management Incentive Award Plan July 1, 1997
SECTION V
GENERAL PREMISES
This Plan is based on four fundamental factors:
1. After tax but before incentive year-end profit as adjusted by the
Board of Directors for any extraordinary factors or those which could be
perceived as resulting from risk taking to achieve short-term profits.
2. Equity.
3. Maximizing the potential contribution of each Participant based on
resources and direction afforded the individual.
4. The appraisal of each Participant's individual job performance and
contribution towards the Bank's long-term goals.
SECTION VI
EVALUATING PERFORMANCE
The Board of Directors desires that the organization's management function as a
team and strive to achieve results together. Toward this end, while none of us
are prescient, we require that personal objectives or areas of work emphasis for
the year be identified that are expected to contribute to the whole.
By July 30, 1998, each if the participants listed in Exhibit "A", with the
exception of the Board Chairman, President and Executive Vice President, shall
prepare and submit a chronological listing, with some narrative explanation to
define scope and/or benefit to the bank, of their accomplishments during the
preceding FY, to the President. The President shall review the submissions of
accomplishments and as he deems appropriate consult with both the individuals
and supervisors. The President with the Board Chairman and Executive Vice
President, shall rank order the submissions and provide copies of the
participants' submission, plus their rank order to the Chairman of the Pension
and Personnel Committee, for their information no later than August 15th.
- 3 -
<PAGE>
Management Incentive Award Plan July 1, 1997
By August 15th, the Board Chairman, President and Executive Vice President,
shall prepare and submit a chronological listing, with some narrative
explanation to define scope and/or benefit to the bank, of their accomplishments
during the preceding FY, to the Chairman of the Pension and Personnel Committee
if so requested. The Pension and Personnel Committee shall meet and after
reviewing the accomplishments of the Board Chairman, President and Executive
Vice President, allocate their performance bonuses
At the August monthly Board of Directors Meeting the Chairman of the Pension and
Personnel Committee will submit his recommendations for the allocation of the
annual bonus pool. The Pension and Personnel Committee will advise the President
of the balance of funds available for allocation among the remaining plan
participants no later than August 30th. Following discussion and approval of the
recommendations the distribution of the annual bonuses will be affected to all
participants in a Special September Payroll on or before September 15th.
SECTION VII
DETERMINATION OF INCENTIVE AWARD FUND
The Board of Directors anticipates each year to contain challenges for the
management team. Wanting to continue to emphasize a results based compensation
component while first rewarding shareholders, it seems prudent to base the
Management Incentive Award Fund on the Bank's Return on Equity.
As of June 30, 1998, the Management Incentive Award Fund will be determined as
follows:
1. The Board of Directors has determined 1ST BANCORP's equity as of
the end of the FY1997, to be $22,332,876. A base Net Income of $781,650 is
required for the Management Incentive Award Plan.
2. If 1ST BANCORPS's Net Income exceeds $781,650, then 20% of the
excess shall be deemed eligible for and the basis for establishing the
Management Incentive Award Fund subject to review by the Board of
Directors.
3. The Management Incentive Award Fund is to be reviewed by the Board
of Directors and, at their sole discretion, adjusted for extraordinary
effects during the Fiscal Year and/or for any transactions that resulted
from excessive risk-taking to achieve short- term results. It is understood
that there is normally a risk-reward relationship. The Board of Directors'
judgment will be employed in the assessment of the limit of "acceptable,,
risk-taking.
- 4 -
<PAGE>
Management Incentive Award Plan July 1, 1997
SECTION VIII
DISTRIBUTION
The Personnel and Pension Committee, none of whom are Participants, will look
first at the sum of the year's earnings of all Participants and the difference
between that and the annual total compensation of the most recent peer survey(s)
of positions most like ours. That compared to the Management Incentive Award
Fund generated in Section VII will guide in the overall allocation of the
individual awards.
The Chairman of the Board, President and Executive Vice President & CFO shall
report to the Personnel and Pension Committee on accomplishments of their
individual objectives as set forth under Section VI. That, along with the
Personnel and Pension Committee's ongoing assessment through Board of Directors
and Personnel and Pension Committee meetings, Audit Reports, 10Q's and K's,
Examination Reports, and any other factors they deem pertinent, will become the
basis for their evaluation and the Chairman of the Board and the President. The
Chairman of the Board and the President will be invited to participate in the
evaluation of the Executive Vice President & CFO.
The Personnel and Pension Committee, with the Chairman of the Board and the
President, will recommend to the entire Board of Directors, the individual
incentive awards to the Chairman of the Board, President and the Executive Vice
President & CFO.
The President, with and through his management organization, will evaluate the
remaining other Participants' performance based on their synopsis of
achievements during the Fiscal Year and any other factors deemed pertinent.
Objective achievement will be a significant factor, though we appreciate that
evaluation is not an exact science. Other factors that may be considered would
be creativity and innovation brought to the job, community involvement,
professional development, teamwork, attendance, size of staff, cost
consciousness, budgetary responsibility, revenue generation, additional
responsibility assumed during the Fiscal Year not otherwise addressed all as a
part of a total job performance evaluation.
Based on the above individual evaluations and knowing the amount of the
Management Incentive Award Fund remaining to be allocated, the President will
prepare a listing showing the names of all Plan Participants and the incentive
award recommended for each by him. Appropriate explanation and/or interpretation
should accompany any unusual situation(s).
Final distribution/allocation approval of the Management Incentive Award Fund is
reserved for the Board of Directors. Payout of the Management Incentive Award
Fund, if generated, will be effected by September 15, 1997.
- 5 -
<PAGE>
Management Incentive Award Plan July 1, 1997
SECTION IX
CONCLUSION
It is the intention of the First Federal Bank, A F.S.B. to administer the
Management Incentive Award Plan so the maximum benefits commensurate with safe
and sound business practices will result for all Plan Participants and thereby
generously favor the shareholders. All restrictions, provisions for changes and
relief are included to provide maximum protection for the administrators and
stockholders, and to provide for the continuation of this Plan or some other
plan to accomplish the purposes set forth in Section II.
The Board of Directors will review the Plan annually, in the light of the
then-current conditions and Plan operation. If there are changes called for to
better meet the purpose, appropriate revisions will be adopted. Every effort
will be made to announce those changes to Participants before the Plan Year, but
no later than the end of the first quarter.
The Bank reaffirms its commitment to the principles of management participation
in setting of goals, and in incentive compensation after shareholder
satisfaction in recognition of achievement. The Bank firmly believes that a
strong incentive program will produce results for the shareholders.
- 6 -
<PAGE>
Management Incentive Award Plan July 1, 1997
EXHIBIT "A"
MANAGEMENT INCENTIVE AWARD PLAN PARTICIPANTS -- 97/98
C. James MCCORMICK, Chairman of the Board
Frank D. BARACANI, President & CEO
M. Lynn STENFTENAGEL, Executive Vice President & CFO
Carroll C. HAMNER, Senior Vice President
Gerald R. BELANGER, Senior Vice President
Bradley M. RUST, Senior Vice President & Controller
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
Doralynn ELLIOTT, Assistant Vice President
Kelly J. GAY, Assistant Vice President
Ruth E. HUNTER, Assistant Vice President
Randall W. PRATT, Assistant Vice President
Carol A. WITSHORK, Assistant Vice President
IN ADDITION TO THE ABOVE LISTED OFFICERS OF FIRST FEDERAL BANK, A F.S.B., AS OF
JULY 1, 1997, INDIVIDUALS SUBSEQUENTLY APPOINTED/PROMOTED AS OFFICERS IN THE
GRADE OF ASSISTANT VICE PRESIDENT OR ABOVE IN THE COURSE OF THE FISCAL YEAR
1998, SHALL BE DEEMED ELIGIBLE TO PARTICIPATE IN THE MANAGEMENT INCENTIVE AWARD
PROGRAM, SUBJECT TO THE RECOMMENDATION OF THE PRESIDENT, AND APPROVAL OF THE
BOARD OF DIRECTORS, SUCH PARTICIPATION MAY BE ON A PRO RATA BASIS AS A
PERCENTAGE OF THE FISCAL YEAR THAT THEY SERVE IN AN OFFICER CAPACITY. IT IS
NOTED THAT CURRENT AND FUTURE OFFICERS ASSIGNED TO MORTGAGE ORIGINATION OFFICES
ARE EXCLUDED FROM THE PLAN AND THAT ELIGIBILITY IS CONTINGENT UPON BEING IN A
QUALIFIED ACTIVE OFFICER STATUS AT THE END OF THE PLAN YEAR.
FIRST FEDERAL BANK, AFSB
DIRECTOR DEFERRED COMPENSATION AGREEMENT
(AS AMENDED AND RESTATED EFFECTIVE DECEMBER 31, 1997)
THIS DIRECTOR DEFERRED COMPENSATION AGREEMENT (THE "AGREEMENT"),
originally effective as of the 1st day of July, 1993, and as amended and
restated effective December 31, 1997 by and between FIRST FEDERAL BANK, AFSB, a
banking corporation organized and existing under the laws of the United States
(hereinafter referred to as "Bank") and C. James McCormick (hereinafter referred
to as "Director"), for the purpose of formalizing the agreement between the Bank
and the Director in which the Director defers receipt of fees under the terms
and conditions described below.
WITNESSETH:
WHEREAS, the Director serves the Bank as a member of the Board of
Directors; and
WHEREAS, the Bank recognizes the valuable services heretofore performed
for it by the Director and wishes to encourage continued service; and
WHEREAS, the Bank values the efforts, abilities and accomplishments of
the Director and recognizes that the Director's services will substantially
contribute to its continued growth and profits in the future; and
WHEREAS, the Director wishes to defer a certain portion of fees to be
earned in the future; and
WHEREAS, the parties hereto desire to formalize the terms and
conditions upon which the Bank shall pay such deferred compensation to the
Director and/or his designated beneficiary; and
WHEREAS, the Bank has adopted this Director Deferred Compensation
Agreement which controls all issues relating to the deferral of fees as
described herein;
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereto agree to the following terms and conditions:
SECTION I
DEFINITIONS
When used herein, the following words and phrases shall have the
meanings below unless the context clearly indicates otherwise:
1.1 "Accrued Benefit" means the sum of all deferred amounts and interest
credited to the Director's Retirement Account and due and owing to the
Director or his Beneficiaries pursuant to this Agreement.
1.2 "Bank" means FIRST FEDERAL BANK, AFSB or any successor thereto.
1.3 "Beneficiary" means the person, persons (and their heirs) or other
entity designated as Beneficiary in writing to the Bank to whom the
share of the deceased Director's Retirement Account is payable in the
event of his death. If no Beneficiary is so designated, then the
Director's Spouse, if living, will be deemed the Beneficiary. If the
Director's Spouse is not living, then the Children of Director will be
deemed the Beneficiaries and will take on a per stirpes basis. If there
are no living Children, then the Estate of the Director will be deemed
the Beneficiary.
1.4 "Board" means the Board of Directors of the Bank.
1.5 "Children" means the Director's children, both natural and adopted,
then living at the time payments are due the Children under this
Agreement.
1.6 "Deferral Period" means the period in which the Director has in effect
a deferral election; provided, however, that the Deferral Period shall
automatically terminate on June 30, 1998 or, if earlier, on the date of
the Director's Normal Retirement Date.
1.7 "Deferred Compensation Benefit" means that benefit which can be
provided by annuitizing the Director's Retirement Account balance as of
the Valuation Date immediately preceding the initial distribution date
over a one hundred eighty (180) month period. A monthly interest factor
of 1.075% shall be used to annuitize the account balance.
1.8 "Disability" means the determination by a duly licensed physician
selected by the Bank that because of ill health, accident, disability
or general inability because of age, that Director is no longer able,
properly and satisfactorily, to perform his duties as a Director.
1.9 "Effective Date" shall be July 1, 1993.
1.10 "Estate" means the Estate (including, when applicable, any irrevocable
trust governing the transfer of non-probate assets) of the Director.
1.11 "Guaranteed Investment Contract Account" means book entries maintained
by the Bank reflecting deferred amounts with interest being credited at
the rate of .667% per month; provided, however, that the existence of
such book entries and the existence of the Guaranteed Investment
Contract Account shall not create and shall not be deemed to create a
trust of any kind, or fiduciary relationship between the Bank and the
Director, his designated Beneficiary or Beneficiaries under this
Agreement.
1.12 "Normal Retirement Date" means January 1, 1999.
1.13 "Payout Period" means the time frame in which certain benefits payable
hereunder shall be distributed. Payments shall be made in equal
consecutive monthly installments commencing on the first day of the
month coincident with or next following the occurrence of any event
which triggers distribution and continuing for a period of one hundred
eighty (180) months.
1.14 "Phantom Unit Account" means the total value of all units of phantom
stock purchased by the Director, each having a value equal to the fair
market value (as determined in the manner provided below) of a share of
1ST BANCORP common stock. The fair market value of the Director's
Phantom Unit Account shall be determined as of the Valuation Date
immediately preceding the date on which the Director's Retirement
Account is annuitized by converting each phantom unit to an amount
equal to the closing bid price of 1ST BANCORP's common stock on such
Valuation Date. The Director shall purchase phantom units at a price
per share equal to eighty-five percent (85%) of the fair market value
(as determined above) of a share of 1ST BANCORP's common stock on the
Valuation Date immediately preceding the calendar year quarter to which
the deferral of fees and purchase relates.
The Director's Phantom Unit Account shall also be credited with
additional phantom units at each date on which 1ST BANCORP makes a cash
dividend or an in kind dividend (other than its common stock) with
respect to its shares. The number of units to be credited shall be
determined by dividing the amount of the cash dividend or the fair
market value of any in kind dividend by 85% of the fair market value
(as determined above) of a share of 1ST BANCORP's common stock on the
Valuation Date immediately preceding the calendar year quarter in which
the dividend is paid with respect to 1ST BANCORP's common stock.
1.15 "Retirement Account" means book entries maintained by the Bank
reflecting deferred amounts and equal to the sum of the Guaranteed
Investment Contract Account and the Phantom Unit Account. The existence
of such book entries and the Retirement Account shall not create and
shall not be deemed to create a trust of any kind, or a fiduciary
relationship between the Bank and the Director, his designated
Beneficiary, or other Beneficiaries under this Agreement.
1.16 "Spouse" means the individual to whom the Director is legally married
at the time of the Director's death.
1.17 "Survivor's Benefit" means monthly level payments to the Beneficiary in
the amount of Eight Hundred Ten Dollars and Eighty-Three Cents
($810.83) for one hundred eighty (180) months. In the event the
Survivor's Benefit is less than the Deferred Compensation Benefit, the
Deferred Compensation benefit shall be paid in lieu of the Survivor's
Benefit. In no event is it intended for the Director to receive both a
Survivor's Benefit and Deferred Compensation Benefit.
1.18 "Valuation Date" means the last business day of March, June, September,
December beginning on and after June 30, 1993.
<PAGE>
SECTION II
DEFERRED COMPENSATION
Commencing on the Effective Date, and continuing through the end of
the Deferral Period, the Director and the Bank agree that the Director shall
defer into his Retirement Account monthly Director's fees of Six Hundred
($600.00) Dollars that the Director would otherwise be entitled to receive from
the Bank for each month of the Deferral Period. The Director shall direct the
apportionment of his monthly deferral between the Guaranteed Investment Contract
Account and the Phantom Unit Account. Such allocation shall be in twenty-five
(25%) percent increments and shall be evidenced in writing by completion of an
Election Form (Exhibit B). If the Director fails to submit an Election Form, one
hundred percent (100%) of his monthly deferrals shall be allocated to the
Guaranteed Investment Contract Account. The Director shall have the right to
change such apportionment once per year for new deferrals and for existing
bookkeeping balances held in his Retirement Account, such change becoming
effective at the next plan anniversary date (January 1). Any change in the
allocation for existing balances may be made in whole dollar amounts or in
twenty-five percent (25%) increments. Any such change must also be evidenced in
writing to become effective.
<PAGE>
SECTION III
TERMINATION OF ELECTION AND NEW ELECTIONS
The Director's election to defer compensation shall continue in
effect, pursuant to the terms of this Agreement unless and until the Director
files with the Bank a Notice of Discontinuance (Exhibit C attached hereto). A
Notice of Discontinuance shall be effective if filed at least twenty (20) days
prior to any January 1st. Such Notice of Discontinuance shall be effective
commencing with the January 1st following its filing. If the Director
discontinues his deferrals, he may reinstate the deferrals as of a January 1st
by filing in writing an election to recommence deferrals at least twenty (20)
days prior to the January 1st on which the deferrals are to recommence.
SECTION IV
RETIREMENT BENEFIT
4.1 Retirement Benefit. At Normal Retirement Date, the Bank agrees to
commence payment of the Director's Deferred Compensation Benefit. Such
payments will be in accordance with the terms of the Payout Period.
4.2 Disability Retirement Benefit. Notwithstanding any other provision
hereof, the Director shall be entitled to receive his Deferred
Compensation Benefits hereunder prior to his Normal Retirement Date in
any case the Director terminates service due to Disability. The benefit
shall be distributed in accordance with the Payout Period. In the event
the total benefits received by the Director pursuant to this Subsection
are less than the total Survivor's Benefit [i.e., One Hundred
Forty-Five Thousand Nine Hundred Fifty Dollars ($145,950)], upon
Director's death, an additional lump sum payment shall be made to
Director's Beneficiary to make up the difference between these two (2)
gross benefit amounts.
SECTION V
DEATH BENEFITS
5.1 Death Prior to Termination of Service. In the event of the Director's
death prior to termination of service with the Bank, while covered by
the provisions of this Agreement, the Director's Beneficiary shall be
paid the Survivor's Benefit. Payments shall be in accordance with the
Payout Period.
5.2 Death After Termination of Service. In the event of the Director's
death after his termination of service, but prior to commencing receipt
of benefit payments under this Agreement, the Director's Beneficiary
shall be paid a monthly amount for a period of one hundred eighty (180)
months, commencing within thirty (30) days of the Director's death. The
amount of such benefit payment shall be determined as follows:
(a) If the Director has deferred less than Thirty-Six Thousand
Dollars ($36,000), the Director's Beneficiary shall be paid a
reduced Survivor's Benefit, which shall be determined by
multiplying the Survivor's Benefit (Eight Hundred Ten Dollars
and Eighty-Three Cents ($810.83)) by a fraction, the numerator
of which shall be equal to the total compensation actually
deferred by the Executive and the denominator of which shall
be equal to Thirty-Six Thousand Dollars ($36,000).
(b) If death occurs after the Director has deferred Thirty-Six
Thousand Dollars ($36,000), his Beneficiary shall be paid the
Survivor's Benefit.
5.3 Death After Commencement of Benefits. In the event of the Director's
death after the commencement of the Deferred Compensation Benefit, but
prior to the completion of all such payments due and owing hereunder,
the Bank shall continue to make monthly payments to the Director's
Beneficiary until a total of one hundred eighty (180) equal monthly
payments have been made to the Director and/or his Beneficiary.
5.4 Additional Death Benefit Burial Expense. In addition to the
above-described death benefits, upon the Director's death, the
Director's Beneficiary shall be entitled to receive a one-time lump sum
death benefit in the amount of Ten Thousand ($10,000.00) Dollars;
provided, however, that if the Director ceases to be a member of the
Board before July 1, 1998 for reasons other than his death or
disability, the one-time lump sum election death benefit otherwise
provided in this Subsection shall not be payable.
SECTION VI
CHANGES IN CAPITAL AND CORPORATE STRUCTURE
In the event of any change in the outstanding shares of common stock
of the Bank by reason of an issuance of additional shares, recapitalization,
reclassification, reorganization, stock split, reverse stock split, combination
of shares, stock dividend or similar transaction, the Board shall
proportionately adjust, in an equitable manner, the number of phantom units in
the Director's Phantom Unit Account as well as the purchase price of phantom
units. The foregoing adjustments shall be made in a manner that will cause the
relationship between the cost and market value of each phantom unit purchased
hereunder to remain unchanged as a result of the applicable transaction.
<PAGE>
SECTION VII
BENEFICIARY DESIGNATION
The Director shall have the right, at any time, to submit in
substantially the form attached hereto as Exhibit A, a written designation of
primary and secondary Beneficiaries to whom payment under this Agreement shall
be made in the event of his death prior to complete distribution of the benefits
due and payable under the Agreement. Each Beneficiary designation shall become
effective only when receipt thereof is acknowledged in writing by the Bank.
<PAGE>
SECTION VIII
DIRECTOR'S RIGHT TO ASSETS
The rights of the Director, any Beneficiary, or any other person
claiming through the Director under this Agreement, shall be solely those of an
unsecured general creditor of the Bank. The Director, the Beneficiary, or any
other person claiming through the Director, shall only have the right to receive
from the Bank those payments as specified under this Agreement. The Director
agrees that he, his Beneficiary, or any other person claiming through him shall
have no rights or interests whatsoever in any asset of the Bank, including any
insurance policies or contracts which the Bank may possess or obtain to
informally fund this Agreement. Any asset used or acquired by the Bank in
connection with the liabilities it has assumed under this Agreement, except as
expressly provided, shall not be deemed to be held under any trust for the
benefit of the Director or his Beneficiaries, nor shall any asset be considered
security for the performance of the obligations of the Bank. Any such asset
shall be and remain, a general, unpledged, and unrestricted asset of the Bank.
<PAGE>
SECTION IX
RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust
any fund or money with which to pay its obligations under this Agreement. The
Director, his Beneficiaries or any successor in interest to him shall be and
remain simply a general unsecured creditor of the Bank in the same manner as any
other creditor having a general claim for matured and unpaid compensation. The
Bank reserves the absolute right at its sole discretion to either purchase
assets to meet its obligations undertaken by this Agreement or to refrain from
the same and to determine the extent, nature, and method of such asset
purchases. Should the Bank decide to purchase assets such as life insurance,
mutual funds, disability policies or annuities, the Bank reserves the absolute
right, in its sole discretion, to terminate such assets at any time, in whole or
in part. At no time shall the Director be deemed to have any lien, nor right,
title or interest in or to any specific investment or to any assets of the Bank.
If the Bank elects to invest in a life insurance, disability or annuity policy
upon the life of the Director, then the Director shall assist the Bank by freely
submitting to a physical examination and supplying such additional information
necessary to obtain such insurance or annuities.
<PAGE>
SECTION X
ALIENABILITY AND ASSIGNMENT PROHIBITION
Neither the Director nor any Beneficiary under this Agreement shall
have any power or right to transfer, assign, anticipate, hypothecate, mortgage,
commute, modify or otherwise encumber in advance any of the benefits payable
hereunder, nor shall any of said benefits be subject to seizure for the payment
of any debts, judgments, alimony or separate maintenance owed by the Director or
his Beneficiary, nor be transferable by operation of law in the event of
bankruptcy, insolvency or otherwise.
SECTION XI
ACT PROVISIONS
11.1 Named Fiduciary and Administrator. The Bank shall be the named
fiduciary and administrator of this Agreement. As administrator, the
Bank shall be responsible for the management, control and
administration of the Agreement as established herein. The
administrator may delegate to others certain aspects of the management
and operational responsibilities of the Agreement, including the
employment of advisors and the delegation of ministerial duties to
qualified individuals.
11.2 Claims Procedure and Arbitration. In the event that benefits under this
Agreement are not paid to the Director (or to his Beneficiary in the
case of the Director's death) and such claimants feel they are entitled
to receive such benefits, then a written claim must be made to the Bank
within sixty (60) days from the date payments are refused. The Bank and
its Board shall review the written claim and, if the claim is denied,
in whole or in part, they shall provide in writing, within ninety (90)
days of receipt of such claim, their specific reasons for such denial,
reference to the provisions of this Agreement upon which the denial is
based, and any additional material or information necessary to perfect
the claim. Such written notice shall further indicate the additional
steps to be taken by claimants if a further review of the claim denial
is desired.
If claimants desire a second review, they shall notify the Bank in
writing within sixty (60) days of the first claim denial. Claimants may
review the Agreement or any documents relating thereto and submit any
written issues and comments they may feel appropriate. In its sole
discretion, the Bank, through the disinterested member of its Board,
shall then review the second claim and provide a written decision
within sixty (60) days of receipt of such claim. This decision shall
likewise state the specific reasons for the decision and shall include
reference to specific provisions of the Agreement upon which the
decision is based.
If claimants continue to dispute the benefit denial based upon
completed performance of the Agreement or the meaning and effect of the
terms and conditions thereof, then claimants may submit the dispute to
a board of Arbitration for final arbitration. Said board shall consist
of one member selected by the claimant, one member selected by the
Bank, and the third member selected by the first two members. The board
of Arbitration shall operate under any generally recognized set of
arbitration rules. The parties hereto agree that they and their heirs,
personal representatives, successors and assigns shall be bound by the
decision of such arbitration board with respect to any controversy
properly submitted to it for determination.
SECTION XII
MISCELLANEOUS
12.1 No Effect on Directorship Rights. Nothing contained herein will confer
upon the Director the right to be retained in the service of the Bank
nor limit the right of the Bank to discharge or otherwise deal with the
Director without regard to the existence of the Agreement. Pursuant to
12 C.F.R. ss. 563.39(b), the following conditions shall apply to this
Agreement:
(1) The Board may remove the Director at any time, but any removal
by the Board shall not prejudice the Director's vested right
to compensation or other benefits under the contract.
(2) If the Director is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a
notice served under Section 8(e)(3) or (g)(1) of the Federal
Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)) the
Bank's obligations under the contract shall be suspended as of
the date of termination of service unless stayed by
appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay the Director
all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate (in whole or in
part) any of its obligations which were suspended.
(3) If the Director is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order
issued under Section 8(e)(4) or (g)(1) of the Federal Deposit
Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the Bank under the contract shall terminate as
of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(4) If the Bank is in default (as defined in Section 3(x)(1) of
the Federal Deposit Insurance Act), all obligations under the
contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the
contracting parties.
(5) All non-vested obligations under the contract shall be
terminated, except to the extent determined that continuation
of the contract is necessary for the continued operation of
the Bank:
(i) by the Director or his designee at the time the
Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement
to provide assistance to or on behalf of the Bank
under the authority contained in ss. 13(c) of the
Federal Deposit Insurance Act; or
(ii) by the Director or his designee, at the time the
Director or his designee approves a supervisory
merger to resolve problems related to operation of
the Bank or when the Bank is determined by the
Director to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not
be affected by such action.
12.2 State Law. The Agreement is established under, and will be construed
according to, the laws of the State of Indiana.
12.3 Severability. In the event that any of the provisions of this Agreement
or portion thereof, are held to be inoperative or invalid by any court
of competent jurisdiction, then: (1) insofar as is reasonable, effect
will be given to the intent manifested in the provisions held invalid
or inoperative, and (2) the validity and enforceability of the
remaining provisions will not be affected thereby.
12.4 Incapacity of Recipient. In the event the Director is declared
incompetent and a conservator or other person legally charged with the
care of his person or of his estate is appointed, any benefits under
the Agreement to which such the Director is entitled shall be paid to
such conservator or other person legally charged with the care of his
person or his estate. Except as provided above in this paragraph, when
the Board, in its sole discretion, determines that the Director is
unable to manage his financial affairs, the Board may direct the Bank
to make distributions to any person for the benefit of the Director.
12.5 Recovery of Estate Taxes. If the Director's gross estate for federal
estate tax purposes includes any amount determined by reference to and
on account of this Deferred Compensation Agreement, and if the
Beneficiary is other than the Director's Estate, then the Director's
Estate shall be entitled to recover from the Beneficiary receiving such
benefit under the terms of the Survivor's Benefit an amount by which
(x) the total estate tax due by Director's estate, exceeds (y) the
total estate tax which would have been payable if the value of such
benefit had not been included in the Director's gross Estate. If there
is more than one person receiving such benefit, the right of recovery
shall be against each such person in proportion to the benefits
received by each such person. In the event any Beneficiary has a
liability hereunder, such Beneficiary may petition the Bank for a lump
sum payment in an amount not to exceed the Beneficiary's liability
hereunder.
12.6 Unclaimed Benefit. The Director shall keep the Bank informed of his
current address and the current address of his Beneficiaries. The Bank
shall not be obligated to search for the whereabouts of any person. If
within three (3) years after the actual death of the Director the Bank
is unable to locate any Beneficiary of the Director, then the Bank may
fully discharge its obligation by payment to the Estate.
12.7 Limitations on Liability. Notwithstanding any of the preceding
provisions of the Agreement and except for the benefits otherwise
payable under this Agreement, neither the Bank, nor any individual
acting as an employee or agent of the Bank, or as a member of the Board
shall be liable to the Director or any other person for any claim,
loss, liability or expense incurred in connection with the Agreement.
12.8 Gender. Whenever in this Agreement words are used in the masculine or
neuter gender, they shall be read and construed as in the masculine,
feminine or neuter gender, whenever they should so apply.
12.9 Affect on Other Corporate Benefit Agreements. Nothing contained in this
Agreement shall affect the right of the Director to participate in or
be covered by any qualified or non-qualified pension, profit sharing,
group, bonus or other supplemental compensation or fringe benefit
agreement constituting a part of the Bank's existing or future
compensation structure.
12.10 Suicide. Notwithstanding anything to the contrary in this Agreement,
the Survivor Benefits otherwise provided herein shall not be payable if
the Director's death results from suicide, whether sane or insane,
within two (2) years after the execution of this Agreement. If the
Director dies during this two year period due to suicide, the balance
of the Retirement Account will be paid to the Director's designated
Beneficiary in a single payment. Payment is to be made within thirty
(30) days after the Director's death is declared a suicide by competent
legal authority. Credit shall be given to the Bank for payments made
prior to determination of suicide.
12.11 Headings. Headings and sub-headings in this Agreement are inserted for
reference and convenience only and shall not be deemed a part of this
Agreement.
SECTION XIII
AMENDMENT/REVOCATION
This Agreement shall not be amended, modified or revoked at any time,
in whole or part, without the mutual written consent of the Director and the
Bank, and such mutual consent shall be required even if the Director is no
longer serving the Bank as a member of the Board.
<PAGE>
SECTION XIV
EXECUTION
14.1 This Agreement sets forth the entire understanding of the parties
hereto with respect to the transactions contemplated hereby, and any
previous agreements or understandings between the parties hereto
regarding the subject matter hereof are merged into and superseded by
this Agreement.
14.2 This Agreement shall be executed in duplicate, each copy of which, when
so executed and delivered, shall be an original, but both copies shall
together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Amended and Restated
Agreement to be executed on this 19th day of Dec., 1997.
/s/ C. James McCormick
C. James McCormick
FIRST FEDERAL BANK, AFSB
By: Lynn Stenftenagel
Executive Vice President
(Title)
<PAGE>
DIRECTOR DEFERRED COMPENSATION AGREEMENT
BENEFICIARY DESIGNATION
_____________________, under the terms of a certain Director Deferred
Compensation Agreement by and between him and FIRST FEDERAL BANK, AFSB,
Vincennes, Indiana, dated __________________, 19__, hereby designates the
following Beneficiary to receive any guaranteed payments or death benefits under
such Agreement, following his death:
PRIMARY BENEFICIARY:
SECONDARY BENEFICIARY:
This Beneficiary Designation hereby revokes any prior Beneficiary
Designation which may have been in effect.
Such Beneficiary Designation is revocable.
DATE: , 19
(WITNESS) , Director
(WITNESS)
Exhibit A
<PAGE>
DIRECTOR DEFERRED COMPENSATION AGREEMENT
ELECTION FORM
NAME:
(Please Print)
Investment Allocation Election: I hereby elect to have my monthly deferrals
credited with earnings or losses based on the following allocation:
(Indicate Percentage in Increments of 25% Only)
Guaranteed Investment Contract Account _______ %
Phantom Unit Account _______ %
Total (Must Equal 100%) _______ %
DATE , Director
Exhibit B
<PAGE>
DIRECTOR DEFERRED COMPENSATION AGREEMENT
NOTICE OF DISCONTINUANCE
TO: FIRST FEDERAL BANK, AFSB
Attention:
I hereby give notice of my election to discontinue deferral of my
compensation under that certain Director Deferred Compensation Agreement, by and
between Bank and the undersigned, dated the ____ day of __________, 199 . This
notice is submitted at least twenty (20) days prior to January 1st and shall be
effective as of such date, as specified below.
Discontinue deferral as of January 1, 19___.
, Director
DATE
Exhibit C
FIRST FEDERAL BANK, AFSB
DIRECTOR DEFERRED COMPENSATION AGREEMENT
(AS AMENDED AND RESTATED EFFECTIVE DECEMBER 31, 1997)
THIS DIRECTOR DEFERRED COMPENSATION AGREEMENT (THE "AGREEMENT"),
originally effective as of the 1st day of July, 1993, and as amended and
restated effective December 31, 1997 by and between FIRST FEDERAL BANK, AFSB, a
banking corporation organized and existing under the laws of the United States
(hereinafter referred to as "Bank") and Ruth Mix Carnahan (hereinafter referred
to as "Director"), for the purpose of formalizing the agreement between the Bank
and the Director in which the Director defers receipt of fees under the terms
and conditions described below.
WITNESSETH:
WHEREAS, the Director serves the Bank as a member of the Board of
Directors; and
WHEREAS, the Bank recognizes the valuable services heretofore
performed for it by the Director and wishes to encourage continued service; and
WHEREAS, the Bank values the efforts, abilities and accomplishments
of the Director and recognizes that the Director's services will substantially
contribute to its continued growth and profits in the future; and
WHEREAS, the Director wishes to defer a certain portion of fees to be
earned in the future; and
WHEREAS, the parties hereto desire to formalize the terms and
conditions upon which the Bank shall pay such deferred compensation to the
Director and/or his designated beneficiary; and
WHEREAS, the Bank has adopted this Director Deferred Compensation
Agreement which controls all issues relating to the deferral of fees as
described herein;
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereto agree to the following terms and conditions:
SECTION I
DEFINITIONS
When used herein, the following words and phrases shall have the
meanings below unless the context clearly indicates otherwise:
1.1 "Accrued Benefit" means the sum of all deferred amounts and interest
credited to the Director's Retirement Account and due and owing to
the Director or his Beneficiaries pursuant to this Agreement.
1.2 "Bank" means FIRST FEDERAL BANK, AFSB or any successor thereto.
1.3 "Beneficiary" means the person, persons (and their heirs) or other
entity designated as Beneficiary in writing to the Bank to whom the
share of the deceased Director's Retirement Account is payable in the
event of his death. If no Beneficiary is so designated, then the
Director's Spouse, if living, will be deemed the Beneficiary. If the
Director's Spouse is not living, then the Children of Director will
be deemed the Beneficiaries and will take on a per stirpes basis. If
there are no living Children, then the Estate of the Director will be
deemed the Beneficiary.
1.4 "Board" means the Board of Directors of the Bank.
1.5 "Children" means the Director's children, both natural and adopted,
then living at the time payments are due the Children under this
Agreement.
1.6 "Deferral Period" means the period in which the Director has in
effect a deferral election; provided, however, that the Deferral
Period shall automatically terminate on June 30, 1998 or, if earlier,
on the date of the Director's Normal Retirement Date.
1.7 "Deferred Compensation Benefit" means that benefit which can be
provided by annuitizing the Director's Retirement Account balance as
of the Valuation Date immediately preceding the initial distribution
date over a one hundred eighty (180) month period. A monthly interest
factor of 1.075% shall be used to annuitize the account balance.
1.8 "Disability" means the determination by a duly licensed physician
selected by the Bank that because of ill health, accident, disability
or general inability because of age, that Director is no longer able,
properly and satisfactorily, to perform his duties as a Director.
1.9 "Effective Date" shall be July 1, 1993.
1.10 "Estate" means the Estate (including, when applicable, any
irrevocable trust governing the transfer of non-probate assets) of
the Director.
1.11 "Guaranteed Investment Contract Account" means book entries
maintained by the Bank reflecting deferred amounts with interest
being credited at the rate of .667% per month; provided, however,
that the existence of such book entries and the existence of the
Guaranteed Investment Contract Account shall not create and shall not
be deemed to create a trust of any kind, or fiduciary relationship
between the Bank and the Director, his designated Beneficiary or
Beneficiaries under this Agreement.
1.12 "Normal Retirement Date" means January 1, 1998.
1.13 "Payout Period" means the time frame in which certain benefits
payable hereunder shall be distributed. Payments shall be made in
equal consecutive monthly installments commencing on the first day of
the month coincident with or next following the occurrence of any
event which triggers distribution and continuing for a period of one
hundred eighty (180) months.
1.14 "Phantom Unit Account" means the total value of all units of phantom
stock purchased by the Director, each having a value equal to the
fair market value (as determined in the manner provided below) of a
share of 1ST BANCORP common stock. The fair market value of the
Director's Phantom Unit Account shall be determined as of the
Valuation Date immediately preceding the date on which the Director's
Retirement Account is annuitized by converting each phantom unit to
an amount equal to the closing bid price of 1ST BANCORP's common
stock on such Valuation Date. The Director shall purchase phantom
units at a price per share equal to eighty-five percent (85%) of the
fair market value (as determined above) of a share of 1ST BANCORP's
common stock on the Valuation Date immediately preceding the calendar
year quarter to which the deferral of fees and purchase relates.
The Director's Phantom Unit Account shall also be credited with
additional phantom units at each date on which 1ST BANCORP makes a
cash dividend or an in kind dividend (other than its common stock)
with respect to its shares. The number of units to be credited shall
be determined by dividing the amount of the cash dividend or the fair
market value of any in kind dividend by 85% of the fair market value
(as determined above) of a share of 1ST BANCORP's common stock on the
Valuation Date immediately preceding the calendar year quarter in
which the dividend is paid with respect to 1ST BANCORP's common
stock.
1.15 "Retirement Account" means book entries maintained by the Bank
reflecting deferred amounts and equal to the sum of the Guaranteed
Investment Contract Account and the Phantom Unit Account. The
existence of such book entries and the Retirement Account shall not
create and shall not be deemed to create a trust of any kind, or a
fiduciary relationship between the Bank and the Director, his
designated Beneficiary, or other Beneficiaries under this Agreement.
1.16 "Spouse" means the individual to whom the Director is legally married
at the time of the Director's death.
1.17 "Survivor's Benefit" means monthly level payments to the Beneficiary
in the amount of Five Hundred Fifty-Nine Dollars ($559) for one
hundred eighty (180) months. In the event the Survivor's Benefit is
less than the Deferred Compensation Benefit, the Deferred
Compensation benefit shall be paid in lieu of the Survivor's Benefit.
In no event is it intended for the Director to receive both a
Survivor's Benefit and Deferred Compensation Benefit.
1.18 "Valuation Date" means the last business day of March, June,
September, December beginning on and after June 30, 1993.
<PAGE>
SECTION II
DEFERRED COMPENSATION
Commencing on the Effective Date, and continuing through the end of
the Deferral Period, the Director and the Bank agree that the Director shall
defer into his Retirement Account monthly Director's fees of Six Hundred
($600.00) Dollars that the Director would otherwise be entitled to receive from
the Bank for each month of the Deferral Period. The Director shall direct the
apportionment of his monthly deferral between the Guaranteed Investment Contract
Account and the Phantom Unit Account. Such allocation shall be in twenty-five
(25%) percent increments and shall be evidenced in writing by completion of an
Election Form (Exhibit B). If the Director fails to submit an Election Form, one
hundred percent (100%) of his monthly deferrals shall be allocated to the
Guaranteed Investment Contract Account. The Director shall have the right to
change such apportionment once per year for new deferrals and for existing
bookkeeping balances held in his Retirement Account, such change becoming
effective at the next plan anniversary date (January 1). Any change in the
allocation for existing balances may be made in whole dollar amounts or in
twenty-five percent (25%) increments. Any such change must also be evidenced in
writing to become effective.
<PAGE>
SECTION III
TERMINATION OF ELECTION AND NEW ELECTIONS
The Director's election to defer compensation shall continue in
effect, pursuant to the terms of this Agreement unless and until the Director
files with the Bank a Notice of Discontinuance (Exhibit C attached hereto). A
Notice of Discontinuance shall be effective if filed at least twenty (20) days
prior to any January 1st. Such Notice of Discontinuance shall be effective
commencing with the January 1st following its filing. If the Director
discontinues his deferrals, he may reinstate the deferrals as of a January 1st
by filing in writing an election to recommence deferrals at least twenty (20)
days prior to the January 1st on which the deferrals are to recommence.
SECTION IV
RETIREMENT BENEFIT
4.1 Retirement Benefit. At Normal Retirement Date, the Bank agrees to
commence payment of the Director's Deferred Compensation Benefit.
Such payments will be in accordance with the terms of the Payout
Period.
4.2 Disability Retirement Benefit. Notwithstanding any other provision
hereof, the Director shall be entitled to receive his Deferred
Compensation Benefits hereunder prior to his Normal Retirement Date
in any case the Director terminates service due to Disability. The
benefit shall be distributed in accordance with the Payout Period. In
the event the total benefits received by the Director pursuant to
this Subsection are less than the total Survivor's Benefit [i.e., One
Hundred Thousand Six Hundred Twenty Dollars ($100,620)], upon
Director's death, an additional lump sum payment shall be made to
Director's Beneficiary to make up the difference between these two
(2) gross benefit amounts.
SECTION V
DEATH BENEFITS
5.1 Death Prior to Termination of Service. In the event of the Director's
death prior to termination of service with the Bank, while covered by
the provisions of this Agreement, the Director's Beneficiary shall be
paid the Survivor's Benefit. Payments shall be in accordance with the
Payout Period.
5.2 Death After Termination of Service. In the event of the Director's
death after his termination of service, but prior to commencing
receipt of benefit payments under this Agreement, the Director's
Beneficiary shall be paid a monthly amount for a period of one
hundred eighty (180) months, commencing within thirty (30) days of
the Director's death. The amount of such benefit payment shall be
determined as follows:
(a) If the Director has deferred less than Twenty-Eight
Thousand Eight Hundred Dollars ($28,800), the Director's
Beneficiary shall be paid a reduced Survivor's Benefit,
which shall be determined by multiplying the Survivor's
Benefit (Five Hundred Fifty-Nine Dollars ($559)) by a
fraction, the numerator of which shall be equal to the
total compensation actually deferred by the Executive and
the denominator of which shall be equal to Twenty-Eight
Thousand Eight Hundred Dollars ($28,800).
(b) If death occurs after the Director has deferred
Twenty-Eight Thousand Eight Hundred Dollars ($28,800), his
Beneficiary shall be paid the Survivor's Benefit.
5.3 Death After Commencement of Benefits. In the event of the Director's
death after the commencement of the Deferred Compensation Benefit,
but prior to the completion of all such payments due and owing
hereunder, the Bank shall continue to make monthly payments to the
Director's Beneficiary until a total of one hundred eighty (180)
equal monthly payments have been made to the Director and/or his
Beneficiary.
5.4 Additional Death Benefit Burial Expense. In addition to the
above-described death benefits, upon the Director's death, the
Director's Beneficiary shall be entitled to receive a one-time lump
sum death benefit in the amount of Ten Thousand ($10,000.00) Dollars;
provided, however, that if the Director ceases to be a member of the
Board before July 1, 1998 for reasons other than his death or
disability, the one-time lump sum election death benefit otherwise
provided in this Subsection shall not be payable.
SECTION VI
CHANGES IN CAPITAL AND CORPORATE STRUCTURE
In the event of any change in the outstanding shares of common stock
of the Bank by reason of an issuance of additional shares, recapitalization,
reclassification, reorganization, stock split, reverse stock split, combination
of shares, stock dividend or similar transaction, the Board shall
proportionately adjust, in an equitable manner, the number of phantom units in
the Director's Phantom Unit Account as well as the purchase price of phantom
units. The foregoing adjustments shall be made in a manner that will cause the
relationship between the cost and market value of each phantom unit purchased
hereunder to remain unchanged as a result of the applicable transaction.
<PAGE>
SECTION VII
BENEFICIARY DESIGNATION
The Director shall have the right, at any time, to submit in
substantially the form attached hereto as Exhibit A, a written designation of
primary and secondary Beneficiaries to whom payment under this Agreement shall
be made in the event of his death prior to complete distribution of the benefits
due and payable under the Agreement. Each Beneficiary designation shall become
effective only when receipt thereof is acknowledged in writing by the Bank.
<PAGE>
SECTION VIII
DIRECTOR'S RIGHT TO ASSETS
The rights of the Director, any Beneficiary, or any other person
claiming through the Director under this Agreement, shall be solely those of an
unsecured general creditor of the Bank. The Director, the Beneficiary, or any
other person claiming through the Director, shall only have the right to receive
from the Bank those payments as specified under this Agreement. The Director
agrees that he, his Beneficiary, or any other person claiming through him shall
have no rights or interests whatsoever in any asset of the Bank, including any
insurance policies or contracts which the Bank may possess or obtain to
informally fund this Agreement. Any asset used or acquired by the Bank in
connection with the liabilities it has assumed under this Agreement, except as
expressly provided, shall not be deemed to be held under any trust for the
benefit of the Director or his Beneficiaries, nor shall any asset be considered
security for the performance of the obligations of the Bank. Any such asset
shall be and remain, a general, unpledged, and unrestricted asset of the Bank.
<PAGE>
SECTION IX
RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust
any fund or money with which to pay its obligations under this Agreement. The
Director, his Beneficiaries or any successor in interest to him shall be and
remain simply a general unsecured creditor of the Bank in the same manner as any
other creditor having a general claim for matured and unpaid compensation. The
Bank reserves the absolute right at its sole discretion to either purchase
assets to meet its obligations undertaken by this Agreement or to refrain from
the same and to determine the extent, nature, and method of such asset
purchases. Should the Bank decide to purchase assets such as life insurance,
mutual funds, disability policies or annuities, the Bank reserves the absolute
right, in its sole discretion, to terminate such assets at any time, in whole or
in part. At no time shall the Director be deemed to have any lien, nor right,
title or interest in or to any specific investment or to any assets of the Bank.
If the Bank elects to invest in a life insurance, disability or annuity policy
upon the life of the Director, then the Director shall assist the Bank by freely
submitting to a physical examination and supplying such additional information
necessary to obtain such insurance or annuities.
<PAGE>
SECTION X
ALIENABILITY AND ASSIGNMENT PROHIBITION
Neither the Director nor any Beneficiary under this Agreement shall
have any power or right to transfer, assign, anticipate, hypothecate, mortgage,
commute, modify or otherwise encumber in advance any of the benefits payable
hereunder, nor shall any of said benefits be subject to seizure for the payment
of any debts, judgments, alimony or separate maintenance owed by the Director or
his Beneficiary, nor be transferable by operation of law in the event of
bankruptcy, insolvency or otherwise.
SECTION XI
ACT PROVISIONS
11.1 Named Fiduciary and Administrator. The Bank shall be the named
fiduciary and administrator of this Agreement. As administrator, the
Bank shall be responsible for the management, control and
administration of the Agreement as established herein. The
administrator may delegate to others certain aspects of the
management and operational responsibilities of the Agreement,
including the employment of advisors and the delegation of
ministerial duties to qualified individuals.
11.2 Claims Procedure and Arbitration. In the event that benefits under
this Agreement are not paid to the Director (or to his Beneficiary in
the case of the Director's death) and such claimants feel they are
entitled to receive such benefits, then a written claim must be made
to the Bank within sixty (60) days from the date payments are
refused. The Bank and its Board shall review the written claim and,
if the claim is denied, in whole or in part, they shall provide in
writing, within ninety (90) days of receipt of such claim, their
specific reasons for such denial, reference to the provisions of this
Agreement upon which the denial is based, and any additional material
or information necessary to perfect the claim. Such written notice
shall further indicate the additional steps to be taken by claimants
if a further review of the claim denial is desired.
If claimants desire a second review, they shall notify the Bank in
writing within sixty (60) days of the first claim denial. Claimants
may review the Agreement or any documents relating thereto and submit
any written issues and comments they may feel appropriate. In its
sole discretion, the Bank, through the disinterested member of its
Board, shall then review the second claim and provide a written
decision within sixty (60) days of receipt of such claim. This
decision shall likewise state the specific reasons for the decision
and shall include reference to specific provisions of the Agreement
upon which the decision is based.
If claimants continue to dispute the benefit denial based upon
completed performance of the Agreement or the meaning and effect of
the terms and conditions thereof, then claimants may submit the
dispute to a board of Arbitration for final arbitration. Said board
shall consist of one member selected by the claimant, one member
selected by the Bank, and the third member selected by the first two
members. The board of Arbitration shall operate under any generally
recognized set of arbitration rules. The parties hereto agree that
they and their heirs, personal representatives, successors and
assigns shall be bound by the decision of such arbitration board with
respect to any controversy properly submitted to it for
determination.
SECTION XII
MISCELLANEOUS
12.1 No Effect on Directorship Rights. Nothing contained herein will
confer upon the Director the right to be retained in the service of
the Bank nor limit the right of the Bank to discharge or otherwise
deal with the Director without regard to the existence of the
Agreement. Pursuant to 12 C.F.R. ss. 563.39(b), the following
conditions shall apply to this Agreement:
(1) The Board may remove the Director at any time, but any
removal by the Board shall not prejudice the Director's
vested right to compensation or other benefits under the
contract.
(2) If the Director is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by
a notice served under Section 8(e)(3) or (g)(1) of the
Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) and
(g)(1)) the Bank's obligations under the contract shall be
suspended as of the date of termination of service unless
stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Bank may in its discretion (i)
pay the Director all or part of the compensation withheld
while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations
which were suspended.
(3) If the Director is removed and/or permanently prohibited
from participating in the conduct of the Bank's affairs by
an order issued under Section 8(e)(4) or (g)(1) of the
Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or
(g)(1)), all obligations of the Bank under the contract
shall terminate as of the effective date of the order, but
vested rights of the contracting parties shall not be
affected.
(4) If the Bank is in default (as defined in Section 3(x)(1)
of the Federal Deposit Insurance Act), all obligations
under the contract shall terminate as of the date of
default, but this paragraph shall not affect any vested
rights of the contracting parties.
(5) All non-vested obligations under the contract shall be
terminated, except to the extent determined that
continuation of the contract is necessary for the
continued operation of the Bank:
(i) by the Director or his designee at the time the
Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf
of the Bank under the authority contained in
ss. 13(c) of the Federal Deposit Insurance Act;
or
(ii) by the Director or his designee, at the time
the Director or his designee approves a
supervisory merger to resolve problems related
to operation of the Bank or when the Bank is
determined by the Director to be in an unsafe
or unsound condition.
Any rights of the parties that have already vested, however,
shall not be affected by such action.
12.2 State Law. The Agreement is established under, and will be construed
according to, the laws of the State of Indiana.
12.3 Severability. In the event that any of the provisions of this
Agreement or portion thereof, are held to be inoperative or invalid
by any court of competent jurisdiction, then: (1) insofar as is
reasonable, effect will be given to the intent manifested in the
provisions held invalid or inoperative, and (2) the validity and
enforceability of the remaining provisions will not be affected
thereby.
12.4 Incapacity of Recipient. In the event the Director is declared
incompetent and a conservator or other person legally charged with
the care of his person or of his estate is appointed, any benefits
under the Agreement to which such the Director is entitled shall be
paid to such conservator or other person legally charged with the
care of his person or his estate. Except as provided above in this
paragraph, when the Board, in its sole discretion, determines that
the Director is unable to manage his financial affairs, the Board may
direct the Bank to make distributions to any person for the benefit
of the Director.
12.5 Recovery of Estate Taxes. If the Director's gross estate for federal
estate tax purposes includes any amount determined by reference to
and on account of this Deferred Compensation Agreement, and if the
Beneficiary is other than the Director's Estate, then the Director's
Estate shall be entitled to recover from the Beneficiary receiving
such benefit under the terms of the Survivor's Benefit an amount by
which (x) the total estate tax due by Director's estate, exceeds (y)
the total estate tax which would have been payable if the value of
such benefit had not been included in the Director's gross Estate. If
there is more than one person receiving such benefit, the right of
recovery shall be against each such person in proportion to the
benefits received by each such person. In the event any Beneficiary
has a liability hereunder, such Beneficiary may petition the Bank for
a lump sum payment in an amount not to exceed the Beneficiary's
liability hereunder.
12.6 Unclaimed Benefit. The Director shall keep the Bank informed of his
current address and the current address of his Beneficiaries. The
Bank shall not be obligated to search for the whereabouts of any
person. If within three (3) years after the actual death of the
Director the Bank is unable to locate any Beneficiary of the
Director, then the Bank may fully discharge its obligation by payment
to the Estate.
12.7 Limitations on Liability. Notwithstanding any of the preceding
provisions of the Agreement and except for the benefits otherwise
payable under this Agreement, neither the Bank, nor any individual
acting as an employee or agent of the Bank, or as a member of the
Board shall be liable to the Director or any other person for any
claim, loss, liability or expense incurred in connection with the
Agreement.
12.8 Gender. Whenever in this Agreement words are used in the masculine or
neuter gender, they shall be read and construed as in the masculine,
feminine or neuter gender, whenever they should so apply.
12.9 Affect on Other Corporate Benefit Agreements. Nothing contained in
this Agreement shall affect the right of the Director to participate
in or be covered by any qualified or non-qualified pension, profit
sharing, group, bonus or other supplemental compensation or fringe
benefit agreement constituting a part of the Bank's existing or
future compensation structure.
12.10 Suicide. Notwithstanding anything to the contrary in this Agreement,
the Survivor Benefits otherwise provided herein shall not be payable
if the Director's death results from suicide, whether sane or insane,
within two (2) years after the execution of this Agreement. If the
Director dies during this two year period due to suicide, the balance
of the Retirement Account will be paid to the Director's designated
Beneficiary in a single payment. Payment is to be made within thirty
(30) days after the Director's death is declared a suicide by
competent legal authority. Credit shall be given to the Bank for
payments made prior to determination of suicide.
12.11 Headings. Headings and sub-headings in this Agreement are inserted
for reference and convenience only and shall not be deemed a part of
this Agreement.
SECTION XIII
AMENDMENT/REVOCATION
This Agreement shall not be amended, modified or revoked at any time,
in whole or part, without the mutual written consent of the Director and the
Bank, and such mutual consent shall be required even if the Director is no
longer serving the Bank as a member of the Board.
<PAGE>
SECTION XIV
EXECUTION
14.1 This Agreement sets forth the entire understanding of the parties
hereto with respect to the transactions contemplated hereby, and any
previous agreements or understandings between the parties hereto
regarding the subject matter hereof are merged into and superseded by
this Agreement.
14.2 This Agreement shall be executed in duplicate, each copy of which,
when so executed and delivered, shall be an original, but both copies
shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Amended and Restated
Agreement to be executed on this ____ day of ___________, 1997.
/s/ Ruth Mix Carnahan
Ruth Mix Carnahan
FIRST FEDERAL BANK, AFSB
By: Lynn Stenftenagel
Executive Vice President
(Title)
<PAGE>
DIRECTOR DEFERRED COMPENSATION AGREEMENT
BENEFICIARY DESIGNATION
_________________________, under the terms of a certain Director
Deferred Compensation Agreement by and between him and FIRST FEDERAL BANK, AFSB,
Vincennes, Indiana, dated __________________, 19__, hereby designates the
following Beneficiary to receive any guaranteed payments or death benefits under
such Agreement, following his death:
PRIMARY BENEFICIARY:
SECONDARY BENEFICIARY:
This Beneficiary Designation hereby revokes any prior Beneficiary
Designation which may have been in effect.
Such Beneficiary Designation is revocable.
DATE: , 19
(WITNESS) , Director
(WITNESS)
Exhibit A
<PAGE>
DIRECTOR DEFERRED COMPENSATION AGREEMENT
ELECTION FORM
NAME:
(Please Print)
Investment Allocation Election: I hereby elect to have my monthly deferrals
credited with earnings or losses based on the following allocation:
(Indicate Percentage in Increments of 25% Only)
Guaranteed Investment Contract Account _______ %
Phantom Unit Account _______ %
Total (Must Equal 100%) _______ %
DATE , Director
Exhibit B
<PAGE>
DIRECTOR DEFERRED COMPENSATION AGREEMENT
NOTICE OF DISCONTINUANCE
TO: FIRST FEDERAL BANK, AFSB
Attention:
I hereby give notice of my election to discontinue deferral of my
compensation under that certain Director Deferred Compensation Agreement, by and
between Bank and the undersigned, dated the ____ day of __________, 199 . This
notice is submitted at least twenty (20) days prior to January 1st and shall be
effective as of such date, as specified below.
Discontinue deferral as of January 1, 19___.
, Director
DATE
Exhibit C
FIRST FEDERAL BANK, AFSB
DIRECTOR DEFERRED COMPENSATION AGREEMENT
(AS AMENDED AND RESTATED EFFECTIVE DECEMBER 31, 1997)
THIS DIRECTOR DEFERRED COMPENSATION AGREEMENT (THE "AGREEMENT"),
originally effective as of the 1st day of July, 1993, and as amended and
restated effective December 31, 1997 by and between FIRST FEDERAL BANK, AFSB, a
banking corporation organized and existing under the laws of the United States
(hereinafter referred to as "Bank") and Robert W. Ballard (hereinafter referred
to as "Director"), for the purpose of formalizing the agreement between the Bank
and the Director in which the Director defers receipt of fees under the terms
and conditions described below.
WITNESSETH:
WHEREAS, the Director serves the Bank as a member of the Board of
Directors; and
WHEREAS, the Bank recognizes the valuable services heretofore
performed for it by the Director and wishes to encourage continued service; and
WHEREAS, the Bank values the efforts, abilities and accomplishments
of the Director and recognizes that the Director's services will substantially
contribute to its continued growth and profits in the future; and
WHEREAS, the Director wishes to defer a certain portion of fees to be
earned in the future; and
WHEREAS, the parties hereto desire to formalize the terms and
conditions upon which the Bank shall pay such deferred compensation to the
Director and/or his designated beneficiary; and
WHEREAS, the Bank has adopted this Director Deferred Compensation
Agreement which controls all issues relating to the deferral of fees as
described herein;
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereto agree to the following terms and conditions:
SECTION I
DEFINITIONS
When used herein, the following words and phrases shall have the
meanings below unless the context clearly indicates otherwise:
1.1 "Accrued Benefit" means the sum of all deferred amounts and interest
credited to the Director's Retirement Account and due and owing to
the Director or his Beneficiaries pursuant to this Agreement.
1.2 "Bank" means FIRST FEDERAL BANK, AFSB or any successor thereto.
1.3 "Beneficiary" means the person, persons (and their heirs) or other
entity designated as Beneficiary in writing to the Bank to whom the
share of the deceased Director's Retirement Account is payable in the
event of his death. If no Beneficiary is so designated, then the
Director's Spouse, if living, will be deemed the Beneficiary. If the
Director's Spouse is not living, then the Children of Director will
be deemed the Beneficiaries and will take on a per stirpes basis. If
there are no living Children, then the Estate of the Director will be
deemed the Beneficiary.
1.4 "Board" means the Board of Directors of the Bank.
1.5 "Children" means the Director's children, both natural and adopted,
then living at the time payments are due the Children under this
Agreement.
1.6 "Deferral Period" means the period in which the Director has in
effect a deferral election; provided, however, that the Deferral
Period shall automatically terminate on June 30, 1998 or, if earlier,
on the date of the Director's Normal Retirement Date.
1.7 "Deferred Compensation Benefit" means that benefit which can be
provided by annuitizing the Director's Retirement Account balance as
of the Valuation Date immediately preceding the initial distribution
date over a one hundred eighty (180) month period. A monthly interest
factor of 1.075% shall be used to annuitize the account balance.
1.8 "Disability" means the determination by a duly licensed physician
selected by the Bank that because of ill health, accident, disability
or general inability because of age, that Director is no longer able,
properly and satisfactorily, to perform his duties as a Director.
1.9 "Effective Date" shall be July 1, 1993.
1.10 "Estate" means the Estate (including, when applicable, any
irrevocable trust governing the transfer of non-probate assets) of
the Director.
1.11 "Guaranteed Investment Contract Account" means book entries
maintained by the Bank reflecting deferred amounts with interest
being credited at the rate of .667% per month; provided, however,
that the existence of such book entries and the existence of the
Guaranteed Investment Contract Account shall not create and shall not
be deemed to create a trust of any kind, or fiduciary relationship
between the Bank and the Director, his designated Beneficiary or
Beneficiaries under this Agreement.
1.12 "Normal Retirement Date" means the first day of the month following
the month during which the Director attains age sixty-five (65).
1.13 "Payout Period" means the time frame in which certain benefits
payable hereunder shall be distributed. Payments shall be made in
equal consecutive monthly installments commencing on the first day of
the month coincident with or next following the occurrence of any
event which triggers distribution and continuing for a period of one
hundred eighty (180) months.
1.14 "Phantom Unit Account" means the total value of all units of phantom
stock purchased by the Director, each having a value equal to the
fair market value (as determined in the manner provided below) of a
share of 1ST BANCORP Bank's common stock. The fair market value of
the Director's Phantom Unit Account shall be determined as of the
Valuation Date immediately preceding the date on which the Director's
Retirement Account is annuitized by converting each phantom unit to
an amount equal to the closing bid price of 1ST BANCORP's common
stock on such Valuation Date. The Director shall purchase phantom
units at a price per share equal to eighty-five percent (85%) of the
fair market value (as determined above) of a share of 1ST BANCORP's
common stock on the Valuation Date immediately preceding the calendar
year quarter to which the deferral of fees and purchase relates.
The Director's Phantom Unit Account shall also be credited with
additional phantom units at each date on which 1ST BANCORP makes a
cash dividend or an in kind dividend (other than its common stock)
with respect to its shares. The number of units to be credited shall
be determined by dividing the amount of the cash dividend or the fair
market value of any in kind dividend by 85% of the fair market value
(as determined above) of a share of 1ST BANCORP's common stock on the
Valuation Date immediately preceding the calendar year quarter in
which the dividend is paid with respect to 1ST BANCORP's common
stock.
1.15 "Retirement Account" means book entries maintained by the Bank
reflecting deferred amounts and equal to the sum of the Guaranteed
Investment Contract Account and the Phantom Unit Account. The
existence of such book entries and the Retirement Account shall not
create and shall not be deemed to create a trust of any kind, or a
fiduciary relationship between the Bank and the Director, his
designated Beneficiary, or other Beneficiaries under this Agreement.
1.16 "Spouse" means the individual to whom the Director is legally married
at the time of the Director's death.
1.17 "Survivor's Benefit" means monthly level payments to the Beneficiary
in the amount of Nine Hundred Eighty-One Dollars and Eight Cents
($981.08) for one hundred eighty (180) months. In the event the
Survivor's Benefit is less than the Deferred Compensation Benefit,
the Deferred Compensation benefit shall be paid in lieu of the
Survivor's Benefit. In no event is it intended for the Director to
receive both a Survivor's Benefit and Deferred Compensation Benefit.
1.18 "Valuation Date" means the last business day of March, June,
September, December beginning on and after June 30, 1993.
<PAGE>
SECTION II
DEFERRED COMPENSATION
Commencing on the Effective Date, and continuing through the end of
the Deferral Period, the Director and the Bank agree that the Director shall
defer into his Retirement Account monthly Director's fees of Six Hundred
($600.00) Dollars that the Director would otherwise be entitled to receive from
the Bank for each month of the Deferral Period. The Director shall direct the
apportionment of his monthly deferral between the Guaranteed Investment Contract
Account and the Phantom Unit Account. Such allocation shall be in twenty-five
(25%) percent increments and shall be evidenced in writing by completion of an
Election Form (Exhibit B). If the Director fails to submit an Election Form, one
hundred percent (100%) of his monthly deferrals shall be allocated to the
Guaranteed Investment Contract Account. The Director shall have the right to
change such apportionment once per year for new deferrals and for existing
bookkeeping balances held in his Retirement Account, such change becoming
effective at the next plan anniversary date (January 1). Any change in the
allocation for existing balances may be made in whole dollar amounts or in
twenty-five percent (25%) increments. Any such change must also be evidenced in
writing to become effective.
<PAGE>
SECTION III
TERMINATION OF ELECTION AND NEW ELECTIONS
The Director's election to defer compensation shall continue in
effect, pursuant to the terms of this Agreement unless and until the Director
files with the Bank a Notice of Discontinuance (Exhibit C attached hereto). A
Notice of Discontinuance shall be effective if filed at least twenty (20) days
prior to any January 1st. Such Notice of Discontinuance shall be effective
commencing with the January 1st following its filing. If the Director
discontinues his deferrals, he may reinstate the deferrals as of a January 1st
by filing in writing an election to recommence deferrals at least twenty (20)
days prior to the January 1st on which the deferrals are to recommence.
SECTION IV
RETIREMENT BENEFIT
4.1 Retirement Benefit. At Normal Retirement Date, the Bank agrees to
commence payment of the Director's Deferred Compensation Benefit.
Such payments will be in accordance with the terms of the Payout
Period.
4.2 Disability Retirement Benefit. Notwithstanding any other provision
hereof, the Director shall be entitled to receive his Deferred
Compensation Benefits hereunder prior to his Normal Retirement Date
in any case the Director terminates service due to Disability. The
benefit shall be distributed in accordance with the Payout Period. In
the event the total benefits received by the Director pursuant to
this Subsection are less than the total Survivor's Benefit [i.e., One
Hundred Seventy-Six Thousand Five Hundred Ninety-Five Dollars
($176,595), upon Director's death, an additional lump sum payment
shall be made to Director's Beneficiary to make up the difference
between these two (2) gross benefit amounts.
SECTION V
DEATH BENEFITS
5.1 Death Prior to Termination of Service. In the event of the Director's
death prior to termination of service with the Bank, while covered by
the provisions of this Agreement, the Director's Beneficiary shall be
paid the Survivor's Benefit. Payments shall be in accordance with the
Payout Period.
5.2 Death After Termination of Service. In the event of the Director's
death after his termination of service, but prior to commencing
receipt of benefit payments under this Agreement, the Director's
Beneficiary shall be paid a monthly amount for a period of one
hundred eighty (180) months, commencing within thirty (30) days of
the Director's death. The amount of such benefit payment shall be
determined as follows:
(a) If the Director has deferred less than Thirty-Six Thousand
Dollars ($36,000), the Director's Beneficiary shall be
paid a reduced Survivor's Benefit, which shall be
determined by multiplying the Survivor's Benefit (Nine
Hundred Eighty-One Dollars and Eight Cents ($981.08)) by a
fraction, the numerator of which shall be equal to the
total compensation actually deferred by the Executive and
the denominator of which shall be equal to Thirty-Six
Thousand Dollars ($36,000).
(b) If death occurs after the Director has deferred Thirty-Six
Thousand Dollars ($36,000), his Beneficiary shall be paid
the Survivor's Benefit.
5.3 Death After Commencement of Benefits. In the event of the Director's
death after the commencement of the Deferred Compensation Benefit,
but prior to the completion of all such payments due and owing
hereunder, the Bank shall continue to make monthly payments to the
Director's Beneficiary until a total of one hundred eighty (180)
equal monthly payments have been made to the Director and/or his
Beneficiary.
5.4 Additional Death Benefit Burial Expense. In addition to the
above-described death benefits, upon the Director's death, the
Director's Beneficiary shall be entitled to receive a one-time lump
sum death benefit in the amount of Ten Thousand ($10,000.00) Dollars;
provided, however, that if the Director ceases to be a member of the
Board before July 1, 1998 for reasons other than his death or
disability, the one-time lump sum election death benefit otherwise
provided in this Subsection shall not be payable.
SECTION VI
CHANGES IN CAPITAL AND CORPORATE STRUCTURE
In the event of any change in the outstanding shares of common stock
of the Bank by reason of an issuance of additional shares, recapitalization,
reclassification, reorganization, stock split, reverse stock split, combination
of shares, stock dividend or similar transaction, the Board shall
proportionately adjust, in an equitable manner, the number of phantom units in
the Director's Phantom Unit Account as well as the purchase price of phantom
units. The foregoing adjustments shall be made in a manner that will cause the
relationship between the cost and market value of each phantom unit purchased
hereunder to remain unchanged as a result of the applicable transaction.
<PAGE>
SECTION VII
BENEFICIARY DESIGNATION
The Director shall have the right, at any time, to submit in
substantially the form attached hereto as Exhibit A, a written designation of
primary and secondary Beneficiaries to whom payment under this Agreement shall
be made in the event of his death prior to complete distribution of the benefits
due and payable under the Agreement. Each Beneficiary designation shall become
effective only when receipt thereof is acknowledged in writing by the Bank.
<PAGE>
SECTION VIII
DIRECTOR'S RIGHT TO ASSETS
The rights of the Director, any Beneficiary, or any other person
claiming through the Director under this Agreement, shall be solely those of an
unsecured general creditor of the Bank. The Director, the Beneficiary, or any
other person claiming through the Director, shall only have the right to receive
from the Bank those payments as specified under this Agreement. The Director
agrees that he, his Beneficiary, or any other person claiming through him shall
have no rights or interests whatsoever in any asset of the Bank, including any
insurance policies or contracts which the Bank may possess or obtain to
informally fund this Agreement. Any asset used or acquired by the Bank in
connection with the liabilities it has assumed under this Agreement, except as
expressly provided, shall not be deemed to be held under any trust for the
benefit of the Director or his Beneficiaries, nor shall any asset be considered
security for the performance of the obligations of the Bank. Any such asset
shall be and remain, a general, unpledged, and unrestricted asset of the Bank.
<PAGE>
SECTION IX
RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust
any fund or money with which to pay its obligations under this Agreement. The
Director, his Beneficiaries or any successor in interest to him shall be and
remain simply a general unsecured creditor of the Bank in the same manner as any
other creditor having a general claim for matured and unpaid compensation. The
Bank reserves the absolute right at its sole discretion to either purchase
assets to meet its obligations undertaken by this Agreement or to refrain from
the same and to determine the extent, nature, and method of such asset
purchases. Should the Bank decide to purchase assets such as life insurance,
mutual funds, disability policies or annuities, the Bank reserves the absolute
right, in its sole discretion, to terminate such assets at any time, in whole or
in part. At no time shall the Director be deemed to have any lien, nor right,
title or interest in or to any specific investment or to any assets of the Bank.
If the Bank elects to invest in a life insurance, disability or annuity policy
upon the life of the Director, then the Director shall assist the Bank by freely
submitting to a physical examination and supplying such additional information
necessary to obtain such insurance or annuities.
<PAGE>
SECTION X
ALIENABILITY AND ASSIGNMENT PROHIBITION
Neither the Director nor any Beneficiary under this Agreement shall
have any power or right to transfer, assign, anticipate, hypothecate, mortgage,
commute, modify or otherwise encumber in advance any of the benefits payable
hereunder, nor shall any of said benefits be subject to seizure for the payment
of any debts, judgments, alimony or separate maintenance owed by the Director or
his Beneficiary, nor be transferable by operation of law in the event of
bankruptcy, insolvency or otherwise.
SECTION XI
ACT PROVISIONS
11.1 Named Fiduciary and Administrator. The Bank shall be the named
fiduciary and administrator of this Agreement. As administrator, the
Bank shall be responsible for the management, control and
administration of the Agreement as established herein. The
administrator may delegate to others certain aspects of the
management and operational responsibilities of the Agreement,
including the employment of advisors and the delegation of
ministerial duties to qualified individuals.
11.2 Claims Procedure and Arbitration. In the event that benefits under
this Agreement are not paid to the Director (or to his Beneficiary in
the case of the Director's death) and such claimants feel they are
entitled to receive such benefits, then a written claim must be made
to the Bank within sixty (60) days from the date payments are
refused. The Bank and its Board shall review the written claim and,
if the claim is denied, in whole or in part, they shall provide in
writing, within ninety (90) days of receipt of such claim, their
specific reasons for such denial, reference to the provisions of this
Agreement upon which the denial is based, and any additional material
or information necessary to perfect the claim. Such written notice
shall further indicate the additional steps to be taken by claimants
if a further review of the claim denial is desired.
If claimants desire a second review, they shall notify the Bank in
writing within sixty (60) days of the first claim denial. Claimants
may review the Agreement or any documents relating thereto and submit
any written issues and comments they may feel appropriate. In its
sole discretion, the Bank, through the disinterested member of its
Board, shall then review the second claim and provide a written
decision within sixty (60) days of receipt of such claim. This
decision shall likewise state the specific reasons for the decision
and shall include reference to specific provisions of the Agreement
upon which the decision is based.
If claimants continue to dispute the benefit denial based upon
completed performance of the Agreement or the meaning and effect of
the terms and conditions thereof, then claimants may submit the
dispute to a board of Arbitration for final arbitration. Said board
shall consist of one member selected by the claimant, one member
selected by the Bank, and the third member selected by the first two
members. The board of Arbitration shall operate under any generally
recognized set of arbitration rules. The parties hereto agree that
they and their heirs, personal representatives, successors and
assigns shall be bound by the decision of such arbitration board with
respect to any controversy properly submitted to it for
determination.
SECTION XII
MISCELLANEOUS
12.1 No Effect on Directorship Rights. Nothing contained herein will
confer upon the Director the right to be retained in the service of
the Bank nor limit the right of the Bank to discharge or otherwise
deal with the Director without regard to the existence of the
Agreement. Pursuant to 12 C.F.R. ss. 563.39(b), the following
conditions shall apply to this Agreement:
(1) The Board may remove the Director at any time, but any
removal by the Board shall not prejudice the Director's
vested right to compensation or other benefits under the
contract.
(2) If the Director is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by
a notice served under Section 8(e)(3) or (g)(1) of the
Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) and
(g)(1)) the Bank's obligations under the contract shall be
suspended as of the date of termination of service unless
stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Bank may in its discretion (i)
pay the Director all or part of the compensation withheld
while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations
which were suspended.
(3) If the Director is removed and/or permanently prohibited
from participating in the conduct of the Bank's affairs by
an order issued under Section 8(e)(4) or (g)(1) of the
Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or
(g)(1)), all obligations of the Bank under the contract
shall terminate as of the effective date of the order, but
vested rights of the contracting parties shall not be
affected.
(4) If the Bank is in default (as defined in Section 3(x)(1)
of the Federal Deposit Insurance Act), all obligations
under the contract shall terminate as of the date of
default, but this paragraph shall not affect any vested
rights of the contracting parties.
(5) All non-vested obligations under the contract shall be
terminated, except to the extent determined that
continuation of the contract is necessary for the
continued operation of the Bank:
(i) by the Director or his designee at the time the
Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf
of the Bank under the authority contained in
ss. 13(c) of the Federal Deposit Insurance Act;
or
(ii) by the Director or his designee, at the time
the Director or his designee approves a
supervisory merger to resolve problems related
to operation of the Bank or when the Bank is
determined by the Director to be in an unsafe
or unsound condition.
Any rights of the parties that have already vested, however,
shall not be affected by such action.
12.2 State Law. The Agreement is established under, and will be construed
according to, the laws of the State of Indiana.
12.3 Severability. In the event that any of the provisions of this
Agreement or portion thereof, are held to be inoperative or invalid
by any court of competent jurisdiction, then: (1) insofar as is
reasonable, effect will be given to the intent manifested in the
provisions held invalid or inoperative, and (2) the validity and
enforceability of the remaining provisions will not be affected
thereby.
12.4 Incapacity of Recipient. In the event the Director is declared
incompetent and a conservator or other person legally charged with
the care of his person or of his estate is appointed, any benefits
under the Agreement to which such the Director is entitled shall be
paid to such conservator or other person legally charged with the
care of his person or his estate. Except as provided above in this
paragraph, when the Board, in its sole discretion, determines that
the Director is unable to manage his financial affairs, the Board may
direct the Bank to make distributions to any person for the benefit
of the Director.
12.5 Recovery of Estate Taxes. If the Director's gross estate for federal
estate tax purposes includes any amount determined by reference to
and on account of this Deferred Compensation Agreement, and if the
Beneficiary is other than the Director's Estate, then the Director's
Estate shall be entitled to recover from the Beneficiary receiving
such benefit under the terms of the Survivor's Benefit an amount by
which (x) the total estate tax due by Director's estate, exceeds (y)
the total estate tax which would have been payable if the value of
such benefit had not been included in the Director's gross Estate. If
there is more than one person receiving such benefit, the right of
recovery shall be against each such person in proportion to the
benefits received by each such person. In the event any Beneficiary
has a liability hereunder, such Beneficiary may petition the Bank for
a lump sum payment in an amount not to exceed the Beneficiary's
liability hereunder.
12.6 Unclaimed Benefit. The Director shall keep the Bank informed of his
current address and the current address of his Beneficiaries. The
Bank shall not be obligated to search for the whereabouts of any
person. If within three (3) years after the actual death of the
Director the Bank is unable to locate any Beneficiary of the
Director, then the Bank may fully discharge its obligation by payment
to the Estate.
12.7 Limitations on Liability. Notwithstanding any of the preceding
provisions of the Agreement and except for the benefits otherwise
payable under this Agreement, neither the Bank, nor any individual
acting as an employee or agent of the Bank, or as a member of the
Board shall be liable to the Director or any other person for any
claim, loss, liability or expense incurred in connection with the
Agreement.
12.8 Gender. Whenever in this Agreement words are used in the masculine or
neuter gender, they shall be read and construed as in the masculine,
feminine or neuter gender, whenever they should so apply.
12.9 Affect on Other Corporate Benefit Agreements. Nothing contained in
this Agreement shall affect the right of the Director to participate
in or be covered by any qualified or non-qualified pension, profit
sharing, group, bonus or other supplemental compensation or fringe
benefit agreement constituting a part of the Bank's existing or
future compensation structure.
12.10 Suicide. Notwithstanding anything to the contrary in this Agreement,
the Survivor Benefits otherwise provided herein shall not be payable
if the Director's death results from suicide, whether sane or insane,
within two (2) years after the execution of this Agreement. If the
Director dies during this two year period due to suicide, the balance
of the Retirement Account will be paid to the Director's designated
Beneficiary in a single payment. Payment is to be made within thirty
(30) days after the Director's death is declared a suicide by
competent legal authority. Credit shall be given to the Bank for
payments made prior to determination of suicide.
12.11 Headings. Headings and sub-headings in this Agreement are inserted
for reference and convenience only and shall not be deemed a part of
this Agreement.
SECTION XIII
AMENDMENT/REVOCATION
This Agreement shall not be amended, modified or revoked at any time,
in whole or part, without the mutual written consent of the Director and the
Bank, and such mutual consent shall be required even if the Director is no
longer serving the Bank as a member of the Board.
<PAGE>
SECTION XIV
EXECUTION
14.1 This Agreement sets forth the entire understanding of the parties
hereto with respect to the transactions contemplated hereby, and any
previous agreements or understandings between the parties hereto
regarding the subject matter hereof are merged into and superseded by
this Agreement.
14.2 This Agreement shall be executed in duplicate, each copy of which,
when so executed and delivered, shall be a original, but both copies
shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Amended and Restated
Agreement to be executed on this ____ day of ___________, 1997.
/s/ Robert W. Ballard
Robert W. Ballard
FIRST FEDERAL BANK, AFSB
By: /s/ Lynn Stenftenagel
Executive Vice President
(Title)
<PAGE>
DIRECTOR DEFERRED COMPENSATION AGREEMENT
BENEFICIARY DESIGNATION
________________________, under the terms of a certain Director
Deferred Compensation Agreement by and between him and FIRST FEDERAL BANK, AFSB,
Vincennes, Indiana, dated __________________, 19__, hereby designates the
following Beneficiary to receive any guaranteed payments or death benefits under
such Agreement, following his death:
PRIMARY BENEFICIARY:
SECONDARY BENEFICIARY:
This Beneficiary Designation hereby revokes any prior Beneficiary
Designation which may have been in effect.
Such Beneficiary Designation is revocable.
DATE: , 19
(WITNESS) , Director
(WITNESS)
Exhibit A
<PAGE>
DIRECTOR DEFERRED COMPENSATION AGREEMENT
ELECTION FORM
NAME:
(Please Print)
Investment Allocation Election: I hereby elect to have my monthly deferrals
credited with earnings or losses based on the following allocation:
(Indicate Percentage in Increments of 25% Only)
Guaranteed Investment Contract Account _______ %
Phantom Unit Account _______ %
Total (Must Equal 100%) _______ %
DATE , Director
Exhibit B
<PAGE>
DIRECTOR DEFERRED COMPENSATION AGREEMENT
NOTICE OF DISCONTINUANCE
TO: FIRST FEDERAL BANK, AFSB
Attention:
I hereby give notice of my election to discontinue deferral of my
compensation under that certain Director Deferred Compensation Agreement, by and
between Bank and the undersigned, dated the ____ day of __________, 199 . This
notice is submitted at least twenty (20) days prior to January 1st and shall be
effective as of such date, as specified below.
Discontinue deferral as of January 1, 19___.
, Director
DATE
Exhibit C
Director Deferred Compensation Agreements, as Amended and Restated Effective
December 31, 1997 for Directors Frank D. Baracani, Donald G. Bell, James William
Bobe, Rahmi Soyugenc, Mary Lynn Stenftenagel, and John J. Summers, are identical
to the Agreement for Robert W. Ballard, except the following Sections:
Section
------------------------------------------------------
1.12 1.17 4.2 5.2(a)
Frank D. Baracani $2,103.00 $378,540 $2,103.00
Donald G. Bell 70 $1,079.17 $194,250 $1,079.17
James William Bobe $2,313.25 $416,385 $2,313.25
Rahmi Soyugenc 70 $1,187.08 $213,675 $1,187.08
Mary Lynn Stenftenagel $6,600.17 $1,188,030 $6,600.17
John J. Summers 70 $981.08 $176,595 $981.08
FIRST AMENDMENT TO THE
FIRST FEDERAL BANK, A F.S.B.
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT
Pursuant to rights reserved under Section XI of the First Federal Bank,
A F.S.B. Executive Supplemental Retirement Income Agreement (the "Agreement")
entered into as of July 1, 1993 by First Federal Bank, A F.S.B. (the "Bank") and
Frank D. Baracani ("Executive") hereby agree to amend Section 1.17 and Section
1.18 of the Agreement effective as of October 1, 1996 to provide, in their
entirety, as follows:
1.17 "Supplemental Retirement Income Benefit" means an annual
amount equal to Thirty- Five Thousand Seven Hundred
Eighteen Dollars ($35,718). This total shall be divided by
twelve (12) and paid in equal monthly installments for a
period of one hundred eighty (180) months.
1.18 "Survivor's Benefit" means Thirty-Five Thousand Seven
Hundred Eighteen Dollars (35,718) per year to be paid in
one hundred eighty (180) equal monthly installments.
This First Amendment has been entered into this 27th day of March
1997.
FIRST FEDERAL BANK, A F.S.B.
By: /s/ C. James McCormick
----------------------------------
C. James McCormick
Chairman of the Board
/s/ Frank D. Baracani
----------------------------------
Frank D. Baracani, Executive
FIRST AMENDMENT TO THE
FIRST FEDERAL BANK, A F.S.B.
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT
Pursuant to rights reserved under Section XI of the First Federal Bank,
A F.S.B. Executive Supplemental Retirement Income Agreement (the "Agreement")
entered into as of July 1, 1993 by First Federal Bank, A F.S.B. (the "Bank") and
Mary Lynn Stenftenagel ("Executive") hereby agree to amend Section 1.17 and
Section 1.18 of the Agreement effective as of October 1, 1996 to provide, in
their entirety, as follows:
1.17 "Supplemental Retirement Income Benefit" means an annual
amount equal to Thirty- Five Thousand Nine Hundred Seven
Dollars ($35,907). This total shall be divided by twelve
(12) and paid in equal monthly installments for a period
of one hundred eighty (180) months.
1.18 "Survivor's Benefit" means Thirty-Five Thousand Nine
Hundred Seven Dollars (35,718) per year to be paid in one
hundred eighty (180) equal monthly installments.
This First Amendment has been entered into this 25th day of
March 1997.
FIRST FEDERAL BANK, A F.S.B.
By: /s/ Frank D. Baracani
------------------------------------
Frank D. Baracani, President
/s/ Mary Lynn Stenftenagel
----------------------------------
Mary Lynn Stenftenagel, Executive
1ST BANCORP
ANNUAL REPORT
1998
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Table of Contents
Message to the
Shareholders...................................................................2
Selected Financial Highlights..................................................3
Business
Discussion.....................................................................4
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....................................21
Office Locations..............................................................41
Board of Directors............................................................42
Management....................................................................43
Corporate Information.........................................................44
<PAGE>
Message to the Shareholders:
The announced merger with German American Bancorp overshadows all other
events and financial reporting that we normally discuss in this Annual
Report. We are excited about the opportunities afforded to the Corporation
upon the consummation of the merger. We feel that our addition to the
German American Bancorp family will enhance an already solid, profitable,
well-managed multi-bank holding company.
During 1998, the Corporation generated net earnings of $1,911,000, or $1.73
per share on a diluted basis. This compares to net earnings of $821,000, or
$.75 per share during the previous year when earnings were reduced with the
special one-time SAIF assessment. During the year, all of the subsidiaries
were profitable, including the newest member to our family, First Title
Insurance Company.
We will continue to remain a community-oriented bank meeting the needs of
our current and new customers. The future is bright for our customers,
associates, and shareholders! As always, we wish to thank you for your
continued loyalty and support.
Sincerely,
/s/ C. James McCormick
C. James McCormick
CEO and Chairman of the Board
/s/ Frank Baracani
Frank Baracani
President
<PAGE>
Selected Financial Highlights
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Summary of Earnings (Dollars in thousands except per share amounts)
(for the year ended June 30):
<S> <C> <C> <C> <C> <C>
Interest Income 19,453 19,694 20,875 19,903 15,506
Interest Expense 13,004 13,292 14,520 13,419 8,955
Provision for Loan Losses 755 373 83 100 75
Non-Interest Income 2,142 3,098 10,391 5,384 3,434
Non-Interest Expense 5,309 8,555 7,528 7,898 7,459
Income Taxes 616 (249) 3,373 1,440 808
Net Earnings 1,911 821 5,762 2,430 1,643
Basic Earnings Per Share (1) $1.75 $0.75 $5.22 $2.24 $1.46
Diluted Earnings Per Share (1) $1.73 $0.75 $5.22 $2.23 $1.46
Financial Condition
(as of June 30):
Total Assets 260,149 270,490 263,483 312,759 253,560
Securities Available for Sale 15,504 11,588 10,499 - 5,758
Securities Held to Maturity 19,553 44,065 43,624 72,005 51,119
Loans 187,739 174,609 169,339 206,923 176,181
Deposits 117,763 144,316 137,148 209,805 172,791
Borrowings 115,381 100,296 100,885 79,387 59,520
Stockholders' Equity 23,855 22,333 21,729 16,333 13,520
Stockholders' Equity Per Share (1)(2) $21.85 $20.32 $19.71 $14.83 $13.79
Supplemental Data
(At or for the year ended June 30):
Yield on Interest-Earning Assets 7.93% 7.77% 7.75% 7.22% 6.87%
Cost of Interest-Earning Liabilities 5.62% 5.54% 5.67% 5.02% 4.18%
Net Interest-Rate Spread 2.31% 2.23% 2.08% 2.20% 2.69%
Net Interest-Rate Margin 2.63% 2.52% 2.36% 2.35% 2.89%
Return on Average Total Assets 0.73% 0.31% 2.05% 0.84% 0.70%
Return on Average Shareholders' Equity 8.28% 3.79% 29.45% 16.62% 12.24%
Equity to Assets Ratio 9.17% 8.26% 8.25% 5.22% 5.33%
Cash Dividends Per Share (1) $0.26 $0.25 $0.24 $0.11 $0.11
Dividend Payout Ratio 14.86% 33.37% 4.52% 5.13% 7.81%
</TABLE>
_______________________
(1) All per share calculations have been adjusted for the 3-for-2 stock split
effective November 15, 1997 and the 5% stock dividends issued February 9,
1996, January 10, 1997, and January 23, 1998.
(2) Calculated by dividing total equity by number of shares of common stock
outstanding at year end.
<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 Insurance Company ("First Title").
On August 6, 1998, an Agreement was signed providing for the merger of 1ST
BANCORP into German American Bancorp. Under the Agreement, the shareholders of
1ST BANCORP will receive shares of common stock of German American Bancorp with
a targeted aggregate market value of $57,120,000 (based on market prices of
German American common stock during a period of 15 trading days ending on the
second trading date preceding closing) in a tax-free exchange, or approximately
$50.94 per 1ST BANCORP share (assuming exercise of all outstanding options). If
the German American share price is less than $28 per share or more than $33 per
share during the valuation period, however, then the number of shares to be
issued in the transaction will be based on a minimum or maximum share price, as
the case may be, of $28 or $33. Accordingly, to the extent that German
American's share price during the valuation period is less than $28 or more than
$33, then the market value of the transaction could vary from the targeted
value. The proposed merger is subject to the approval of 1ST BANCORP's and
German American's shareholders as well as the appropriate bank regulatory
agencies; receipt of a fairness opinion and other conditions. It is contemplated
the merger will become effective during the first quarter of calendar year 1999.
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 $118.1 million in loans during fiscal 1998 as compared to
$117.0 million in loans during fiscal 1997. Although total fundings during the
two years are comparable, there was a shift from nonconforming to conforming and
consumer loan production in 1998. During 1998, conforming mortgage loan fundings
increased to $61.5 million as compared to $36.5 million in 1997. This increase
is attributed mainly to refinance loan activity which resulted from the downward
trend in interest rates during the year. Consumer loan production increased to
$17.7 million during 1998 from $9.9 million during 1997 mainly because of the
newly initiated indirect automobile loan program. Nonconforming mortgage loan
fundings decreased to $37.5 million during 1998 as compared to $70.2 million in
1997. This decreased volume resulted from the restructuring of the nonconforming
loan production office network in June, 1997 when all except one office was
closed.
First Federal is committed to efficiently providing the credit needs of the
Vincennes and surrounding communities and is successful in that endeavor.
However, the Bank continues its focus on the nonconforming mortgage market as
well. This market provides loans to a wider range of qualifying mortgage
customers.
A portion of the highest 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 $55.1 million of
residential mortgage loans as compared to the sale of $76.2 million of
residential mortgage loans during fiscal 1997.
At June 30, 1998, the Bank maintained a 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 $ 4,501,000 2.4%
Permanent Mortgages on:
1-4 family dwelling units 155,913,000 82.0%
5 or more dwelling units 2,904,000 1.5%
Nonresidential property 2,768,000 1.5%
Land 1,872,000 1.0%
Consumer and Other Loans 22,133,000 11.6%
-----------------------------
Total Loans $190,091,000 100.0%
Over 95% of the total loan portfolio at June 30, 1998 consisted of residential
real estate or consumer loans. Of the total $118.1 million loans processed
during fiscal year 1998, over 98% was for residential or consumer purposes.
At June 30, 1998, nonperforming assets totaled $3.9 million or 1.5% of total
assets This compares to $2.5 million, or .9% of total assets at June 30, 1997.
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, 1998 aggregated $1.5 million, or .8%
of net loans receivable. This compares to $.1.2 million, or .8% of net loans
receivable at June 30, 1997. The provision for loan losses was $755,000 during
fiscal 1998 as compared to $373,000 during fiscal 1997. This increase was
necessary because of the increased concentration of nonconforming and consumer
loans in portfolio which, by their nature, exhibit a greater degree of credit
risk. 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 years 1997 and 1998, the Agency purchased
books of business from two different local insurance agencies, thereby
increasing the premium base. At June 30, 1998, 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.
Title Insurance
First Title Insurance Company had been a dormant corporation until the middle of
the fiscal year when the assets of Illiana Abstract Company were purchased.
First Title provides title and abstract searches, title insurance, and mortgage
closing services. The Company sells insurance as agent for Chicago Title
Insurance Company, Stewart Title Guaranty Company, and Ticor Title Insurance
Company.
<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, increased competition in the nonconforming
lending arena, and the announced acquisition by German American Corporation.
Results of Operations and Financial Condition
1ST BANCORP's net earnings during fiscal year 1998 were $1,911,000 as compared
to $821,000 during fiscal year 1997 and $5,762,000 during fiscal 1996. Diluted
earnings per share were $1.73 during 1998, $.75 during 1997, and $5.22 during
1996. Dividends per common share were $. 26 in 1998, $.25 in 1997, and $.24 in
1996.
1ST BANCORP's assets were $260,149,000 at June 30, 1998 as compared to
$270,490,000 at June 30, 1997. Stockholders' equity at June 30, 1998 was
$23,855,000, an increase of $1,522,000 from stockholders' equity of $22,333,000
at June 30, 1997.
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, the trend was one of
declining interest rates.
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.
Net Interest Income
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
Average Yield
Balance Interest Rate
ASSETS
Interest Earning Assets:
Short-Term Investments and
<S> <C> <C> <C>
Interest Bearing Deposits $11,309 $621 5.49%
Investment and Trading
Account Securities 49,252 3,097 6.29%
Loans 184,877 15,735 8.51%
-------------------------------------------------
Total Interest Earning Assets 245,438 19,453 7.93%
Allowance for Loan Losses (1,172)
Other Assets 17,146
------------
Total Assets 261,412
============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest Bearing Liabilities:
Deposits 130,502 7,308 5.60%
Short-Term Borrowings 53 3 5.66%
Federal Home Loan Bank Advances
and Other Borrowings 100,955 5,693 5.64%
-------------------------------------------------
Total Interest Bearing Liabilities 231,510 13,004 5.62%
Other Liabilities 6,836
Stockholders' Equity 23,066
------------
Total Liabilities and
Stockholders' Equity 261,412
============
Net Interest Income / Spread 6,449 2.31%
=====================================
Net Interest Margin 2.63%
====================
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------
Average Yield
Balance Interest Rate
ASSETS
Interest Earning Assets:
Short-Term Investments and
<S> <C> <C> <C>
Interest Bearing Deposits $12,579 $677 5.38%
Investment and Trading
Account Securities 62,237 3,870 6.22%
Loans 178,746 15,147 8.47%
-----------------------------------------------------
Total Interest Earning Assets 253,562 19,694 7.77%
Allowance for Loan Losses (979)
Other Assets 12,764
-------------------
Total Assets 265,347
===================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest Bearing Liabilities:
Deposits 139,674 7,678 5.50%
Short-Term Borrowings 964 53 5.50%
Federal Home Loan Bank Advances
and Other Borrowings 99,218 5,561 5.60%
-----------------------------------------------------
Total Interest Bearing Liabilities 239,856 13,292 5.54%
Other Liabilities 3,821
Stockholders' Equity 21,670
-------------------
Total Liabilities and
Stockholders' Equity 265,347
===================
Net Interest Income / Spread 6,402 2.23%
==================================
Net Interest Margin 2.52%
================
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------
Average Yield
Balance Interest Rate
ASSETS
Interest Earning Assets:
Short-Term Investments and
<S> <C> <C> <C>
Interest Bearing Deposits $17,825 $955 5.36%
Investment and Trading
Account Securities 59,777 3,893 6.51%
Loans 191,735 16,027 8.36%
-----------------------------------------------
Total Interest Earning Assets 269,337 20,875 7.75%
Allowance for Loan Losses (886)
Other Assets 13,221
------------------
Total Assets 281,672
==================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest Bearing Liabilities:
Deposits 163,793 9,073 5.54%
Short-Term Borrowings 3,368 154 4.57%
Federal Home Loan Bank Advances
and Other Borrowings 89,103 5,293 5.94%
-----------------------------------------------
Total Interest Bearing Liabilities 256,264 14,520 5.67%
Other Liabilities 5,842
Stockholders' Equity 19,566
------------------
Total Liabilities and
Stockholders' Equity 281,672
==================
Net Interest Income / Spread 6,355 2.08%
=============================
Net Interest Margin 2.36%
=============
</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 $6,449,000 in 1998 as compared to $6,402,000 in
1997 and $6,355,000 in 1996. The increases during the three-year period were due
to the increase in the net interest spread and net interest margin during times
in which the volume of interest earning assets and interest bearing liabilities
decreased.
Interest income was $19,453,000 in 1998 as compared to $19,694,000 in 1997 and
$20,875,000 in 1996. Interest expense was $13,004,000 in 1998 as compared to
$13,292,000 in 1997 and $14,520,000 in 1996. 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
7.93% during 1998 from 7.77% during 1997 and 7.75% during 1996. The annualized
average cost of interest bearing liabilities has fluctuated during the period,
increasing to 5.62% during 1998 from 5.54% during 1997 as compared to 5.67%
during 1996. The net interest spread has increased to 2.31% in 1998 as compared
to 2.23% in 1997 and 2.08% during 1996.
Fiscal 1998 vs. Fiscal 1997
Although the average levels of interest earning assets and interest bearing
liabilities decreased during 1998 as compared to 1997, there was an increase in
net interest income.
The average balance of short-term investments and interest bearing deposits
decreased to $11,309,000 during 1998 as compared to $12,579,000 during 1997. The
average yield stayed relatively stable at 5.49% during 1998 as compared to 5.38%
during 1997.
Average investment and trading account securities decreased during 1998 to
$49,252,000 from $62,237,000 in 1997. The decision was made to allow the
investment portfolio to decrease as securities matured or were called and to
reinvest funds in portfolio loans which generate a higher rate of interest. The
average interest rate on the investment and trading account securities remained
relatively constant at 6.29% during 1998 compared to 6.22% during 1997.
Average loans increased to $184,877,000 during 1998 from $178,746,000 during
1997 because of the decision to place loans in portfolio for yield purposes. The
average yield on loans increased to 8.51% during 1998 as compared to 8.47%
during 1997. Although this increase appears insignificant, it occurred during a
time of declining interest rates. The increased yield resulted from placing
higher yielding nonconforming loans in portfolio during the year.
With the increased yields on short-term investments and interest bearing
deposits, investment and trading account securities, and loans, the overall
yield on total interest earning assets increased to 7.93% during 1998 as
compared to 7.77% during 1997. This increase was somewhat offset by the
increased cost of interest-bearing liabilities.
Because of the fluctuating interest rates experienced in the fiscal year, the
cost of average deposits increased to 5.60% during 1998 as compared to 5.50%
during 1997. The average balance of deposits declined during the year to
$130,502,000 during 1998 from $139,674,000 during 1997. This decrease resulted
from normal fluctuations in deposits experienced by the Bank.
The cost of Federal Home Loan Bank advances and other borrowed money remained
relatively constant at 5.64% during 1998 as compared to 5.60% during 1997. The
level of average borrowings increased to $100,955,000 during 1998 compared to
$99,218,000 during 1997, as more borrowings were utilized as an alternative to
the acquisition of savings deposits.
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.
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 $13,928,000 in 1998, by $13,706,000 in 1997, and by $13,073,000
in 1996. 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 32 basis points in
1998, by 29 basis points in 1997, and by 28 basis points in 1996.
Non-Interest Income
Non-interest income decreased to $2,142,000 in 1998 from $3,098,000 in 1997 and
from $10,391,000 in 1996. During the past three years, more emphasis has been
placed on interest income, therefore the level of non-interest income continues
to decline. 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 decreased during 1998 to $831,000 as compared to
$2,124,000 during 1997 and $2,026,000 during 1996. The decrease in 1998 was
caused by the decision to place loans in portfolio to generate net interest
income. Total loan sales aggregated $55,096,000 in 1998, $76,202,000 in 1997,
and $161,422,000 in 1996. The greater gain on sale of loans in 1997 and 1996
resulted from sale of nonconforming loans which generate a strong gain on sale
and are not as rate sensitive as conforming mortgage loans. Included in the loan
sales during 1998, 1997 and 1996, respectively, were $8,163,000, $37,709,000 and
$27,910,000 in nonconforming loans.
A $32,000 net gain on sales of securities was recognized during 1998 as compared
to a net loss of $29,000 during 1997 and a net loss of $111,000 during 1996. 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.
Income from fees and service charges decreased to $321,000 during 1998 from
$341,000 during 1997 and as compared to $296,000 in 1996. 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
$120,811,000 at June 30, 1998, $112,642,000 at June 30, 1997, and $81,353,000 at
June 30, 1996.
Other non-interest income increased to $958,000 in 1998 from $662,000 in 1997
and as compared to $906,000 in 1996. The increase in 1998 is attributed to the
increased income generated by First Financial Insurance Agency, Inc. and by
First Title Insurance Company. First Financial recognized insurance income of
$437,000 during 1998 as compared to $260,000 in 1997. First Title recognized
$93,000 in title-related income during 1998 as compared to no income during 1997
when the company was inactive. Included in the 1996 income is $237,000 which
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 1998 or 1997.
Non-Interest Expense
Non-interest expense decreased substantially to $5,309,000 in 1998 from
$8,555,000 in 1997 and from $7,528,000 in 1996. The decrease in 1998 resulted
from the closing of the outlying mortgage loan production offices, including
reduction in personnel, occupancy, and other expenses. 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.
Compensation and employee benefits, the major component of non-interest expense,
decreased to $2,993,000 in 1998 from $4,195,000 in 1997 and from $4,273,000 in
1996. The decrease during 1998 was from the decrease in employees resulting from
the closing of the majority of the mortgage loan production offices in late
fiscal 1997.
Net occupancy decreased to $536,000 in 1998 from $719,000 in 1997 and from
$746,000 in 1996. This is also due to the closing of the mortgage loan
production offices.
Other non-interest expense also decreased in 1998 to $1,619,000 from $2,052,000
in 1997 and from $2,040,000 in 1996. This decrease is attributed to a decrease
of ancillary expenses because of the closing of the loan production offices.
Income Taxes
The Corporation incurred an income tax expense of $616,000 in 1998 as compared
to an income tax benefit of $249,000 in 1997 and an income tax expense of
$3,373,000 in 1996. The Corporation has invested in an affordable housing senior
citizen project that produces tax credits. This significantly lowered the income
tax rate during the three fiscal years. In 1997, 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.
Financial Condition
The Corporation's assets aggregated $260,149,000 at June 30, 1998, a decrease of
$10,341,000 from assets of $270,490,000 at June 30, 1997. Total cash and cash
equivalents decreased by $4,131,000 to $16,163,000 at June 30, 1998 from
$20,294,000 at June 30, 1997. This decrease was due to a normal fluctuation in
cash in conjunction with managing the mortgage loan pipeline.
Net loans receivable increased to $185,290,000 at June 30, 1998 from
$146,840,000 at June 30, 1997. This increase resulted from the decision during
the year to portfolio mortgage loans as the highest yielding investment
alternative in the decreasing interest rate environment. Lower yielding
conforming loans continued to be sold whereas the higher yielding high quality
nonconforming loans were retained in portfolio. The loans held for sale
decreased to $2,449,000 at June 30, 1998 from $27,769,000 at June 30, 1997
because of a bulk sale in late 1998 and because of the decision to retain loans
in portfolio rather than to include them as held for sale.
Securities held to maturity decreased by $24,512,000 during the year to
$19,553,000 at June 30, 1998 from $44,065,000 at June 30, 1997. This decrease
resulted from securities maturing or being called during the year and the
decision to allow the portfolio to shrink to fund the increasing loan portfolio.
Securities available for sale increased to $15,504,000 at June 30, 1998 from
$11,588,000 at June 30, 1997. Securities purchased during the year for liquidity
reasons were placed in the available for sale portfolio.
Total deposits decreased by $26,553,000 to $117,763,000 at June 30, 1998 from
$144,316,000 at June 30, 1997. This occurred because of greater reliance on
borrowed funds rather than use of brokered deposits to supplement savings
deposits obtained in the Vincennes area.
To somewhat offset this decrease in deposits, advances from FHLB and other
borrowings increased by $15,085,000 to $115,381,000 at June 30, 1998 from
$100,296,000 at June 30, 1997.
Capital Resources
At June 30, 1998, stockholders' equity was $23,855,000, an increase of
$1,522,000 over total stockholders' equity of $22,333,000 at June 30, 1997.
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, 1998, 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, 1998, First
Federal was classified as "well-capitalized."
The following is a summary of the Bank's regulatory capital and capital
requirements at June 30, 1998:
<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 $23,855,000
First Federal GAAP Capital $22,603,000 $22,603,000 $22,603,000 $22,603,000 $22,603,000 $22,603,000
Capital Adjustments:
Unrealized Loss on Investment Securities 36,000 36,000 36,000 36,000 36,000
General Valuation Allowance 1,000,000
Disallowed (37,000) (37,000) (37,000) (37,000) (37,000)
-------------------------------------------------------------------------
Regulatory Computed Capital 22,602,000 22,602,000 22,602,000 22,602,000 23,602,000
=========================================================================
Total Assets:
Adjusted Total Assets 259,779,000 259,779,000 259,779,000 - -
Risk-Weighted Assets - - - 157,919,000 157,919,000
-------------------------------------------------------------------------
Regulatory Computed Assets 259,779,000 259,779,000 259,779,000 157,919,000 157,919,000
=========================================================================
Regulatory Capital Ratio 8.70% 8.70% 8.70% 14.31% 14.95%
==== ==== ==== ===== =====
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 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, 1998.
Prepayment assumptions and decay rates have been applied to more accurately
reflect the asset/liability gap.
<TABLE>
<CAPTION>
At June 30, 1998
Maturing or Repricing Within
-----------------------------------------------------------------------------------------------
Average 1 Year 1 to 3 3 to 5 More than
Rate Total Or Less Years Years 5 Years
-----------------------------------------------------------------------------------------------
(Dollars in Thousands)
Rate Sensitive Assets
- - -----------------------------------------------------------------------------------------------------------------------------------
Loans Receivable (1)
<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate Mortgage loans 8.39% $80,425 $34,969 $35,950 $8,034 $1,472
Fixed Rate Mortgage loans 8.39% 89,982 22,303 24,006 15,620 28,053
Nonmortgage Loans 8.97% 22,133 8,763 8,113 4,240 1,017
Investments 6.06% 56,657 31,813 9,679 5,470 9,695
---------------------------------------------------------------------------------------------
Total Rate Sensitive Assets 7.91% $249,197 $97,848 $77,748 $33,364 $40,237
===================================================================================================================================
Rate Sensitive Liabilities
- - -----------------------------------------------------------------------------------------------------------------------------------
Deposits
Fixed Maturity Deposits 5.99% $94,738 $60,706 $25,615 $6,365 $2,052
Other Deposits (2) 3.79% 23,023 17,059 2,341 1,339 2,284
FHLB Advances and Other Borrowings 5.44% 115,381 26,209 19,000 45,000 25,172
---------------------------------------------------------------------------------------------
Total Rate Sensitive Liabilities 5.50% $233,142 $103,974 $46,956 $52,704 $29,508
===================================================================================================================================
Total Asset/Liability Gap $16,055 ($6,126) $30,792 ($19,340) $10,729
Cumulative Asset/Liability Gap $16,055 ($6,126) $24,666 $5,326 $16,055
Cumulative Gap as a Percentage of
Total Assets - 1998 -2.35% 9.48% 2.05% 6.17%
Cumulative Gap as a Percentage of
Total Assets - 1997 -8.26% -16.44% -9.71% 4.99%
</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 $117,763,000 at June 30, 1998, and borrowings, which totaled
$115,381,000 at June 30, 1998. During the year, cash flow needs were also
supplied by loan payments, proceeds from sales of loans and securities, and
proceeds from maturities and calls of securities.
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. At
June 30, 1998, First Federal's regulatory liquidity exceeded the 4% requirement.
Year 2000 Compliance
The Year 2000 issue is the result of potential problems with the programming
code in existing computer systems as the Year 2000 approaches. An assessment of
the impact of the Year 2000 issue on the Corporation's computer systems has been
completed. Management is closely monitoring the progress of the systems in place
toward Year 2000 compliance.
The Bank's records are primarily maintained by a third-party data center. The
Corporation also relies on third party vendors to provide data processing
capabilities. Formal communications from the data center and other service
providers indicate reprogramming will be completed within a sufficient time
frame to allow adequate testing to ensure continuing operations in the Year
2000. Completion of testing for Year 2000 compliance is expected by June 30,
1999. Management believes the Year 2000 issue will not pose significant
operational problems for the Corporation's computer systems.
Expenses related to upgrading the computer systems and software for Year 200
compliance is estimated to be $200,000. At June 30, 1998, approximately $130,000
of this amount had already been expended in connection with Year 2000
compliance. Management does not consider the cost to the Corporation of these
Year 2000 compliance activities to be material to the financial position or
results of operations in any given year.
<PAGE>
Independent Auditors' Report
The Board of Directors
1ST BANCORP:
We have audited the accompanying consolidated statements of financial condition
of 1ST BANCORP and subsidiaries as of June 30, 1998 and 1997 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, 1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three year period ended June
30, 1998 in conformity with generally accepted accounting principles.
Indianapolis, Indiana
July 23, 1998 except as to note 17,
which is as of August 6, 1998
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
Cash and cash equivalents:
<S> <C> <C>
Interest bearing deposits $ 15,831,000 19,771,000
Non-interest bearing deposits 332,000 523,000
----------------- -----------------
Cash and cash equivalents 16,163,000 20,294,000
----------------- -----------------
Securities available for sale (note 2) 15,504,000 11,588,000
Securities held to maturity (market value of $19,514,000
and $43,556,000) (note 3) 19,553,000 44,065,000
Loans receivable, net (notes 4 and 8) 185,290,000 146,840,000
Loans held 2,449,000 27,769,000
for sale
Accrued interest receivable:
Securities 524,000 1,081,000
Loans 1,205,000 1,099,000
Stock in FHLB of Indianapolis, at cost 5,769,000 4,941,000
Office premises and equipment (note 6) 3,077,000 3,225,000
Real estate 930,000 397,000
owned
Prepaid expenses and other assets 9,685,000 9,191,000
----------------- -----------------
260,149,000 270,490,000
================= =================
Liabilities and Stockholders' Equity
Liabilities:
Deposits 117,763,000 144,316,000
(note 7)
Advances from FHLB and other borrowings (note 8) 115,381,000 100,296,000
Advance payments by borrowers for taxes and insurance 362,000 304,000
Accrued interest payable on deposits 598,000 1,194,000
Accrued expenses and other liabilities 2,190,000 2,047,000
----------------- -----------------
236,294,000 248,157,000
----------------- -----------------
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
1,091,710 and 1,099,187 1,092,000 698,000
Paid-in 2,084,000 2,642,000
capital
Retained earnings, substantially restricted 20,715,000 19,102,000
Unrealized depreciation on securities available for
sale (note 2) (36,000) (109,000)
----------------- -----------------
23,855,000 22,333,000
----------------- -----------------
Commitments (note 14)
$ 260,149,000 270,490,000
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
Interest income:
<S> <C> <C> <C>
Loans $ 15,735,000 15,147,000 16,027,000
Securities 3,093,000 3,852,000 3,890,000
Trading account securities 4,000 18,000 3,000
Other short-term investments and interest bearing deposits 621,000 677,000 955,000
--------------- --------------- ---------------
Total interest income 19,453,000 19,694,000 20,875,000
--------------- --------------- ---------------
Interest expense:
Deposits (note 7) 7,308,000 7,678,000 9,073,000
Short-term borrowings 3,000 53,000 154,000
FHLB advances and other borrowings 5,693,000 5,561,000 5,293,000
--------------- --------------- ---------------
Total interest expense 13,004,000 13,292,000 14,520,000
--------------- --------------- ---------------
Net interest income before
provision for loan losses 6,449,000 6,402,000 6,355,000
Provision for loan losses (note 4) 755,000 373,000 83,000
--------------- --------------- ---------------
Net interest income after
provision for loan losses 5,694,000 6,029,000 6,272,000
--------------- --------------- ---------------
Non-interest income:
Fees and service charges 321,000 341,000 296,000
Net gain (loss) on sales of securities available for
sale and trading account securities (note 2) 32,000 (29,000) (111,000)
Net gain on sales of loans 831,000 2,124,000 2,026,000
Net gain on sale of branch offices (note 13) - - 7,274,000
Other (note 5) 958,000 662,000 906,000
--------------- --------------- ---------------
Total non-interest income 2,142,000 3,098,000 10,391,000
--------------- --------------- ---------------
Non-interest expense:
Compensation and employee benefits 2,993,000 4,195,000 4,273,000
Net occupancy 536,000 719,000 746,000
Federal insurance premiums (note 7) 161,000 1,589,000 469,000
Other 1,619,000 2,052,000 2,040,000
--------------- --------------- ---------------
Total non-interest expense 5,309,000 8,555,000 7,528,000
--------------- --------------- ---------------
Earnings before income taxes 2,527,000 572,000 9,135,000
Income taxes (note 12) 616,000 (249,000) 3,373,000
--------------- --------------- ---------------
Net earnings $ 1,911,000 821,000 5,762,000
=============== =============== ===============
Basic earnings per share (note 10) $ 1.75 .75 5.22
=============== =============== ===============
Diluted earnings per share (note 10) $ 1.73 .75 5.22
=============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Unrealized
depreciation
on securities Total
Common Paid-in Retained available stockholders'
stock capital earnings for sale equity
<S> <C> <C> <C> <C> <C>
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
reinvestment 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 ($.24 per share) - - (261,000) - (261,000)
Change in net unrealized depreciation on
securities available for sale (note 2) - - - (55,000) (55,000)
Net earnings - - 5,762,000 - 5,762,000
----------- ------------- ------------- ----------- --------------
Balance at June 30, 1996 667,000 2,747,000 18,560,000 (245,000) 21,729,000
Issuance of common stock through employee
stock purchase plan (note 9) 3,000 76,000 - - 79,000
Issuance of common stock through dividend
reinvestment and shareholder stock purchase plan 2,000 52,000 - - 54,000
Purchase and retirement of common stock (note 9) (7,000) (200,000) - - (207,000)
Issuance of 33,013 shares of common stock at
par value for 5% stock dividend plus cash in
lieu of fractional shares 33,000 (33,000) (5,000) - (5,000)
Dividends ($.25 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
Issuance of common stock through employee
stock purchase plan (note 9) 3,000 72,000 - - 75,000
Issuance of common stock through dividend
reinvestment and shareholder stock purchase plan 1,000 35,000 - - 36,000
Purchase and retirement of common stock (note 9) (10,000) (295,000) - - (305,000)
Issuance of 51,705 shares of common stock at
par value for 5% stock dividend plus cash in
lieu of fractional shares 52,000 (52,000) (5,000) - (5,000)
Issuance of 345,741 shares of common stock at
par value for 3 for 2 stock split plus cash in lieu
of fractional shares 346,000 (346,000) (5,000) - (5,000)
Exercise of stock options to purchase 1,575 shares
of common stock at $19.07 per share (note 9) 2,000 28,000 - - 30,000
Dividends ($0.26 per share) - - (288,000) - (288,000)
Change in net unrealized depreciation on
securities available for sale (note 2) - - - 73,000 73,000
Net earnings - - 1,911,000 - 1,911,000
----------- ------------- ------------- ----------- --------------
Balance at June 30, 1998 $ 1,092,000 2,084,000 20,715,000 (36,000) 23,855,000
=========== ============= ============= =========== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
Net cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 1,911,000 821,000 5,762,000
Adjustments to reconcile net earnings to net cash provided
(used) by operating activities:
Depreciation and amortization 479,000 348,000 300,000
Amortization of mortgage servicing rights 242,000 153,000 107,000
Gain on sale of loans (831,000) (2,124,000) (2,026,000)
Loss (gain) on sale of securities (32,000) 29,000 111,000
Gain on sale of branch - - (7,274,000)
Loss on sale of equipment - 54,000 -
Net change in loans held for sale 25,320,000 (9,179,000) (13,486,000)
Provision for loan losses 755,000 373,000 83,000
Change in accrued interest receivable 451,000 35,000 107,000
Change in prepaid expenses and other assets (634,000) (476,000) 635,000
Change in accrued expenses and other liabilities (501,000) (79,000) (1,646,000)
Loss on investment in limited partnership 113,000 122,000 263,000
------------- --------------- --------------
Net cash provided (used) by operating activities 27,273,000 (9,923,000) (17,064,000)
------------- --------------- --------------
Cash flows from investing activities:
Purchases of securities held to maturity - (3,519,000) (34,262,000)
Proceeds from maturities of securities held to maturity 24,510,000 3,062,000 16,872,000
Purchases of securities available for sale (49,709,000) (31,913,000) (46,074,000)
Proceeds from maturity of securities available for sale 10,530,000 1,192,000 5,015,000
Proceeds from sale of securities available for sale 35,339,000 29,826,000 76,159,000
Change in loans, net (39,213,000) 1,159,000 (12,834,000)
Purchase of life insurance policies - (35,000) -
Purchase of stock of FHLB of Indianapolis (828,000) (77,000) (988,000)
Purchases of office premises and equipment (161,000) (615,000) (154,000)
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
------------- --------------- --------------
Net cash used by investing activities (19,532,000) (920,000) (5,544,000)
------------- --------------- --------------
Cash flows from financing activities:
Net (decrease) increase in deposits (26,553,000) 7,168,000 11,017,000
Proceeds from FHLB advances and other borrowings 81,996,000 83,768,000 202,544,000
Repayment of FHLB advances and other borrowings (66,911,000) (84,357,000) (181,046,000)
Proceeds from issuance of common stock 141,000 133,000 137,000
Purchase and retirement of common stock (305,000) (207,000) (182,000)
Payment of dividends on common stock (298,000) (279,000) (266,000)
Increase (decrease) in advance payments by borrowers for interest and taxes 58,000 (188,000) (1,829,000)
------------- --------------- --------------
Net cash provided (used) by financing activities (11,872,000) 6,038,000 30,375,000
------------- --------------- --------------
Net increase (decrease) in cash and cash equivalents (4,131,000) (4,805,000) 7,767,000
Cash and cash equivalents at beginning of year 20,294,000 25,099,000 17,332,000
------------- --------------- --------------
Cash and cash equivalents at end of year $ 16,163,000 20,294,000 25,099,000
============= =============== ==============
Additional disclosures:
Interest paid $ 13,567,000 12,917,000 14,170,000
============= =============== ==============
Income taxes paid $ 996,000 287,000 4,700,000
============= =============== ==============
Transfer of investment securities held to maturity to available
for sale account $ - - 45,838,000
============= =============== ==============
Transfer of loans receivable to prepaid expenses and other assets $ 3,863,000 4,111,000 -
============= =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(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 Insurance 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 significantly 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 as 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.
The Bank provides specific valuation allowances for estimated losses on
loans and real estate owned when a significant and permanent decline in
value occurs. 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. 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.
<PAGE>
2
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
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.
Loans are placed on non-accrual status when the collection of interest
becomes doubtful. Interest previously accrued but not deemed collectible
is reserved.
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.
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, 1998.
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.
<PAGE>
3
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 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 equity. The statement is effective for fiscal
years beginning after December 15, 1997. The Corporation does not
anticipate the adoption of SFAS 130 in fiscal 1999 will have any impact
on its financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosure About Segments of an Enterprise and Related
Information (SFAS 131) which requires the disclosure of financial and
descriptive information about reportable operating segments. Operating
segments are components of an enterprise about which financial
information is available and is evaluated regularly in deciding how to
allocate resources and assess performance. The Corporation does not
anticipate the adoption of SFAS 131 in fiscal 1999 will have any impact
on its financial position or results of operations.
In February 1998, the FASB issued Statement of Financial Accounting
Standard No. 132, Employers' Disclosures About Pension and Other
Postretirement Benefits (SFAS 132) which standardizes disclosure
requirements for pension and other postretirement benefit plans. As this
standard does not change the measurement or recognition of those plans,
the Corporation does not anticipate the adoption of SFAS 132 in 1999 will
have any impact on its financial position or results of operations.
<PAGE>
4
1ST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS 133) which establishes accounting and reporting standards for
derivative instruments. SFAS 133 requires all derivatives to be
recognized as either assets or liabilities in the statement of financial
condition at fair value. The accounting for changes in fair value of the
derivative depends on the intended use of the derivative and the
resulting designation. The Corporation does not anticipate the adoption
of SFAS 133 in fiscal 2000 will have a material impact on its financial
position or results of operations.
Reclassifications
Certain amounts in the 1997 and 1996 consolidated financial statements
have been reclassified to conform to the 1998 presentation.
(2) Securities Available for Sale
Securities available for sale consist of the following at June 30:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Mortgage-backed securities:
<S> <C> <C> <C>
FHLMC $ 1,723,000 - (2,000) 1,721,000
GNMA 9,245,000 - (60,000) 9,185,000
Investments:
U.S. Treasury and agency
obligations 4,596,000 6,000 (4,000) 4,598,000
--------------- -------------- -------------- ---------------
$ 15,564,000 6,000 (66,000) 15,504,000
=============== ============== ============== ===============
1997
----------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
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>
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.
<PAGE>
For the year ended June 30, 1998, gross realized gains and gross realized
losses on sales of investment securities available for sale were $7,000
and $13,000, respectively and from the sales of mortgage-backed
securities available for sale were $35,000 and $4,000, respectively. For
the year ended June 30, 1997, gross realized losses from the 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, 1998, gross realized gains and gross realized
losses on sales of trading account securities were $18,000 and $11,000,
respectively. 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.
At June 30, 1998, the contractual maturity of securities available for
sale follows:
Amortized Market
cost value
Due after one year through five years $ 1,998,000 1,994,000
Due after five years through ten years 601,000 600,000
Due after ten years 1,997,000 2,004,000
Mortgage-backed securities 10,968,000 10,906,000
------------ ----------
$15,564,000 15,504,000
=========== ==========
(3) Securities Held to Maturity
Securities held to maturity at June 30 consist of:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 19,258,000 2,000 (46,000) 19,214,000
Mortgage-backed securities 295,000 5,000 - 300,000
--------------- -------------- ------------- --------------
$ 19,553,000 7,000 (46,000) 19,514,000
=============== ============== ============= ==============
1997
---------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
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>
<PAGE>
At June 30, 1998, the contractual maturity of securities held to maturity
follows:
<TABLE>
<CAPTION>
Amortized Market
cost value
<S> <C> <C>
Due within one year $ 8,450,000 8,436,000
Due after one year through five years 8,808,000 8,776,000
Due after five years through ten years 1,000,000 1,000,000
Due after ten years 1,000,000 1,002,000
Mortgage-backed securities 295,000 300,000
-------------- --------------
$ 19,553,000 19,514,000
============== ==============
(4) Loans Receivable
Loans receivable at June 30 consist of:
1998 1997
---- ----
Real estate loans:
Mortgage $ 163,457,000 135,189,000
Construction 4,501,000 2,038,000
Consumer and other loans 22,133,000 12,748,000
--------------- ----------------
190,091,000 149,975,000
--------------- ----------------
Less:
Undisbursed loan funds (3,475,000) (1,536,000)
Deferred loan fees and unamortized premiums
and discounts, net 139,000 (441,000)
Allowance for loan losses (1,465,000) (1,158,000)
--------------- ----------------
(4,801,000) (3,135,000)
--------------- ----------------
$ 185,290,000 146,840,000
=============== ================
8.46% 8.53%
=============== ================
</TABLE>
At June 30, 1998, 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 1,158,000 896,000 878,000
Provision charged to operations 755,000 373,000 83,000
Loans charged off, net of recoveries (448,000) (111,000) (65,000)
-------------- ------------- ------------
Balance at end of year $ 1,465,000 1,158,000 896,000
============== ============= ============
</TABLE>
<PAGE>
Non accrual loans amounted to $3,491,000 and $2,330,000 at June 30, 1998
and 1997, 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, 1998 consists of:
Balance at beginning of year $ 614,000
Loans originated 132,000
Repayments (482,000)
===========
Balance at end of year $ 264,000
===========
(5) Mortgage Banking
The amount of loans serviced by the Bank for the benefit of others was
$120,811,000, $112,642,000, and $81,353,000 at June 30, 1998, 1997 and
1996, respectively.
At June 30, 1998 and 1997, unamortized loan servicing rights totaled
$1,012,000 and $819,000, respectively, and are included in prepaid
expenses and other assets in the Consolidated Statement of Financial
Condition. For the years ended June 30, 1998, 1997, and 1996, the Bank
capitalized $426,000, $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. 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 1998 or 1997.
(6) Office Premises and Equipment
Office premises and equipment at June 30 consist of:
1998 1997
---- ----
Land and improvements $ 345,000 345,000
Buildings and improvements 2,956,000 2,952,000
Furniture and equipment 1,949,000 1,986,000
------------- -------------
5,250,000 5,283,000
Less accumulated depreciation 2,173,000 2,058,000
------------- -------------
$ 3,077,000 3,225,000
============= =============
<PAGE>
(7) Deposits
Deposits at June 30 consist of:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
Statement savings accounts (2.87% and 2.86% at
June 30, 1998 and 1997) 6,340,000 6,766,000
Variable rate savings accounts (6.00% at June 30,
1998 and 1997) 8,776,000 9,163,000
NOW and Super NOW accounts (0.00%-3.10% and
0.00%-3.25% at June 30, 1998 and 1997) 3,447,000 3,015,000
Money market accounts (weighted average rate of 4.29% ------------------- ----------------
and 4.06% at June 30, 1998 and 1997) 23,025,000 23,208,000
------------------- ----------------
Certificates:
Less than 4% 247,000 191,000
4% - 4.99% 2,088,000 4,435,000
5% - 5.99% 51,675,000 77,581,000
6% - 6.99% 31,748,000 25,478,000
7% - 7.99% 8,152,000 12,228,000
8% or more 828,000 1,195,000
------------------- ----------------
94,738,000 121,108,000
------------------- ----------------
Weighted average cost of all deposits 117,763,000 144,316,000
============== ==============
5.56% 5.49%
============== ==============
</TABLE>
Scheduled maturities of certificates at June 30, 1998 are summarized as
follows:
Year ending June 30,
1999 $ 60,706,000
2000 18,777,000
2001 6,838,000
2002 1,875,000
2003 4,490,000
Thereafter 2,052,000
----------------
$ 94,738,000
================
Included in certificates at June 30, 1998 and 1997 are approximately
$7,050,000 and $8,828,000, 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, 1998.
<PAGE>
Interest expense by type of deposit for the years ended June 30 follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statement Savings and variable
rate savings accounts $ 552,000 316,000 392,000
NOW, Super NOW and Money Market 381,000 375,000 652,000
Certificates 6,375,000 6,987,000 8,029,000
-------------- ------------- -------------
$ 7,308,000 7,678,000 9,073,000
============== ============= =============
</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 were reduced in 1998 and will continue
to be reduced in the future.
(8) Advances From FHLB and Other Borrowings
Advances from FHLB and other borrowings at June 30 consist of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Advances from FHLB collateralized by qualifying mortgages, investment
securities and mortgage-backed securities (as defined) equal to
125% of FHLB
advances $ 115,381,000 98,815,000
Promissory note with interest payable at prime rate
(as defined) plus 1/2% (9.0% at June 30,
1997) with principal payments of $49,375
due quarterly through December 30, 2004.
Collateralized by 100% of the common stock of
the-Bank. Prepaid in November 1997 --- 1,481,000
---------------- ----------------
$ 115,381,000 100,296,000
================ ================
</TABLE>
The interest rates on the advances from FHLB at June 30, 1998 were as
follows: $5,000,000 at 4.88%, $13,209,000 at 4.96%, $10,000,000 at 5.00%,
$10,000,000 at 5.35%, $10,000,000 at 5.39%, $10,000,000 at 5.50%,
$10,000,000 at 5.55%, $5,000,000 at 5.60%, $10,000,000 at 5.62%,
$10,000,000 at 5.68%, $10,000,000 at 5.72%, $3,000,000 at 5.83%,
$9,000,000 at 5.85%, and $172,000 at 5.91%. Although all of these
advances are at fixed interest rates, the FHLB has the option at various
times of converting $87,000,000 of the advances to variable interest
rates. 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%, $10,000,000 at 5.72%, and $20,000,000 of variable rate advances
with a rate at June 30, 1997 of 5.775%. The weighted average interest
rate of all borrowings was 5.44% and 5.62% at June 30, 1998 and 1997,
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, and $2,956,000 for the years ended June 30, 1997 and
1996, respectively, with maximum amounts outstanding at any month-end of
$4,020,000, and $8,838,000 during the years ended June 30, 1997 and 1996,
respectively.
<PAGE>
Advances from FHLB at June 30, 1998 are contractually scheduled to mature
as follows:
Maturity
1999 $ 26,209,000
2000 19,000,000
2001 -
2002 10,000,000
2003 35,000,000
Thereafter 25,172,000
===============
$ 115,381,000
===============
(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, 1998, the Bank's risk-based capital
ratio of 15.0% 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, 1998, the Bank's core
capital and leverage ratio of 8.7% 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, 1998, the Bank was
classified as well-capitalized with a total risked based capital ratio of
15.0%, a Tier 1 risked-based capital ratio of 14.3% and a leverage (core)
capital ratio of 8.7%.
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.
<PAGE>
The following is a summary of the Bank's regulatory capital and capital
requirements at June 30, 1998 and 1997.
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
--------------------------- ------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- --------- ------------- ------- ------------- ---------
As of June 30, 1998:
<S> <C> <C> <C> <C> <C> <C>
Total capital to
risk-weighted
assets 23,602,000 15.0% 12,633,000 8.0% 15,792,000 10.0%
Tier 1 capital to
risk-weighted
assets 22,602,000 14.3% 6,317,000 4.0% 9,475,000 6.0%
Tier 1 capital to
adjusted total 22,602,000 8.7% 10,391,000 4.0% 12,989,000 5.0%
assets
As of June 30, 1997:
Total capital to
risk-weighted
assets 23,086,000 16.0% 11,555,000 8.0% 14,444,000 10.0%
Tier 1 capital to
risk-weighted
assets 22,436,000 15.5% 5,778,000 4.0% 8,666,000 6.0%
Tier 1 capital to
adjusted total
assets 22,436,000 8.3% 10,823,000 4.0% 13,528,000 5.0%
</TABLE>
At the time of conversion from mutual to stock in 1987, 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 any
liquidation distribution may be made with respect to the stockholders.
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 October 23, 1997, the Board of Directors approved a 3-for-2 stock
split. On December 18, 1997, the Board of Directors approved a 5% common
stock dividend. Also, on November 22, 1996 and December 21, 1995, the
Board of Directors approved 5% common stock dividends. All share and per
share data have been retroactively restated to reflect the stock split
and stock dividends.
<PAGE>
Stock Option Plans
The Corporation has a stock option plan under which 260,465 authorized
but unissued shares of common stock were reserved. Under the plan,
151,938 non-qualified stock options were granted at $3.45 per share to
outside directors and 65,117 incentive stock options and 16,279
non-qualified stock options were granted at $3.45 and $3.54 per share,
respectively, to certain key employees. Of the 65,117 incentive stock
options granted to certain key employees, 2,605 options were canceled in
1994. All options granted had been exercised or canceled as of June 30,
1996. In 1997, 26,775 incentive stock options were granted at $19.07 to
certain key employees. In 1998, no incentive stock options were granted.
Shares available and options outstanding under the plans are as follows:
<TABLE>
<CAPTION>
Shares
available
for future Options Price per
grant outstanding share
<S> <C> <C> <C>
Balance at June 30, 1995 and 1996 29,736 - -
Granted in 1997 (26,775) 26,775 19.07
------------- --------------
Balance at June 30, 1997 2,961 26,775 19.07
Exercised in 1998 - (1,575) 19.07
============= ==============
Balance at June 30, 1998 2,961 25,200 19.07
============= ============== ==============
</TABLE>
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 basic
earnings per share would have been as follows:
1998 1997
---- ----
Net earnings:
As reported $ 1,911,000 821,000
============= ============
Pro forma $ 1,911,000 724,000
============= ============
Basic earnings per share:
As reported $ 1.75 .75
============= ============
Pro forma $ 1.75 .66
============= ============
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.
<PAGE>
Stock Purchase Plans
The Corporation maintains an Employee Stock Purchase Plan whereby
full-time employees of 1ST BANCORP and subsidiaries 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 24,522 authorized but unissued shares were reserved for issuance under
this plan. In 1998, 5,613 shares were issued and purchased by employees.
The Board of Directors suspended this plan effective June 30, 1998 for
plan years 1999 and beyond. Under a former plan, with identical terms as
the existing plan, a total of 5,904 and 8,621 shares were issued and
purchased by employees in 1997 and 1996, respectively.
Stock Repurchase Plan
In August 1996, the Board authorized the repurchase of up to 5% of the
outstanding shares of common stock (1,108,230 shares were outstanding at
the time), subject to market conditions, over a two year period which
expires in August 1998. During the years ended June 30, 1998 and 1997,
15,750 and 11,628 shares, respectively, of common stock were repurchased
at an average price per share of $19.37 and $17.80, respectively. Under a
similar plan, 10,516 shares were repurchased in 1996 at an average price
of $17.28.
(10) Earnings Per Share
In February 1997, the FASB issued Statement of Financial Accounting
Standard No. 128, Earnings Per Share (FAS 128). FAS 128 provides
computation, presentation, and disclosure requirements for earnings per
share and supersedes Accounting Principles Board Opinion 15. Basic
earnings per share for 1998, 1997, and 1996, were computed by dividing
net earnings by the weighted average shares of common stock outstanding
(1,090,922, 1,101,724, and 1,103,539 in 1998, 1997, and 1996,
respectively). Diluted earnings per share for 1998, 1997, and 1996 were
computed by dividing net earnings by the weighted average shares of
common stock and common stock that would have been outstanding assuming
the issuance of all dilutive potential common shares outstanding
(1,099,293, 1,101,724, and 1,103,539 in 1998, 1997, and 1996,
respectively.) Dilution of the per-share calculation relates to stock
options. Diluted earnings per share for 1998, 1997, and 1996 are the same
as primary earnings per share calculated and reported under superseded
APB 15. Fully diluted earnings per share as previously reported under APB
15 are no longer required.
(11) Employee Benefit Plans
Substantially all employees are covered under a noncontributory defined
benefit pension plan. Net periodic pension expense (benefit) for the
years ended June 30 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $ 81,000 128,000 177,000
Interest cost 77,000 79,000 124,000
Actual return on assets (279,000) (173,000) (87,000)
Net amortization and deferral (15,000) 76,000 (34,000)
-------------- ------------- -----------
Net periodic pension expense (benefit) $ (136,000) 110,000 180,000
============== ============= ===========
</TABLE>
Prior service cost is being amortized over the average remaining service
period of active employees.
<PAGE>
<TABLE>
<CAPTION>
Accumulated plan benefit information for the Bank's plan is as follows:
1998 1997
---- ----
<S> <C> <C>
Actuarial present value of projected benefit obligations:
Vested benefit obligation $ 747,000 721,000
Nonvested benefit obligation 31,000 60,000
-------------- ----------------
Total accumulated benefit obligation 778,000 781,000
Additional benefits based upon estimated future
salary levels 192,000 190,000
-------------- ----------------
Total projected benefit obligation 970,000 971,000
Fair market value of plan assets 1,526,000 1,336,000
-------------- ----------------
Fair market value of plan assets over projected benefit
obligation 556,000 365,000
Unrecognized prior service cost (25,000) (28,000)
Unrecognized gain (350,000) (355,000)
Unrecognized transition asset 5,000 6,000
-------------- ----------------
Accrued pension asset (liability) $ 186,000 (12,000)
============== ================
</TABLE>
The weighted-average assumed rate of return used in determining the net
periodic pension cost for 1998 and 1997 was 8.0% and in determining the
actuarial present value of accumulated benefit obligations at June 30,
1998 and 1997 was 7.5%. The weighted-average rate of increase in future
compensation levels used for 1998 and 1997 was 5.0%.
The Bank has an Incentive Bonus Plan for certain salaried employees. The
bonus pool for the years ended June 30, 1998, 1997 and 1996 was $278,000,
$220,000, and $300,000, 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 fifteen-year period once the director reaches
normal retirement age. 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, 1998, 1997 and 1996, the Bank expensed $256,000,
$102,000, and $99,000, respectively, under the plans and recognized
$66,000, $65,000, and $41,000, 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.
(12) Income Taxes
The components of the provision (benefit) for income taxes for the years
ended June 30 consist of:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 510,000 (213,000) 2,881,000
State income taxes 236,000 71,000 843,000
Deferred (130,000) (107,000) (351,000)
-------------- ------------- --------------
$ 616,000 (249,000) 3,373,000
============== ============= ==============
</TABLE>
<PAGE>
The differences between the effective income tax rate and the statutory
Federal corporate rate consist of:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate 34.0% 34.0% 34.0%
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit 6.2 8.2 6.1
Affordable, housing tax credit (13.6) (60.0) -
Refund of prior year taxes - (26.0) -
Increase in cash surrender value of life insurance (0.9) (3.8) (0.2)
Other (1.3) 4.1 (3.0)
---------- ----------- ----------
Effective tax rate 24.4% (43.5)% 36.9%
========== =========== ==========
</TABLE>
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>
1998 1997
---- ----
Deferred tax assets:
<S> <C> <C>
Deferred loan fees $ 20,000 41,000
Securities available for sale 24,000 72,000
Allowance for loan losses for financial reporting purposes 400,000 260,000
Deferred compensation and benefits 307,000 270,000
Uncollected interest 89,000 -
Other 16,000 26,000
----------- -----------
856,000 669,000
----------- -----------
Deferred tax liabilities:
Mortgage servicing 405,000 327,000
Excess tax depreciation 86,000 85,000
FHLB stock dividend 52,000 52,000
Allowance for loan losses for tax purposes in excess of
base year allowance 80,000 125,000
Partnership loss 53,000 -
Other 64,000 46,000
----------- -----------
740,000 635,000
-----------
-----------
Net deferred tax asset $ 116,000 34,000
=========== ===========
</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.
<PAGE>
Retained earnings at June 30, 1998, includes approximately $2,300,000 for
which no provision for federal income taxes has been made. This amount
represents allocations of income for allowable bad debt deductions.
Reduction of amounts so allocated for purposes other than tax bad debt
losses will create taxable income which will be subject to the then
current corporate income tax rate. It is not contemplated that amounts
allocated to bad debt deductions will be used in any manner to create
taxable income.
Financial Services of Southern Indiana Corp. ("Financial Services"), a
subsidiary of the Bank, became a limited partner in House Investments,
Shady Oak, L.P. during 1994. Under the terms of the partnership
agreement, Financial Services contributed capital of $2,500,000 in 1995.
The Partnership owns and operates an apartment complex which qualifies
for affordable housing tax credits. The investment is being accounted for
using the equity method. The Bank also provided a mortgage loan to the
partnership in August 1996 which had a balance of $2,269,000 and
$2,287,000 at June 30, 1998 and 1997, respectively.
(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 $18,143,000 and $5,255,000, and $1,674,000
and $2,555,000 at June 30, 1998 and 1997, respectively. The Bank had no
outstanding commitments to purchase loans, mortgage-backed securities,
and investments at June 30, 1998. These commitments, which are subject to
certain limitations, extend over varying periods of time with the
majority to be fulfilled over a 12-month period. The Bank does not
project any losses will be incurred as a result of these commitments. The
majority of the commitments to originate loans are for fixed rate
mortgage loans at rates ranging from 6.75% to 10.40% and adjustable rate
mortgage loans at rates ranging from 7.25% to 10.25% at June 30, 1998.
<PAGE>
(15) Parent Company Financial Information
Following is condensed financial information of the Corporation:
Condensed Statements of Financial Condition
<TABLE>
<CAPTION>
June 30,
----------------------------------
Assets 1998 1997
------ ---- ----
<S> <C> <C>
Cash $ 330,000 691,000
Investment in subsidiaries 23,513,000 23,091,000
Due from subsidiary 14,000 33,000
Other assets - 16,000
--------------- ---------------
$ 23,857,000 23,831,000
=============== ===============
Liabilities and Stockholders' Equity
Long-term debt - 1,481,000
Accounts payable and accrued expenses 2,000 17,000
--------------- ---------------
2,000 1,498,000
Stockholders' equity 23,855,000 22,333,000
--------------- ---------------
$ 23,857,000 23,831,000
=============== ===============
</TABLE>
Condensed Statements of Earnings
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend from subsidiaries $ 1,800,000 1,600,000 550,000
Other operating income 21,000 27,000 38,000
Operating expenses (168,000) (242,000) (263,000)
-------------- ------------- --------------
1,653,000 1,385,000 325,000
Income tax benefit 58,000 85,000 89,000
-------------- ------------- --------------
Income before equity in undistributed earnings
of subsidiaries 1,711,000 1,470,000 414,000
Equity in undistributed earnings (loss) of
subsidiaries 200,000 (649,000) 5,348,000
-------------- ------------- --------------
Net earnings $ 1,911,000 821,000 5,762,000
============== ============= ==============
</TABLE>
<PAGE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------
1998 1997 1996
---- ---- ----
Net cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 1,911,000 821,000 5,762,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed earnings of
subsidiaries (200,000) 649,000 (5,348,000)
Change in accounts payable and accrued
expenses (15,000) - -
Change in due from subsidiary 19,000 (12,000) 25,000
Change in other assets 16,000 3,000 1,000
--------------- ------------- ---------------
Net cash provided by operating
activities 1,731,000 1,461,000 440,000
--------------- ------------- ---------------
Cash flows from investing activities:
Capital contributions to subsidiaries (149,000) (500,000) -
--------------- ------------- ---------------
Net cash used by investing activities (149,000) (500,000) -
--------------- ------------- ---------------
Cash flows from financing activities:
Repayment of long-term debt (1,481,000) (198,000) (197,000)
Dividends to stockholders (298,000) (279,000) (266,000)
Purchase of common shares (305,000) (207,000) (182,000)
Proceeds from issuance of common stock 141,000 133,000 137,000
--------------- ------------- ---------------
Net cash used by financing activities (1,943,000) (551,000) (508,000)
--------------- ------------- ---------------
Net increase (decrease) in cash and cash
equivalents (361,000) 410,000 (68,000)
Cash and cash equivalents at beginning of year 691,000 281,000 349,000
--------------- ------------- ---------------
Cash and cash equivalents at end of year $ 330,000 691,000 281,000
=============== ============= ===============
</TABLE>
(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.
<PAGE>
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.
<TABLE>
<CAPTION>
1998 1997
----------------------------- ------------------------------
Carrying Estimated Carrying Estimated
(In thousands) amount fair value amount fair value
Assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 16,163 16,163 20,294 20,294
Securities including securities
available for sale 35,057 35,018 55,653 55,144
Loans receivable including loans
held for sale, net 187,739 189,022 174,609 173,651
Accrued interest receivable 1,729 1,729 2,180 2,180
Stock in FHLB of Indianapolis 5,769 5,769 4,941 4,941
Residential mortgage loan servicing 1,012 1,165 819 1,005
Liabilities
Deposits 117,763 117,569 144,316 143,241
Borrowings
FHLB advances 115,381 115,735 98,815 97,599
Long-term borrowing - - 1,481 1,481
Advance payments by borrowers
for taxes and insurance 362 362 304 304
Accrued interest payable 856 856 1,409 1,409
</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.
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.
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 for
similar deposit accounts.
<PAGE>
FHLB Advances. Fair values for fixed-maturity fixed-rate FHLB advances
and fix-maturity variable rate advances are calculated using either fair
market valuations provided by the FHLB of Indianapolis or 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.
(17) Subsequent Event
On August 6, 1998, the Corporation announced that it had entered into a
definitive agreement to merge the Corporation with and into German
American Bancorp. Under the terms of the agreement, the shareholders of
the Corporation are targeted to receive shares of common stock of German
American Bancorp with an equivalent value of approximately $50.94 for
each 1ST BANCORP share, subject to certain changes in the market value of
German American Bancorp shares.
The proposal is subject to approval by the shareholders of both the
Corporation and German American Bancorp, approval by appropriate bank
regulatory agencies and other conditions outlined in the agreement. The
Corporation anticipates the merger will become effective during the first
calendar quarter of 1999. In connection with the definitive agreement,
the Corporation also entered into a Stock Option Agreement with German
American Bancorp, which gives German American Bancorp an option to
purchase 19.9% of the Corporation's outstanding shares at $50.94 per
share upon the occurrence of certain events that create the potential for
another party to acquire control of the Corporation.
<PAGE>
1ST BANCORP AND SUBSIDIARIES
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, Indiana 47670
(812) 385-2659
First Title Insurance Company
102 N. Fifth Street
Vincennes, Indiana 47591
(812) 882-7837
<PAGE>
1ST BANCORP AND SUBSIDIARIES
DIRECTORS AND OFFICERS OF 1ST BANCORP
C. James McCormick, Chairman & CEO*
Chairman of the Board - McCormick, Inc., Bestway Express, Inc., and
President of JAMAC Corp.
John J. Summers, Vice Chairman
Retired President,
Hamilton Glass Products, Inc.
Frank Baracani, President*
President and Chief Executive Officer,
First Federal Bank,
A Federal Savings Bank
Donald G. Bell, Vice President
Retired Senior Partner - Hart, Bell, Cummings,
Ewing & Stuckey, Attorneys-at-Law
Lynn Stenftenagel, Secretary/Treasurer*
Executive Vice President, Secretary,
and Chief Financial Officer,
First Federal Bank,
A Federal Savings Bank
R. William Ballard
Retired Senior Vice President,
First Federal Bank,
A Federal Savings Bank
James W. Bobe
Farmer and County Commissioner
Ruth Mix Carnahan
Secretary-Treasurer, Carnahan Grain, Inc.
Rahmi Soyugenc
Chairman of the Board and President -
Evansville Metal Products, Inc.,
President - National Anodizing &
Plating, Keller Street Corporation
All 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>
1ST BANCORP AND SUBSIDIARIES
MANAGEMENT
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, Chief Financial
Officer and Secretary
Ruth Mix Carnahan, Treasurer
Bradley M. Rust, Senior Vice President/Controller
Gerald R. Belanger, Senior Vice President
Jay A. Baker, Vice President
Laura E. Bogard, Vice President
Rana M. Lee, Vice President
Cheryl A. Otten, Vice President
Paula J. Pesch, Vice President
Doris J. Blackburn, Assistant Vice President
Scott E. Blackburn, Assistant Vice President
Lynn Elliott, Assistant Vice President
Kelly J. Gay, Assistant Vice President
Ruth Etta Hunter, Assistant Vice President
Randall W. Pratt, Assistant Vice President
Karen K. Tolliver, Assistant Vice President
Carol A. Witshork, Assistant Vice President
Glenda L. Berryman, Assistant Secretary
Katherine E. Coleman, Assistant Secretary
Denise A. Loudermilk, Assistant Secretary
Shirley S. Rose, Assistant Secretary
Shawn M. Thomas, Assistant Secretary
Officers of First Financial Insurance Agency, Inc.
C. James McCormick, Chairman of the Board
Frank Baracani, President and Chief Executive Officer
J. Timothy Tresslar, Vice President and General Manager
Lynn Stenftenagel, Secretary and Treasurer
Officers of First Title Insurance Company
C. James McCormick, Chairman of the Board
Frank Baracani, President and Chief Executive Officer
Lynn Stenftenagel, Secretary and Treasurer
Kathy V. Frey, General Manager
<PAGE>
1ST BANCORP AND SUBSIDIARIES
CORPORATE INFORMATION
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, 1998, there were 385 shareholders of record and 1,096,189
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 1998 45.00 26.50
March 1998 29.25 25.00
December 1997 40.50 26.00
September 1997 43.50 29.00
June 1997 33.25 30.00
March 1997 32.00 28.50
December 1996 31.50 27.25
September 1996 32.00 26.00
Internet Address
http://www.businesswire.com/cnn/fbcv.htm
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
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 23, 1998 except as
to note 13, which is as of August 6, 1998, relating to the consolidated
statements of financial condition of 1ST BANCORP and subsidiaries as of June 30,
1998 and 1997 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, 1998, which report appears in the June 30, 1998 annual report on Form 10-K
of 1ST BANCORP.
Indianapolis, Indiana
September 28, 1998
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 23, 1998 except as
to note 13, which is as of August 6, 1998, relating to the consolidated
statements of financial condition of 1ST BANCORP and subsidiaries as of June 30,
1998 and 1997 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, 1998, which report appears in the June 30, 1998 annual report on Form 10-K
of 1ST BANCORP.
Indianapolis, Indiana
September 28, 1998
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-8 of 1ST BANCORP of our report dated July 23, 1998 except as
to note 13, which is as of August 6, 1998, relating to the consolidated
statements of financial condition of 1ST BANCORP and subsidiaries as of June 30,
1998 and 1997 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, 1998, which report appears in the June 30, 1998 annual report on Form 10-K
of 1ST BANCORP.
Indianapolis, Indiana
September 28, 1998
<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.
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<NAME> 1ST BANCORP
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