-----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, S7FWJpWNBMoR0y4Wm01EJGR8VkGwQcH1AvkZbYS5L85krCfHNpOB0IwH/22rFuVy TQlzYd2CYI+H/Ar+ZP8GYQ== 0000908834-97-000223.txt : 19970929 0000908834-97-000223.hdr.sgml : 19970929 ACCESSION NUMBER: 0000908834-97-000223 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970630 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: 10-K SEC ACT: SEC FILE NUMBER: 000-17915 FILM NUMBER: 97686215 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 10-K 1 1ST BANCORP FORM 10-K FOR PERIOD ENDED 6/30/97 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1997 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________to__________________ Commission File Number : 0-17915 1ST BANCORP (Exact name of registrant as specified in its charter) Indiana 35-1775411 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification Number) 101 North Third Street Vincennes, Indiana 47591 (Address of Principal executive offices) (Zip Code) Registrant's telephone number, including area code: (812)885-2255 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock ($1.00 par value) Title of Class Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (Para. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. |__| State the aggregate market value of the voting stock held by nonaffiliates of the registrant: $17,022,704 as of September 9, 1997. Number of shares of Common Stock outstanding as of September 9, 1997: 691,460 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended June 30, 1997 are incorporated into Part II. Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders are incorporated into Part I and Part III. 1ST BANCORP FORM 10-K INDEX Page No. Forward Looking Statement.............................................. 3 Part I Item 1. Business..................................................... 3 Item 2. Properties................................................... 37 Item 3. Proceedings.................................................. 37 Item 4. Submission of Matters to a Vote of Security Holders.......... 37 Item 4.5 Executive Officers of the Corporation........................ 37 Part II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters....................................... 38 Item 6. Selected Financial Data..................................... 38 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 38 Item 7A. Quantitative and Qualitative Disclosures about Market Risks...................................... 38 Item 8. Financial Statements and Supplementary Data................. 40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.................... 40 Part III Item 10. Directors and Executive Officers of the Registrant.......... 41 Item 11. Executive Compensation...................................... 41 Item 12. Security Ownership of Certain Beneficial Ownership and Management................................ 41 Item 13. Certain Relationships and Related Transactions.............. 41 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................... 41 Signatures............................................................. 43 2 FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K ("Form 10-K") contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-K and include statements regarding the intent, belief, outlook, estimate or expectations of the Corporation (as defined below), its directors or its officers primarily with respect to future events and the future financial performance of the Corporation. Readers of this Form 10-K are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-K identifies important factors that could cause such differences. These factors include changes in interest rates; loss of deposits and loan demand to other savings and financial institutions; substantial changes in financial markets; changes in real estate values and the real estate market; regulatory changes; or the deterioration in the financial strength of the Corporation's loan customers. PART I Item 1. Business General 1ST BANCORP, an Indiana Corporation (the "Corporation" or "1ST BANCORP"), is a nondiversified, unitary savings and loan holding company. The principal asset of the Corporation is the outstanding stock of First Federal Bank, A Federal Savings Bank, ("First Federal" or the "Bank") and the Bank's subsidiary, Financial Services of Southern Indiana Corporation. Other subsidiaries of the Corporation include First Financial Insurance Agency, Inc. ("First Financial"), a full service insurance agency, and First Title Company ("First Title"), a currently inactive company incorporated for the purpose of providing title search services for mortgage lenders. First Federal is a federally-chartered stock savings bank that was converted to the stock form of ownership and to a federal savings bank in May, 1987. The Bank is primarily engaged in attracting deposits from the general public and applying these funds, together with borrowings, to the origination of residential mortgage loans and consumer loans. First Federal's revenue is primarily derived from interest on, and fees received in connection with, real estate and other loans. The Bank also experienced gains on the sale of its mortgage loans as part of its continuing operations and asset/liability management efforts. The Bank's principal expenses are interest on deposits and borrowings and general and administrative expenses. The principal sources of funds for First Federal's lending activities are its deposits, amortization and prepayments of outstanding loans, sales of mortgage loans and borrowings from the Federal Home Loan Bank of Indianapolis ("FHLB" or "FHLB of Indianapolis"). The Bank's deposits are insured by the full faith and credit of the United States government by the Federal Deposit Insurance Corporation's ("FDIC") Savings Association Insurance Fund ("SAIF"). Deposit accounts in First Federal are generally insured by the SAIF to a maximum of $100,000 for each insured depositor. The Bank is a member of the FHLB of Indianapolis and is subject to comprehensive regulation, examination, and supervision by the Office of Thrift Supervision ("OTS") and the FDIC. 3 First Federal offers a full range of banking services through its two banking offices located in Vincennes, Indiana. Additionally, the Bank operates one loan origination office in Evansville Indiana. During the fourth quarter of fiscal year 1997, the Bank closed loan origination offices in Indianapolis, Indiana, Louisville, Kentucky, and suburbs of Cincinnati and Dayton, Ohio. One additional loan origination office located in a suburb of Cleveland, Ohio was closed earlier in fiscal year 1997. The office closures were undertaken to centralize all administrative loan functions in the Vincennes offices, to afford more standardized procedures and controls, and to decrease overhead expenses in the nonconforming loan operations. The Bank's principal market area is Knox County in Indiana. The Bank's deposits are obtained primarily from persons who are residents of its primary market area. However, to supplement local deposits, the Bank also makes use of brokered deposits which range in original maturity from one to three years with rates ranging from 5.5% to 6.4%. The program serves as an alternative source of funds to compliment the borrowing program and retail savings programs offered in the Bank's local market. The brokered funds enable the Bank to manage maturities of its deposits in its effort to manage interest rate risk. During fiscal 1997, First Financial purchased the book of business of an existing independent insurance agency. The book of business was merged with the existing customer base of First Financial. As a result of the acquisition, First Financial opened a full service insurance office in Princeton, Indiana in addition to its existing full service office in Vincennes, Indiana. Lending Activities General First Federal has traditionally concentrated its lending activities on conventional first mortgage loans secured by residential property. Conventional loans are neither insured by the Federal Housing Administration ("FHA") nor partially guaranteed by the Veteran's Administration ("VA"). At June 30, 1997, First Federal's net loan portfolio aggregated $146.8 million, representing 54.3% of total assets at that date. This compares to the Bank's net loan portfolio of $150.7 million at June 30, 1996 representing 57.2% of total assets. The Bank has historically concentrated on the origination and purchase of conforming conventional mortgage lending. This market is represented by loans conforming to documentation and underwriting standards dictated by the Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC") and the Federal National Mortgage Association ("Fannie Mae" or "FNMA"). The Bank continues to originate conforming loan product but in the past two fiscal years has also concentrated on the origination of nonconforming mortgage loans. Nonconforming loans meet alternative documentation and underwriting requirements dictated by a secondary market made up of companies other than FHLMC and FNMA. Such loans are made to a broader customer base and are graded "A" through "D." Creditworthiness, collateral, equity, and other factors are weighed in the grading of the nonconforming loans and interest rates charged are commensurate with risk. 4 The Bank offers both fixed rate mortgage and adjustable rate mortgage ("AML") loans. In addition to residential real estate lending, as part of its asset and liability management strategy, First Federal continues its lending activities in other shorter-term interest rate sensitive loans, including consumer loans, which accounted for 8.7% of the total loan portfolio at June 30, 1997 as compared to 6.6% of the total loan portfolio at June 30, 1996. The following table (which excludes the loans held for sale portfolio) sets forth the composition of the Bank's loan portfolio by type of loan at the dates indicated:
At June 30, - ----------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------------------------------------------------------------------------- (in thousands) Real estate loans: Mortgage $135,189 $141,247 $181,676 $153,251 $140,140 Construction 2,038 2,171 7,364 12,460 4,862 Consumer loans 7,277 5,839 10,203 9,285 8,765 Other Loans 5,471 4,171 6,859 6,775 4,889 ---------------------------------------------------------------------------- 149,975 153,428 206,102 181,771 158,656 ---------------------------------------------------------------------------- Undisbursed loans funds (1,536) (1,297) (3,038) (7,707) (1,495) Deferred loan fees and unamortized premiums and discounts, net (441) (486) (367) (430) (488) Allowance for loan losses (1,158) (896) (878) (817) (892) ---------------------------------------------------------------------------- (3,135) (2,679) (4,283) (8,954) (2,875) ---------------------------------------------------------------------------- Net loans receivable $146,840 $150,749 $201,819 $172,817 $155,781 ============================================================================
Contractual Maturities of Loans The following table summarizes the contractual maturities of First Federal's loan portfolio due for the fiscal periods indicated as of June 30, 1997 by type of loan: Fiscal Periods Indicated as of June 30, 1997
Balance Outstanding More More More More More at than 1 than 2 than 3 than 5 than 10 June 30, One Year Year to Years to Years to Years to Years to More than 1997 or less 2 Years 3 Years 5 Years 10 Years 15 Years 15 Years -------------------------------------------------------------------------------------------------- Real estate loans: Mortgage $135,189 $1,813 $1,974 $2,148 $4,884 $16,531 $25,258 $82,581 Construction 2,038 2,038 - - - - - - Consumer and Other Loans 12,748 1,429 1,570 1,726 3,981 4,042 - - --------------------------------------------------------------------------------------------------- Total $149,975 $5,280 $3,544 $3,874 $8,865 $20,573 $25,258 $82,581 ===================================================================================================
5 Contractual maturities of loans do not reflect the average life of the Bank's loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and refinancings. Scheduled principal amortization also reduces the average maturity of the loan portfolio. The average life of mortgage loans tends to increase, however, when current mortgage rates substantially exceed rates on existing mortgages. Adjustable- and Fixed-Rate Loans The following table sets forth by type of loan the amount of First Federal's fixed-rate loans and adjustable rate mortgage loans ("AML") included in its gross loans receivable:
At June 30, - ----------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------------------------------------------------------------------------- (in thousands) One-to-Four Family Residential Mortgage Loans Fixed Rates $67,310 $54,212 $71,772 $64,294 $44,963 Adjustable Rates 60,767 81,051 107,849 92,492 90,957 ---------------------------------------------------------------------------- Total $128,077 $135,263 $179,621 $156,786 $135,920 Commercial Real Estate Loans Fixed Rates 5,901 3,511 2,996 4,062 4,468 Adjustable Rates 3,249 4,644 6,423 4,863 4,614 ---------------------------------------------------------------------------- Total $9,150 $8,155 $9,419 $8,925 $9,082 Total Real Estate Loans Fixed Rates 73,211 57,723 74,768 68,356 49,431 Adjustable Rates 64,016 85,695 114,272 97,355 95,571 ---------------------------------------------------------------------------- Total $137,227 $143,418 $189,040 $165,711 $145,002 Consumer & Other Loans Fixed Rates 8,168 6,671 11,438 10,011 8,841 Adjustable Rates 4,580 3,339 5,624 6,049 4,813 ---------------------------------------------------------------------------- Total $12,748 $10,010 $17,062 $16,060 $13,654 Total Loans Receivable Fixed Rates 81,379 64,394 86,206 78,367 58,272 Adjustable Rates 68,596 89,034 119,896 103,404 100,384 ---------------------------------------------------------------------------- Total $149,975 $153,428 $206,102 $181,771 $158,656
Residential Mortgage Loans To the extent deemed appropriate, in view of market forces, First Federal intends to continue to originate AMLs in order to reduce the impact of rapid increases in market rates of interest on its operations and the market value of its equity. Although critical to maintaining an asset/liability matching program and a reasonable interest rate risk posture, adjustable-rate loans generally do not adjust as rapidly as changes in the Bank's cost of funds. The Bank also continues to be an originator of fixed rate mortgage loans. Fixed rate conforming residential mortgages currently originated by the Bank generally are made with 15 and 30 year amortization schedules. Fixed rate nonconforming residential mortgages currently originated by the Bank generally are made with 15 year or less amortization schedules. The Bank also originates fixed-rate residential mortgages with balloon payments, with the balloon payment being due generally in five or seven years for conforming loans and 15 years for nonconforming loans. 6 A portion of the conforming fixed rate and adjustable rate residential mortgage loans currently being originated by First Federal is sold to FHLMC. These loans are typically sold with the servicing rights retained by the Bank. A portion of the fixed rate nonconforming mortgage loans is also sold on a non-recourse basis in the nonconforming secondary market. The nonconforming loans are typically sold with the servicing rights released. However, the highest quality nonconforming loans are being retained in portfolio in order to enhance the net interest margin. Adjustable rate nonconforming mortgage loans are currently originated and placed in the held for sale portfolio. Sales of adjustable rate nonconforming loans was limited during fiscal year 1997. Of the $115.0 million loans originated in fiscal year 1997, $70.2 million were nonconforming mortgage loan originations. This compares to the origination of $65.9 million of nonconforming mortgage loans of the total $144.9 million loan originations during fiscal year 1996. At June 30, 1997, $66.5 million nonconforming loans were included in the loan portfolio as compared to $23.3 million in portfolio at June 30, 1996. The increased level of nonconforming loans in portfolio is an integral part of the Bank's strategy to expand the net interest margin in an orderly manner. The Bank also originates second mortgages, the majority of which are on real estate in which it also holds the first mortgage. The loans have either adjustable rate or fixed rate features with terms similar to first mortgage loans. The second mortgage, when combined with the balance of the first mortgage, normally does not exceed 80% of the value of the real estate. During fiscal year 1997, the Bank discontinued a program of granting second mortgage loans up to 100% of appraised value. The program was discontinued due to the inherent credit risk associated with that type of lending. The Bank offers 100% financing programs with the first mortgage retained by the Bank, and a concurrent second mortgage being closed and retained at another financial institution. First Federal offers residential construction loans to both individuals and builders. Such loans accounted for approximately 3.2% of the total amount of loans originated by the Bank in fiscal year 1997. The construction loans are generally for a period of 6 to 12 months, and the Bank may receive personal guarantees from the principals. An independent appraiser inspects all sites prior to origination of the loans as required by OTS regulations. The Bank also provides the permanent financing on construction projects for residential housing. The Bank normally grants a commitment for permanent financing concurrent with the origination of the construction loan. Such commitments are generally market rate commitments and require the borrower to satisfy the Bank's normal underwriting criteria at the time the loan is made. Terms are similar to those established for other first mortgage loans. Interest rates are generally adjustable and are set at the time of the origination of the construction loan. In the case of an AML, the construction period is included in the time frame upon which the interest rate adjustment is based. In many instances, construction loans have a commitment for permanent financing either from the Bank or another financial institution prior to closing the construction loan. In other cases, the Bank does grant "spec" residential construction loans to builders on a limited basis. The number of "spec" loans to each builder is limited by the amount and number of projects that such builder has in process at any one time. These limits are established and regularly monitored by the Board of Directors. Under policies adopted by the Bank's Board of Directors, the Bank limits the loan-to-value ratio to 100% on residential mortgage loans. The Bank generally requires all conventional loans with loan-to-value ratios in excess of 80% to carry private mortgage insurance which insures First Federal against default on a portion of the principal amount of the loan. Nonconforming mortgage loans generally may not exceed 85% of the value of the secured property. Commercial real estate loans generally may not exceed 75% of the value of the secured property. Construction loans generally may not exceed 80% of the value of the secured property and generally are made for 80% or less of the appraised value of the property upon completion. 7 It is the Bank's policy to obtain title insurance policies insuring that First Federal has a valid lien on mortgaged real estate. Borrowers also must obtain hazard insurance policies prior to closing and, when required by the Department of Housing and Urban Development, flood insurance policies. Commercial Real Estate Loans At June 30, 1997, First Federal's commercial real estate loan portfolio (including loans secured by nonresidential property, land, and five or more dwelling units) aggregated $9.2 million, or 6.1% of the total loan portfolio. During the early 1980s, First Federal originated and purchased a number of commercial real estate loans. Such activity has been very limited in the past several years. Land development loans are generally limited to less than 75% of the market value of the improved land and are granted as revolving lines of credit. Interest rates generally are 2% above the prime rate, recalculated on a monthly basis. As lot sales occur, the Bank generally requires a payment equal to 75% of the gross sale proceeds. The land development loans have been granted in communities currently or previously served by various First Federal offices. Consumer Lending The Bank also originates consumer loans, which include savings account loans, student loans, automobile loans, property improvement loans, home equity loans, mobile home loans, credit card loans, and other secured and unsecured consumer loans. Applicable laws and regulations permit the Bank to make secured and unsecured consumer loans up to 35% of the institution's total assets. At June 30, 1997, such loans constituted $12.7 million, or 8.7% of the total loan portfolio. The maximum term of automobile loans is generally five years, with the rate and term dependent upon whether the vehicle is new or used. During fiscal year 1997, the Bank initiated an indirect auto lending program through a selected number of new and used automobile dealers in its primary market area. The indirect auto lending program will serve to augment the traditional auto lending program of the Bank. Terms are similar for the traditional and indirect auto programs. Home equity loans are variable rate and are treated as revolving lines of credit. At June 30, 1997, home equity loans aggregated $4.2 million, available balances averaged $10,271, and approved credit line balances averaged $20,255. Savings account loans generally do not exceed 90% of the savings account balance which collateralizes the loan and demand an interest rate generally equal to 2.0% above the rate paid on the savings account. 8 Origination, Purchase and Sale of Loans and Participations As a federally-chartered savings institution, First Federal has general authority to make real estate loans secured by properties located throughout the United States. Through its loan origination office network, the Bank's lending market was expanded beyond its traditional areas. However, at June 30, 1997, a majority of First Federal's total loans receivable were secured by real estate located in central and southern Indiana and southern Illinois. During the mid-1980s, First Federal purchased a limited number of participations in loans originated by other financial institutions. In such instances, First Federal purchased a portion of a loan from a lead lender which services the loan and remits to the Bank its pro-rata share of interest and principal payments received from the borrower. First Federal pays a fee from .25% to .50% of the interest earned on the loan to the lead lender for servicing the loan. This operating strategy was undertaken because of an inadequate supply of loans in the Bank's primary lending area. Since that time, few participations have been purchased. The Bank has expanded its origination and purchasing operations for mortgage loans and currently has an adequate supply of loans in its market areas. The Bank is continually looking for new market areas into which it can expand. Historically, conforming mortgage loans have been originated by the Bank primarily through referrals from real estate brokers, builders and walk-in customers, as well as through refinancing for existing customers. The Bank carefully monitors interest rates in its market areas and believes that it is competitive in such areas. First Federal continues to obtain its market share of loans in its primary market area. In addition, through mortgage banking services, additional loans are granted in other communities. The mortgage banking services for the past three fiscal years have been primarily concentrated in the nonconforming loan markets. During fiscal 1997, the Bank originated $104.7 million of residential real estate loans (including construction loans) as compared to $132.2 million of residential real estate loans in 1996 and $95.3 million of residential real estate loans in 1995. The decreased volume of residential real estate loan originations during fiscal 1997 resulted from reduced retail conforming loan originations. The decreased conforming loan originations were largely attributable to the sale of two retail banking branches in Tipton and Kokomo, Indiana during December 1995 (the "Branch Sales"). In addition, the decline was attributable to the general economic conditions which depressed loan activity in the Bank's primary lending area during fiscal 1997. However, nonconforming loan originations increased slightly during fiscal year 1997. Volume increased in fiscal 1996 as compared with fiscal 1995 primarily due to the increased production of nonconforming loans from the Bank's loan origination office network . Conforming loans purchased through a wholesale correspondent network decreased to $2.0 million during fiscal 1997 as compared to $27.6 million during 1996 and $13.7 million during fiscal 1995. The conforming wholesale correspondent loan program was discontinued during fiscal 1997 due to pricing constraints. The increase in loan purchases during 1996 was attributable to a program designed to replace the loan production from the branches sold during the year. Additionally, the Bank originated and sold FHA and VA loans in the secondary mortgage market. During 1997, the Bank sold $32.1 million in conforming loans to FHLMC as compared to the sale of $67.6 million in loans to FHLMC in fiscal year 1996. The Bank continues to service most of the loans sold in fiscal 1997 and retains a portion of the interest received (.250% to .375%) as a servicing fee. A total of $6.4 million in FHA/VA loans were sold to private investors during fiscal year 1997. These loans were sold servicing released. During fiscal 1996, $28.4 million in loans were sold in conjunction with the Branch Sales and $37.5 million in conforming loans and FHA/VA loans were sold to private investors. An aggregate of $37.7 million in nonconforming loans were sold to various investors during fiscal 1997 as compared to $27.9 million in nonconforming loan sales in fiscal 1996. These loans are generally sold servicing released. 9 The following table shows total loan originations, purchases, sales and repayment activities (including loans held for sale) of the Bank during the periods indicated:
Years Ended June 30, ------------------------------------------------ 1997 1996 1995 ------------------------------------------------ (in thousands) Loans Originated Real estate loans Construction (1) $ 3,623 $ 15,466 $ 14,169 Land -- -- 740 Loans for purchase or refinance of existing property: One-to-four units 101,047 116,783 81,117 Over four units -- -- 143 Commercial 383 215 313 Consumer loans (2) 9,926 12,394 14,537 --------- --------- --------- Total loans originated $ 114,979 $ 144,858 $ 111,019 Participations and whole loans purchased $ 2,042 $ 27,583 $ 13,695 Participations and whole loans sold ($ 76,202) ($161,421) ($ 32,835) Loan principal repayments (35,093) (50,208) (56,854) --------- --------- --------- Change in loan portfolio $ 5,726 ($ 39,188) $ 35,025
- ------------------- (1) Construction loans originated are residential. (2) Consumer loans consist primarily of home equity, savings account, signature, automobile, and property improvement loans. Income from Lending Activities Interest rates charged by First Federal on mortgage loans are primarily determined by competitive loan rates offered in its market areas. Mortgage loan rates reflect factors such as general interest rate levels, the supply of money available to the savings industry and the demand for such loans. These factors are, in turn, affected by general economic conditions, the monetary policies of the federal government, (including the Board of Governors of the Federal Reserve Board), the general supply of money in the economy, tax policies and governmental budget matters. In addition to interest earned on loans and the income from servicing of loans, the Bank receives income through fees in connection with late payments, changes of property ownership and for miscellaneous services related to its loans. Income from these activities varies from period to period with the volume and type of loans originated, modified, sold or purchased, which in turn is dependent on prevailing mortgage interest rates and their effect on the demand for loans in markets serviced by the Bank. In its lending, the Bank may charge loan origination fees which are calculated as a percentage of the amount borrowed. Loan origination fees and certain related direct loan origination costs are offset and the resulting net amount is deferred and amortized over the lives of the related loans as an adjustment to the yield of such related loans. However, in the event the related loan is sold, any net deferred loan fees remaining with respect to such loans are taken into income. In addition, commitment fees are offset against related direct costs and recognized over the life of the related loans as an adjustment of yield, if the commitment is exercised, or, if the commitment expires unexercised, the commitment fees are recognized in income upon expiration of the commitment. 10 The following table sets forth certain information concerning loan origination and commitment fees and deferred loan origination and commitment fees on First Federal's mortgage loan portfolio for each of the periods or as of the dates indicated. 1997 1996 1995 ---------------------------- (in thousands) Loan origination, commitment fees and service fees earned during the year ended June 30 $137 $140 $780 Net deferred loan origination and commitment fees on mortgage loans at end of year $476 $611 $360 Purchased and originated mortgage servicing rights at end of year $819 $591 $1,432 Asset Quality Collection Practices When a borrower fails to make a required payment on a loan, the Bank attempts to cause the deficiency to be cured by contacting the borrower and seeking payment. Contacts are generally made after a payment is more than 16 days past due and a late charge is assessed at such time for conforming mortgage loans. In the case of nonconforming mortgage loans, contact is generally made after a payment is five days past due. For nonconforming loans, as with conforming loans, late charges are assessed at which time a payment is more than 16 days past due. If the delinquency exceeds 120 days and is not cured through the Bank's normal collection procedures, the Bank will generally institute measures to remedy the default, including commencing a foreclosure action or accepting from the mortgagor a voluntary deed of the secured property in lieu of foreclosure. If a foreclosure action is instituted and the loan is not reinstated, paid in full, or refinanced, the property is sold pursuant to statutory requirements after obtaining a judgment of foreclosure from the appropriate court. The property is then included in the Bank's "real estate owned" account until it is sold. The Bank is permitted by federal regulations to finance the sales of these properties by loans or contracts to facilitate the sale of real estate owned, which involve a lower down payment or a longer term than would be generally allowed by the Bank's underwriting standards. 11 Nonaccrual Loans and Real Estate Owned At June 30, 1997, nonaccrual loans and real estate owned totaled $2.7 million, or 1.01% of total assets. The increased delinquencies are attributable to several factors including general economic conditions and the abundance of consumer bankruptcies being experienced throughout the Bank's lending areas. The upward trend in nonaccrual loans is largely attributable to one-to-four family mortgage loans becoming more than 90 days past due. The upward trend in loan delinquencies relates to both conforming and nonconforming mortgage loans. Loan quality continues to be of major importance to the Bank and strong efforts are being made to ensure loan quality. In an effort to mitigate potential losses and reduce non-performing assets mortgage loan collection personnel have been expanded, more stringent collection practices have been implemented, and certain higher risk lending programs have been discontinued. In addition, loan loss allowances have been increased to prepare for potential future losses in the loan portfolio. Two commercial mortgage loans with outstanding principal balances of $975,000 at June 30, 1994 and $1,000,000 at June 30, 1993 in which the Bank purchased participating interests became non-performing in fiscal year 1993, and are included in the schedule below for 1994 and 1993. The participation loans were disposed of during fiscal year 1995 at no loss to the Bank. 12 The table below sets forth the amounts and categories of First Federal's nonaccrual loans and real estate owned for the last five years. It is the policy of the Bank to review loans regularly and loans are placed on nonaccrual status when the loans become contractually past due more than 90 days.
At June 30, -------------------------------------------------------- 1997 1996 1995 1994 1993 -------------------------------------------------------- (Dollars in thousands) Nonaccrual loans and real estate owned: Non-accrual loans(1) $2,330 $ 846 $ 400 $1,635 $1,647 Real estate owned(2) 397 177 145 160 168 Restructured loans -- -- -- -- -- ------------------------------------------------------ Total nonaccrual loans and real estate owned $2,727 $1,023 $ 545 $1,795 $1,815 Nonaccrual loans and real estate owned to total assets 1.01% 0.39% 0.17% 0.71% 0.79%
- --------------------- (1) Approximately $200,000 in gross interest income would have been recorded in the year ended June 30, 1997 if the loans had been current in accordance with their original terms and had been outstanding throughout the year, or since origination if held for part of the period. Approximately $99,000 in interest income was actually recognized in the year. (2) Troubled loans acquired through foreclosure or deed-in-lieu of foreclosure are included in the Statement of Financial Condition as real estate owned. Loss and Delinquency Experience During the year ended June 30, 1997, the Bank realized net charge-offs on loans aggregating $111,000. At June 30, 1997, 1.04% of the outstanding principal balance of loans in the Bank's portfolio was delinquent between 61 and 90 days and 1.63% was delinquent 91 days or more. The Bank's loss experience on its loan portfolio for the years shown is summarized in the following tables: Year Ended June 30, --------------------------------------------- 1997 1996 1995 -------------------------------------------- (Dollars in thousands) Loans receivable, net $146,840 $150,749 $201,819 Net losses (charge-offs) $111 $65 $39 Percent delinquent 61 days or more at end of year 2.67% 1.76% 1.14% Total dollar amount foreclosed $686 $180 $691 Percent foreclosed 0.47% 0.12% 0.34% Analysis of the Allowance for Loan Losses
Year Ended June 30, --------------------------------------------------------- 1997 1996 1995 1994 1993 --------------------------------------------------------- (Dollars in thousands) Balance at beginning of year $896 $878 $817 $892 $808 Charge-offs Loans Real estate mortgages 81 30 15 138 85 Consumer loans 38 52 32 23 30 Recoveries Loans Real estate mortgages 1 13 - 1 73 Consumer loans 7 4 8 10 11 ---------------------------------------------------- Net charge-offs 111 65 39 150 31 Provisions charged to operations 373 83 100 75 115 ---------------------------------------------------- Balance at end of year $1,158 $896 $878 $817 $892 ==================================================== Ratio of net charge-offs during the year to average loans outstanding during the year 0.07% 0.04% 0.04% 0.09% 0.03%
13 Additional information regarding the allowance for loan losses is as follows:
At June 30, 1997 ------------------------------------------------------------------ % of Loans in Allowance as a Amount of Each Category to Allowance as a % of Loans Type of Loan Allowance Loans Receivable % of Loan Type Receivable ------------ --------- ---------------- -------------- ---------- (Dollars in thousands) One-to-Four Family Mortgage Loans $ 520 85.31% 0.41% 0.35% Commercial Real Estate Loans 508 6.19% 5.47% 0.34% Consumer & Other Loans 130 8.50% 1.02% 0.09% ------ ------ ---- $1,158 100.00% 0.78%
At June 30, 1996 ------------------------------------------------------------------ % of Loans in Allowance as a Amount of Each Category to Allowance as a % of Loans Type of Loan Allowance Loans Receivable % of Loan Type Receivable ------------ --------- ---------------- -------------- ---------- (Dollars in thousands) One-to-Four Family Mortgage Loans $267 88.16% 0.20% 0.17% Commercial Real Estate Loans 536 5.32% 6.57% 0.35% Consumer & Other Loans 93 6.52% 0.93% 0.06% ---- ------ ---- $896 100.00% 0.58%
At June 30, 1995 ------------------------------------------------------------------ % of Loans in Allowance as a Amount of Each Category to Allowance as a % of Loans Type of Loan Allowance Loans Receivable % of Loan Type Receivable ------------ --------- ---------------- -------------- ---------- (Dollars in thousands) One-to-Four Family Mortgage Loans $214 87.29% 0.12% 0.10% Commercial Real Estate Loans 559 4.52% 5.93% 0.27% Consumer & Other Loans 105 8.19% 0.62% 0.05% ---- ------ ---- $878 100.00% 0.42%
At June 30, 1994 ------------------------------------------------------------------ % of Loans in Allowance as a Amount of Each Category to Allowance as a % of Loans Type of Loan Allowance Loans Receivable % of Loan Type Receivable ------------ --------- ---------------- -------------- ---------- (Dollars in thousands) One-to-Four Family Mortgage Loans $228 86.25% 0.15% 0.13% Commercial Real Estate Loans 566 4.91% 6.34% 0.31% Consumer & Other Loans 23 8.84% 0.14% 0.01% ---- ------ ---- $817 100.00% 0.45%
At June 30, 1993 ------------------------------------------------------------------ % of Loans in Allowance as a Amount of Each Category to Allowance as a % of Loans Type of Loan Allowance Loans Receivable % of Loan Type Receivable ------------ --------- ---------------- -------------- ---------- (Dollars in thousands) One-to-Four Family Mortgage Loans $227 85.67% 0.17% 0.14% Commercial Real Estate Loans 642 5.72% 7.07% 0.40% Consumer & Other Loans 23 8.61% 0.17% 0.02% ---- ------ ---- $892 100.00% 0.56%
14 First Federal regularly reviews the status of non-performing assets to evaluate the adequacy of the allowances for loan and real estate owned losses. The allowance for loan losses is maintained through the provision for loan losses, which is charged to earnings. In addition to the general loan loss allowance, specific valuation allowances have been established for loans and contracts. An asset would warrant such an allowance because the loan balance exceeds the appraised value or because of other reasons to anticipate a loss. At June 30, 1997, specific valuation allowance balances were $508,000 of which approximately 95% was for one real estate contract acquired in a merger with United Savings Association of Central Indiana, F.A., in 1989. The loan balance at June 30, 1997 was $1.3 million. This specific valuation allowance was established at the time the loan was acquired; the loan is current in its payments and as the loan continues to pay down the specific valuation allowance is released. The remainder of the specific valuation allowances are for single family residential mortgage loans in which the Bank anticipates losses to be realized in the future. Investment Activities The Bank is required under federal regulations to maintain a minimum amount of liquid assets which may be invested in specified short-term securities and the Bank is also permitted to make certain other securities investments. Investment decisions are made by authorized officers of First Federal within policies established by First Federal's Board of Directors. At June 30, 1997, First Federal's investment securities portfolio aggregated $44.1 million, consisting exclusively of U.S. agency obligations. See Note 3 of the Notes to the Consolidated Financial Statements for a description of investment securities owned at June 30, 1997. At June 30, 1997, the Bank's investment securities available for sale portfolio aggregated $11.6 million, consisting of U.S. Treasury and agency obligations. See Note 2 of the Notes to the Consolidated Financial Statements for a description of investment securities available for sale owned at June 30, 1997. The current investment policy of the Bank includes the use of both long-term and short-term U.S. government obligations to protect against interest rate fluctuations. The short-term portfolio is managed by the Bank to maximize the earnings on investable funds while also maintaining an adequate level of liquidity. The Bank has the ability and intention to hold its current investment portfolio to maturity. 15 The following tables set forth the values of the investment securities as of the dates indicated. Maturities of each category of securities are also indicated. Investment Securities Portfolio
At June 30, At June 30, At June 30, 1997 1996 1995 -------------------------------------------- -------------- ------------ Amortized Market Wtd. Ave. Amortized Amortized Investment Type (1) Maturity Cost Value Yield Cost Cost - --------------------------------- ------------------------------------------------------------------ -------------- ----------- (Dollars in thousands) U.S. Treasury and agency obligations less than 1 year - - - including mortgage- 1 - 5 years 24,215 23,912 5.58% backed securities 5 - 10 years 11,351 11,159 6.77% more than 10 years 8,499 8,485 7.73% ------------------------------- $44,065 $43,556 6.30% $43,624 $72,005 Federal Home Loan Bank stock N/A 4,941 4,941 7.85% 4,864 3,876 ------------------------------- --------- ---------- Total Investment Securities $49,006 $48,497 6.46% $48,488 $75,881 =============================== ========= ========== - ----------------------------------
(1) There are no tax-exempt securities included in the above totals. Available for Sale Portfolio
At June 30, At June 30, At June 30, 1997 1996 1995 ----------------------------------- ------------------------------ Amortized Market Wtd. Ave. Amortized Amortized Investment Type (1) Maturity Cost Value Yield Cost Cost - ------------------------------------- --------------------------------------------------------- ------------------------------- (Dollars in thousands) U.S. Treasury and agency obligations less than 1 year - - - including mortgage- 1 - 5 years 1,005 994 6.25% backed securities 5 - 10 years 4,560 4,491 7.20% more than 10 years 6,204 6,103 7.07% ---------------------- $11,769 $11,588 7.05% $10,907 - ---------------------- ------- -------- Total Available for Sale Securities $11,769 $11,588 6.23% $10,907 - ====================== ======= ======== - ----------------
(1) There are no tax-exempt securities included in the above totals. 16 The following table sets forth certain information regarding changes in interest income and interest expense of the Bank for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in rates (change in rate multiplied by old volume), (ii) changes in volume (change in volume multiplied by old rate), and (iii) changes in rate/volume.
Year Ended June 30, -------------------------------------------------------------------------- 1996 vs. 1997 (in thousands) Rate/ Rate Volume Volume Total ----------------- ---------------- ---------------- ---------------- Interest earning assets: Loan portfolio (1)(2)(3) $211 ($1,086) ($5) ($880) Investment securities, trading account investments and other short-term deposits (4) (132) (169) (301) - ----------- ------------- ----------- ------------ Total $79 ($1,255) ($5) ($1,181) Interest-bearing liabilities: ------------ ------------- ----------- ------------ Savings accounts ($65) ($1,326) ($4) ($1,395) Short-term borrowings 31 (132) - (101) Advances from FHLB and other borrowings (302) 565 5 268 Total ($336) ($893) $1 ($1,228) Net change in interest income (expense) $415 ($362) ($6) $47 =========== ============ =========== ============
Year Ended June 30, -------------------------------------------------------------------------- 1995 vs. 1996 (in thousands) Rate/ Rate Volume Volume Total ----------------- ---------------- ---------------- ---------------- Interest earning assets: Loan portfolio (1)(2)(3) $1,062 ($100) ($27) $935 Investment securities, trading account investments and other short-term deposits (4) 346 (300) (8) 38 ----------- ------------- ----------- ------------ Total $1,408 ($400) ($35) $973 ----------- ------------- ----------- ------------ Interest-bearing liabilities: Savings accounts $1,626 ($1,527) ($3) $96 Short-term borrowings (96) (129) - (225) Advances from FHLB and other 77 1,156 (3) 1,230 borrowings Total $1,607 ($500) ($6) $1,101 ----------- ------------- ----------- ------------ Net change in interest income (expense) ($199) $100 ($29) ($128) =========== ============ =========== ============
- --------------------------------- (1) The effect of nonaccrual loans on net interest-earning assets is not material. (2) Out-of-period items and adjustments excluded are not material. (3) Loan fees included in interest income are not material. (4) All taxable (no tax-exempt investments held). 17 Yields Earned and Rates Paid; Certain Ratios The following table sets forth for First Federal the weighted average yields earned on its interest-earning assets, average cost of interest-bearing liabilities and the spread between yields earned and rates paid as of June 30, 1997 and for each of the years ended June 30, 1997, 1996, and 1995. Average balances are based on quarter-end balances.
As of June 30, Year Ended June 30, ------------------ -------------------------------------- 1997 1997 1996 1995 ------------------ -------------------------------------- Weighted average yield on loan portfolio 8.53% 8.47% 8.36% 7.82% Weighted average yield on investment securities, trading account investments, and other short-term deposits 6.36% 6.08% 6.25% 5.83% Weighted average yield on all interest-earning assets 7.86% 7.77% 7.75% 7.22% Weighted average rate paid on savings accounts 5.49% 5.50% 5.54% 4.69% Weighted average rate paid on FHLB advances and other borrowings 5.67% 5.60% 5.89% 5.86% Weighted average rate on all interest-bearing liabilities 5.57% 5.54% 5.67% 5.02% Net interest margin 2.58% 2.52% 2.36% 2.35%
Sources of Funds General Savings accounts and other types of deposits have traditionally been the principal source of the Bank's funds for use in lending and for other general business purposes. In addition to deposits, the Bank derives funds from loan repayments, loan sales, FHLB advances, and reverse repurchase agreements. Borrowings may be used on a short-term basis to compensate for seasonal or other reductions in deposits or inflows at less than projected levels, as well as on a longer-term basis to support expanded lending activities. 18 Deposits The Bank has a wide variety of deposit programs designed to attract both short-term and long-term deposits from the general public. These deposit accounts include passbook accounts, NOW accounts, and money market accounts (Super NOW accounts), as well as fixed-rate certificates and money market accounts. The following table sets forth information regarding the types of deposit accounts offered by First Federal at June 30, 1997 in its primary market area:
Interest Rates Type of Deposit Accounts at June 30, 1997 Compounding Minimum - ----------------------------------------------------------------------------------------------------------------------------------- NOW 2.90 - 3.29% Simple Varies by type of account MMDA 2.70 - 5.37% Simple Varies by type of account Passbook/Statement Savings 2.70 - 4.00% Daily Varies by type of account Certificates of Deposit: 91 days 4.00% Simple 1,000 182 days 4.85% Simple 500 7-11 months 5.75% Simple 1,000 1 year 5.00% Daily 500 1 1/2 years 5.10% Daily 500 1 1/2 year stepped-rate 6.09% Simple 1,000 2 years 5.25% Simple 1,000 2 1/2 years 5.35% Daily 500 3 year stepped-rate 6.00% Simple 1,000 3 1/2 years 5.50% Simple 500 5 years 5.75% Simple 500 10 years 6.00% Simple 500 IRA Certificates: 1 1/2 years 5.25% Daily 100 2 1/2 years 5.40% Daily 100 3 1/2 years 5.65% Simple 100 5 years 6.00% Simple 100 Negotiable Certificates: Jumbos generally, 4.25 - 6.25% Simple 100,000 normal rate + .25%
The large variety of savings accounts offered by the Bank has increased the Bank's ability to retain retail deposits and has allowed it to be more competitive in obtaining new funds; but, it has not eliminated the threat of disintermediation (the flow of funds away from savings institutions into direct investment vehicles, such as government and corporate securities). As customers have become more rate conscious and willing to move funds into higher yielding accounts, the ability of the Bank to attract and maintain deposits and the Bank's cost of funds have been, and will continue to be, significantly affected by money market conditions. 19 The following table shows the distribution and weighted average rate of First Federal's deposits by type of deposits as of the dates indicated.
June 30, ----------------------------------------------------------------------------------- 1997 1996 --------------------------------------- ------------------------------------------ % of Wtd. Avg. % of Wtd. Avg. Balance Deposits Rate Balance Deposits Rate --------------------------------------- ------------------------------------------ (Dollars in thousands) (Dollars in thousands) Type of account: Passbook/NOW/Super NOW Variable Rate Savings Accounts(1) $20,193 14.0% 3.8% $17,170 12.5% 3.2% MMDAs 3,015 2.1% 4.1% 3,089 2.3% 3.9% Certificates of Deposit(2) 121,108 83.9% 5.8% 116,889 85.2% 5.8% --------------------- ---------------------- Total $144,316 100.0% 5.5% $137,148 100.0% 5.5% ===================== ======================
June 30, 1995 ------------------------------------------ % of Wtd. Avg. Balance Deposits Rate ------------------------------------------ (Dollars in thousands) Type of account: Passbook/NOW/Super NOW Variable Rate Savings Accounts(1) $38,712 18.5% 2.9% MMDAs 11,120 5.3% 3.0% Certificates of Deposit(2) 159,973 76.2% 5.8% ---------------------------- Total $209,805 100.0% 5.1% ============================
- ---------- (1) Includes noninterest-bearing accounts. (2) Includes negotiated rate certificates of deposit and IRAs. The following table shows the average amount of, and average rate paid on, First Federal's deposits by type of deposit for the periods indicated.
Years Ended June 30, --------------------------------------------------------------------------------------------- 1997 1996 ------------------------------------------ ------------------------------------------ Average % of Wtd. Avg. Average % of Wtd. Avg. Balance Total Rate Balance Total Rate ------------------------------------------ ------------------------------------------ (Dollars in thousands) (Dollars in thousands) Type of account: Passbook/NOW/Super NOW Variable Rate Savings Accounts(1) 17,627 12.5% 3.7% 26,636 16.2% 2.9% MMDAs 3,172 2.3% 4.0% 4,098 2.5% 3.1% Certificates of Deposit(2) 118,875 84.5% 5.8% 133,059 80.9% 6.2% Accrued Interest 1,039 0.7% - 769 0.4% - ------------------------ ------------------------ Total $140,713 100.0% 5.5% $164,562 100.0% 5.5% ======================== ========================
Years Ended June 30, ------------------------------------------ 1995 ------------------------------------------ Average % of Wtd. Avg. Balance Total Rate ------------------------------------------ (Dollars in thousands) Type of account: Passbook/NOW/Super NOW Variable Rate Savings Accounts(1) $47,455 24.7% 3.1% MMDAs 5,406 2.8% 2.8% Certificates of Deposit(2) 138,489 72.2% 5.3% Accrued Interest 504 0.3% - ------------------------ Total $191,854 100.0% 4.7% ======================== - -------------------------- (1) Includes noninterest-bearing accounts. (2) Includes negotiated rate certificates of deposit and IRAs. 20 The following table sets forth information relating to the Bank's deposit flows during the years indicated.
Year Ended June 30, --------------------------------------------------------- 1997 1996 1995 --------------------------------------------------------- (in thousands) Increase (decrease) in deposits before interest credited $2,734 ($77,909) $31,318 Interest credited 4,434 5,252 5,696 ------------- ---------------- ---------------- Net increase (decrease) in deposits $7,168 ($72,657) $37,014 ------------- ---------------- ---------------- Total deposits at end of period $144,316 $137,148 $209,805 ============= ================ ================
The principal methods used by First Federal to attract deposits include the offering of a wide variety of services and accounts, competitive interest rates, and convenient office locations and service hours. In an effort to better serve its primary market area and expand and retain its retail deposit base, the Bank opened a new branch office during fiscal 1997 in Vincennes, Indiana. The primary focus of the new branch office is to better serve the Bank's retail deposit customers. The Bank uses traditional marketing methods to attract new customers and deposits, including mass media advertising and direct mailings. The development of new deposit accounts and services within the past several years has enhanced the Bank's ability to attract deposits. During the fiscal year ended June 30, 1997, the Bank increased its brokered deposits to $45.1 million from $34.1 million. The brokered deposit program serves as an alternative source of funds to compliment the borrowing programs and retail savings programs offered in the Bank's local market. The brokered funds enable the Bank to manage maturities of its deposits in its effort to manage interest rate risk. The following table presents, by various interest rate categories, the contractual maturity of certificates of deposits as of June 30, 1997.
Maturing in the 12 months ending June 30: Balances at June 30, 1997 1998 1999 2000 Thereafter --------------------------------------------------------------------------- (in thousands) Certificates of deposit: Less than 4.00% $ 19 $ 184 $ 6 $ 1 $ - 4.00% to 4.99% 4,435 4,410 - 25 - 5.00% to 5.99% 77,581 67,292 7,360 1,754 1,175 6.00% to 6.99% 25,478 12,924 7,029 2,918 2,607 7.00% to 7.99% 12,228 6,355 2,172 2,274 1,427 8.00% to 9.99% 1,055 458 560 24 13 10.00% or more 140 - - - 140 -------------------------------------------------------------------------- Total certificates of deposit $121,108 $91,623 $ 17,127 $ 6,996 5,362 ==========================================================================
As of June 30, 1997, First Federal had $8.8 million of time deposits with balances over $100,000. Maturity of these deposits is as follows: 21 (in thousands) 3 months or less $2,568 Over 3 months through 6 months 322 Over 6 months through 12 months 3,370 Over 12 months 2,568 ---------------- Total $8,828 ================ Borrowings First Federal obtains advances from the FHLB of Indianapolis collateralized by the security of mortgage loans and investment securities it owns. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. Advances from the FHLB are generally available to member institutions to meet seasonal withdrawals and other withdrawals of savings accounts and to expand lending, as well as to aid the efforts of member institutions to establish better asset/liability management strategies. The Bank had $98.8 million in outstanding advances from the FHLB at June 30, 1997. 1ST BANCORP had a $1.5 million loan outstanding from Ambank, Vincennes, Indiana at June 30, 1997. 1ST BANCORP originally borrowed $1.5 million in June, 1991, of which, $1.0 million was used as a capital infusion to First Federal. An additional $1.0 million was borrowed in December, 1994, all of which was used as a capital infusion to First Federal. First Federal also obtains short-term financing through reverse repurchase agreements. These obligations provide another source to meet short-term demands for additional funds. However, at June 30, 1997, there were no reverse repurchase agreements outstanding. 22 The following table sets forth certain information regarding advances from the FHLB and other borrowings, excluding reverse repurchase agreements, by the Corporation at the end of and during the years indicated. At June 30, ----------------------------------------------- 1997 1996 1995 ----------------------------------------------- Weighted average rate on advances from the Federal Home Loan Bank and other borrowings 5.67% 5.56% 6.01% Year Ended June 30, ------------------------------------------------ 1997 1996 1995 ------------------------------------------------ (Dollars in thousands) Maximum amount of advances from the Federal Home Loan Bank and other borrowings outstanding at any month end $100,346 $99,054 $91,617 Approximate average advances from the Federal Home Loan Bank and other borrowings outstanding $99,218 $89,103 $69,645 Approximate weighted average rate paid on advances from the Federal Home Loan Bank and other borrowings 5.60% 5.94% 5.83% The weighted average rates in the previous table were computed using the average balance based upon quarter end balances and total interest expense. Effects of Inflation The primary assets and liabilities of savings institutions such as First Federal are monetary in nature. As a result, interest rates have a more significant impact on First Federal's performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturity structures of First Federal's assets and liabilities are critical to the maintenance of acceptable performance levels. The principal effect of inflation, as distinct from levels of interest rates, on First Federal's earnings is in the area of other expense. Such expense items as employee compensation, employee benefits, and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans made by First Federal. First Federal is unable to determine the extent, if any, to which the properties securing its loans have appreciated in dollar value due to inflation. 23 Regulation General First Federal, as a federally chartered stock savings bank, is a member of the Federal Home Loan Bank System (the "FHLB System") and its deposits are insured by the Savings Association Insurance Fund ("SAIF"), which is administered by the FDIC. First Federal is subject to extensive regulation by the OTS. Federal associations may not enter into certain transactions unless certain regulatory tests are met or they obtain prior governmental approval and the associations must file reports with these governmental agencies about their activities and their financial condition. Periodic compliance examinations of the Bank are conducted by the OTS which has, in conjunction with the FDIC in certain situations, enforcement powers. This supervision and regulation is intended primarily for the protection of depositors and federal deposit insurance funds. First Federal is also subject to certain reserve requirements under the Board of Governors of the Federal Reserve System ("FRB" or "Federal Reserve Board") regulations. Congress is considering legislation that would require all federal savings associations, such as First Federal, either to convert to a national bank or a state-chartered bank by a specified date to be determined. In addition, under the legislation, the Corporation likely would no longer be regulated as a savings and loan holding company, but rather as a bank holding company. This proposed legislation would abolish the OTS and transfer its functions among the other federal banking regulators. It cannot be predicted with certainty whether or in what form the legislation will be enacted. An OTS regulation establishes a schedule for the assessment of fees upon all savings associations to fund the operations of the OTS. The regulation also establishes a schedule of fees for the various types of applications and filings made by savings associations with the OTS. The general assessment, to be paid on a semi-annual basis, is based upon the savings association's total assets, including consolidated subsidiaries, as reported in a recent quarterly thrift financial report. Currently, the quarterly assessment rates range from .01164% of assets for associations with $67 million in assets or less to .00308% for associations with assets in excess of $35 billion. First Federal's current semi-annual assessment, based upon its March 31, 1997 total assets of $273.2 million, was $36,660. The Bank is also subject to federal and state regulation as to such matters as loans to officers, directors, or principal shareholders, required reserves, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuance or retirements of its own securities, and limitations upon other aspects of banking operations. In addition, the activities and operations of the Bank are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust laws. 24 Federal Home Loan Bank System First Federal is a member of the FHLB System, which consists of 12 regional banks. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System, including the FHLB of Indianapolis. The FHLB System provides a central credit facility primarily for member savings associations and savings banks and other member financial institutions. First Federal is required to hold shares of capital stock in the FHLB of Indianapolis in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations at the end of each calendar year, .3% of its assets or 1/20 (or such greater fraction established by the FHLBank) of outstanding FHLB advances, commitments, lines of credit and letters of credit. First Federal is currently in compliance with this requirement. At June 30, 1997, First Federal's investment in FHLB of Indianapolis stock was $4,941,000. In past years, First Federal received dividends on its FHLBank stock. Certain provisions of The Financial Institution Reform, Recovery, and Enforcement Act of 1989, as amended ("FIRREA"), require all 12 FHLBanks to provide funds for the resolution of troubled savings associations and to establish affordable housing programs through direct loans or interest subsidies on advances to members to be used for lending at subsidized interest rates for low-and-moderate-income, owner-occupied housing projects, affordable rental housing, and certain other community projects. These contributions and obligations have reduced the level of FHLB dividends paid and could adversely affect the value of FHLB stock in the future. For the year ended June 30, 1997, dividends paid to First Federal totaled $382,000, for an annual rate of 7.8%. A reduction in value of such stock may result in a corresponding reduction in First Federal's capital. The FHLB of Indianapolis serves as a reserve or central bank for member institutions within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. It makes advances to members in accordance with policies and procedures established by the FHLB and the Board of Directors of the FHLB of Indianapolis. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. FIRREA prescribes eligible collateral as first mortgage loans less than 90 days delinquent or securities evidencing interests therein, securities (including mortgage-backed securities) issued, insured or guaranteed by the federal government or any agency thereof, FHLB deposits and, to a limited extent, real estate with readily ascertainable value in which a perfected security interest may be obtained. Other forms of collateral may be accepted as overcollateralization or, under certain circumstances, to renew advances. All long-term advances are required to provide funds for residential home financing and the FHLB has established standards of community service that members must meet to maintain access to long-term advances. Currently First Federal has $87.5 million of mortgage loans and $41.3 million of investment securities pledged as collateral for FHLB advances. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. Under current law, savings associations which cease to be Qualified Thrift Lenders are ineligible to receive advances from their FHLB. 25 Liquidity For each calendar month, First Federal is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, specified United States Government, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to an amount not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings during the preceding calendar month. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions, and is currently 5% although the OTS has proposed a reduction of the percentage to 4%. OTS regulations also require each member savings association to maintain an average daily balance of short-term liquid assets at a specified percentage (currently 1%) of the total of its net withdrawable deposit accounts and short-term borrowings during the preceding calendar month. The OTS has proposed abolishing this latter requirement. Monetary penalties may be imposed for failure to meet these liquidity requirements. The monthly average liquidity of First Federal for June, 1997 was 10.44% and its average short-term liquidity ratio at June 30, 1997 was 6.95%. First Federal has never been subject to monetary penalties for failure to meet its liquidity requirements. Real Estate Lending Standards OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits, that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval, and reporting requirements to monitor compliance with the associations's real estate lending policies. The Bank's written real estate lending policies must be reviewed and approved by the associations's board of directors at least annually. Further, each Bank is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions. Safety and Soundness Standards On February 2, 1995, the federal banking agencies adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. On August 27, 1996, the federal banking agencies added asset quality and earnings standards to the safety and soundness guidelines. 26 Insurance of Deposits Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance fund, the BIF for commercial banks and state savings banks, and the SAIF for savings associations and banks that have acquired deposits from savings associations. The FDIC is required to maintain designated levels of reserves in each fund. As of September 30, 1996, the reserves of the SAIF were below the level required by law, primarily because of a significant portion of the assessments paid into the SAIF have been used to pay the cost of prior thrift failures, while the reserves of the BIF met the levels required by law in May, 1995. However, on September 30, 1996, provisions designed to recapitalize the SAIF and eliminate the premium disparity between the BIF and the SAIF were signed into law. See "--Assessments" below. Assessments. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to the target level within a reasonable time and may decrease these rates if the target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. An institution's risk level is determined based on its capital level and the FDIC's level of supervisory concern about the institution. On September 30, 1996, President Clinton signed into law legislation which included provisions designed to recapitalize the SAIF and eliminate the significant premium disparity between the BIF and SAIF. Under the new law, First Federal was charged a one-time special assessment equal to $0.657 per $100 in assessable deposits at March 31, 1995. First Federal recognized this one-time assessment as a non-recurring operating expense of $1,330,000 before tax during the three-month period ending September 30, 1996, and First Federal paid the assessment on November 27, 1996. The assessment was fully deductible for both federal and state income tax purposes. Beginning January 1, 1997, First Federal's annual deposit insurance premium was reduced from .23% to .0644% of total assessable deposits. BIF institutions pay lower assessments than comparable SAIF institutions because BIF institutions pay only 20% of the rate paid by SAIF institutions on their deposits with respect to obligations issued by the federally-chartered corporation which provided some of the financing to resolve the thrift crisis in the 1980's ("FICO"). The 1996 law also provides for the merger of the SAIF and the BIF by 1999, but not until such time as bank and thrift charters are combined. Until the charters are combined, savings associations with SAIF deposits may not transfer deposits into the BIF system without paying various exit and entrance fees, and SAIF institutions will continue to pay higher FICO assessments. Such exit and entrance fees need not be paid if a SAIF institution converts to a bank charter or merges with a bank, as long as the resulting bank continues to pay applicable insurance assessments to the SAIF, and as long as certain other conditions are met. 27 Regulatory Capital Currently, savings associations are subject to three separate minimum capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital requirement, and (iii) a risk-based capital requirement. The leverage limit requires that savings associations maintain "core capital" of at least 3% of total assets. Core capital is generally defined as common stockholders' equity (including retained income), noncumulative perpetual preferred stock and related surplus, certain minority equity interests in subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing rights, and purchased credit card relationships (subject to certain limitations) less nonqualifying intangibles. Under the tangible capital requirement, a savings association must maintain tangible capital (core capital less all intangible assets except purchased mortgage servicing rights which may be included after making the above-noted adjustments in an amount up to 100% of tangible capital) of at least 1.5% of total assets. Under the risk-based capital requirements, a minimum amount of capital must be maintained by a savings association to account for the relative risks inherent in the type and amount of assets held by the saving association. The risk-based capital requirement requires a savings association to maintain capital (defined generally for these purposes as core capital plus general valuation allowances and permanent or maturing capital instruments such as preferred stock and subordinated debt less assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four categories (0-100%) with a credit risk-free asset such as cash requiring no risk-based capital and an asset with a significant credit risk such as a delinquent commercial loan being assigned a factor of 100%. At June 30, 1997, based on the capital standards then in effect, First Federal was in compliance with the fully phased-in capital requirements. The OTS has delayed implementation of a rule which sets forth the methodology for calculating an interest rate risk component to be incorporated into the OTS regulatory capital rule. Under the rule, only savings associations with "above normal" interest rate risk (institutions whose portfolio equity would decline in value by more than 2% of assets in the event of a hypothetical 200 basis point move in interest rates) will be required to maintain additional capital for interest rate risk under the risk-based capital framework. A savings association with an "above normal" level of exposure will have to maintain additional capital equal to one-half the difference between its measured interest rate risk (the most adverse change in the market value of its portfolio resulting from a 200 basis point move in interest rates divided by the estimated market value of its assets) and 2%, multiplied by the market value of its assets. That dollar amount of capital is in addition to a savings association's existing risk-based capital requirement. Although the OTS has decided to delay implementation of this rule, it will continue to monitor closely the level of interest rate risk at individual savings associations and it retains the authority, on a case-by-case basis, to impose additional capital requirements for individual savings associations with significant interest rate risk. In periods of rapidly changing interest rates, the Bank's balance sheet is subject to significant fluctuations in market value (interest rate risk exposure). However, as the delayed interest rate risk rules proposed by the OTS currently read, the Bank at June 30, 1997, would have no additional capital requirement. The Bank's management remains cognizant of the proposed rules and continues to monitor its interest rate risk position. 28 The following is a summary of First Federal's regulatory capital and capital requirements at June, 30 1997: Tangible Core Risk-based Capital Capital Capital --------------- -------------- ----------- (Dollars in thousands) Regulatory Capital $22,436 $22,436 $23,086 Minimum capital requirement 4,059 8,117 11,555 ------------------------------------------ Excess capital $18,377 $14,319 $11,531 Regulatory capital ratio 8.3% 8.3% 16.0% Minimum capital ratio 1.5% 3.0% 8.0% If an association is not in compliance with its capital requirements, the OTS is required to prohibit asset growth and to impose a capital directive that may restrict, among other things, the payment of dividends and officers' compensation. In addition, the OTS and FDIC generally are authorized to take enforcement actions against a savings association that fails to meet its capital requirements, which actions may include restrictions on operations and banking activities, the imposition of a capital directive, a cease and desist order, civil monetary penalties or harsher measures such as the appointment of a receiver or conservator or a forced merger into another institution. Prompt Corrective Action The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FedICIA") requires, among other things, federal bank regulatory authorities to take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, FedICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At June 30, 1997, the Bank was categorized as "well capitalized" meaning that the Bank's total risk-based capital ratio exceeded 10%, its Tier I risk-based ratio exceeded 6%, and its leverage ratio exceeded 5%, and the Bank was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. Capital Distribution Regulations An OTS regulation imposes limitations upon all "capital distributions" by savings associations, including cash dividends, payments by a savings association to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash- out merger and other distributions charged against capital. The regulation establishes a three-tiered system of regulation, with the greatest flexibility being afforded to well-capitalized institutions. A savings association which has total capital (immediately prior to and after giving effect to the capital distribution) that is at least equal to its fully phased-in capital requirements would be a Tier 1 institution. A savings association that has total capital at least equal to its minimum capital requirements, but less than its fully phased-in capital requirements, would be a Tier 2 institution. A savings association having total capital that is less than its minimum capital requirements would be a Tier 3 institution. However, a savings association which otherwise qualifies as a Tier 1 institution may be designated by the OTS as a Tier 2 or Tier 3 institution if the OTS determines that the savings association is "in need of more than normal supervision." First Federal is currently a Tier 1 institution. 29 A Tier 1 Institution could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year up to 100% of its net income to date during the calendar year plus an amount that would reduce by one-half its "surplus capital ratio" (the excess over its fully phased-in capital requirements) at the beginning of the calendar year. Any additional amount of capital distributions would require prior regulatory approval. The OTS has proposed revisions to these regulations which would permit savings associations to declare dividends in amounts which would assure that they remain adequately capitalized following the dividend declaration. Savings associations in a holding company system which are rated Camel 1 or 2 and which are not in troubled condition would need to file a prior notice with the OTS concerning such dividend declaration. Federal Reserve System Under FRB regulations, First Federal is required to maintain reserves against its transaction accounts (primarily checking and NOW accounts), and non-personal money market deposit accounts. The effect of these reserve requirements is to increase First Federal's cost of funds. First Federal is in compliance with its reserve requirements. A federal savings association, like other depository institutions maintaining reservable accounts, may borrow from the Federal Reserve Bank "discount window," but the FRB's regulations require the savings association to exhaust other reasonable alternative sources, including borrowing from its regional FHLB, before borrowing from the Federal Reserve Bank. FedICIA imposes certain limitations on the ability of undercapitalized depository institutions to borrow from Federal Reserve Banks. Holding Company Regulations The Corporation is a savings and loan holding company within the meaning of the Home Owners' Loan Act, as amended ("HOLA"), and is subject to regulatory oversight of the Director of the OTS. As such, the Corporation is registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, First Federal is subject to certain restrictions in its dealings with the Corporation and with other companies affiliated with the Corporation. The HOLA generally prohibits a savings and loan holding company, without prior approval of the Director of the OTS, from (i) acquiring control of any other savings association or savings and loan holding company or controlling the assets thereof or (ii) acquiring or retaining more than 5 percent of the voting shares of a savings association or holding company thereof which is not a subsidiary. Additionally, under certain circumstances, a savings and loan holding company is permitted to acquire, with the approval of the Director of OTS, up to 15 percent of previously unissued voting shares of an under-capitalized savings association for cash without that savings association being deemed controlled by the holding company. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock may also acquire control of any savings association, other than a subsidiary association, or any other savings and loan holding company. 30 The Corporation currently is a unitary savings and loan holding company, and there are generally no restrictions on the activities of a unitary savings and loan holding company. However, if the Director of the OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness, or stability of its subsidiary savings association, the Director of the OTS may impose such restrictions as deemed necessary to address such risk and limiting (i) payment of dividends by the savings association, (ii) transactions between the savings association and its affiliates, and (iii) any activities of the savings association that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings association. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings association subsidiary of such a holding company fails to meet the Qualified Thrift Lender ("QTL") test, then such unitary holding company shall also presently become subject to the activities restrictions applicable to multiple holding companies. (Additional restrictions on securing advances from the Federal Home Loan Bank also apply.) See "-- Qualified Thrift Lender." At June 30, 1997, First Federal's asset composition was in excess of that required to qualify First Federal as a Qualified Thrift Lender. If the Corporation were to acquire control of another savings association other than through merger or other business combination with First Federal, the Corporation would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings association meets the QTL test, the activities of the Corporation and any of its subsidiaries (other than First Federal or other subsidiary savings associations) would thereafter be subject to further restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings association shall commence, or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings association, (iv) holding or managing properties used or occupied by a subsidiary savings association, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by the FSLIC by regulation as of March 5, 1987 to be engaged in by multiple holding companies or (vii) those activities authorized by the FRB as permissible for bank holding companies, unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS prior to being engaged in by a multiple holding company. The Director of the OTS may also approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 5, 1987, or if the laws of the state in which the association to be acquired is located specifically permit associations to be acquired by state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings associations). Also, the Director of the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. 31 No subsidiary savings association of a savings and loan holding company may declare or pay dividends on its permanent or nonwithdrawable stock unless it first gives the Director of OTS thirty days advance notice of such declaration and payment. Any dividend declared during such period, or without the giving of such notice, shall be invalid. Federal Securities Law The shares of Common Stock of the Corporation are registered with the Securities and Exchange Commission (the "SEC") under the 1934 Act. The Corporation is therefore subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the 1934 Act and the rules of the SEC thereunder. Shares of Common Stock held by persons who are affiliates of the Corporation may not be resold without registration or unless sold in accordance with the resale restrictions of Rule 144 under the 1933 Act. If the Corporation meets the current public information requirements under Rule 144, each affiliate of the Corporation who complies with the other conditions of Rule 144 (including a one-year holding period and conditions that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Corporation or (ii) the average weekly volume of trading in such share during the preceding four calendar weeks. Qualified Thrift Lender Savings associations must meet a QTL test which requires a savings association to have at least 65% of its portfolio assets invested in "qualified thrift investments" on a monthly average basis in nine out of every twelve months. Qualified thrift investments under the QTL test include: (i) loans made to purchase, refinance, construct, improve or repair domestic residential housing or manufactured housing; (ii) home equity loans; (iii) mortgage-backed securities; (iv) direct or indirect existing obligations of either the FDIC or the FSLIC for ten years from the date of issuance, if issued prior to July 1, 1989; (v) obligations of the FDIC, FSLIC Resolution Fund and the Resolution Trust Corporation for a five year period from July 1, 1989, if issued after such date; (vi) FHLB stock; (vii) 50% of the dollar amount of residential mortgage loans originated and sold within 90 days or origination; (viii) investments in service corporations that derive at least 80% of their gross revenues from activities directly related to purchasing, refinancing, constructing, improving or repairing domestic residential real estate or manufacturing housing; (ix) 200% of the dollar amount of loans and investments made to acquire, develop and construct one-to four-family residences that are valued at no more than 60% of the median value of homes constructed in the area; (x) 200% of the dollar amount of loans for the acquisition or improvement of residential real property, churches, schools, and nursing homes located within, and loans for any purpose to any small business located within, an area where credit needs of its low and moderate income residents are determined not to have been adequately met; (xi) loans for the purchase, construction, improvement or upkeep of churches, schools, nursing homes and hospitals not qualified under (x); (xii) up to 10% of portfolio assets held in consumer loans or loans for educational purposes; and (xiii) FHLMC and FNMA stock. However, the aggregate amount of investments in categories (vii)-(xiii) which may be taken into account for the purpose of whether an institution meets the QTL test cannot exceed 15% of portfolio assets. Portfolio assets under the QTL test include all of an association's assets less (i) goodwill and other intangibles, (ii) the value of property used by the association to conduct its business, and (iii) its liquid assets as required to be maintained under law up to 20% of total assets. A savings association that fails to meet the QTL test must either convert to a bank (although its deposit insurance assessments will continue to be those of, and payments will continue to be made to, the SAIF) or be subject to the following penalties: (i) it may not enter into any new activity except for those permissible for a national bank and for a savings association; (ii) its branching activities shall be limited to those of a national bank; (iii) it shall not be eligible for any new FHLB advances; and (iv) it shall be bound by regulations applicable to national banks respecting payment of dividends. Three years after failing the QTL test the association must (i) dispose of any investment or activity not permissible for a national bank and a savings association and (ii) repay all outstanding FHLB advances. If such a savings association is controlled by a savings and loan holding company, then the holding company must within a prescribed time period become registered as a bank holding company and become subject to all rules and regulations applicable to bank holding companies (including restrictions as to the scope of permissible business activities). 32 A savings association failing to meet the QTL test may requalify as a QTL if it thereafter meets the QTL test. In the event of such requalification, it shall not be subject to the penalties described above. A savings association which subsequently again fails to qualify under the QTL test shall become subject to all of the described penalties without application of any waiting period. At June 30, 1997, 76.2% of First Federal's portfolio assets (as defined on that date) were invested in qualified thrift investments (as defined on that date), and therefore First Federal's asset composition was in excess of that required to qualify First Federal as a QTL. First Federal does not expect to change significantly its lending or investment activities in the near future; and, therefore it expects to continue to qualify as a QTL, although there can be no such assurance. Community Reinvestment Act Matters Under current law, ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") must be disclosed. The disclosure will include both a four-unit descriptive rating - using terms such as satisfactory and unsatisfactory - and a written evaluation of each institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the Community Reinvestment Act and its record of lending to first-time home buyers. The FHLBs have established an "Affordable Housing Program" to subsidize the interest rate of advances to member associations engaged in lending for long-term, low- and moderate-income, owner-occupied and affordable rental housing at subsidized rates. First Federal has participated in such programs in the past and has plans to participate in the future. The examiners have determined that First Federal has a satisfactory record of meeting community credit needs. 33 Taxation Federal Taxation Historically, savings associations, such as First Federal, have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, the Bank is no longer be able to use the percentage of taxable income method of computing its allocable tax bad debt deduction. The Bank is required to compute its allocable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. First Federal will recapture approximately $440,000 over a six year period beginning in fiscal 1997. In addition, the pre-1988 reserve, in which no deferred taxes have been recorded, will not have to be recaptured into income unless (i) the Bank no longer qualifies as a bank under the Code, or (ii) excess dividends are paid out by the Bank. Depending on the composition of its items of income and expense, a savings institution may be subject to the alternative minimum tax. A savings institution must pay an alternative minimum tax equal to the amount (if any) by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before this adjustment and before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid that is attributable to most preferences (although not to post-August 7, 1986 tax-exempt interest) can be credited against regular tax due in later years. The Corporation and its subsidiaries file a consolidated federal income tax return, which has the effect of eliminating intercompany distributions, including dividends, in the computation of consolidated taxable income. Income of the Corporation generally would not be taken into account in determining the bad debt deduction allowed to First Federal, regardless of whether a consolidated tax return is filed. However, certain "functionally related" losses of the Corporation would be required to be taken into account in determining the permitted bad debt deduction. The Corporation's federal income tax returns have not been audited in the last five years. 34 State Taxation For its taxable year beginning January 1, 1990, First Federal became subject to Indiana's Financial Institutions Tax ("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for purposes of FIT, begins with taxable income as defined by Section 63 of the Internal Revenue Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. Competition The Bank's primary market area consists of Knox County, Indiana. A majority of the Bank's savings deposits are received from residents of its primary market area, and a majority of its loans are secured by properties in this area. First Federal faces substantial competition both in the attraction of deposits and in the making of mortgage and other loans in its primary market area. Competition for the origination of real estate loans principally comes from other savings institutions, commercial banks, and mortgage banking companies located in its primary market area. Under current law, bank holding companies may acquire savings associations. Savings associations may also acquire banks under federal law. To date, several bank holding company acquisitions of healthy savings associations in Indiana have been completed. Affiliations between banks and healthy savings associations based in Indiana may also increase the competition faced by the Bank and the Corporation. In addition, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of- state branches either through merger or de novo expansion. The State of Indiana enacted legislation establishing interstate branching provisions for Indiana state chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law authorizes Indiana banks to branch interstate by merger or de novo expansion and authorizes out-of-state banks meeting certain requirements to branch into Indiana by merger or de novo expansion. The Indiana Branching Law became effective March 15, 1996. This new legislation may also result in increased competition for the Corporation and the Bank. 35 The primary factors influencing competition for deposits are interest rates, service and convenience of office locations. The Bank competes for loan originations primarily through the efficiency and quality of services it provides borrowers and through interest rates and loan fees it charges. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels, and other factors that are not readily predictable. Current Accounting Issues In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 provides computation, presentation, and disclosure requirements for earnings per share. The requirements for the presentation of primary and fully diluted earnings per share will be replaced with basic and diluted earnings per share. SFAS 128 Statement is effective for financial statements for both interim and annual periods ending after December 15, 1997, and earlier application is not permitted. Due to the Corporation's current capital structure and limited common stock equivalents, the Statement is not expected to have a material impact on the financial statements or results of operations of the Corporation. In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"). SFAS 129 was issued in connection with SFAS 128 and establishes standards for disclosing information about an entity's capital structure. SFAS 129 is effective for periods ending after December 15, 1997. The adoption of SFAS 129 is not expected to have any impact on the financial statements or results of operations of the Corporation. In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and displaying comprehensive income and its components in the financial statements. Comprehensive income is the total of net income and all nonowner changes in shareholders' equity. SFAS 130 is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. The Statement will require new disclosures by the Corporation, but is not expected to have a material impact on the financial statements or results of operations of the Corporation. In June 1997, The FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"), which introduces new guidance on segment reporting. SFAS 131 is effective for fiscal years beginning after December 15, 1997, with earlier application encouraged. The Statement is not expected to have a material impact on the financial statements or results of operations of the Corporation. Employees As of September 9, 1997, 1ST BANCORP and its subsidiaries had 81 full-time and 6 part-time employees. None of these employees is represented by a collective bargaining agreement or union, and the Corporation believes it enjoys harmonious relations with its personnel. 36 Item 2. Properties. At June 30, 1997, 1ST BANCORP and First Federal conducted their business and operations from the main office located at 101 North Third Street, Vincennes, Indiana; a drive-up branch facility at 1700 Willow Street, Vincennes, Indiana; and its office annex at 102 North Fifth Street, Vincennes, Indiana. The property and buildings are owned by the Bank with a net book value of $2.0 million at June 30, 1997. First Financial conducted its business from its office located at 626 Veterans Drive, Vincennes, Indiana. This property and building are owned by First Financial and had a net book value of $412,000 at June 30, 1997. A portion of the First Financial building is leased to an independent third party. Item 3. Legal Proceedings. Neither 1ST BANCORP, First Federal, nor First Financial is involved in any legal proceedings, other than routine proceedings occurring in the ordinary course of its business. Item 4. Submission of Matters to Vote of Security Holders. No matter was submitted to the Corporation's shareholders during the quarter ended June 30, 1997. Item 4.5 Executive Officers of the Corporation. Presented below is certain information regarding the executive officers of the Corporation or the Corporation's wholly owned subsidiary, First Federal Bank, A Federal Savings Bank: Frank Baracani (age 55) has been President and Director of the Corporation and First Federal during the past five years. Donald G. Bell (age 67) has been Vice President and Director of the Corporation; Director of First Federal; and Partner with the law firm of Hart, Bell, Cummings, Ewing & Stuckey, Vincennes, Indiana during the last five years. C. James McCormick (72) has been Chairman of the Board, Director and Chief Executive Officer of the Corporation, and Chairman of the Board and Director of First Federal during the last five years. 37 Mary Lynn Stenftenagel (43) has been Director and Secretary - Treasurer of the Corporation and Director and Chief Financial Officer of First Federal during the last five years. Ms. Stenftenagel has been Executive Vice President and Secretary of First Federal since October, 1993 and for one year prior she served as Senior Vice President of First Federal. John J. Summers (67) has been Vice Chairman of the Board and Director of the Corporation and Vice Chairman of the Board and Director of First Federal during the last five years. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The information required herein is incorporated by reference from "Market Information" on page 40 of 1ST BANCORP's 1997 Annual Report to Shareholders (the "Annual Report to Shareholders"). Item 6. Selected Financial Data. The information required herein is incorporated by reference from "Selected Financial Highlights" on page 3 of the Annual Report to Shareholders. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required herein is incorporated by reference from pages 7 to 14 of the Annual Report to Shareholders. Item 7A. Quantitative and Qualitative Disclosures about Market Risks Because the majority of the Corporation's balance sheet consists of interest earning assets and interest bearing liabilities, it is exposed to interest rate risk. Therefore, additional information is being provided regarding the exposure to this interest rate risk. The OTS requires all regulated thrift institutions to calculate the estimated change in the institution's net portfolio value ("NPV") assuming instantaneous, parallel shifts in the Treasury yield curve of 100 to 400 basis points, either up or down, and in 100 basis point increments. The NPV is defined as the present value of expected cash flows from existing assets less the present value of expected cash flows from existing liabilities plus the present value of net expected cash inflows from existing off-balance sheet contracts. 38 The OTS provides all institutions that file a schedule entitled the Consolidated Maturity & Rate schedule ("CMR") as a part of their quarterly Thrift Financial Report with an interest rate sensitivity report of NPV. The OTS simulation model uses a discounted cash flow analysis and an option-based pricing approach to measuring the interest rate sensitivity of NPV. The OTS model estimates the economic value of each type of asset, liability, and off-balance sheet contract under the assumption that the Treasury yield curve shifts instantaneous and parallel up and down 100 to 400 basis points in 100 basis point increments. The OTS allows thrifts under $500 million in total assets to use the results of their interest rate sensitivity model, which is based on information provided by the institution, to estimate the sensitivity of NPV. The OTS model utilizes an option-based pricing approach to estimate the sensitivity of mortgage loans. The most significant embedded option in these types of assets is the prepayment option of the borrowers. The OTS model uses various price indications and prepayment assumptions to estimate sensitivity of mortgage loans. At June 30, 1997, the price indications for adjustable rate mortgage loans ranged from 87% to 108% of the underlying mortgage balances. The price indications for fixed rate mortgage loans securities varied from 69% to 120% of the underlying mortgage balances. Prepayment rates for mortgage loans ranged from 4% to 76% Constant Prepayment Rate ("CPR") as of June 30, 1997. The NPV sensitivity of the structured securities segment of the investment securities portfolio is provided by the Bank to the OTS and is not simulated by the OTS model. The sensitivity to interest rate changes of the Bank's structured securities is obtained by simulation analysis performed by independent third party investment brokers. The remaining investment securities are valued by the OTS model based upon a discounted cash flow approach which assumes semi-annual interest cash flows with principal repaid at maturity. The cash flows are discounted based upon Treasury security yields with similar maturities. In the OTS model, the value of deposit accounts appears on the asset and liability side of the NPV analysis. In estimating the value of certificates of deposit ("CD") accounts, the liability portion of the CD is represented by the implied value when comparing the difference between the CD face rate and available wholesale CD rates. On the asset side of the NPV calculation, the value of the "customer relationship" due to the rollover of retail CD deposits represents an intangible asset in the NPV calculation. 39 Other deposit accounts such as transaction accounts, money market deposit accounts, passbook accounts, and noninterest bearing accounts also are included on the asset and liability side of the NPV calculation in the OTS model. These accounts are valued at 100% of the respective account balances on the liability side. On the asset side of the analysis, the value of the "customer relationship" of the various types of deposit accounts is reflected as a deposit intangible. The NPV sensitivity of borrowed funds is estimated by the OTS model based on a discounted cash flow approach. The cash flows are assumed to consist of monthly or semi-annual interest payments with principal paid at maturity (dependent upon the type of borrowing). These cash flows are discounted based upon London Interbank Offered Rates ("LIBOR"). The OTS model is based only on the Bank level balance sheet. Various asset and liability categories were adjusted to reflect the consolidated NPV of the Corporation. These adjustments were not material to the outcome of the simulation analysis of NPV. The following table sets forth the Corporation's interest rate sensitivity of NPV as of June 30, 1997.
Net Portfolio Value Net Portfolio as a % of Present Value Value of Assets ---------------------------------------------------------------------------------- (Dollars in thousands) Change in Rates $ Amount $ Change % Change NPV Ratio Change - --------- ---------------------------------------------------------------------------------- +400 bp 9,894 (20,683) -68% 3.98% (705)bp +300 bp 15,536 (15,041) -49% 6.06% (496)bp +200 bp 21,103 (9,474) -31% 8.00% (302)bp +100 bp 26,342 (4,235) -14% 9.72% (131)bp 0 bp 30,577 11.03% - -100 bp 33,701 3,124 10% 11.92% 90 bp - -200 bp 35,986 5,409 18% 12.53% 151 bp - -300 bp 38,593 8,016 26% 13.22% 219 bp - -400 bp 41,940 11,363 37% 14.09% 306 bp
Various strategies are in place to control the Corporation's exposure to interest rate risk. The Corporation has an Asset/Liability Committee ("ALCO") comprised of senior management personnel which is primarily responsible for management of the Corporation's exposure to interest rate risk. The ALCO actively monitors the interest rate risk position and develops strategies to minimize its potential negative effects on the Corporation's financial condition. As its primary strategy to control the potential negative effects of the Corporation's market risk exposure, the ALCO actively adjusts its interest earning asset and interest bearing liability composition and pricing. Item 8. Financial Statements and Supplementary Data. The information required herein is incorporated by reference from pages 16 to 37 of the Annual Report to Shareholders. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. There were no such changes or disagreements during the applicable period. 40 PART III Item 10. Directors and Executive Officers of the Registrant. The information required herein with respect to directors is incorporated by reference from the definitive proxy statement of 1ST BANCORP, dated September 26, 1997 (the "Proxy Statement") under "Proposal I - Election of Directors" on pages 4 to 5 of the Proxy Statement. Information required herein pursuant to Item 405 of Regulation S-K (Para. 229.405 of this chapter) is incorporated by reference from page 10 of the Proxy Statement. Information concerning the Corporation's executive officers is included in Item 4.5 in Part I of this report. Item 11. Executive Compensation. The information required herein is incorporated by reference from pages 7 to 9 of the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required herein is incorporated by reference from pages 3 to 6 of the Proxy Statement. Item 13. Certain Relationships and Related Transactions. The information required herein is incorporated by reference from page 10 of the Proxy Statement. PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Documents Filed as Part of this Report The following financial statements are incorporated by reference (see Exhibit 13): Page in the 1997 Annual Report to Financial Statements Shareholders Independent Auditors' Report 15 Consolidated Statements of Financial Condition as of June 30, 1997, and 1996. 16 Consolidated Statements of Earnings for the Years Ended June 30, 1997, 1996, and 1995. 17 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1997, 1996, and 1995. 18 Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1996, and 1995. 19 Notes to Consolidated Financial Statements. 20 (b) There were no reports on Form 8-K filed during the quarter ended June 30, 1997. (c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on page 43. (d) All schedules are omitted as the required information either is not applicable or is included in the Consolidated Financial Statements or related notes. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 1ST BANCORP Date: September 24, 1997 By:/s/ C. James McCormick --------------------------------- C. James McCormick Chief Executive Officer Date: September 24, 1997 By:/s/ Frank D. Baracani --------------------------------- Frank D. Baracani Director and President Each person whose individual signature appears below hereby authorizes Frank D. Baracani as attorney-in-fact with full power of substitution to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Form 10-K. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities and on the dates set forth below: /s/ C. James McCormick Date: September 24, 1997 - ------------------------------------------ C. James McCormick, Chairman of the Board and Chief Executive Officer /s/ John J. Summers Date: September 24, 1997 - ------------------------------------------ John J. Summers, Vice Chairman of the Board /s/ Frank D. Baracani Date: September 24, 1997 - ------------------------------------------ Frank D. Baracani, Director, President /s/ Donald G. Bell Date: September 24, 1997 - ------------------------------------------ Donald G. Bell, Director, Vice President /s/ Mary Lynn Stenftenagel Date: September 24, 1997 - ------------------------------------------ Mary Lynn Stenftenagel, Director, Secretary/Treasurer (Principal Accounting and Financial Officer) /s/ R. William Ballard Date: September 24, 1997 - ------------------------------------------ R. William Ballard, Director /s/ Rahmi Soyugenc Date: September 24, 1997 - ------------------------------------------ Rahmi Soyugenc, Director /s/ Ruth Mix Carnahan Date: September 24, 1997 - ------------------------------------------ Ruth Mix Carnahan, Director /s/ James W. Bobe Date: September 24, 1997 - ------------------------------------------ James W. Bobe, Director EXHIBIT INDEX No. Exhibits Page 3a Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Registrant's Registration Statement on Form S-4, Registration No. 33-24587, filed September 28, 1988 (the "Registration Statement") * 3b Restated By-Laws of 1ST BANCORP (incorporated by reference to Exhibit 3b to the Registrant's Form 10-K for the year ended June 30, 1994). * 10a Incentive Stock Option Plan (incorporated by reference from Exhibit 10a-1 to the Registrant's Form 10-K for the year ended June 30, 1991). * 10b 1ST BANCORP Stock Option Plan (incorporated by reference from Exhibit 10b-1 to the Registrant's Form 10-K for the year ended June 30, 1991). * 10c First Federal Management Incentive Plan for Fiscal Year 1994 (incorporated by reference to Exhibit 10c to the Registrant's Form 10-K for the year ended June 30, 1994). * 10d Form of Director Deferred Compensation Agreement, dated July 1, 1993, between First Federal and each of C. James McCormick, John J. Summers, Frank D. Baracani, Mary Lynn Stenftenagel, Robert W. Ballard, Ruth Mix Carnahan, Donald G. Bell, Rahmi Soyugenc, and James W. Bobe (incorporated by reference to Exhibit 10d to the Registrant's Form 10-K for the year ended June 30, 1994). * 10e Form of Executive Supplemental Retirement Income Agreement, dated July 1, 1993, between First Federal and each of C. James McCormick, Frank D. Baracani, Mary Lynn Stenftenagel, Robert W. Ballard, Carroll C. Hamner, Wayne P. Kaufman, and Ronald E. McGill (incorporated by reference to Exhibit 10d to the Registrant's Form 10-K for the year ended June 30, 1994). * 10f 1ST BANCORP 1997 Employee Stock Purchase Plan (incorporated by reference to Exhibit A to the Registrant's 1996 Proxy Statement). 13 Annual Report to Shareholders __ 21 Subsidiaries of the Registrant __ 23.1 Independent Auditors' Consent __ 23.2 Independent Auditors' Consent __ 23.3 Independent Auditors' Consent __ 27 Financial Data Schedule (to be filed electronically) (*) Previously filed with the SEC and by this reference incorporated into this Annual Report. 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 EX-21 3 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Subsidiaries of 1ST BANCORP The following chart indicates the corporate structure, including subsidiaries of 1ST BANCORP: 1ST BANCORP | | | | -------------------------------------------------------------- | | | | | | First Federal Bank, A FSB First Financial Insurance First Title Company | Agency Inc. | | | Financial Services of Southern Indiana Corporation EX-23.1 4 KPMG CONSENT RE: REG. STATEMENT (NO. 33-60162) [KPMG Peat Marwick LLP letterhead] Independent Auditors' Consent The Board of Directors 1ST BANCORP: We consent to incorporation by reference in the registration statement (No. 33-60162) on Form S-3 of 1ST BANCORP of our report dated July 17, 1997, relating to the consolidated statements of financial condition of 1ST BANCORP and subsidiaries as of June 30, 1997 and 1996 and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1997, which report appears in the June 30, 1997 annual report on Form 10-K of 1ST BANCORP. /s/ KPMG Peat Marwick LLP Indianapolis, Indiana September 25, 1997 EX-23.2 5 KPMG CONSENT RE: REG. STATEMENT (NO. 33-13145) [KPMG Peat Marwick LLP letterhead] Independent Auditors' Consent The Board of Directors 1ST BANCORP: We consent to incorporation by reference in the registration statement (No. 33-13145) on Form S-8 of 1ST BANCORP of our report dated July 17, 1997, relating to the consolidated statements of financial condition of 1ST BANCORP and subsidiaries as of June 30, 1997 and 1996 and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1997, which report appears in the June 30, 1997 annual report on Form 10-K of 1ST BANCORP. /s/ KPMG Peat Marwick LLP Indianapolis, Indiana September 25, 1997 EX-23.3 6 KPMG CONSENT RE: REG. STATEMENT (NO. 33-38404) [KPMG Peat Marwick LLP letterhead] Independent Auditors' Consent The Board of Directors 1ST BANCORP: We consent to incorporation by reference in the registration statement (No. 33-38404) on Form S-8 of 1ST BANCORP of our report dated July 17, 1997, relating to the consolidated statements of financial condition of 1ST BANCORP and subsidiaries as of June 30, 1997 and 1996 and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1997, which report appears in the June 30, 1997 annual report on Form 10-K of 1ST BANCORP. /s/ KPMG Peat Marwick LLP Indianapolis, Indiana September 25, 1997 EX-27 7 FDS FOR 1ST BANCORP
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1ST BANCORP AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000840458 1ST BANCORP 1,000 U.S. DOLLARS 12-MOS JUN-30-1997 JUL-1-1996 JUN-30-1997 1.000 523 19,771 0 0 11,588 44,065 43,556 175,767 1,158 270,490 144,316 0 3,545 100,296 698 0 0 21,635 270,490 15,147 3,870 677 19,694 7,678 13,292 6,402 373 (29) 8,555 572 572 0 0 821 1.17 1.17 7.77 2,330 0 0 2,339 896 119 8 1,158 508 0 650
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