-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LG6gfEm4rNDAeLF4haOX3bui8x9ClfFrBCsKU5nItnJ2vF/+fW+8iEUjb2B+9C5b /9UtAbvw0jzHw83GP5+UkA== 0000908834-97-000222.txt : 19970929 0000908834-97-000222.hdr.sgml : 19970929 ACCESSION NUMBER: 0000908834-97-000222 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971023 FILED AS OF DATE: 19970926 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST BANCORP /IN/ CENTRAL INDEX KEY: 0000840458 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 351775411 STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: SEC FILE NUMBER: 000-17915 FILM NUMBER: 97686206 BUSINESS ADDRESS: STREET 1: THIRD & BUSSERON STREETS CITY: VINCENNES STATE: IN ZIP: 47591 BUSINESS PHONE: 8128824528 MAIL ADDRESS: STREET 1: THIRD & BUSSERON STREET STREET 2: P O BOX 1417 CITY: VINCENNES STATE: IN ZIP: 47591 DEF 14A 1 1ST BANCORP PROXY STATEMENT FOR ANNUAL MEETING SCHEDULE 14A Information Required in Proxy Statement SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant: Yes. Filed by a Party other than the Registrant: No. Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as Permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 1ST BANCORP (Name Of Registrant As Specified In Its Charter) 1ST BANCORP (Name of Person(s) Filing Proxy Statement) Payment of Filing Fee (Check the appropriate box): [X] No fee required [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11 (1) Title of each class of securities to which transaction applies: N/A (2) Aggregate number of securities to which transaction applies: N/A (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): N/A (4) Proposed maximum aggregate value of transaction: N/A (5) Total fee paid: [ ] Fee paid previously with preliminary materials [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. N/A (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: NOTICE OF ANNUAL MEETING OF SHAREHOLDERS To Be Held On Thursday, October 23, 1997 NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of 1ST BANCORP (the "Corporation") will be held at the Vincennes Elks Country Club, 2715 Washington Avenue, Vincennes, Indiana 47591 on Thursday, October 23, 1997, at 10:30 a.m., Eastern Standard time, for the following purposes, which are more completely set forth in the accompanying Proxy Statement: (1) To elect three directors for terms of three years, each to serve until his or her successor has been elected and qualified; and (2) To transact such other business as may come before the meeting. The Board of Directors has fixed September 8, 1997, as the voting record date for the determination of shareholders entitled to notice of and to vote at the Annual Meeting and at any adjournment thereof. Only shareholders of record at the close of business on that date will be entitled to notice of and to vote at the Annual Meeting or at any such adjournment. BY ORDER OF THE BOARD OF DIRECTORS /s/ Mary Lynn Stenftenagel Mary Lynn Stenftenagel Secretary-Treasurer Vincennes, Indiana September 26, 1997 ================================================================================ YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN. EVEN IF YOU PLAN TO BE PRESENT, YOU ARE URGED TO COMPLETE, SIGN, DATE, AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THIS MEETING, YOU MAY VOTE EITHER IN PERSON OR BY YOUR PROXY. ANY PROXY GIVEN MAY BE REVOKED BY YOU IN WRITING OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE THEREOF. ================================================================================ 1ST BANCORP PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS This Proxy Statement is furnished to the holders of common stock, $1.00 par value per share ("Common Stock"), of 1ST BANCORP (the "Corporation") in connection with the solicitation of proxies on behalf of the Board of Directors to be used at the Annual Meeting of Shareholders to be held at the Vincennes Elks Country Club, 2715 Washington Avenue, Vincennes, Indiana 47591 on Thursday, October 23, 1997, at 10:30 a.m., Eastern Standard time, and at any adjournment thereof for the purposes set forth in the Notice of Annual Meeting. The principal asset of the Corporation consists of 100% of the issued and outstanding shares of common stock, $1.00 par value per share, of First Federal Bank, A Federal Savings Bank ("First Federal"). This Proxy Statement is expected to be mailed to the shareholders on or about September 26, 1997. The proxy solicited hereby, if properly signed and returned to the Corporation and not revoked prior to its use, will be voted in accordance with the instructions contained therein. If no contrary instructions are given, each proxy received will be voted for the matters described below and, upon the transaction of such other business as may properly come before the meeting, in accordance with the best judgment of the persons appointed as proxies. Any shareholder giving a proxy has the power to revoke it at any time before it is exercised by (i) filing with the Secretary of the Corporation written notice thereof (Mary Lynn Stenftenagel, 101 North Third Street, Vincennes, Indiana 47591), (ii) submitting a duly executed proxy bearing a later date, or (iii) by appearing at the Annual Meeting and giving the Secretary notice of his or her intention to vote in person. Proxies solicited hereby may be exercised only at the Annual Meeting and any adjournment thereof and will not be used for any other meeting. VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF Only shareholders of record at the close of business on September 8, 1997 ("Voting Record Date"), will be entitled to vote at the Annual Meeting. On the Voting Record Date, there were 691,460 shares of Common Stock issued and outstanding, and the Corporation had no other class of equity securities outstanding. Each share of Common Stock is entitled to one vote at the Annual Meeting on all matters properly presented at the Annual Meeting. A majority of the votes entitled to be cast, in person or by proxy, at the meeting is necessary for a quorum. In determining whether a quorum is present, shareholders who abstain, cast broker non-votes, or withhold authority to vote on one or more director nominees will be deemed present at the meeting. The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of September 8, 1997, 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. As of January 10, 1997, the Corporation effected a 5% stock dividend with respect to its shares of Common Stock. All share and per share figures set forth in this Proxy Statement have been adjusted to reflect that stock dividend.
Number of Shares of Name and Address of Common Stock Beneficially Percent of Beneficial Owner Owned (1)(2) Class - ---------------------------------------------------------------------- ------------------- Rahmi Soyugenc 66,599(3) 9.63% 119 LaDonna Boulevard Evansville, Indiana 47711 Joseph H. Moss 50,000 7.23% 1100 Circle 75 Parkway Suite 800 Atlanta, Georgia 30339 Tidal Insurance Company Limited 29,988(4) 4.33% c/o S.T.A.R. Corporate Management Hibiscus Square Grand Turk Turks & Caicos Islands British West Indies Dierberg Four, L.P. 29,822(4) 4.31% c/o First Securities America, Inc. Suite 404 135 N. Meramec Clayton, Missouri 63105
- ------------------------- (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 2,756 shares held solely by Mr. Soyugenc's wife. (4) While Tidal Insurance Company Limited and Dierberg Four, L.P. each beneficially own under 5% of the Corporation's outstanding shares, each of these shareholders filed a Schedule 13D with the SEC and the Corporation. James and Mary Dierberg, and their three children, control Dierberg Four, L.P. which controls Tidal Insurance Company Limited. Tidal Insurance Company Limited and Dierberg Four, L.P. each disclaims beneficial ownership of the Common Stock owned by the other party. PROPOSAL I - ELECTION OF DIRECTORS The By-Laws of the Corporation provide that the Board of Directors shall determine the number of directors, between 5 and 15, and currently it has established a board of nine members. The By-Laws further provide that the Board of Directors is to be divided into three classes as nearly equal in number as possible. The members of each class are to be elected for a term of three years and until their successors are elected and qualified. One class of directors is to be elected annually. Unless otherwise directed, each proxy executed and returned by a shareholder will be voted for the election of the nominees listed below. If any person named as nominee should be unable or unwilling to stand for election at the time of the Annual Meeting, the proxy holders will nominate and vote for a replacement nominee recommended by the Board of Directors. At this time, the Board of Directors knows of no reason why the nominees listed below may not be able to serve as directors if elected. Each of the nominees is a current director of the Corporation. Directors are elected by a plurality of the votes cast. Plurality means that the individuals who receive the largest number of votes cast are elected up to the maximum number of directors to be chosen at the meeting. Abstentions, broker non-votes, and instructions on the accompanying proxy to withhold authority to vote for one or more of the nominees will result in the respective nominees receiving fewer votes. However, the number of votes otherwise received by the nominee will not be reduced by such action. 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 the Voting Record Date. 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.
Common Stock Principal Director Director Beneficially Occupation of the of First Term Owned as of During the Last Corporation Federal To September 8, Name and Age Five Years Since Since Expire 1997(1) - ------------ ---------- ----- ----- ------ ----------------------------- Nominees James W. Director of the Corporation 1993 1993 2000 224(2) .03% Bobe and of First Federal; (Age 53) President, Bobe Farms, Inc. (farming)
Common Stock Principal Director Director Beneficially Occupation of the of First Term Owned as of During the Last Corporation Federal To September 8, Name and Age Five Years Since Since Expire 1997(1) - ------------ ---------- ----- ----- ------ ---------------------------- Amount % C. James Chairman of the Board and 1989 1966 2000 20,840(3)(8) 3.01% McCormick Chief Executive Officer of (Age 72) 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; Vice Chairman and Director of Golf Hosts, Inc.(resort owner and operator located in Tarpon Springs, Florida) Mary Lynn Director and Secretary- 1989 1988 2000 17,233(8) 2.50% Stenftenagel Treasurer of the Corporation; (Age 43) Director, Executive Vice President, Secretary, and Chief Financial Officer of First Federal Directors Continuing In Office R. William Director of the Corporation 1991 1971 1999 20,984(4) 3.03% Ballard and First Federal Bank (Age 63) Retired from First Federal Frank D. President and Director of 1989 1984 1999 23,310(5)(8) 3.38% Baracani the Corporation and President, (Age 55) Chief Executive Officer and Director of First Federal Donald G. Vice President and Director 1989 1988 1998 30,983 4.48% Bell of the Corporation; Director (Age 67) of First Federal; Retired Senior Partner with the law firm of Hart, Bell, Cummings, Ewing & Stuckey Vincennes, Indiana Ruth Mix Director of the Corporation 1991 1981 1998 3,403 0.49% Carnahan and Director and Treasurer (Age 78) of First Federal; Secretary- Treasurer of Carnahan Grain, Inc., Edwardsport, Indiana
Common Stock Principal Director Director Beneficially Occupation of the of First Term Owned as of During the Last Corporation Federal To September 8, Name and Age Five Years Since Since Expire 1997(1) - ------------ ---------- ----- ----- ------ ------------------------------ Amount % Rahmi Director of the Corporation 1991 1989 1998 66,599(6) 9.63% Soyugenc and of First Federal; President (Age 66) of Evansville Metal Products, Evansville, Indiana John J. Vice Chairman of the Board 1989 1984 1999 18,022(7) 2.60% Summers of the Corporation and First (Age 67) Federal; retired President of Hamilton Glass Products, Inc., Vincennes, Indiana All directors and executive officers as a group (9 persons) 201,598(9) 29.15% - ---------------------------
(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) All shares are owned jointly by Mr. Bobe and his wife. (3) 5,844 of these shares are in the name of Bettye McCormick with Mr. McCormick as personal representative, 6,373 are owned by each of two of Mr. McCormick's adult children, and 2,250 are owned by a third adult child of Mr. McCormick (collectively these beneficial owners are referred to as the "McCormick Family".) Except for the 5,844 shares 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. (4) Of these shares, 3,752 shares are owned jointly with Mr. Ballard's wife. (5) Of these shares, 13,054 shares are owned jointly by Mr. Baracani and his wife and 33 shares are held in trust for Mr . Baracani's daughter. (6) These shares include 2,756 shares held solely by Mr. Soyugenc's wife. (7) All shares are owned by Mr. Summers' wife. (8) Excludes stock options for 4,000 shares which are not exercisable until January 1, 1998. (9) Excludes stock options for 12,000 shares which are not exercisable until January 1, 1998. The Board of Directors and its Committees During the year ended June 30, 1997, the Board of Directors of the Corporation met twelve times. No incumbent director of the Corporation attended fewer than 75% of the aggregate total number of meetings of the Board of Directors of the Corporation held during the last fiscal year and the total number of meetings held by all committees of the Board on which he or she served during the last fiscal year. The standing committees of the Board of Directors of the Corporation are the Nominating Committee, Audit Committee, Executive Committee, Option Administration Committee, By-Laws and Corporate Affairs Committee, and Personnel Committee. All committee members are appointed by the Board of Directors. The Nominating Committee selects nominees for election as directors of the Corporation. The Nominating Committee met one time in the fiscal year ended June 30, 1997. The Nominating Committee which nominated the director nominees set forth in this Proxy Statement consisted of Mr. Ballard (Chairman), Mr. Bell and Mrs. Carnahan. Although the Nominating Committee of the Corporation will consider nominees recommended by shareholders, it has not actively solicited recommendations for nominees from shareholders nor has it established procedures for this purpose. Article 4.14 of the Corporation's By-Laws provides that shareholders entitled to vote for the election of directors may name nominees for election to the Board of Directors. Under the Corporation's By-Laws, written notice of a proposed nomination must be received by the Secretary of the Corporation not less than 20 days prior to any annual meeting of shareholders, provided that if fewer than 30 days' notice of the meeting is given to shareholders, such written notice shall be received not later than the close of the tenth day following the day on which notice of the meeting was mailed to shareholders. The Audit Committee reviews the records and affairs of the Corporation to determine its financial condition, oversees the adequacy of the systems of internal control, and monitors the Corporation's adherence in accounting and financial reporting to generally accepted accounting principles and regulatory accounting principles, as appropriate. The Audit Committee, which currently consists of Messrs. Soyugenc (Chairman), Bell, Bobe, Ballard, and Summers and Mrs. Carnahan, met six times in fiscal 1997. The Option Administration Committee administers the 1ST BANCORP Stock Option Plan and the 1ST BANCORP Employee Stock Purchase Plan. The Option Administration Committee, which currently consists of Messrs. Bell (Chairman), Summers, and Soyugenc, and Mrs. Carnahan, met two times in fiscal 1997. The By-Laws and Corporate Affairs Committee, which reviews the Corporation's and First Federal's By-Laws and suggests amendments to them from time to time, met one time during the last fiscal year. Its members are Messrs. McCormick, Summers, Baracani, Bell, Soyugenc, Ballard and Bobe, Mrs. Carnahan, and Ms. Stenftenagel. The Personnel Committee reviews, oversees and recommends to the Board various employee related programs such as the Management Incentive Plan, salary adjustments and employee insurance. Its members currently consisting of Messrs. Summers (Chairman), Bell, Bobe, Soyugenc, Ballard and Mrs. Carnahan, met seven times in 1997. Management Remuneration and Related Transactions Remuneration of Named Executive Officers During the fiscal year ended June 30, 1997, 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, 1997, and (ii) each executive officer of the Corporation serving as such during the 1997 fiscal year, who earned over $100,000 in salary and bonuses during that year (the "Named Executive Officers").
Summary Compensation Table Long Term Annual Compensation Compensation ------------------------------------------------------------------------ Awards --------------------------- Other Annual Restricted Securities All Name and Principal Fiscal Compensation Stock Underlying Other Position Year Salary($)(1) Bonus($)(2) ($)(3) Awards($) Options(#) Compensation($) - -------- ---- ------------ ------------------ ---------- ---------- --------------- C. James McCormick 1997 $43,531 $25,000 - - 4,000 - Chairman of the Board 1996 41,865 34,729 - - - - and Chief Executive 1995 41,519 33,000 - - - - Officer of the Corporation and Chairman of the Board of First Federal Frank D. Baracani 1997 $105,845 $72,000 - - 4,190 - President and Director 1996 101,626 97,000 - - 171 - of the Corporation 1995 97,146 92,000 - - 168 - and First Federal and Chief Executive Officer of First Federal Mary Lynn Stenftenagel 1997 72,616 $48,000 - - 4,626 - Director and Secretary- 1996 69,471 64,000 - - 555 - Treasurer of the 1995 66,484 60,000 - - 529 - Corporation, Director, Executive Vice President, Secretary, and Chief Financial Officer of First Federal
(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 Officers of the Corporation receive certain perquisites, but the incremental cost of providing such perquisites does not exceed the lesser of $50,000 or 10% of the officer's salary and bonus. Stock Options The following table sets forth information related to options granted during fiscal year 1997 to each of the Named Executive Officers: Option Grants-Last Fiscal Year
% of Total Options Granted to Exercise or Options Employees Base Price Name Granted (#) in Fiscal Year ($/Share) Expiration Date - ---------------------- ------------- ------------------ ------------- --------------- C. James McCormick 4,000 (1) 25.52% $30.03 (1) 6/30/02 Frank D. Baracani 4,000 (1) 23.52% $30.03 (1) 6/30/02 190 (2) 5.33% $21.04 (2) 6/30/97 Mary Lynn Stenftenagel 4,000 (1) 23.52% $30.03 (1) 6/30/02 626 (2) 17.56% $21.04 (2) 6/30/97
(1) Option to acquire shares of the Corporation's Common Stock pursuant to a grant under the 1ST BANCORP Stock Option Plan. These options were granted at the fair market value of the shares (calculated by using the average bid and asked price) at June 30, 1997, which was $30.03 per share. (2) 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, 1996 and on June 30, 1997, which was $24.75 per share. The following table shows stock option exercises by the Named Executive Officers during fiscal 1997, including the aggregate value realized by such officers on the date of exercise. The following table includes the number of shares covered by stock options held by the Named Executive Officers as of June 30, 1997. Also reported are the values for "in-the-money" options (options whose exercise price is lower than the market value of the shares at fiscal year end) which represent the spread between the exercise price of any such existing stock options and the year-end market price of the stock. Aggregate Option Exercises in Last Fiscal Year and Outstanding Stock Option Grants and Value Realized As of 6/30/97
Number of Securities Value of Unexercised Shares Value Realized Underlying Unexercised In-the-Money Acquired on at Exercise Options at Fiscal Year End Options at Fiscal Year End Name Exercise(#) Date($)(1) Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ---------- ----------- ------------- ----------- ------------- C. James McCormick - - - 4,000 - - Frank D. Baracani 190 $ 1,708 - 4,000 - - Lynn Stenftenagel 626 $ 5,628 - 4,000 - -
(1) Aggregate market value of the shares covered by the option less the aggregate price paid by the Named Executive Officer. (2) Options granted by the Board of Directors on June 30, 1997 at the current market price of $30.03 per share. Director's Fees For fiscal 1997, no director of the Corporation was paid any director fees. 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. Indebtedness of Management Since the beginning of its fiscal year ended June 30, 1997, 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. Transactions with Affiliates During fiscal 1997 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. The Corporation intends to retain such law firm in a similar capacity in fiscal 1997. 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, 1997, 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. ACCOUNTANTS The firm of KPMG Peat Marwick LLP has been selected as the Corporation's principal independent accountant for the current year. KPMG Peat Marwick LLP has served as the Corporation's principal accountant since fiscal 1990. A representative of KPMG Peat Marwick LLP will be present at the Annual Meeting with the opportunity to make a statement if he so desires. He will be available to respond to any appropriate questions shareholders may have. SHAREHOLDER PROPOSALS Any proposal which a shareholder wishes to have presented at the next Annual Meeting of the Corporation must be received at the Main office of the Corporation for the inclusion in the proxy statement no later than 120 days in advance of September 26, 1998. Any such proposals should be sent to the attention of the Secretary of the Corporation at 101 North Third Street, Vincennes, Indiana 47591. OTHER MATTERS Management is not aware of any business to come before the Annual Meeting other than those matters described above in the Proxy Statement. However, if any other matters should properly come before the Annual Meeting, it is intended that the proxies solicited hereby will be voted with respect to those other matters in accordance with the judgment of the persons voting the proxies. The cost of solicitation of proxies will be borne by the Corporation. The Corporation will reimburse brokerage firms and other custodians, nominees and fiduciaries for reasonable expenses incurred by them in sending proxy materials to the beneficial owners of the Common Stock. In addition to solicitation by mail, directors, officers and employees of the Corporation may solicit proxies personally or by telephone without additional compensation. ANNUAL REPORTS A copy of the Corporation's Annual Report to Shareholders for the year ended June 30, 1997, accompanies this Proxy Statement. Such Annual Report is not part of the proxy solicitation materials. By Order of the Board of Directors /s/ Mary Lynn Stenftenagel Mary Lynn Stenftenagel September 26, 1997 Secretary-/Treasurer EX-13 2 SHAREHOLDER ANNUAL REPORT FOR 1ST BANCORP 1997 [COVER] 1ST BANCORP ANNUAL REPORT Table of Contents 1ST BANCORP AND SUBSIDIARIES Message to the Shareholders................................................ 2 Selected Financial Highlights.............................................. 3 Board of Directors......................................................... 4 Business Discussion........................................................ 5 Management's Discussion and Analysis of Results of Operations and Financial Condition.............................. 7 Independent Auditors' Report............................................... 16 Consolidated Statements of Financial Condition............................. 17 Consolidated Statements of Earnings........................................ 18 Consolidated Statements of Stockholders' Equity............................ 19 Consolidated Statements of Cash Flows...................................... 20 Notes to Consolidated Financial Statements................................. 20 Management and Office Locations............................................ 38 Senior Management.......................................................... 39 Corporate Information...................................................... 40 [PHOTO OF C. JAMES MCCORMICK AND FRANK BARACANI] Message to the Shareholders: During each of the past two fiscal years, the occurrence of one-time events conversely affected the Corporation's earnings. 1ST BANCORP's earnings dropped to $821,000 during fiscal 1997 because of a special industry-wide assessment to recapitalize the Savings Association Insurance Fund (SAIF) which resulted in a $1,330,000 charge to Bank earnings. This compares to record net earnings of $5,762,000 during fiscal 1996 when two branch banking offices were sold, thereby greatly enhancing earnings for the year. Earnings per share were $1.17 during 1997 as compared to $8.22 during 1996. Although the recapitalization of the SAIF negatively impacted fiscal 1997 earnings, it was a positive event for the future of the industry. The SAIF recapitalization will positively impact the future earnings of the Corporation when the ongoing annual deposit insurance assessments will be greatly reduced. In addition to dealing with the SAIF assessment, it was a busy year for First Federal Bank, A Federal Savings Bank. All loan administrative functions were relocated to Vincennes in June, 1997, affording more standardized procedures and control, as well as substantially decreased overhead expenses. Only one nonconforming mortgage loan production office, in Evansville, Indiana, remains in operation. Overhead for the three loan production offices that were closed in the consolidation process exceeded $2.0 million annually. Therefore, operations in fiscal 1998 should reflect this cost savings. On the retail side, we opened a branch office in Vincennes during the fiscal year, thereby affording greater customer service in our primary market area. First Financial Insurance Agency, Inc. had a busy year as well. An office was opened in Princeton, Indiana, which has already proven to be successful. The size of the agency doubled with the purchase of the book of insurance business of a local insurance agency. This purchase also expanded the Agency's market share of business and provided additional insurance products to Agency customers. Currently, First Financial represents 26 insurance companies. In addition to the restructuring of the loan offices which will reduce operating expenses, we also accomplished the goal of increasing the net interest margin. The margin increased to 2.52% during fiscal 1997 as compared to 2.36% during fiscal 1996. This is the highest net interest margin experienced by the Corporation since fiscal year 1994. We have chosen to increase the margin in an orderly manner and therefore this process is ongoing. A major factor in the increased interest rate margin has been placing higher rate nonconforming mortgage loan product in portfolio thereby increasing the yield on loans to 8.47% in 1997 from 8.36% in 1996, during a time of decreasing interest rates in the market as a whole. Although collection efforts are strong, nonperforming assets increased to $2.5 million, or .9% of assets at June 30, 1997 as compared to $.8 million, or .3% of assets at June 30, 1996. This increase was due to an increase in both conforming and nonconforming loan delinquencies, mostly attributed to customer bankruptcies. Acknowledging this increase in substandard assets, we have increased our general valuation allowance to $650,000 at June 30, 1997 from $392,000 at June 30, 1996, an increase of over 65%. Total allowance for loan losses at June 30, 1997 aggregated $1.2 million, or .8% of net loans receivable. This compares to $.9 million, or .6% of net loans receivable at June 30, 1996. We also have discontinued some high risk programs, such as the 100% loan program, after evaluation indicated the reward did not offset the risk. We wish to acknowledge the contributions of R. William "Bill" Ballard and Carroll C. Hamner who retired from the Bank with over 75 years combined experience in the financial industry, including a combined 53 years at First Federal. We are pleased that Bill will remain on the Board of Directors and Carroll will continue employment with the Bank on a part-time basis so we will have the benefit of their counsel and experience. 1ST BANCORP continues to focus on maximizing earnings and shareholder value. We feel the strategies put in place in regard to overhead reduction and yield enhancement, coupled with the reduction in the SAIF premium, have positioned the Corporation for a successful fiscal 1998. As always, we wish to thank our shareholders, associates, and customers for their continued loyalty and support. Sincerely, /s/ C. James McCormick /s/ Frank Baracani C. James McCormick Frank Baracani CEO and Chairman of the Board President Selected Financial Highlights
1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Summary of Earnings (Dollars in thousands except per share amounts) (For the year ended June 30): Interest Income 19,694 20,875 19,903 15,506 16,149 Interest Expense 13,292 14,520 13,419 8,955 9,405 Provision for Loan Losses 373 83 100 75 115 Non-Interest Income 3,098 10,391 5,384 3,434 3,705 Non-Interest Expense 8,555 7,528 7,898 7,459 6,836 Income Taxes (249) 3,373 1,440 808 1,222 Net Earnings 821 5,762 2,430 1,643 2,276 - ---------------------------------------------------------------------------------------------------- Earnings Per Share (1) $ 1.17 $ 8.22 $ 3.54 $ 2.31 $ 3.42 ==================================================================================================== Financial Condition (As of June 30): Total Assets 270,490 263,483 312,759 253,560 230,293 Securities Available for Sale 11,588 10,499 -- 5,758 1,307 Securities Held to Maturity 44,065 43,624 72,005 51,119 25,990 Loans 174,609 169,339 206,923 176,181 178,004 Deposits 144,316 137,148 209,805 172,791 172,413 Borrowings 100,296 100,885 79,387 59,520 37,200 Stockholders' Equity 22,333 21,729 16,333 13,520 12,854 - ---------------------------------------------------------------------------------------------------- Stockholders' Equity Per Share (1)(2) $ 32.00 $ 31.05 $ 23.36 $ 21.71 $ 20.17 ==================================================================================================== Supplemental Data (At or for the year ended June 30): Yield on Interest-Earning Assets 7.77% 7.75% 7.22% 6.87% 7.78% Cost of Interest-Earning Liabilities 5.54% 5.67% 5.02% 4.18% 4.76% Net Interest-Rate Spread 2.23% 2.08% 2.20% 2.69% 3.02% Net Interest-Rate Margin 2.52% 2.36% 2.35% 2.89% 3.25% Return on Average Total Assets 0.31% 2.05% 0.84% 0.70% 1.03% Return on Average Shareholders' Equity 3.79% 29.45% 16.62% 12.24% 20.10% Equity to Assets Ratio 8.26% 8.25% 5.22% 5.33% 5.58% Cash Dividends Per Share (1) $ 0.39 $ 0.37 $ 0.18 $ 0.18 $ 0.13 Dividend Payout Ratio 33.37% 4.52% 5.13% 7.81% 3.99% ====================================================================================================
(1) All per share calculations have been adjusted for the 5-for-4 stock split effective July 15, 1992 and the 5% stock dividends issued February 9, 1996 and January 10, 1997. (2) Calculated by dividing total equity by number of shares of common stock outstanding at year end. BOARD OF DIRECTORS [PHOTO OF BOARD OF DIRECTORS] Front row, left to right: John J. Summers, Vice Chairman Retired President Hamilton Glass Products, Inc. C. James McCormick, Chairman & CEO* Chairman of the Board - McCormick, Inc., Bestway Express, Inc., and President of JAMAC Corp. Frank Baracani, President* President and Chief Executive Officer, First Federal Bank, A Federal Savings Bank Lynn Stenftenagel, Secretary/Treasurer* Executive Vice President, Secretary, Chief Financial Officer, First Federal Bank, A Federal Savings Bank Back row, left to right: James W. Bobe Farmer and County Commissioner Rahmi Soyugenc Chairman of the Board and President - Evansville Metal Products, Inc., President - National Anodizing & Plating, Keller Street Corporation Ruth Mix Carnahan Secretary-Treasurer, Carnahan Grain, Inc. Donald G. Bell, Vice President Retired Senior Partner - Hart, Bell, Cummings, Ewing & Stuckey, Attorneys-at-Law R. William Ballard Retired Senior Vice President, First Federal Bank, A Federal Savings Bank All of the above directors of 1ST BANCORP are also directors of First Federal Bank, A Federal Savings Bank *Also director and officer of First Financial Insurance Agency, Inc. and First Title Company BUSINESS DISCUSSION 1ST BANCORP, an Indiana corporation formed in 1988 (the "Corporation"), is a nondiversified, unitary savings and loan holding company whose principal subsidiary is First Federal Bank, A Federal Savings Bank ("First Federal" or the "Bank"). The Bank operates two retail banking offices in Vincennes, Indiana and a loan production office in Evansville, Indiana. Other Corporation subsidiaries include First Financial Insurance Agency, Inc. ("First Financial" or the "Agency"), a full service insurance agency, and First Title Company, a currently inactive corporation. Lending First Federal continues its commitment to residential mortgage lending, but at the same time, offers ancillary types of lending for customer convenience and to diversify the loan portfolio. The Bank has always put mortgage lending in the forefront of its business opportunities and has a successful track record in efficiently satisfying the housing needs of targeted communities. First Federal funded $117.0 million in loans during fiscal 1997 as compared to $172.4 million in loans during fiscal 1996. The decreased loan volume resulted from reduced conforming retail loan volume during 1997 as compared to 1996. Nonconforming loan volume increased slightly during the year. Conventional conforming mortgage and consumer loan fundings aggregated $46.8 million during fiscal 1997 as compared to $106.5 million during 1996. The Bank maintained its market share of mortgage loans in its designated lending area during 1997 as compared to 1996. This decrease in fundings is attributed to the sales of the Tipton and Kokomo branch offices in December, 1995, the discontinuance of the wholesale correspondent mortgage program in the first quarter of fiscal year 1997, and the general economic conditions which resulted in decreased mortgage and consumer loan activity in the Bank's lending area during 1997. First Federal is committed to efficiently providing the credit needs of the Vincennes and surrounding communities. However, with the decreased volume in conventional mortgage lending and the decreasing profits provided by such lending, the Bank continues its focus on the nonconforming mortgage market. This market provides loans to a wider range of qualifying mortgage customers. During fiscal 1997, $70.2 million of nonconforming loans were funded as compared to $65.9 million of nonconforming mortgage loans in 1996. These loans were generated during the year by loan production offices located in Indiana, Ohio, and Kentucky. Toward the end of fiscal 1997, nonconforming loan production had decreased substantially because of the influx of new mortgage companies and mortgage brokers into the nonconforming loan business, so the decision was made to restructure the Bank's nonconforming loan division. Only the Evansville, Indiana loan production office remains open, and all administrative functions are conducted from the home office. This restructuring resulted in a substantial decrease in overhead and operating expenses. A portion of the high quality nonconforming mortgage loans are retained in the portfolio for yield. The remainder of the nonconforming loans are sold, servicing released, to other companies, in order to preserve asset quality and to generate non-interest income. During the year, most of the conforming mortgage loans were sold in the secondary market with servicing retained by the Bank; however, a portion of the new conforming lending was placed in the portfolio. Retaining conforming mortgage loans in portfolio served to balance the loan portfolio and also enhanced yield since the rates were higher than for alternative investments. During the year, First Federal sold $76.2 million of residential mortgage loans as compared to the sale of $161.4 million of residential mortgage loans during fiscal 1996. At June 30, 1997, the Bank maintained a high quality loan portfolio with a concentration in residential real estate as shown in the following table: Real Estate Loans: Construction Loans on: 1-4 family dwelling units $ 2,038,000 1.4% Permanent Mortgages on: 1-4 family dwelling units 126,039,000 84.0% 5 or more dwelling units 2,969,000 2.0% Nonresidential property 3,619,000 2.4% Land 2,562,000 1.7% Consumer Loans 12,748,000 8.5% - ------------------------------------------------------------ Total Loans $149,975,000 100.0% ============================================================ Over 94% of the total loan portfolio at June 30, 1997 consisted of residential real estate or consumer loans. Of the total $117.0 million loans processed during fiscal year 1997, over 99% was for residential or consumer purposes. At June 30, 1997, nonperforming assets totaled $2.5 million, or .9% of total assets. This compares to $.8 million, or .3% of assets at June 30, 1996. This increase is attributed to several factors, including general economic conditions and the abundance of consumer bankruptcies being experienced throughout the country and in our primary lending area. Loan quality continues to be of major importance and strong effort is being made to ensure a quality portfolio. General valuation allowances have been increased to prepare for potential future losses in the portfolio. Total allowance for loan losses at June 30, 1997 aggregated $1.2 million, or .8% of net loans receivable. This compares to $.9 million, or .6% of net loans receivable at June 30, 1996. The provision for loan losses was $373,000 during fiscal 1997 as compared to $83,000 during fiscal 1996. Management believes the allowance is adequate to absorb potential future losses. Retail Banking The Bank operates two banking offices in Vincennes, Indiana. A variety of savings products and conveniences are offered by First Federal. Checking accounts, money market deposit accounts, and savings certificates are offered at competitive interest rates. Wire services, travelers' checks, money orders, savings bonds, ATM services, bank by mail, and automatic transfers are offered for customer convenience. An extensive array of loan products is also offered. Fixed rate, adjustable rate, and balloon mortgages, as well as consumer loan products, credit cards, and overdraft and home equity lines of credit are available. Nonconforming mortgage loans are also offered, thus providing mortgage service for all segments of the communities being served. Insurance First Financial Insurance Agency, Inc. has offices in Vincennes and Princeton, Indiana. The Agency continues to grow in insurance volume and in the number of companies represented. During fiscal 1997, the Agency purchased the book of business of a local insurance agency, thereby doubling the premium base. At June 30, 1997, the Agency represented 18 property and casualty insurance companies. First Financial provides a full line of insurance products, including home, auto, farm and commercial coverages. The Agency also markets various health and life insurance products through its affiliation with 8 additional companies. MANAGEMENT'S DISCUSSION AND ANALYSIS This report contains certain forward looking statements that inherently involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: general economic conditions in the Corporation's market area, the deterioration in the financial strength of the Corporation's loan customers, and increased competition in the nonconforming lending arena. Results of Operations and Financial Condition 1ST BANCORP's net earnings during fiscal year 1997 were $821,000 as compared to $5,762,000 during fiscal 1996 and $2,430,000 during 1995. Earnings per share were $1.17 during 1997, $8.22 during 1996, and $3.54 during 1995. Dividends per common share were $.39 in 1997, $.37 in 1996, and $.18 in 1995. 1ST BANCORP's assets increased to $270,490,000 at June 30, 1997 as compared to $263,483,000 at June 30, 1996. Stockholders' equity at June 30, 1997 was $22,333,000, an increase of $604,000 from stockholders' equity of $21,729,000 at June 30, 1996. Interest Rate Environment and Corporate Strategic Planning The interest rate environment plays an important role in the strategic planning, new business, and earnings of the Corporation. This year, interest rates fluctuated less than in previous years and the trend was one of slightly declining rates overall. With the increased volume in nonconforming mortgage originations, the effect of interest rate fluctuations to the Corporation is somewhat mitigated because rates do not move as quickly in the nonconforming mortgage market as in the conforming mortgage market. Net Interest Income
1997 1996 1995 ----------------------------- ------------------------- ------------------------ Average Yield Average Yield Average Yield Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- ------- -------- ---- ASSETS Interest Earning Assets: Short-Term Investments and Interest Bearing Deposits $12,579 $677 5.38% $17,825 $955 5.36% $12,332 $666 5.40% Investment and Trading Account Securities 62,237 3,870 6.22% 59,777 3,893 6.51% 70,067 4,144 5.91% Loans 178,746 15,147 8.47% 191,735 16,027 8.36% 193,020 15,093 7.82% ---------------------------- ------------------------- ------------------------ Total Interest Earning Assets 253,562 19,694 7.77% 269,337 20,875 7.75% 275,419 19,903 7.22% Allowance for Loan Losses (979) (886) (855) Other Assets 12,764 13,221 15,383 ------- ------- ------- Total Assets 265,347 281,672 289,947 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Interest Bearing Liabilities: Deposits 139,674 7,678 5.50% 163,793 9,073 5.54% 191,350 8,977 4.69% Short-Term Borrowings 964 53 5.50% 3,368 154 4.57% 6,186 379 6.13% Federal Home Loan Bank Advances and Other Borrowings 99,218 5,561 5.60% 89,103 5,293 5.94% 69,645 4,063 5.83% ---------------------------- ------------------------- ------------------------ Total Interest Bearing Liabilities 239,856 13,292 5.54% 256,264 14,520 5.67% 267,181 13,419 5.02% Other Liabilities 3,821 5,842 8,149 Stockholders' Equity 21,670 19,566 14,617 ------- ------- ------- Total Liabilities and Stockholders' Equity 265,347 281,672 289,947 ======= ======= ======= Net Interest Income / Spread 6,402 2.23% 6,355 2.08% 6,484 2.20% ============== ============== ============= Net Interest Margin 2.52% 2.36% 2.35% ==== ==== ====
Net interest income is affected by both the volume and rates of interest earnings assets and interest bearing liabilities. Net interest income before provision for loan losses was $6,402,000 in 1997 as compared to $6,355,000 in 1996 and $6,484,000 in 1995. The increase in 1997 from the level in 1996 is due to the increase in the net interest spread and net interest margin during a time in which the volume of interest earning assets and interest bearing liabilities decreased. The decrease in 1996 from the level in 1995 is due to a lower volume of interest earning assets and interest bearing liabilities which was not offset by a substantially increased net interest margin as was the case during 1997. Interest income was $19,694,000 in 1997 as compared to $20,875,000 in 1996 and $19,903,000 in 1995. Interest expense was $13,292,000 in 1997 as compared to $14,520,000 in 1996 and $13,419,000 in 1995. These levels are reflective of the interest rate fluctuations and the various operating strategies implemented during the three year period as discussed below. The annualized average yield on interest earning assets has increased during the past three years because of changes in the economic environment and because of the increased volume of high yielding nonconforming mortgage loans being placed in the portfolio. The average yield on interest earning assets increased to 7.77% during 1997 from 7.75% during 1996 and 7.22% during 1995. The annualized average cost of interest bearing liabilities has fluctuated during the period, decreasing to 5.54% during 1997 from 5.67% during 1996 and as compared to 5.02% during 1995. The net interest spread has increased to 2.23% in 1997 as compared to 2.08% during 1996 and 2.20% in 1995. Fiscal 1997 vs. Fiscal 1996 The average levels of interest earning assets and interest bearing liabilities decreased substantially during 1997 as compared to 1996. This was caused by the branch sales which took place in December, 1995. Yet, net interest income actually increased during the period. Cash management was challenging during 1997 because of the fluctuating level of loan fundings on a monthly basis and the timing of loan sales. The average balance of short-term investments and interest bearing deposits decreased to $12,579,000 during 1997 as compared to $17,825,000 in 1996 because of less necessity to keep cash on hand during a time of decreased loan volume. The average yield stayed relatively stable at 5.38% during 1997 as compared to 5.36% in 1996. Average investment and trading account securities increased during 1997 to $62,237,000 from $59,777,000 in 1996. The average interest rate decreased to 6.22% during 1997 from 6.51% during 1996. This occurred because reinvestment of excess cash and proceeds from called investment securities was at lower interest rates due to the decline in interest rates during the year. Average loans decreased to $178,746,000 during 1997 from $191,735,000 during 1996. Offsetting this decline was an increase in the average yield on loans to 8.47% during 1997 from 8.36% during 1996. The decline in the average loan volume resulted from the branch sales, and the increased yield resulted from placing higher yielding nonconforming loans in portfolio during the year. With the increased loan yield, offset by the decline in the yield on investment and trading account securities, the overall yield on total interest earning assets increased to 7.77% during 1997 as compared to 7.75% during 1996. More importantly, however, for net interest income purposes, was the decrease in the average cost of interest bearing liabilities during the year. With the declining interest rate environment, the cost of average deposits decreased to 5.50% during 1997 as compared to 5.54% during 1996. The average balance of deposits also declined during the year to $139,674,000 during 1997 from $163,793,000 during 1996, because of the branch sales in December 1995 and the use of borrowings in lieu of higher cost brokered deposits. Likewise, the cost of Federal Home Loan Bank advances and other borrowed money decreased to 5.60% during the year as compared to 5.94% during 1996 because of the declining interest rate environment. The level of average borrowings increased to $99,218,000 during 1997 as compared to $89,103,000 during 1996 because the price of such borrowings was less than the price of brokered deposits with similar terms. Fiscal 1996 vs. Fiscal 1995 Because of the branch sales in December 1995, cash management was an increased strategic concern during fiscal 1996. The average yield on short-term investments and interest bearing deposits remained relatively stable at 5.36% during 1996 as compared to 5.40% during 1995, however the average balance increased to $17,825,000 during 1996 from $12,332,000 during 1995. Alternative cash sources were necessary to fund the cash outflow resulting from the branch sales. Funds were obtained through increased borrowing and brokered funds as well as through the sale of loans and securities. However, these funds were not immediately reinvested because strategic planning called for investing in high yield nonconforming loans as such loans became available. Therefore, this cash was generating income at overnight funds rates until invested in loans. Because of the opportunity allowed by the FASB Special Report on implementation of Statement 115, the investment portfolio was restructured in December 1995. This resulted in the sale of securities which decreased the average balance in investment and trading account securities to $59,777,000 in 1996 as compared to $70,067,000 in 1995. These investment securities had a substantially improved yield of 6.51% during 1996 as compared to 5.91% during 1995. The Corporation's average loan balance stayed relatively constant at $191,735,000 during 1996 compared to $193,020,000 during 1995. However, the yield increased by 54 basis points to 8.36% during 1996 from 7.82% during 1995. This increase in yield resulted from the sale of lower yielding loans during the year and the replacement of these loans in portfolio by the higher yielding nonconforming loans. While all the restructuring on the asset side resulted in an increased yield on earning assets, the restructuring of the liability side resulted in an offsetting larger increase in the cost of interest bearing liabilities. With the outflow of savings occurring as a result of the branch sales, cash was obtained through brokered savings and through increased borrowings. The average deposits during 1996 decreased to $163,793,000 from $191,350,000 during 1995 because of the deposit outflow associated with the branch sales, offset somewhat by an increase in brokered deposits. Because the deposits that were sold included transaction accounts and passbook funds, the average cost of these transferred deposits was relatively low. Thus, the average cost of interest bearing deposits rose to 5.54% in 1996 as compared to 4.69% during 1995. Although not reflected in net interest income, the decrease in deposits resulted in a decreased federal deposit insurance premium expense. This is reflected in non-interest expense. To supplement cash flow, additional funds were borrowed during 1996. The average balance of Federal Home Loan Bank advances and other borrowings increased to $89,103,000 in 1996 from $69,645,000 in 1995. Even though the average cost of such borrowings remained relatively constant at 5.94% during 1996 as compared to 5.83% during 1995, the increased volume contributed to the increased cost of interest bearing liabilities. Net interest margin Another factor that must be considered is the contribution of interest free funds on the interest rate spread, which is the basis of the interest rate margin. Average interest earning assets exceeded average interest bearing liabilities by $13,706,000 in 1997, by $13,073,000 in 1996, and by $8,238,000 in 1995. An excess of interest earning assets effectively contributes interest free funds as an integral part of the interest rate margin. Thus, the Corporation's net interest margin exceeded the spread by 29 basis points in 1997, by 28 basis points in 1996, and by 15 basis points in 1995. Non-Interest Income Non-interest income decreased in 1997 to $3,098,000 from $10,391,000 in 1996, and as compared to $5,384,000 in 1995. The major reason for the $7,293,000 decrease during 1997 was the $7,274,000 gain on sale of the branch offices during 1996. Net gain on sales of loans stayed relatively constant at $2,124,000 during 1997 as compared to $2,026,000 during 1996. Net gains on sales of loans during 1995 was $582,000. The increases in 1996 and 1997 were because of the sale of nonconforming loans which generate a strong gain on sale and are not as rate sensitive as conforming mortgage loans. The adoption of FAS 122 for fiscal years 1996 and later, resulted in increased gain on sale of loans due to the capitalization of originated mortgage servicing rights ($366,000 during 1997 and $454,000 during 1996.) Total loan sales aggregated $76,202,000 in 1997, $161,422,000 in 1996, and $32,835,000 in 1995. Included in the loan sales during 1997 and 1996, respectively, were $37,709,000 and $27,910,000 in nonconforming loans. A $29,000 net loss on sales of securities was recognized during 1997 as compared to a net loss of $111,000 during 1996 and net gains of $16,000 in 1995. The loss in 1996 was incurred because of the opportunity afforded by the issuance of the FASB Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," to restructure the investment portfolio. Lower yielding securities were sold to improve investment yield on the remaining portfolio. Income from fees and service charges increased to $341,000 during 1997 from $296,000 in 1996, and as compared to $981,000 in 1995. The level of fees is significantly affected by servicing fee income on loans serviced for other owners. The Bank retains .25% servicing fee on fixed rate loans and .375% servicing fee on adjustable rate loans that have been sold in the secondary market. Loans sold to others, with servicing retained by the Bank, totaled $112,642,000 at June 30, 1997, $81,353,000 at June 30, 1996, and $193,058,000 at June 30, 1995. Other non-interest income decreased to $662,000 in 1997 from $906,000 in 1996 and from $3,805,000 in 1995. Of this income, $237,000 during 1996 and $2,980,000 during 1995 resulted from the sale of FHLMC and FNMA servicing rights. These servicing rights were sold to minimize prepayment risk associated with the projected lowering long term interest rate scenario. Additionally, in years prior to 1996, these servicing rights were sold to recognize currently the value in net income; with the adoption of FAS 122, this is no longer necessary, as the value of the servicing rights is recognized currently. Accordingly, no servicing rights were sold during 1997. Non-Interest Expense Non-interest expense increased to $8,555,000 in 1997 from $7,528,000 in 1996, as compared to $7,898,000 in 1995. The increase in 1997 is attributed to the one-time pre-tax charge of $1,330,000 to federal insurance premiums for an industry-wide special assessment by the FDIC to recapitalize the SAIF. As a result of this one-time assessment, the Bank's deposit insurance premiums will be reduced in the future. Compensation and employee benefits, the major component of non-interest expense, decreased to $4,195,000 in 1997 from $4,273,000 in 1996 and from $4,442,000 in 1995. The decreases during 1997 and 1996 were from the decrease in employees resulting from the branch sales in December 1995. Net occupancy decreased to $719,000 in 1997 from $746,000 in 1996 and from $815,000 during 1995. This is also due to the sale of the branch offices. Income Taxes The Corporation generated an income tax expense of ($249,000) in fiscal 1997 as compared to $3,373,000 in fiscal 1996 and $1,440,000 in fiscal 1995. The negative tax expense in fiscal 1997 resulted from the Corporation's investment in an affordable housing senior citizen project that produces tax credits. Because of the SAIF assessment which lowered earnings, the total amount of tax credits could not be used as related to fiscal 1997 income, however, tax laws allowed the credits to be carried back to the prior year when income was sufficient for the Corporation to use the full fiscal 1997 allocated credit. Financial Condition The Corporation's total assets increased to $270,490,000 at June 30, 1997 from $263,483,000 at June 30, 1996. Total cash and cash equivalents decreased by $4,805,000 to $20,294,000 at June 30, 1997 from $25,099,000 at June 30, 1996. This decrease was due to less necessity for cash to fund a decreasing pipeline of mortgage loans. Net loans receivable decreased to $146,840,000 at June 30, 1997 from $150,749,000 at June 30, 1996. This decrease resulted from the decreased mortgage volume, the continued decision to sell lower grade nonconforming loans to mitigate credit risk, and the continued decision to sell conforming loans to mitigate interest rate risk. The loans held for sale increased to $27,769,000 from $18,590,000 at June 30, 1996 because adjustable rate loans are currently being placed in the held for sale portfolio for liquidity purposes. Prepaid expenses and other assets increased by $4,475,000 during the year mainly because of the pending settlement of a $4,111,000 loan sale. Total deposits increased to $144,316,000 at June 30, 1997 from $137,148,000 at June 30, 1996. Brokered deposits are used to supplement savings deposits obtained in the Vincennes area. Total brokered savings increased to $45,100,000 at June 30, 1997 from $34,058,000 at June 30, 1996. Capital Resources At June 30, 1997, stockholders' equity was $22,333,000, an increase of $604,000 over total stockholders' equity of $21,729,000 at June 30, 1996. The Corporation is subject to regulation as a savings and loan holding company by the Office of Thrift Supervision. The Bank, as a subsidiary of a savings and loan holding company, is subject to certain restrictions in its dealings with the Corporation. The Bank is also subject to the regulatory requirements applicable to a federal savings bank. Current capital regulations require savings institutions to have minimum tangible capital equal to 1.5% of total assets and a minimum 3% core capital ratio. Additionally, savings institutions are required to meet a risk-based capital ratio equal to 8% of risk-weighted assets. At June 30, 1997, the Bank exceeded all capital requirements. Minimum capital standards place savings institutions into one of five categories, from "critically undercapitalized" to "well-capitalized," depending on levels of three measures of capital. A well-capitalized institution, as defined by the regulations, would have a total risk-based capital ratio of at least 10%, a Tier 1 (core) risk-based capital ratio of at least 6%, and a leverage (core) risk-based capital ratio of at least 5%. At June 30, 1997, First Federal was classified as "well-capitalized." The following is a summary of the Bank's regulatory capital and capital requirements at June 30, 1997:
Core/ Tier 1 Total GAAP Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital - --------------------------------------------------------------------------------------------------------------------------------- 1ST BANCORP GAAP Capital $22,333,000 First Federal GAAP Capital $22,367,000 $22,367,000 $22,367,000 $22,367,000 $22,367,000 $22,367,000 Capital Adjustments: Unrealized Loss on Investment Securities 109,000 109,000 109,000 109,000 109,000 General Valuation Allowance 650,000 Disallowed (40,000) (40,000) (40,000) (40,000) (40,000) ---------------------------------------------------------------------- Regulatory Computed Capital 22,436,000 22,436,000 22,436,000 22,436,000 23,086,000 ====================================================================== Total Assets: Adjusted Total Assets 270,568,000 270,568,000 270,568,000 - - Risk-Weighted Assets - - - 144,438,000 144,438,000 ---------------------------------------------------------------------- Regulatory Computed Assets 270,568,000 270,568,000 270,568,000 144,438,000 144,438,000 ====================================================================== Regulatory Capital Ratio 8.29% 8.29% 8.29% 15.53% 15.98% ==== ==== ==== ===== ===== Regulatory Capital Category: OTS Minimum Requirements 1.50% 3.00% 8.00% ==== ==== ==== Prompt Corrective Action Requirements: Not Critically Undercapitalized Equal to 2.00% ==== Well Capitalized Equal to or Greater Than 5.00% 6.00% 10.00% ==== ==== =====
Asset and Liability Management Thrift institutions are subject to interest rate risk to the degree that interest-bearing liabilities, primarily deposits and borrowings with relatively short-term maturities, mature or reprice more rapidly, or on a different basis, than interest-earning assets. While having liabilities that mature or reprice more frequently on average than assets will be beneficial in times of declining interest rates, such an asset/liability structure will result in lower net income or net losses during periods of rising interest rates, unless offset by other factors such as non-interest income. Thus, the Corporation's operating results are affected by changes in the level of market rates of interest. An asset/liability management program has been designed and implemented to stabilize and improve earnings by managing interest rate risk without adversely affecting asset quality. This program involves the coordination of sources and uses of funds and the evaluation of changing market rate relationships. In this process, the Corporation's interest rate risk is analyzed using gap analysis and simulation analysis produced in-house and by the OTS. Management closely monitors the asset/liability mix and adjusts policies and strategies to manage the impact of fluctuating interest rates on operating results. The following table sets forth the repricing of the Corporation's interest earning assets and interest bearing liabilities at June 30, 1997. Prepayment assumptions and decay rates have been applied to more accurately reflect the asset/liability gap.
At June 30, 1997 Maturing or Repricing Within ----------------------------------------------------------------- Average 1 Year 1 to 3 3 to 5 More than Rate Total Or Less Years Years 5 Years ------------------------------------------------------------------ (Dollars in Thousands) Rate Sensitive Assets - ----------------------------------------------------------------------------------------------------- Loans Receivable (1) Adjustable Rate Mortgage loans 8.34% $88,757 $67,391 $8,658 $8,767 $3,941 Fixed Rate Mortgage loans 8.55% 76,239 30,399 25,914 9,930 9,996 Nonmortgage Loans 9.73% 12,748 6,514 3,540 1,691 1,003 Investments 6.36% 80,365 24,712 12,407 12,803 30,443 ------------------------------------------------------------------ Total Rate Sensitive Assets 7.86% $258,109 $129,016 $50,519 $33,191 $45,383 ===================================================================================================== Rate Sensitive Liabilities - ----------------------------------------------------------------------------------------------------- Deposits Fixed Maturity Deposits 5.81% $121,108 $91,623 $24,123 $3,123 $2,239 Other Deposits (2) 3.85% 23,208 16,545 2,501 1,475 2,687 FHLB Advances and Other Borrowings 5.67% 100,296 43,198 46,013 10,396 689 ------------------------------------------------------------------ Total Rate Sensitive Liabilities 5.57% $244,612 $151,366 $72,637 $14,994 $5,615 ===================================================================================================== Total Asset/Liability Gap $13,497 ($22,350) ($22,118) $18,197 $39,768 Cumulative Asset/Liability Gap $13,497 ($22,350) ($44,468) ($26,271) $13,497 Cumulative Gap as a Percentage of Total Assets - 1997 -8.26% -16.44% -9.71% 4.99% Cumulative Gap as a Percentage of Total Assets - 1996 -4.05% -21.35% -9.47% 6.56%
- ----------------------------------- (1) The distribution of fixed rate loans is based upon contractual maturity and scheduled contractual repayments adjusted for estimated prepayments. For adjustable rate loans, interest rates adjust at intervals of one month to seven years. (2) A portion of these transaction account balances has been included in the More Than 5 Years category to reflect management's assumption that these accounts are not rate sensitive. Liquidity The Corporation conducts substantially all its business through its thrift subsidiary. The main source of funds for 1ST BANCORP is dividends from the Bank. The Corporation's primary sources of funds are the Bank's deposits, which totaled $144,316,000 at June 30, 1997, and borrowings, which totaled $100,296,000 at June 30, 1997. During the year, cash flow needs were also supplied by loan payments, proceeds from sales of loans and securities, and securities sold under agreement to repurchase. Scheduled loan payments are a relatively stable source of funds, but loan payoffs, the sale of loans, and deposit inflows and outflows fluctuate significantly, depending on market interest rates and economic conditions. Management does not expect any of these items to occur in amounts that would exert pressure on the Corporation's ability to meet consumer demand for liquidity or the regulatory liquidity requirements. Historically, the Bank has maintained its liquid assets above the minimum requirements imposed by OTS regulations and at a level believed by management adequate to meet requirements of normal daily activities. Regulations require thrift institutions to maintain minimum levels of certain liquid investments, as defined in the regulations, of at least 5% of net withdrawable assets. At June 30, 1997, First Federal's regulatory liquidity ratio was 10.44%. [KPMG Peat Marwick LLP Letterhead] Independent Auditors' Report The Board of Directors 1ST BANCORP: We have audited the accompanying consolidated statements of financial condition of 1ST BANCORP and subsidiaries as of June 30, 1997 and 1996 and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three year period ended June 30, 1997. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 1ST BANCORP and subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three year period ended June 30, 1997 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwaick LLP Indianapolis, Indiana July 17, 1997 1ST BANCORP AND SUBSIDIARIES Consolidated Statements of Financial Condition June 30, 1997 and 1996
Assets 1997 1996 ------ ---- ---- Cash and cash equivalents: Interest bearing deposits $ 19,771,000 24,689,000 Non-interest bearing deposits 523,000 410,000 ------------ ------------ Cash and cash equivalents 20,294,000 25,099,000 ------------ ------------ Securities available for sale (note 2) 11,588,000 10,499,000 Securities held to maturity (market value of $43,556,000 and $42,184,000) (note 3) 44,065,000 43,624,000 Loans receivable, net (notes 4 and 8) 146,840,000 150,749,000 Loans held for sale 27,769,000 18,590,000 Accrued interest receivable: Securities 1,081,000 1,036,000 Loans 1,099,000 1,179,000 Stock in FHLB of Indianapolis, at cost 4,941,000 4,864,000 Office premises and equipment (note 6) 3,225,000 2,950,000 Real estate owned 397,000 177,000 Prepaid expenses and other assets 9,191,000 4,716,000 ------------ ------------ $ 270,490,000 263,483,000 =========== =========== Liabilities and Stockholders' Equity Liabilities: Deposits (note 7) 144,316,000 137,148,000 Advances from FHLB and other borrowings (note 8) 100,296,000 100,885,000 Advance payments by borrowers for taxes and insurance 304,000 492,000 Accrued interest payable on deposits 1,194,000 816,000 Accrued expenses and other liabilities 2,047,000 2,413,000 ------------ ------------ 248,157,000 241,754,000 Stockholders' equity (note 9): Preferred stock, no par value; shares authorized of 2,000,000, none outstanding - - Common stock, $1 par value; shares authorized of 5,000,000; shares issued and outstanding of 697,897 and 699,889 698,000 667,000 Paid-in capital 2,642,000 2,747,000 Retained earnings, substantially restricted 19,102,000 18,560,000 Unrealized depreciation on securities available for sale (note 2) (109,000) (245,000) ------------ ------------ 22,333,000 21,729,000 Commitments (note 14) $ 270,490,000 263,483,000 =========== ===========
See accompanying notes to consolidated financial statements. 1ST BANCORP AND SUBSIDIARIES Consolidated Statements of Earnings Years ended June 30, 1997, 1996 and 1995
1997 1996 1995 ---- ---- ---- Interest income: Loans $ 15,147,000 16,027,000 15,093,000 Securities 3,852,000 3,890,000 4,136,000 Trading account securities 18,000 3,000 8,000 Other short-term investments and interest bearing deposits 677,000 955,000 666,000 ------------ ------------ ------------ Total interest income 19,694,000 20,875,000 19,903,000 ---------- ---------- ---------- Interest expense: Deposits (note 7) 7,678,000 9,073,000 8,977,000 Short-term borrowings 53,000 154,000 379,000 FHLB advances and other borrowings 5,561,000 5,293,000 4,063,000 ----------- ----------- ----------- Total interest expense 13,292,000 14,520,000 13,419,000 ---------- ---------- ---------- Net interest income before provision for loan losses 6,402,000 6,355,000 6,484,000 Provision for loan losses (note 4) 373,000 83,000 100,000 ------------ ------------- ------------ Net interest income after provision for loan losses 6,029,000 6,272,000 6,384,000 ----------- ----------- ----------- Non-interest income: Fees and service charges 341,000 296,000 981,000 Net gain (loss) on sales of securities available for sale and trading account securities (note 2) (29,000) (111,000) 16,000 Net gain on sales of loans 2,124,000 2,026,000 582,000 Net gain on sale of branch offices (note 13) - 7,274,000 - Other (note 5) 662,000 906,000 3,805,000 ------------ ------------ ----------- Total non-interest income 3,098,000 10,391,000 5,384,000 ----------- ---------- ----------- Non-interest expense: Compensation and employee benefits 4,195,000 4,273,000 4,442,000 Net occupancy 719,000 746,000 815,000 Federal insurance premiums (note 7) 1,589,000 469,000 494,000 Other 2,052,000 2,040,000 2,147,000 ----------- ----------- ----------- Total non-interest expense 8,555,000 7,528,000 7,898,000 ----------- ----------- ----------- Earnings before income taxes 572,000 9,135,000 3,870,000 Income taxes (note 12) (249,000) 3,373,000 1,440,000 ------------ ----------- ----------- Net earnings $ 821,000 5,762,000 2,430,000 ============ =========== =========== Earnings per share (note 10) 1.17 8.22 3.54 ==== ==== ====
See accompanying notes to consolidated financial statements. 1ST BANCORP AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended June 30, 1997, 1996 and 1995
Unrealized Total depreciation on stock- Common Paid-in Retained securities avail- holders' stock capital earnings able for sale equity Balance at June 30, 1994 $ 565,000 2,429,000 10,749,000 (223,000) 13,520,000 Issuance of common stock through employee stock purchase plan (note 9) 2,000 37,000 - - 39,000 Exercise of options for common stock (note 9) 66,000 338,000 - - 404,000 Issuance of common stock through dividend re- investment and shareholder stock purchase plan 1,000 21,000 - - 22,000 Dividends ($.18 per share) - - (115,000) - (115,000) Change in net unrealized depreciation on securities available for sale (note 2) - - - 33,000 33,000 Net earnings - - 2,430,000 - 2,430,000 --------------------------- ----------------------- ----------- Balance at June 30, 1995 634,000 2,825,000 13,064,000 (190,000) 16,333,000 Issuance of common stock through employee stock purchase plan (note 9) 5,000 77,000 - - 82,000 Issuance of common stock through dividend re- investment and shareholder stock purchase plan 2,000 53,000 - - 55,000 Purchase and retirement of common stock (note 9) (6,000) (176,000) - - (182,000) Issuance of 33,111 shares of common stock at par value for 5% stock dividend plus cash in lieu of fractional shares 32,000 (32,000) (5,000) - (5,000) Dividends ($.37 per share) - - (261,000) - (261,000) Change in net unrealized depreciation on securities available for sale (note 2) - - - (55,000) (55,000) Net earnings - - 5,762,000 - 5,762,000 --------------------------- ----------------------- ----------- Balance at June 30, 1996 667,000 2,747,000 18,560,000 (245,000) 21,729,000 Issuance of common stock through employee stock purchase plan (note 9) 3,000 76,000 - - 79,000 Issuance of common stock through dividend re- investment and shareholder stock purchase plan 2,000 52,000 - - 54,000 Purchase and retirement of common stock (note 9) (7,000) (200,000) - - (207,000) Issuance of 33,013 shares of common stock at par value for 5% stock dividend plus cash in lieu of fractional shares 33,000 (33,000) (5,000) - (5,000) Dividends ($.39 per share) - - (274,000) - (274,000) Change in net unrealized depreciation on securities available for sale (note 2) - - - 136,000 136,000 Net earnings - - 821,000 - 821,000 --------------------------- ------------------------ ------------ Balance at June 30, 1997 $ 698,000 2,642,000 19,102,000 (109,000) 22,333,000 ======= ========= ========== ======= ==========
See accompanying notes to consolidated financial statements. 1ST BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended June 30, 1997, 1996 and 1995
1997 1996 1995 ---- ---- ---- Net cash flows from operating activities: Net earnings $ 821,000 5,762,000 2,430,000 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation and amortization 348,000 300,000 188,000 Amortization of mortgage servicing rights 153,000 107,000 486,000 Gain on sale of loans (2,124,000) (2,026,000) (582,000) Loss (gain) on sale of securities 29,000 111,000 (16,000) Gain on sale of branch - (7,274,000) - Loss on sale of equipment 54,000 - - Net change in loans held for sale (9,179,000) (13,486,000) (1,740,000) Provision for loan losses 373,000 83,000 100,000 Change in accrued interest receivable 35,000 107,000 (702,000) Change in prepaid expenses and other assets (476,000) 635,000 21,000 Change in accrued expenses and other liabilities (79,000) (1,646,000) 443,000 Loss on investment in limited partnership 122,000 263,000 146,000 ------------ ------------------------------ Net cash provided (used) by operating activities (9,923,000) (17,064,000) 774,000 ----------- ------------ ---------------- Cash flows from investing activities: Purchases of securities held to maturity (3,519,000) (34,262,000) (15,989,000) Proceeds from maturities of securities held to maturity 3,062,000 16,872,000 - Purchases of securities available for sale (31,913,000) (46,074,000) - Proceeds from maturity of securities available for sale 1,192,000 5,015,000 693,000 Proceeds from sale of securities available for sale 29,826,000 76,159,000 - Principal collected on loans, net of originations 1,379,000 (12,802,000) (28,227,000) Purchase of life insurance policies (35,000) - - Purchase of stock of FHLB of Indianapolis (77,000) (988,000) (1,378,000) Purchases of office premises and equipment (615,000) (154,000) (187,000) Investment in limited partnership - - (2,500,000) Proceeds from sale of office premises and equipment-branch sales - 1,316,000 - Proceeds from sale of loans-branch sales - 28,875,000 - Sale of deposits-branch sales - (77,406,000) - Proceeds from bulk sale of loans - 37,937,000 - Other (220,000) (32,000) 225,000 ------------ -------------- -------------- Net cash used by investing activities (920,000) (5,544,000) (47,363,000) ------------ ------------ ------------ Cash flows from financing activities: Net increase in deposits 7,168,000 11,017,000 37,014,000 Proceeds from FHLB advances and other borrowings 83,768,000 202,544,000 193,031,000 Repayment of FHLB advances and other borrowings (84,357,000) (181,046,000) (173,164,000) Proceeds from issuance of common stock 133,000 137,000 465,000 Purchase and retirement of common stock (207,000) (182,000) - Payment of dividends on common stock (279,000) (266,000) (115,000) Decrease in advance payments by borrowers for interest and taxes (188,000) (1,829,000) (961,000) ------------ ------------- -------------- Net cash provided by financing activities 6,038,000 30,375,000 56,270,000 ----------- ------------ ------------ Net increase (decrease) in cash and cash equivalents (4,805,000) 7,767,000 9,681,000 Cash and cash equivalents at beginning of year 25,099,000 17,332,000 7,651,000 ---------- ------------ ------------- Cash and cash equivalents at end of year $ 20,294,000 25,099,000 17,332,000 ========== ============ ============ Additional disclosures: Interest paid $ 12,917,000 14,170,000 13,028,000 ========== ============ ============ Income taxes paid $ 287,000 4,700,000 584,000 ============ ============ ============ Transfer of investment securities held to maturity to available for sale account $ - 45,838,000 - =========== ============ ============ Transfer of mortgage-backed securities available for sale to held to maturity account $ - - 231,000 =========== ============ ============ Transfer of investment securities available for sale to held to maturity account $ - - 4,598,000 ============ ============ ============ Transfer of loans receivable to prepaid expenses and other assets $ 4,111,000 - - =========== ============== ============
See accompanying notes to consolidated financial statements. (Continued) 1ST BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 (1) Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of 1ST BANCORP (the "Corporation") and its subsidiaries, First Federal Bank, A Federal Savings Bank and subsidiary (the "Bank"), First Financial Insurance Agency, Inc. and First Title Company. All significant intercompany transactions and balances have been eliminated in consolidation. The accounting and reporting policies of the Corporation and the Bank conform to generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and consolidated statement of earnings for the period. Actual results could differ from those estimates. The Bank is subject to competition from other financial institutions and is regulated by certain federal agencies and undergoes periodic examination by those regulatory authorities. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. Securities Held to Maturity and Available for Sale Securities classified as available for sale are securities that the Corporation intends to hold for an indefinite period of time, but not necessarily until maturity, and include securities that management might use as part of its asset-liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital or other similar factors, and which are carried at market value. Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount in a separate component of stockholders' equity until realized. Securities classified as held to maturity are securities that the Corporation has both the ability and positive intent to hold to maturity and are carried at cost adjusted for amortization of premium or accretion of discount. Gains and losses on securities are computed on a specific identification basis. Loans Receivable and Real Estate Owned Loans receivable are considered long-term investments, and accordingly, are carried at historical cost. 1ST BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) The Bank provides specific valuation allowances for estimated losses on loans and real estate owned when a significant and permanent decline in value occurs. As of July 1, 1995, the Bank adopted Statement of Financial Accounting Standard No. 114, Accounting by Creditors for Impairment of a Loan. Under this standard, loans considered to be impaired are reduced to the present value of expected future cash flows or to fair value of collateral by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to require an increase, allocations are considered in relation to the overall adequacy of the allowance for loan losses and subsequent adjustment to the loss provision. Adopting this standard did not have an impact on the 1996 financial statements. In providing valuation allowances, through a charge to operations, the estimated net realizable value of the underlying collateral and the costs of holding real estate are considered. Non-specific valuation allowances for estimated losses are established based on management's judgment of current economic conditions and the credit risk of the loan portfolio and real estate owned. Management believes the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions and borrower circumstances. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Loan Fees and Related Costs Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized over the contractual life of the related loan as an adjustment of the loan's yield using the interest method. Mortgage Banking Activities The Bank originates and purchases certain mortgage loans for sale in the secondary market. During the origination and purchase period, mortgage loans are designated as held either for investment purposes or for sale. Mortgage loans held for sale are carried at the lower of amortized cost or market value determined on an aggregate basis. Gains and losses on the sale of loans are reflected in operations at the time of sale and are determined by the difference between net sales proceeds and the carrying value of the loans, adjusted for normal servicing fees. The Bank recognizes, as separate assets, rights to service mortgage loans for others however those servicing rights are acquired. The Bank hedges its interest rate risk on fixed rate loan commitments expected to close and the inventory of mortgage loans held for sale. Related hedging gains and losses are recognized at the time gains or losses are recognized on the related loans sold. The Bank does not anticipate any loss on open commitments at June 30, 1997. As of July 1, 1995, the Bank adopted the provisions of Statement of Financial Accounting Standards No. 122, Accounting for Servicing Rights ("SFAS 122"). For servicing retained loan sales, SFAS 122 requires the capitalization of the cost of mortgage service rights, regardless of whether those rights were acquired through purchase or origination. Effective December 31, 1996, SFAS 122 was superseded by Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities ("SFAS 125"). The Bank's accounting for mortgage servicing rights was not changed by SFAS 125. Prior to the adoption of SFAS 122 and SFAS 125, only purchased servicing rights were capitalized. Beginning with the adoption of SFAS 122, the total cost of mortgage loans, whether originated or purchased, with the intent to sell is allocated between the loan servicing right and the mortgage loan without servicing based on their relative fair values at the date of sale. The capitalized cost of loan servicing rights is amortized in proportion to and over the period of, estimated net servicing revenue. Mortgage servicing rights are periodically evaluated for impairment by stratifying them based on the predominant risk characteristics of the underlying serviced loan. Office Premises and Equipment Office premises and equipment are stated at cost, less accumulated depreciation provided on the straight-line basis over the estimated useful lives of the various classes of assets. FHLB Stock Federal law requires a member institution of the Federal Home Loan Bank System to hold common stock of its district FHLB according to a predetermined formula. This investment is stated at cost, which represents redemption value. Pension Plan Pension expense for the Bank's defined benefit pension plan is computed on the basis of accepted actuarial methods. It is the Bank's policy to fund pension costs accrued. Income Taxes The Corporation and its subsidiaries file consolidated income tax returns. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Reclassifications Certain amounts in the 1996 and 1995 consolidated financial statements have been reclassified to conform to the 1997 presentation. (2) Securities Available for Sale Securities available for sale consist of the following at June 30:
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 ========== ========== ======= ==========
1996 Amortized Unrealized Unrealized Market Cost Gains Losses Value Mortgage-backed securities: FHLMC $ 2,402,000 - (47,000) 2,355,000 Investments: U.S. Treasury and agency obligations 8,505,000 - (361,000) 8,144,000 ----------- ---------- ------- ----------- $ 10,907,000 - (408,000) 10,499,000 ========== ========== ======= ==========
A reclassification of investment securities from the held to maturity portfolio to the available for sale portfolio occurred during the quarter ended December 31, 1995, in accordance with the FASB Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investment in Debt and Equity Securities," which was issued November 15, 1995. The investment securities that were reclassified had a carrying value of $45,838,000 and a market value of $46,061,000 at the time of transfer. For the year ended June 30, 1997, gross realized losses on sales of investment securities available for sale were $19,000. For the year ended June 30, 1996, gross realized gains and gross realized losses from the sales of investment securities available for sale were $118,000 and $294,000, respectively, and from the sales of mortgage-backed securities available for sale were $57,000 and $4,000, respectively. For the year ended June 30, 1995, gross realized gains and gross realized losses from the sales of mortgage-backed securities available for sale were $5,000 and $7,000, respectively. For the year ended June 30, 1997, gross realized gains and gross realized losses on sales of trading account securities were $13,000 and $23,000, for the year ended June 30, 1996, gross realized gains and gross realized losses were $13,000 and $1,000, respectively; and for the year ended June 30, 1995, gross realized gains were $18,000. At June 30, 1997, the contractual maturity of securities available for sale follows: Amortized Market cost value Due after one year through five years $ 1,005,000 994,000 Due after five years through ten years 4,560,000 4,491,000 Due after ten years 3,998,000 3,930,000 Mortgage-backed securities 2,206,000 2,173,000 ----------- ----------- $ 11,769,000 11,588,000 ========== ========== (3) Securities Held to Maturity Securities held to maturity at June 30 consist of:
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 ========== ====== ======= ==========
1996 Amortized Unrealized Unrealized Market Cost Gains Losses Value U.S. Treasury and agency obligations $ 43,242,000 - (1,441,000) 41,801,000 Mortgage-backed securities 382,000 3,000 (2,000) 383,000 ------------ ----- ----------- ----------- $ 43,624,000 3,000 (1,443,000) 42,184,000 ========== ===== ========= ==========
At June 30, 1997, the contractual maturity of securities held to maturity follows: Amortized Market cost value Due after one year through five years $ 24,209,000 23,905,000 Due after five years through ten years 11,346,000 11,156,000 Due after ten years 8,192,000 8,174,000 Maturity-backed securities 318,000 321,000 ------------ ------------ $ 44,065,000 43,556,000 ========== ========== (4) Loans Receivable Loans receivable at June 30 consist of:
1997 1996 ---- ---- Real estate loans: Mortgage $ 135,189,000 141,247,000 Construction 2,038,000 2,171,000 Consumer and other loans 12,748,000 10,010,000 ------------ ----------- 149,975,000 153,428,000 Less: Undisbursed loan funds (1,536,000) (1,297,000) Deferred loan fees and unamortized premiums and discounts, net (441,000) (486,000) Allowance for loan losses (1,158,000) (896,000) ------------- ------------- (3,135,000) (2,679,000) $ 146,840,000 150,749,000 =========== =========== Weighted average interest rate 8.53% 8.23% ==== ====
At June 30, 1997, the majority of the Bank's residential and consumer loans receivable are located in central and southern Indiana and southern Illinois. Activity in the allowance for loan losses for the years ended June 30 consists of:
1997 1996 1995 ---- ---- ---- Balance at beginning of year $ 896,000 878,000 817,000 Provision charged to operations 373,000 83,000 100,000 Loans charged off, net of recoveries (111,000) (65,000) (39,000) ---------- -------- -------- Balance at end of year $ 1,158,000 896,000 878,000 ========= ======= =======
Non accrual loans amounted to $2,330,000 and $846,000 at June 30, 1997 and 1996, respectively. The Bank makes loans to its officers and directors in the normal course of business. These loans are made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other customers and do not involve more than the normal risk of collectibility. Activity in these loans for the year ended June 30, 1997 consists of: Balance at beginning of the year $ 408,000 Loans originated 435,000 Repayments (229,000) ------- Balance at end of year $ 614,000 ======= (5) Mortgage Banking The amount of loans serviced by the Bank for the benefit of others was $112,642,000, $81,353,000 and $193,058,000 at June 30, 1997, 1996 and 1995, respectively. At June 30, 1997 and 1996, unamortized loan servicing rights totaled $819,000 and $591,000, respectively, and are included in prepaid expenses and other assets in the consolidated statement of financial condition. For the years ended June 30, 1997 and 1996, the Bank capitalized $366,000 and $454,000, respectively, of servicing rights on loans that were originated through its loan origination network and retail banking offices. The Bank had definitive plans to sell these mortgage loans and retain the servicing rights. During the year ended June 30, 1996, the Bank sold approximately $161,082,000 of its FHLMC and FNMA loan servicing portfolio which resulted in a gain of $237,000. During the year ended June 30, 1995, the Bank sold approximately $380,462,000 of its FHLMC loan servicing portfolio which resulted in a gain of $2,980,000. All such gains and losses are included in other non-interest income in the consolidated statements of earnings. No sales of the Bank's loan servicing portfolio occurred in 1997. (6) Office Premises and Equipment Office premises and equipment at June 30 consist of: 1997 1996 ---- ---- Land and improvements $ 345,000 315,000 Buildings and improvements 2,952,000 2,773,000 Furniture and equipment 1,986,000 1,756,000 --------- --------- 5,283,000 4,844,000 Less accumulated depreciation 2,058,000 1,894,000 --------- --------- $ 3,225,000 2,950,000 ========= ========= (7) Deposits Deposits at June 30 consist of:
1997 1996 ---- ---- Passbook accounts (2.86% and 2.91% at June 30, 1997 and 1996) $ 4,264,000 4,592,000 Variable rate savings accounts (6.00% and 5.75% at June 30, 1997 and 1996) 6,766,000 3,015,000 NOW and Super NOW accounts (0.00%-3.25% and 0.00%-3.26% at June 30, 1997 and 1996) 9,163,000 9,563,000 Money market accounts (weighted average rate of 4.06% and 3.93% at June 30, 1997 and 1996) 3,015,000 3,089,000 ------------- ------------- 23,208,000 20,259,000 Certificates: Less than 4% 191,000 269,000 4% - 4.99% 4,435,000 7,235,000 5% - 5.99% 77,581,000 70,495,000 6% - 6.99% 25,478,000 25,612,000 7% - 7.99% 12,228,000 12,030,000 8% - 9.99% 1,055,000 1,081,000 10% or more 140,000 167,000 -------------- -------------- 121,108,000 116,889,000 $ 144,316,000 137,148,000 =========== =========== Weighted average cost of all deposits 5.49% 5.46% ==== ====
Scheduled maturities of certificates at June 30, 1997 are summarized as follows: Year ending June 30, 1998 $ 91,623,000 1999 17,127,000 2000 6,996,000 2001 1,824,000 2002 1,299,000 Thereafter 2,239,000 ------------- $ 121,108,000 Included in certificates at June 30, 1997 and 1996 are approximately $8,828,000 and $12,619,000, respectively, of certificates greater than $100,000. Eligible savings accounts are insured by the full faith and credit of the United States government up to $100,000 under the Federal Deposit Insurance Corporation's Savings Association Insurance Fund (SAIF) at June 30, 1997. Interest expense by type of deposit for the years ended June 30 follows:
1997 1996 1995 ---- ---- ---- Passbook and variable rate savings accounts $ 316,000 392,000 525,000 NOW, Super NOW and Money Market 375,000 652,000 947,000 Certificates 6,987,000 8,029,000 7,505,000 --------- --------- --------- $ 7,678,000 9,073,000 8,977,000 ========= ========= =========
Net earnings for the year ended June 30, 1997 include a one-time pre-tax charge of $1,330,000 to federal insurance premiums for an industry-wide special assessment by the FDIC to recapitalize SAIF, which insures the Bank's customers' deposits. As a result of this one-time assessment, the Bank's deposit insurance premiums will be reduced in the future. (8) Advances From FHLB and Other Borrowings Advances from FHLB and other borrowings at June 30 consist of:
1997 1996 ---- ---- Advances from FHLB collateralized by qualifying mortgages, investment securities and mortgage-backed securities (as defined) equal to 125% of FHLB advances $ 98,815,000 97,276,000 Promissory note with interest payable at prime rate (as defined) plus 1/2% (9.0% and 8.75% at June 30, 1997 and 1996) with principal payments of $49,375 due quarterly through December 30, 2004. Collateralized by 100% of the common stock of the Bank 1,481,000 1,679,000 Securities sold under agreement to repurchase with a weighted average interest rate of 4.85% at June 30, 1996 - 1,930,000 ------------------ ------------- $ 100,296,000 100,885,000 =========== ===========
The interest rates on the advances from FHLB at June 30, 1997 were as follows: $5,000,000 at 5.46%, $5,000,000 at 5.43%, $3,617,000 at 4.96%, $10,000,000 at 5.62%, $13,000,000 at 5.66%, $10,000,000 at 5.39%, $198,000 at 5.91%, $10,000,000 at 5.50%, $9,000,000 at 5.85%, $3,000,000 at 5.83%, and $30,000,000 of variable rate advances with a rate at June 30, 1997 of 5.775%. The interest rates on the advances from FHLB at June 30, 1996 were as follows: $10,000,000 at 5.46%, $10,000,000 at 5.78%, $10,000,000 at 5.80%, $13,000,000 at 5.66%, $5,000,000 at 5.43%, $5,000,000 at 5.71%, $4,051,000 at 4.96%, $10,000,000 at 5.62%, $10,000,000 at 5.39%, $225,000 at 5.91%, and $20,000,000 of variable rate advances with a rate at June 30, 1996 of 5.48%. The weighted average interest rate of all borrowings was 5.62% and 5.56% at June 30, 1997 and 1996, respectively. Securities sold under agreements to repurchase ("Reverse Repurchases") represent an indebtedness of the Bank secured by U.S. treasury and agency obligations, to be repurchased upon maturity. Reverse repurchases averaged $964,000, $2,956,000 and $5,299,000 for the years ended June 30, 1997, 1996 and 1995, respectively, with maximum amounts outstanding at any month-end of $4,020,000, $8,838,000 and $12,186,000 during the years ended June 30, 1997, 1996 and 1995, respectively. Advances from FHLB and other borrowings at June 30, 1997 are scheduled to mature as follows: FHLB Other Maturity Advances Borrowings Total -------- -------- ---------- ----- 1998 $ 43,000,000 198,000 43,198,000 1999 26,617,000 198,000 26,815,000 2000 19,000,000 198,000 19,198,000 2001 - 198,000 198,000 2002 10,000,000 198,000 10,198,000 Thereafter 198,000 491,000 689,000 ------------ ---------- ------------- $ 98,815,000 1,481,000 100,296,000 ========== ========= =========== (9) Stockholders' Equity The Corporation is subject to regulation as a savings and loan holding company by the Office of Thrift Supervision ("OTS"). The Bank, as a subsidiary of a savings and loan holding company, is subject to certain restrictions in its dealings with the Corporation. The Bank is further subject to the regulatory requirements applicable to a federal savings bank. Thrift institutions are required to maintain risk-based capital of 8.0% of risk-weighted assets. At June 30, 1997, the Bank's risk-based capital ratio of 16.0% exceeded the required amount. Risk-based capital is defined as the Bank's core capital adjusted by certain items. Risk weighting of assets is derived from assigning one of four risk-weighted categories to an institution's assets, based on the degree of credit risk associated with the asset. The categories range from zero percent for low-risk assets (such as United States Treasury securities) to 100% for high-risk assets (such as real estate owned). The carrying value of each asset is then multiplied by the risk weighting applicable to the asset category. The sum of the products of the calculation equals total risk-weighted assets. Savings institutions are also required to maintain a minimum leverage ratio under which core capital must equal at least 3% of total assets, but no less than the minimum required by the Office of the Comptroller of the Currency ("OCC") for national banks which minimum currently stands between 4% and 5% for other than the highest rated institutions. The Bank's primary regulator, OTS, is expected to adopt the OCC minimum. The components of core capital are the same as those set by the OCC for national banks, and consist of common equity plus non-cumulative preferred stock and minority interests in consolidated subsidiaries, minus certain intangible assets. At June 30, 1997, the Bank's core capital and leverage ratio of 8.3% were in excess of the required amounts. The OTS has minimum capital standards that place savings institutions into one of five categories, from "critically undercapitalized" to "well-capitalized," depending on levels of three measures of capital. A well-capitalized institution as defined by the regulations has a total risk-based capital ratio of at least 10 percent, a Tier 1 (core) risk-based capital ratio of at least six percent, and a leverage (core) capital ratio of at least five percent. At June 30, 1997, the Bank was classified as well-capitalized with a total risked based capital ratio of 16.0%, a Tier 1 risked-based capital ratio of 15.5% and a leverage (core) capital ratio of 8.3%. The OTS has regulations governing dividend payments, stock redemptions, and other capital distributions, including upstreaming of dividends by a savings institution to a holding company. Under these regulations, the Bank may, without prior OTS approval, make distributions to the Corporation of up to 100% of its net earnings during the calendar year, plus an amount that would reduce by half its excess capital over its fully phased-in capital requirement at the beginning of the calendar year. The Corporation is not subject to any regulatory restrictions regarding payments of dividends to its shareholders, other than restrictions under Indiana law. At the time of conversion, the Bank established a liquidation account which equaled the Bank's retained earnings as of the date of the latest statement of financial condition included in the offering document. The liquidation account will be maintained for the benefit of depositors, as of the eligibility record date, who continue to maintain their deposits in the Bank after conversion. In the event of a complete liquidation (and only in such event), each eligible depositor will be entitled to receive a liquidation distribution from the liquidation account, in the proportionate amount to the then current adjusted balance for deposits then held, before liquidation distribution may be made with respect to the shareholders. Except for the repurchase of stock and payment of dividends by the Bank, the existence of the liquidation account does not restrict the use or application of such retained earnings. On November 22, 1996, the Board of Directors approved a 5% common stock dividend. Also, on December 21, 1995, the Board of Directors approved a 5% common stock dividend. All share and per share data have been retroactively restated to reflect the stock dividends. Stock Option Plans The Corporation has a stock option plan under which 165,375 authorized but unissued common stock were reserved. Under the plan, 96,469 non-qualified stock options were granted at $5.44 per share to outside directors and 41,344 incentive stock options and 10,336 non-qualified stock options were granted at $5.44 and $5.58 per share, respectively, to certain key employees. Of the 41,344 incentive stock options granted to certain key employees, 1,654 options were canceled in 1994. All options granted had been exercised or canceled as of June 30, 1996. In 1997, 17,000 incentive stock options were granted at $30.03 to certain key employees. Shares reserved and options outstanding under the plans are as follows:
Shares reserved Options Price per for future grant outstanding share Balance at June 30, 1994 17,226 74,834 $ 5.44 - 5.58 Exercised in 1994 - (73,180) 5.44 - 5.58 Canceled in 1994 1,654 (1,654) - ------- ------- Balance at June 30, 1995 and 1996 18,880 - - Granted (17,000) 17,000 30.03 ------ ------ Balance at June 30, 1997 1,880 17,000 30.03 ======= ======
SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair value method of accounting for stock options and similar equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period which is usually the vesting period. Companies are encouraged, but not required to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, but are required to disclose in a note to the financial statements pro-forma net earnings and earnings per share as if the company had applied the new method of accounting. The Company applied APB No. 25 in accounting for its stock-based compensation plans. Had compensation cost been determined on the basis of fair value pursuant to SFAS No. 123, for options granted in 1997, net earnings and earnings per share would have been as follows: Net earnings: As reported $ 821,000 ======= Pro forma $ 724,000 ======= Earnings per share: As reported $ 1.17 ========== Pro forma $ 1.04 ========== The following weighted average assumptions were used in 1997 in the option pricing model: a risk free interest rate of 6.39%; an expected life of the options of 5 years; an expected dividend yield of 1.33%; and a volatility factor of .27. Due to the inclusion of only 1997 option grants, the effects of applying SFAS No. 123 in 1997 may not be representative of the pro-forma impact in future years. Stock Purchase Plans The Corporation maintains an Employee Stock Purchase Plan whereby full-time employees of First Federal Bank, A Federal Savings Bank (the "Bank") and First Financial Insurance Agency, Inc. can purchase the Corporation's common stock at a discount. The purchase price of the shares under this plan is 85% of the fair market value of such stock at the beginning or end of the offering period, whichever is lesser. A total of 15,750 authorized but unissued shares were reserved for issuance under this plan. No shares have been issued under this plan as of June 30, 1997. Under a former plan, with identical terms as the existing plan, a total of 3,749, 5,474 and 2,636 shares were issued and purchased by employees in 1997, 1996 and 1995, respectively, with a total of 13,781 shares issued under the former plan. Stock Repurchase Plan In August 1996, the Board authorized the repurchase of up to 5% of the outstanding shares of common stock (703,638 shares were outstanding at the time), subject to market conditions, over a two year period which expires in August 1998. During the year ended June 30, 1997, 7,383 shares of common stock were repurchased at an average price per share of $28.04. Under a similar plan, 6,677 shares were repurchased in 1996 at an average price of $27.21. (10) Earnings Per Share Earnings per share have been computed on the basis of the weighted average number of common shares outstanding and the dilutive effect of stock options during the years presented using the treasury stock method. The weighted average number of shares outstanding used in the computation was 699,507, 701,273 and 683,226 in 1997, 1996 and 1995, respectively. (11) Employee Benefit Plans Substantially all employees are covered under a noncontributory defined benefit pension plan. Net periodic pension expense for the years ended June 30 consists of the following:
1997 1996 1995 ---- ---- ---- Service cost $ 128,000 177,000 170,000 Interest cost 79,000 124,000 123,000 Actual return on assets (173,000) (87,000) (234,000) Net amortization and deferral 76,000 (34,000) 139,000 -------- -------- ------- Net periodic pension expense $ 110,000 180,000 198,000 ======= ======= =======
Prior service cost is being amortized over the average remaining service period of active employees at the effective date of the amendment. Accumulated plan benefit information for the Bank's plan is as follows:
1997 1996 ---- ---- Actuarial present value of projected benefit obligations: Vested benefit obligation $ 721,000 754,000 Nonvested benefit obligation 60,000 87,000 ----------- ----------- Total accumulated benefit obligation 781,000 841,000 Additional benefits based upon estimated future salary levels 190,000 157,000 ---------- ---------- Total projected benefit obligation 971,000 998,000 Fair market value of plan assets 1,336,000 1,257,000 --------- --------- Fair market value of plan assets over projected benefit obligation 365,000 259,000 Unrecognized prior service cost (28,000) (31,000) Unrecognized gain (355,000) (291,000) Unrecognized transition asset 6,000 6,000 ------------ ------------ Accrued pension cost $ (12,000) (57,000) =========== ===========
The weighted-average assumed rate of return used in determining the net periodic pension cost for 1997 and 1996 was 8.0% and in determining the actuarial present value of accumulated benefit obligations at June 30, 1997 and 1996 was 7.5%, and the weighted-average rate of increase in future compensation levels used for 1997 and 1996 was 5.0%. The Bank has an Incentive Bonus Plan for certain salaried employees. The bonus pool for the years ended June 30, 1997, 1996 and 1995 was $220,000, $300,000 and $345,000, respectively. Effective July 1, 1993, the Board of Directors approved a supplemental retirement plan (Officer Plan) for certain key officers. The Officer Plan provides a target benefit to eligible employees based on their projected salary at time of retirement. Effective July 1, 1993, the Board of Directors also approved a deferred compensation agreement for the directors (Directors Plan). The Directors Plan allows the directors to defer their monthly director fee. The deferred fees accrue interest and will be paid out over a ten-year period once the director retires. Both plans provide certain additional survivor benefits in the case of death before retirement. In connection with the plans, on July 1, 1993 the Bank purchased life insurance policies on certain of the officers and directors participating in the plans. During the years ended June 30, 1997, 1996 and 1995, the Bank expensed $102,000, $99,000 and $100,000, respectively, under the plans and recognized $65,000, $41,000 and $79,000, respectively, related to life insurance policy cash surrender values. In addition to the expense for the year ended June 30, 1996, $133,000 related to benefits for officers terminated as a result of the branch sales was charged against the gain on sale of branches. (12) Income Taxes The components of the provision (benefit) for income taxes for the years ended June 30 consist of: 1997 1996 1995 ---- ---- ---- Current: Federal $ (213,000) 2,881,000 1,090,000 State income taxes 71,000 843,000 339,000 Deferred (107,000) (351,000) 11,000 ------- ---------- ----------- $ (249,000) 3,373,000 1,440,000 ======= ========= ========= The differences between the effective income tax rate and the statutory Federal corporate rate consist of:
1997 1996 1995 ---- ---- ---- Statutory Federal income tax rate 34.0% 34.0 34.0 Increase (decrease) in taxes resulting from: State taxes, net of federal benefit 8.2 6.1 5.8 Affordable housing tax credit (60.0) - - Refund of prior year taxes (26.0) - - Increase in cash surrender value of life insurance (3.8) (0.2) (0.7) Other 4.1 (3.0) (1.9) ----- ---- ---- Effective tax rate (43.5)% 36.9 37.2 ==== ==== ====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30 consist of:
1997 1996 ---- ---- Deferred tax assets: Deferred loan fees $ 41,000 61,000 Securities available for sale 72,000 163,000 Allowance for loan losses for financial reporting purposes 260,000 157,000 Deferred compensation and benefits 270,000 224,000 Other 26,000 82,000 -------- -------- 669,000 687,000 Deferred tax liabilities: Purchased mortgage servicing 57,000 74,000 Originated mortgage servicing 270,000 163,000 Excess tax depreciation 85,000 144,000 FHLB stock dividend 52,000 52,000 Allowance for loan losses for tax purposes in excess of base year allowance 125,000 156,000 Other 46,000 80,000 -------- -------- 635,000 669,000 Net deferred tax asset $ 34,000 18,000 ======== ========
Under the Internal Revenue Code, through 1996 the Bank was allowed a special bad debt deduction related to additions to tax bad debt reserves established for the purpose of absorbing losses. Subject to certain limitations, the Bank was permitted to deduct from taxable income an allowance for bad debts based on a percentage of taxable income before such deductions or actual loss experience. The Bank generally computed its annual addition to its bad debt reserves using the percentage of taxable income method; however, due to certain limitations in 1996, the Bank was only allowed a deduction based on actual loss experience. Under legislation enacted in 1996, beginning in fiscal 1997, the Bank is no longer allowed a special bad debt deduction using a percentage of taxable income method. Also, beginning in 1997, the Bank is required to recapture its excess bad debt reserve over its 1987 base year reserve over a six-year period. The amount has been provided in the Bank's deferred tax liability. Retained earnings at June 30, 1997, includes approximately $2,300,000 for which no provision for federal income taxes has been made. This amount represents allocations of income for allowable bad debt deductions. Reduction of amounts so allocated for purposes other than tax bad debt losses will create taxable income which will be subject to the then current corporate income tax rate. It is not contemplated that amounts allocated to bad debt deductions will be used in any manner to create taxable income. Financial Services of Southern Indiana Corp. ("Financial Services"), a subsidiary of the Bank, became a limited partner in House Investments, Shady Oak, L.P. during 1994. Under the terms of the partnership agreement, Financial Services contributed capital of $2,500,000 in 1995. The Partnership owns and operates an apartment complex which qualifies for affordable housing tax credits. The investment is being accounted for using the equity method. The Bank also provided a mortgage loan to the partnership in August 1996 which had a balance of $2,287,000 at June 30, 1997. (13) Sale of Branches On December 16, 1995, the Corporation completed the sale of certain assets and certain liabilities of two of the Bank's full-service retail branch offices in Tipton and Kokomo, Indiana resulting in a pre-tax gain of $7,274,000. The transaction consisted of the sale of certain mortgage and consumer loans, office premises and equipment and the transfer of certain deposit liabilities. (14) Commitments and Contingencies The Bank had outstanding commitments to originate and sell loans and mortgage-backed securities of $5,255,000 and $30,112,000, and $2,555,000 and $11,147,000 at June 30, 1997 and 1996, respectively. The Bank had no outstanding commitments to purchase loans, mortgage-backed securities, and investments at June 30, 1997. These commitments, which are subject to certain limitations, extend over varying periods of time with the majority to be fulfilled over a 12-month period. The Bank does not project any losses will be incurred as a result of these commitments. The majority of the commitments to originate loans are for fixed rate mortgage loans at rates ranging from 7.875% to 13.45% and adjustable rate mortgage loans at rates ranging from 7.25% to 9.63% at June 30, 1997. (15) Parent Company Financial Information Following is condensed financial information of the Corporation: Condensed Statements of Financial Condition June 30, Assets 1997 1996 ------ ---- ---- Cash $ 691,000 281,000 Investment in subsidiaries 23,091,000 23,104,000 Due from subsidiary 33,000 21,000 Other assets 16,000 19,000 ------------- ------------- $ 23,831,000 23,425,000 ========== ========== Liabilities and Stockholders' Equity Long-term debt 1,481,000 1,679,000 Accounts payable and accrued expenses 17,000 17,000 ------------- ------------- 1,498,000 1,696,000 Stockholders' equity 22,333,000 21,729,000 ---------- ---------- $ 23,831,000 23,425,000 ========== ========== Condensed Statements of Earnings
Year ended June 30, 1997 1996 1995 ---- ---- ---- Dividend from subsidiaries $ 1,600,000 550,000 100,000 Other operating income 27,000 38,000 105,000 Operating expenses (242,000) (263,000) (249,000) ---------- ---------- ---------- 1,385,000 325,000 (44,000) Income tax benefit 85,000 89,000 75,000 ----------- ----------- ----------- Income before equity in undistributed earnings of subsidiaries 1,470,000 414,000 31,000 Equity in undistributed earnings of subsidiaries (649,000) 5,348,000 2,399,000 ---------- --------- --------- Net earnings $ 821,000 5,762,000 2,430,000 ========== ========= =========
Condensed Statements of Cash Flows
Year ended June 30, 1997 1996 1995 ---- ---- ---- Net cash flows from operating activities: Net earnings $ 821,000 5,762,000 2,430,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries 649,000 (5,348,000) (2,399,000) Change in accounts payable and accrued expenses - - 11,000 Change in due from subsidiary (12,000) 25,000 (33,000) Change in other assets 3,000 1,000 (6,000) ------------ ------------ ------------ Net cash provided by operating activities 1,461,000 440,000 3,000 --------- ---------- ------------ Cash flows from investing activities: Capital contributions to subsidiaries (500,000) - (1,000,000) ---------- --------------- --------- Net cash used by investing activities (500,000) - (1,000,000) ---------- --------------- --------- Cash flows from financing activities: Proceeds from long-term debt - - 1,000,000 Repayment of long-term debt (198,000) (197,000) (174,000) Dividends to stockholders (279,000) (266,000) (115,000) Purchase of common shares (207,000) (182,000) - Proceeds from issuance of common stock 133,000 137,000 465,000 ---------- ---------- ---------- Net cash provided (used) by financing activities (551,000) (508,000) 1,176,000 ---------- ---------- --------- Net increase (decrease) in cash and cash equivalents 410,000 (68,000) 179,000 Cash and cash equivalents at beginning of year 281,000 349,000 170,000 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 691,000 281,000 349,000 ========== ========== ==========
(16) Fair Value of Financial Instruments The following disclosure of fair value information is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments." SFAS No. 107 requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate value. The estimated fair value amounts have been determined by the Corporation using available market information and other appropriate valuation techniques. These techniques are significantly affected by the assumptions used, such as the discount rate and estimates of future cash flows. Accordingly, the estimates made herein are not necessarily indicative of the amounts 1ST BANCORP could realize in a current market exchange and the use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amount. The following schedule includes the book value and estimated fair value of all financial assets and liabilities, as well as certain off balance sheet items, at June 30, 1997.
Carrying Estimated (In thousands) amount fair value Assets Cash and cash equivalents $ 20,294 20,294 Securities including securities available for sale 55,653 55,144 Loans receivable including loans held for sale, net 174,609 173,651 Accrued interest receivable 2,180 2,180 Stock in FHLB of Indianapolis 4,941 4,941 Residential mortgage loan servicing 819 1,005 Liabilities Deposits 144,316 143,241 Borrowings: FHLB advances 98,815 97,599 Long-term borrowing 1,481 1,481 Advance payments by borrowers for taxes and insurance 304 304 Accrued interest payable 1,194 1,194
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 at June 30, 1997. Accrued Interest Receivable. The fair value of these financial instruments approximates carrying value. Stock in FHLB of Indianapolis. The fair value of FHLB stock is based on the price at which it may be resold to the FHLB. Residential Mortgage Loan Servicing. The fair value of residential mortgage loan servicing rights is determined based on an internal valuation using the estimated discounted net cash flows to be received less the estimated cost of servicing. Deposits. The fair value of deposits is calculated using a discounted cash flow analysis that applies market interest and decay estimates consistent with those used by the Office of Thrift Supervision at June 30, 1997, for similar deposit accounts. FHLB Advances. Fair values for fixed-maturity fixed-rate FHLB advances and fix-maturity variable rate advances are calculated using a discounted cash flow analysis applying market interest rates for similar borrowings. Long-term Borrowing. The long-term borrowing is an adjustable instrument tied to the prime interest rate. Fair value approximates carrying value. Advance Payments by Borrowers for Taxes and Insurance. The fair value approximates carrying value. Accrued Interest Payable. The fair value of these financial instruments approximates carrying value. Management and Office Locations 1ST BANCORP AND SUBSIDIARIES Officers of First Federal Bank, A Federal Savings Bank C. James McCormick, Chairman of the Board Frank Baracani, President and Chief Executive Officer Lynn Stenftenagel, Executive Vice President, CFO and Secretary Ruth Mix Carnahan, Treasurer Bradley M. Rust, Senior Vice President/Controller Gerald R. Belanger, Senior Vice President Carroll C. Hamner, Senior Vice President Laura E. Bogard, Vice President Cheryl A. Otten, Vice President Paula J. Pesch, Vice President Jay A. Baker, Assistant Vice President Doris J. Blackburn, Assistant Vice President Kathy L. Clinkenbeard, Assistant Vice President Lynn Elliott, Assistant Vice President Kelly J. Gay, Assistant Vice President Ruth E. Hunter, Assistant Vice President Rana M. Lee, Assistant Vice President Randall W. Pratt, Assistant Vice President Carol A. Witshork, Assistant Vice President Glenda L. Berryman, Assistant Secretary T. Rene' Buck, Internal Auditor and Compliance Officer Officers of First Financial Insurance Agency, Inc. C. James McCormick, Chairman of the Board Frank Baracani, President and Chief Executive Officer J. Timothy Tresslar, Vice President and General Manager Lynn Stenftenagel, Secretary and Treasurer Office Locations 1ST BANCORP Corporate Headquarters: 101 N. Third Street Vincennes, Indiana 47591 (812) 885-2255 (800) 688-3865 First Federal Bank, A Federal Savings Bank Main Office: 101 N. Third Street Vincennes, Indiana 47591 (812) 882-4528 (800) 688-4528 Willow Street Drive Up Branch: 1700 Willow Street Vincennes, Indiana 47591 (812) 885-6085 Main Office Annex: 102 N. Fifth Street Vincennes, Indiana 47591 (812) 885-2255 (800) 688-3865 Evansville Loan Origination Office: 125 N. Weinbach, Suite 730 Evansville, Indiana 47711 (812) 476-4441 (888) 476-4441 First Financial Insurance Agency, Inc. Main Office: 626 Veterans Drive Vincennes, Indiana 47591 (812) 886-7283 Princeton Office: 108 South 5th Ave. Princeton, IN 47670 (812) 385-2659 SENIOR MANAGEMENT [PHOTO OF SENIOR MANAGEMENT] Front row, left to right: Bradley M. Rust Senior Vice President and Controller Carroll C. Hamner Senior Vice President Lending Services C. James McCormick Chairman of the Board Frank Baracani President and CEO Gerald R. Belanger Senior Vice President Human Resources Back row, left to right J. Timothy Tresslar * Vice President and General Manager First Financial Insurance Agency,Inc. Cheryl A. Otten Vice President Savings Paula J. Pesch Vice President Secondary Market Laura E. Bogard Vice President Mortgage Lending Lynn Stenftenagel Executive Vice President Secretary and CFO *Not an Officer of First Federal Bank, A Federal Savings Bank Corporate Information 1ST BANCORP AND SUBSIDIARIES Corporate Headquarters 101 North Third Street, Vincennes, Indiana 47591 Annex - 102 North Fifth Street, Vincennes, Indiana 47591 (812) 885-2255 General Counsel Hart, Bell, Cummings, Ewing & Stuckey, Vincennes, Indiana Special Counsel Barnes & Thornburg, Indianapolis, Indiana Transfer Agent Fifth Third Bank Corporate Trust Operations 38 Fountain Square Plaza MD#1050F5 Cincinnati, Ohio 45202 (800) 837-2755 Independent Public Accountants KPMG Peat Marwick LLP, Indianapolis, Indiana Statement of Policy 1ST BANCORP is an equal opportunity employer. Form 1O-K Report Forms 1O-K and 1O-Q, as filed with the SEC, are available without charge by writing to Lynn Stenftenagel, 1ST BANCORP, 101 North Third Street, Vincennes, Indiana 47591 or by calling (812) 885-2255. Shareholder Information At July 31, 1997, there were 390 shareholders of record and 691,461 shares of common stock outstanding. Market Information 1ST BANCORP common stock is traded on NASDAQ under the symbol FBCV. The following table sets forth the high and low bid prices per share of common stock for the periods indicated. This information was furnished by the NASD. Quarter Ended High Low June 1997 33.25 30.00 March 1997 32.00 28.50 December 1996 31.50 27.25 September 1996 32.00 26.00 June 1996 28.00 26.00 March 1996 29.75 29.00 December 1995 31.75 30.50 September 1995 35.00 33.00 Internet Address http://www.businesswire.com/cnn/fbcv.htm [BACK COVER] [1ST BANCORP LOGO] Third & Busseron Streets P.O. Box 1417 Vincennes, Indiana -----END PRIVACY-ENHANCED MESSAGE-----