-----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, EVa8x0ORqc6ins1PG2uC0W9kn5hVPXOJgKeeGGv/G2F6HYtQMvmh4vZNPxKax7Dp Q+TtnxqNBItAYt9xHYSAbQ== 0000908834-98-000260.txt : 19981002 0000908834-98-000260.hdr.sgml : 19981002 ACCESSION NUMBER: 0000908834-98-000260 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 DATE AS OF CHANGE: 19981001 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST BANCORP /IN/ CENTRAL INDEX KEY: 0000840458 STANDARD INDUSTRIAL CLASSIFICATION: 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: 98716750 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 6/30/98 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1998 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________to__________________ Commission File Number : 0-17915 1ST BANCORP (Exact name of registrant as specified in its charter) Indiana 35-1775411 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification Number) 101 North Third Street Vincennes, Indiana 47591 (Address of Principal executive offices) (Zip Code) Registrant's telephone number, including area code: (812)885-2255 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock ($1.00 par value) Title of Class Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (Para. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. |X| State the aggregate market value of the voting stock held by nonaffiliates of the registrant: $33,353,982 as of September 11, 1998. Number of shares of Common Stock outstanding as of September 11, 1998: 1,096,189 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended June 30, 1998 are incorporated into Part II. 1ST BANCORP FORM 10-K INDEX Page No. Forward Looking Statement......................................................3 Part I Item 1. Business.............................................................3 Item 2. Properties...........................................................6 Item 3. Legal Proceedings...................................................36 Item 4. Submission of Matters to a Vote of Security Holders.................36 Item 4.5 Executive Officers of the Corporation...............................37 Part II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters..............................................38 Item 6. Selected Financial Data............................................38 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............................38 Item 7A. Quantitative and Qualitative Disclosures about Market Risk...........38 Item 8. Financial Statements and Supplementary Data........................40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................40 Part III Item 10. Directors and Executive Officers of the Registrant..................41 Item 11. Executive Compensation..............................................43 Item 12. Security Ownership of Certain Beneficial Ownership and Management...46 Item 13. Certain Relationships and Related Transactions......................47 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....48 Signatures....................................................................49 This Annual Report on Form 10-K ("Form 10-K") contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-K and include statements regarding the intent, belief, outlook, estimate or expectations of the Corporation (as defined below), its directors or its officers primarily with respect to future events and the future financial performance of the Corporation. Readers of this Form 10-K are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-K identifies important factors that could cause such differences. These factors include changes in interest rates; loss of deposits and loan demand to other savings and financial institutions; substantial changes in financial markets; changes in real estate values and the real estate market; regulatory changes; the deterioration in the financial strength of the Corporation's loan customers; or the announced acquisition by German American Bancorp. PART I Item 1. Business General 1ST BANCORP, an Indiana corporation (the "Corporation" or "1ST BANCORP"), is a nondiversified, unitary savings and loan holding company. The principal asset of the Corporation is the outstanding stock of First Federal Bank, A Federal Savings Bank, ("First Federal" or the "Bank") and the Bank's subsidiary, Financial Services of Southern Indiana Corporation. Other subsidiaries of the Corporation include First Financial Insurance Agency, Inc. ("First Financial"), a full service insurance agency, and First Title Insurance Company ("First Title"), which provides title search services, underwrites mortgage title insurance, and provides mortgage loan closing services. First Federal is a federally-chartered stock savings bank that was converted to the stock form of ownership and to a federal savings bank in May, 1987. The Bank is primarily engaged in attracting deposits from the general public and applying these funds, together with borrowings, to the origination of residential mortgage loans and consumer loans. First Federal's revenue is primarily derived from interest on, and fees received in connection with, real estate and other loans. The Bank also experienced gains on the sale of its mortgage loans as part of its continuing operations and asset/liability management efforts. The Bank's principal expenses are interest on deposits and borrowings and general and administrative expenses. The principal sources of funds for First Federal's lending activities are its deposits, amortization and prepayments of outstanding loans, sales of mortgage loans and borrowings from the Federal Home Loan Bank of Indianapolis ("FHLB" or "FHLB of Indianapolis"). The Bank's deposits are insured by the full faith and credit of the United States government by the Federal Deposit Insurance Corporation's ("FDIC") Savings Association Insurance Fund ("SAIF"). Deposit accounts in First Federal are generally insured by the SAIF to a maximum of $100,000 for each insured depositor. The Bank is a member of the FHLB of Indianapolis and is subject to comprehensive regulation, examination, and supervision by the Office of Thrift Supervision ("OTS") and the FDIC. First Federal offers a full range of banking services through its two banking offices located in Vincennes, Indiana. Additionally, the Bank operates one loan origination office in Evansville Indiana. During fiscal year 1997, the Bank closed loan origination offices in Indianapolis, Indiana, Louisville, Kentucky, and suburbs of Cincinnati, Cleveland, and Dayton, Ohio. The office closures were undertaken to centralize all administrative loan functions in the Vincennes offices, to afford more standardized procedures and controls, and to decrease overhead expenses in the nonconforming loan operations. The Bank's principal market area is Knox County in Indiana. The Bank's deposits are obtained primarily from persons who are residents of its primary market area. However, to supplement local deposits, the Bank also makes use of brokered deposits which range in original maturity from one to five years with rates ranging from 5.7% to 6.3%. The program serves as an alternative source of funds to complement the borrowing program and retail savings programs offered in the Bank's local market. The brokered funds enable the Bank to manage maturities of its deposits in its effort to manage interest rate risk. During the third quarter of fiscal year 1998, the Corporation acquired the assets of an existing independent title and abstract company. The assets of the acquired company were merged into the previously inactive subsidiary, First Title Insurance Company. First Title sells title insurance as an agent for Chicago Title Insurance Company, Ticor Title Insurance Company, and Stewart Title Guaranty Company. First Financial operates full service insurance offices in Vincennes and Princeton, Indiana. During fiscal year 1997, First Financial purchased the book of business of an existing independent insurance agency. The book of business was merged with the existing customer base of First Financial and resulted in the establishment of First Financial's Princeton office. On August 5, 1998 1ST BANCORP and German American Bancorp ("German American") jointly announced the signing of a definitive agreement (the "Agreement") pursuant to which the Corporation will be merged with and into German American (the "Merger"). The Agreement provides that upon the effective date of the Merger , the shareholders of the Corporation would receive shares of common stock of German American with an aggregate value of $57,120,000 based on market prices during a period of 15 days ending on the second trading date before closing). If the German American share price is less than $28 per share or more than $33 per share during the valuation period, however, then the number of shares to be issued in the transaction will be based on a minimum or maximum share price, as the case may be of $28 or $33. Accordingly, to the extent that German American's share price during the valuation period is less than $28 or more than $33, then the market value of the transaction could vary from the targeted value. Based on the current number of the Corporation's shares outstanding and assuming the exercise of stock options for 29,679 shares held by employees and directors of the Corporation prior to the closing of the merger, each share of the Corporation's common stock would be exchanged for German American stock with a value equal to approximately $50.94. The Corporation has also signed a Stock Option Agreement with German American, giving German American an option to purchase up to 19.9% of the Corporation's outstanding shares, exercisable at $50.94 per share upon occurrence of certain events that create the potential for another party to acquire control of the Corporation. Lending Activities General First Federal has traditionally concentrated its lending activities on first mortgage loans secured by residential property. Typically these loans are neither insured by the Federal Housing Administration ("FHA") nor partially guaranteed by the Veteran's Administration ("VA"). At June 30, 1998, First Federal's net loan portfolio aggregated $185.3 million, representing 71.2% of total assets at that date. This compares to the Bank's net loan portfolio of $146.8 million at June 30, 1997 representing 54.3% of total assets. The Bank has historically concentrated on the origination and purchase of conforming conventional mortgage lending. This market is represented by loans conforming to documentation and underwriting standards dictated by the Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC") and the Federal National Mortgage Association ("Fannie Mae" or "FNMA"). The Bank continues to originate conforming loan product but in the past four fiscal years has also concentrated on the origination of nonconforming mortgage loans. Nonconforming loans meet alternative documentation and underwriting requirements dictated by a secondary market made up of companies other than FHLMC and FNMA. Such loans are made to a broader customer base and are graded "A" through "D." Creditworthiness, collateral, equity, and other factors are weighed in the grading of the nonconforming loans and interest rates charged are commensurate with risk. The Bank offers both fixed rate mortgage and adjustable rate mortgage ("AML") loans. In addition to residential real estate lending, as part of its asset and liability management strategy, First Federal continues its lending activities in other shorter-term interest rate sensitive loans, including consumer loans, which accounted for 11.9% of the total loan portfolio at June 30, 1998 as compared to 8.7% of the total loan portfolio at June 30, 1997. 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, ---------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------------------------------------------------------------------------- (in thousands) Real estate loans: Mortgage $163,457 $135,189 $141,247 $181,676 $153,251 Construction 4,501 2,038 2,171 7,364 12,460 Consumer loans 17,147 7,277 5,839 10,203 9,285 Other Loans 4,986 5,471 4,171 6,859 6,775 ---------------------------------------------------------------------------- 190,091 149,975 153,428 206,102 181,771 ---------------------------------------------------------------------------- Undisbursed loans funds (3,475) (1,536) (1,297) (3,038) (7,707) Deferred loan fees and unamortized premiums and discounts, net 139 (441) (486) (367) (430) Allowance for loan losses (1,465) (1,158) (896) (878) (817) ---------------------------------------------------------------------------- (4,801) (3,135) (2,679) (4,283) (8,954) ---------------------------------------------------------------------------- Net loans receivable $185,290 $146,840 $150,749 $201,819 $172,817 ============================================================================
Contractual Maturities of Loans The following table summarizes the contractual maturities of First Federal's loan portfolio due for the fiscal periods indicated as of June 30, 1998 by type of loan: Principal Repayments Contracturally Due During the Fiscal Periods Indicated as of June 30, 1998
More More More More More Balance than 1 than 2 than 3 than 5 than 10 Outstanding at One Year Year to Years to Years to Years to Years to More than June, 30 1998 or less 2 Years 3 Years 5 Years 10 Years 15 Years 15 Years -------------------------------------------------------------------------------------------------------- Real estate loans: Mortgage $163,457 $4,349 $4,728 $5,141 $11,664 $39,304 $47,859 $50,412 Construction 4,501 4,501 - - - - - Consumer and Other Loans 22,133 1,982 2,167 2,369 5,424 10,191 - - ------------------------------------------------------------------------------------------------------ Total $190,091 $10,832 $6,895 $7,510 $17,088 $49,495 $47,859 $50,412 ======================================================================================================
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, --------------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------------------------------------------------------------------------- (in thousands) One-to-Four Family Residential Mortgage Loans Fixed Rates $84,776 $67,310 $54,212 $71,772 $64,294 Adjustable Rates 75,638 60,767 81,051 107,849 92,492 --------------------------------------------------------------------------- Total $160,414 $128,077 $135,263 $179,621 $156,786 Commercial Real Estate Loans Fixed Rates 3,970 5,901 3,511 2,996 4,062 Adjustable Rates 3,574 3,249 4,644 6,423 4,863 --------------------------------------------------------------------------- Total $7,544 $9,150 $8,155 $9,419 $8,925 Total Real Estate Loans Fixed Rates 88,746 73,211 57,723 74,768 68,356 Adjustable Rates 79,212 64,016 85,695 114,272 97,355 --------------------------------------------------------------------------- Total $167,958 $137,227 $143,418 $189,040 $165,711 Consumer & Other Loans Fixed Rates 17,153 8,168 6,671 11,438 10,011 Adjustable Rates 4,980 4,580 3,339 5,624 6,049 --------------------------------------------------------------------------- Total $22,133 $12,748 $10,010 $17,062 $16,060 Total Loans Receivable Fixed Rates 105,899 81,379 64,394 86,206 78,367 Adjustable Rates 84,192 68,596 89,034 119,896 103,404 --------------------------------------------------------------------------- Total $190,091 $149,975 $153,428 $206,102 $181,771
Residential Mortgage Loans To the extent deemed appropriate, in view of market forces, First Federal intends to continue to originate AMLs in order to reduce the impact of rapid increases in market rates of interest on its operations and the market value of its equity. Although critical to maintaining an asset/liability matching program and a reasonable interest rate risk posture, adjustable-rate loans generally do not adjust as rapidly as changes in the Bank's cost of funds. The Bank also continues to be an originator of fixed rate mortgage loans. Fixed rate residential mortgage loans currently originated by the Bank generally are made with 15 and 30 year amortization schedules. The Bank also originates fixed-rate residential mortgages with balloon payments, with the balloon payment being due generally in five or seven years. A portion of the conforming fixed rate and adjustable rate residential mortgage loans currently being originated and purchased by First Federal are sold to FHLMC. These loans are typically sold with the servicing rights retained by the Bank. The highest quality nonconforming loans are being retained in portfolio in order to enhance the Bank's net interest margin. However, a portion of the nonconforming mortgage loans are also sold on a non-recourse basis in the nonconforming secondary market. The nonconforming loans are typically sold with the servicing rights released. Of the $118.1 million loans originated and purchased in fiscal year 1998, $37.5 million were nonconforming mortgage loans. This compares to the origination and purchase of $70.2 million of nonconforming mortgage loans of the total $117.0 million loan originated and purchased during fiscal year 1997. The lower volume of nonconforming loans in fiscal year 1998 compared with fiscal year 1997 is a result of the restructure of the Bank's loan origination network in the latter part of fiscal year 1997. At June 30, 1998, $85.9 million nonconforming loans were included in the loan portfolio as compared to $66.5 million in portfolio at June 30, 1997. The increased level of nonconforming loans in portfolio is an integral part of the Bank's strategy to expand its net interest margin in an orderly manner. The Bank also originates second mortgages, the majority of which are on real estate in which it also holds the first mortgage. The loans have either adjustable rate or fixed rate features with terms similar to first mortgage loans. The second mortgage, when combined with the balance of the first mortgage, normally does not exceed 90% of the value of the real estate. During fiscal year 1997, the Bank discontinued a program of granting second mortgage loans up to 100% of appraised value. The program was discontinued due to the inherent credit risk associated with that type of lending. The Bank offers 100% financing programs with the first mortgage retained by the Bank, and a concurrent second mortgage being closed and retained by another lender. First Federal offers residential construction loans to both individuals and builders. The Bank normally grants a commitment for permanent financing concurrent with the origination of the construction loan. Such commitments are generally market rate commitments and require the borrower to satisfy the Bank's normal underwriting criteria at the time the loan is made. Terms are similar to those established for other first mortgage loans. Interest rates are generally adjustable and are set at the time of the origination of the construction loan. In the case of an AML, the construction period is included in the time frame upon which the interest rate adjustment is based. In many instances, construction loans have a commitment for permanent financing either from the Bank or another financial institution prior to closing the construction loan. In other cases, the Bank does grant "spec" residential construction loans to builders on a limited basis. The number of "spec" loans to each builder is limited by the amount and number of projects that such builder has in process at any one time. These limits are established and regularly monitored by the Board of Directors. Under policies adopted by the Bank's Board of Directors, the Bank limits the loan-to-value ratio to 100% on residential mortgage loans. The Bank generally requires all conforming loans with loan-to-value ratios in excess of 80% to carry private mortgage insurance which insures First Federal against default on a portion of the principal amount of the loan. Nonconforming mortgage loans generally may not exceed 85% of the value of the secured property. Commercial real estate loans generally may not exceed 75% of the value of the secured property. Construction loans generally may not exceed 80% of the value of the secured property and generally are made for 80% or less of the appraised value of the property upon completion. It is the Bank's policy to obtain title insurance policies insuring that First Federal has a valid lien on mortgaged real estate. Borrowers also must obtain hazard insurance policies prior to closing and, when required by the Department of Housing and Urban Development, flood insurance policies. Commercial Real Estate Loans At June 30, 1998, First Federal's commercial real estate loan portfolio (including loans secured by nonresidential property, land, and five or more dwelling units) aggregated $7.5 million, or 4.0% of the total loan portfolio. During the early 1980s, First Federal originated and purchased a number of commercial real estate loans. Such activity has been very limited in the past several years. Land development loans are generally limited to less than 75% of the market value of the improved land and are granted as revolving lines of credit. Interest rates generally are 2% above the prime rate, recalculated on a monthly basis. As lot sales occur, the Bank generally requires a payment equal to 75% of the gross sale proceeds. The land development loans have been granted in communities currently or previously served by various First Federal offices. Consumer Lending The Bank also originates consumer loans, which include savings account loans, student loans, automobile loans, property improvement loans, home equity loans, mobile home loans, credit card loans, and other secured and unsecured consumer loans. At June 30, 1998, such loans constituted $22.1 million, or 11.6% of the total loan portfolio. The maximum term of automobile loans is generally five years, with the rate and term dependent upon whether the vehicle is new or used. During the fourth quarter of fiscal year 1997, the Bank initiated an indirect auto lending program through a selected number of new and used automobile dealers in its primary market area. The indirect auto lending program serves to augment the traditional auto lending program of the Bank. Terms are similar for the traditional and indirect auto loan programs. Indirect auto loan fundings during fiscal year 1998 totaled $10.0 million. The indirect auto loan portfolio totaled $8.5 million at June 30, 1998. Home equity loans are variable rate and are treated as revolving lines of credit. At June 30, 1998, home equity loans aggregated $4.6 million, available balances averaged $10,300, and approved credit line balances averaged $19,900. Savings account loans generally do not exceed 90% of the savings account balance which collateralizes the loan and demand an interest rate generally equal to 2.0% above the rate paid on the savings account. Origination, Purchase and Sale of Loans and Participations As a federally-chartered savings institution, First Federal has general authority to make real estate loans secured by properties located throughout the United States. Through its loan origination office network, the Bank's lending market was expanded beyond its traditional areas. However, at June 30, 1998, a majority of First Federal's total loans receivable were secured by real estate located in central and southern Indiana and southern Illinois. During the mid-1980s, First Federal purchased a limited number of participations in loans originated by other financial institutions. In such instances, First Federal purchased a portion of a loan from a lead lender which services the loan and remits to the Bank its pro-rata share of interest and principal payments received from the borrower. First Federal pays a fee from .25% to .50% of the interest earned on the loan to the lead lender for servicing the loan. This operating strategy was undertaken because of an inadequate supply of loans in the Bank's primary lending area. Since that time, few participations have been purchased. The Bank has expanded its origination and purchasing operations for mortgage loans and currently has an adequate supply of loans in its market areas. The Bank is continually looking for new market areas into which it can expand. Historically, conforming mortgage loans have been originated by the Bank primarily through referrals from real estate brokers, builders and walk-in customers, as well as through refinancing for existing customers. The Bank carefully monitors interest rates in its market areas and believes that it is competitive in such areas. First Federal continues to obtain its market share of loans in its primary market area. In addition, through mortgage banking services, additional loans are granted in other communities. The mortgage banking services for the past four fiscal years have been primarily concentrated in the nonconforming loan markets. However, during fiscal year 1998 conforming mortgage banking operations increased. During fiscal 1998, the Bank originated $85.7 million of residential real estate loans (including construction loans) as compared to $104.7 million of residential real estate loans in 1997 and $132.2 million of residential real estate loans in 1996. The decreased volume during fiscal 1998 was primarily a decline in nonconforming mortgage loan originations which resulted largely from the closure of the Bank's loan origination offices in fiscal 1997. The decreased volume of residential real estate loan originations during fiscal 1997 compared with fiscal 1996 resulted from reduced retail conforming loan originations. The decreased conforming loan originations were largely attributable to the sale of two retail banking branches in Tipton and Kokomo, Indiana during December 1995 (the "Branch Sales"). In addition, the decline was attributable to the general economic conditions which depressed loan activity in the Bank's primary lending area during fiscal 1997. During fiscal year 1998, $13.3 million in loans were purchased through a wholesale correspondent network compared with $2.0 million purchased during fiscal year 1997. The increase in loans purchased from correspondents was designed to replace a portion of the decreased loan production due to the closure of the majority of the Bank's loan origination offices in fiscal year 1997. The loans purchased in fiscal year 1998 included conforming and nonconforming loans. During 1998, the Bank sold $46.1 million in conforming loans to FHLMC as compared to the sale of $32.1 million in loans to FHLMC in fiscal year 1997. The Bank continues to service most of the loans sold in fiscal 1998 and retains a portion of the interest received (.250% to .375%) as a servicing fee. A total of $871,000 in FHA/VA loans were sold to private investors during fiscal year 1998 as compared with $6.4 million in fiscal year 1997. These loans were sold servicing released. An aggregate of $8.2 million in nonconforming loans were sold to various investors during fiscal 1998 as compared to $37.7 million in nonconforming loan sales in fiscal 1997. These loans were sold servicing released. The decline in nonconforming loan sales is a part of the Bank's asset/liability strategy to enhance the net interest margin by retaining a larger portion of its mortgage loan production in portfolio. The following table shows total loan originations, purchases, sales and repayment activities (including loans held for sale) of the Bank during the periods indicated:
Years Ended June 30, --------------------------------------- 1998 1997 1996 --------------------------------------- (in thousands) Loans Originated Real estate loans Construction (1) $ 2,663 $ 3,623 $ 15,466 Land -- -- -- Loans for purchase or refinance of existing property: One-to-four units 83,019 101,047 116,783 Over four units -- -- -- Commercial 1,485 383 215 Consumer loans (2) 17,665 9,926 12,394 --------------------------------------- Total loans originated $ 104,832 $ 114,979 $ 144,858 Participations and whole loans purchased $ 13,274 $ 2,042 $ 27,583 Participations and whole loans sold ($ 55,096) ($ 76,202) ($161,421) Loan principal repayments (48,214) (35,093) (50,208) --------------------------------------- Change in loan portfolio $ 14,796 $ 5,726 ($ 39,188) ======================================= - - --------------------------------------
(1) Construction loans originated are predominantly 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. The following table sets forth certain information concerning loan origination and commitment fees and deferred loan origination and commitment fees on First Federal's mortgage loan portfolio for each of the periods or as of the dates indicated. 1998 1997 1996 ---------------------------------- (in thousands) Loan origination, commitment fees and service fees earned during the year ended June 30 $91 $137 $140 Net deferred loan origination and commitment fees on mortgage loans at end of year $47 $476 $611 Purchased and originated mortgage servicing rights at end of year $1,012 $819 $591 Asset Quality Collection Practices When a borrower fails to make a required payment on a mortgage loan, the Bank attempts to cause the deficiency to be cured by contacting the borrower and seeking payment. Contacts are generally made after a conforming mortgage loan payment is more than 16 days past due and a late charge is assessed at such time for conforming mortgage loans. In the case of nonconforming mortgage loans, contact is generally made after a payment is five days past due. For nonconforming loans, as with conforming loans, late charges are assessed at which time a payment is more than 16 days past due. If the delinquency exceeds 120 days and is not cured through the Bank's normal collection procedures, the Bank will generally institute measures to remedy the default, including commencing a foreclosure action or accepting from the mortgagor a voluntary deed of the secured property in lieu of foreclosure. If a foreclosure action is instituted and the loan is not reinstated, paid in full, or refinanced, the property is sold pursuant to statutory requirements after obtaining a judgment of foreclosure from the appropriate court. The property is then included in the Bank's "real estate owned" account until it is sold. The Bank is permitted by federal regulations to finance the sales of these properties by loans or contracts to facilitate the sale of real estate owned, which involve a lower down payment or a longer term than would be generally allowed by the Bank's underwriting standards. When a borrower fails to make a required payment on a consumer loan, the Bank attempts to cause the deficiency to be cured by contacting the borrower and seeking payment. Contacts are generally made after a consumer loan is more than 10 days past due and a late charge is assessed at such time. If the delinquency is not cured, the Bank will institute measures to remedy the default. The remedies include repossession of the non-real estate collateral, foreclosure action for loans secured by mortgages, and/or pursuing default judgments against the borrower. In the case of the Bank's auto loan programs, if the delinquency exceeds 45 days and is not cured through the Bank's normal collection procedures, the Bank will generally initiate action to repossess the collateral. The Bank then holds the property for 10 days to allow the borrower to redeem the collateral. If there is no borrower redemption, the property is included in the bank's repossessed assets account until it is sold. Nonaccrual Loans, Real Estate Owned, and Repossessed Assets At June 30, 1998, nonaccrual loans, real estate owned, and repossessed assets totaled $4.4 million, or 1.70% of total assets. Overall, the upward trend in nonaccrual loans is attributable to residential one-to-four family mortgage loans. In particular, the Bank's nonconforming loan delinquencies have increased. Over the past four fiscal years the Bank has expanded its residential one-to-four family nonconforming loan portfolio to increase its net interest margin. While the larger nonconforming loan portfolio has been successful in expanding the net interest margin, the credit risk associated with these loans has contributed to the increased level of delinquencies, nonaccrual loans, and real estate owned. Loan quality continues to be of major importance to the Bank and strong efforts are being made to ensure loan quality. In an effort to mitigate potential losses and reduce non-performing assets additional loan collection personnel have been hired, more stringent collection practices have been implemented, and the 100% nonconforming second mortgage loan program was discontinued. In addition, loan loss allowances have been increased to prepare for potential future losses in the loan portfolio. 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, ------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------------------------------------------------------------- (Dollars in thousands) Nonaccrual loans and real estate owned: Non-accrual loans (1) $3,491 $2,330 $846 $400 $1,635 Real estate owned and repossessed assets (2) 930 397 177 145 160 Restructured loans - - - - - ------------------------------------------------------------------------- Total nonaccrual loans and real estate owned $4,421 $2,727 $1,023 $545 $1,795 Nonaccrual loans and real estate owned to total assets 1.70% 1.01% 0.39% 0.17% 0.71%
- - ------------ (1) Approximately $320,000 in gross interest income would have been recorded in the year ended June 30, 1998 if the loans had been current in accordance with their original terms and had been outstanding throughout the year, or since origination if held for part of the period. Approximately $161,000 in interest income was actually recognized in the year. (2) Troubled loans acquired through repossession, foreclosure, or deed-in-lieu of foreclosure are included in the Statement of Financial Condition as real estate owned. Loss and Delinquency Experience During the year ended June 30, 1998, the Bank realized net charge-offs on loans aggregating $448,000. At June 30, 1998, 1.06% of the outstanding principal balance of loans in the Bank's portfolio was delinquent between 61 and 90 days and 1.88% was delinquent 91 days or more. The Bank's loss experience on its loan portfolio for the years shown is summarized in the following tables: Year Ended June 30, -------------------------------------------- 1998 1997 1996 -------------------------------------------- (Dollars in thousands) Loans receivable, net $185,290 $146,840 $150,749 Net losses (charge-offs) $448 $111 $65 Percent delinquent 61 days or more at end of year 2.94% 2.67% 1.76% Total dollar amount foreclosed $1,375 $686 $180 Percent foreclosed 0.74% 0.47% 0.12% Analysis of the Allowance for Loan Losses
Year Ended June 30, ----------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------------------------------------------------------------------------- (Dollars in thousands) Balance at beginning of year $1,158 $896 $878 $817 $892 Charge-offs Loans Real estate mortgages 389 81 30 15 138 Consumer loans 72 38 52 32 23 Recoveries Loans Real estate mortgages 2 1 13 - 1 Consumer loans 11 7 4 8 10 ----------------------------------------------------------------------- Net charge-offs 448 111 65 39 150 Provisions charged to operations 755 373 83 100 75 ----------------------------------------------------------------------- Balance at end of year $1,465 $1,158 $896 $878 $817 ======================================================================= Ratio of net charge-offs during the year to average loans outstanding during the year 0.27% 0.07% 0.04% 0.04% 0.09%
Additional information regarding the allowance for loan losses is as follows:
At June 30, 1998 ------------------------------------------------------------------------------------- % of Loans in Allowance as a Amount of Each Category to Allowance as a % of Loans Type of Loan Allowance Loans Receivable % of Loan Type Receivable - - ----------------------------------------- -------------- ------------------------ --------------------- ----------------- (Dollars in thousands) One-to-Four Family Mortgage Loans $773 84.39% 0.48% 0.41% Commercial Real Estate Loans 492 3.97% 6.52% 0.26% Consumer & Other Loans 200 11.64% 0.90% 0.11% ---------------- ------------------- --------------------- $1,465 100.00% 0.78% At June 30, 1997 ---------------------------------------------------------------------------------------- % of Loans in Allowance as a Amount of Each Category to Allowance as a % of Loans Type of Loan Allowance Loans Receivable % of Loan Type Receivable - - ----------------------------------------- -------------- ------------------------ ----------------------- ------------------ (Dollars in thousands) One-to-Four Family Mortgage Loans $520 85.31% 0.41% 0.35% Commercial Real Estate Loans 508 6.19% 5.47% 0.34% Consumer & Other Loans 130 8.50% 1.02% 0.09% ---------------- ------------------ ----------------- $1,158 100.00% 0.78% At June 30, 1996 ---------------------------------------------------------------------------------------- % of Loans in Allowance as a Amount of Each Category to Allowance as a % of Loans Type of Loan Allowance Loans Receivable % of Loan Type Receivable - - ----------------------------------------- -------------- ------------------------ ----------------------- ------------------ (Dollars in thousands) One-to-Four Family Mortgage Loans $267 88.16% 0.20% 0.17% Commercial Real Estate Loans 536 5.32% 6.57% 0.35% Consumer & Other Loans 93 6.52% 0.93% 0.06% ---------------- ---------------- --------------------- $896 100.00% 0.58% 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%
First Federal regularly reviews the status of non-performing assets to evaluate the adequacy of the allowances for loan and real estate owned losses. The allowance for loan losses is maintained through the provision for loan losses, which is charged to earnings. In addition to the general loan loss allowance of $1.0 million at June 30, 1998, specific valuation allowances have been established for loans and contracts. An asset would warrant such an allowance because the loan balance exceeds the appraised value or because of other reasons to anticipate a loss. At June 30, 1998, specific valuation allowance balances were $465,000 of which approximately 99% was for one real estate contract acquired in a merger with United Savings Association of Central Indiana, F.A., in 1989. The loan balance at June 30, 1998 was $1.3 million. This specific valuation allowance was established at the time the loan was acquired; the loan is current in its payments and as the loan continues to pay down the specific valuation allowance is released. The remainder of the specific valuation allowances is for one single family residential mortgage loan in which the Bank anticipates a loss to be realized in the future. Additional information regarding the Bank's allowance for loan losses and provision for loan losses is contained in the Management's Discussion and Analysis section of the 1998 Annual Report to Shareholders. Investment Activities The Bank is required under federal regulations to maintain a minimum amount of liquid assets which may be invested in specified short-term securities and the Bank is also permitted to make certain other securities investments. Investment decisions are made by authorized officers of First Federal within policies established by First Federal's Board of Directors. At June 30, 1998, First Federal's investment securities portfolio aggregated $19.6 million, consisting exclusively of U.S. agency obligations. See Note 3 of the Notes to the Consolidated Financial Statements for a description of investment securities owned at June 30, 1998. At June 30, 1998, the Bank's investment securities available for sale portfolio aggregated $15.5 million, consisting of U.S. Treasury and agency obligations. See Note 2 of the Notes to the Consolidated Financial Statements for a description of investment securities available for sale owned at June 30, 1998. The current investment policy of the Bank includes the use of both long-term and short-term U.S. government obligations to protect against interest rate fluctuations. The short-term portfolio is managed by the Bank to maximize the earnings on investable funds while also maintaining an adequate level of liquidity. The following tables set forth the values of the investment securities as of the dates indicated. Maturities of each category of securities are also indicated. Investment Securities Portfolio
At June 30, At June 30, At June 30, 1998 1997 1996 ------------------------------------------- ------------ ------------ Amortized Market Wtd. Ave. Amortized Amortized Investment Type (1) Maturity Cost Value Yield Cost Cost - - --------------------------------- ---------------------------------------------------------------- ------------ ------------ (Dollars in thousands) U.S. Treasury and agency obligations less than 1 year 8,450 8,436 5.27% including mortgage- 1 - 5 years 8,815 8,783 5.85% backed securities 5 - 10 years 1,000 1,000 6.54% more than 10 years 1,288 1,295 7.11% ------------------------- $19,553 $19,514 5.72% $44,065 $43,624 Federal Home Loan Bank stock N/A 5,769 5,769 8.00% 4,941 4,864 ------------------------- -------------- --------- Total Investment Securities $25,322 $25,283 6.24% $49,006 $48,488 ========================= ============== ========= - - --------------------------------------- (1) There are no tax-exempt securities included in the above totals. Available for Sale Portfolio At June 30, At June 30, At June 30, 1998 1997 1996 ------------------------------------------- ------------ ------------ Amortized Market Wtd. Ave. Amortized Amortized Investment Type (1) Maturity Cost Value Yield Cost Cost - - --------------------------------- ---------------------------------------------------------------- ------------ ------------ (Dollars in thousands) U.S. Treasury and agency obligations less than 1 year - - - including mortgage- 1 - 5 years 6.17% 1,998 1,994 backed securities 5 - 10 years 8.01% 601 600 more than 10 years 6.23% 12,965 12,910 ------------------------- $15,564 $15,504 6.29% $11,769 $10,907 ------------------------- -------------- ------- Total Available for Sale $15,564 $15,504 6.29% $11,769 $10,907 Securities ========================= ============== ======= - - --------------------------------------- (1) There are no tax-exempt securities included in the above totals.
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, Year Ended June 30, --------------------------------- ------------------------------------------------ 1997 vs. 1998 1996 vs. 1997 (in thousands) (in thousands) Rate/ Rate/ Rate Volume Volume Total Rate Volume Volume Total ------- ------- ------ ------ -------- ------------ ---------- ------------ Interest earning assets: Loan portfolio (1)(2)(3) $71 $519 ($2) $588 $211 ($1,086) ($5) ($880) Investment securities, trading account investments and other short-term deposits (4) 45 (867) (7) (829) (132) (169) 0 (301) ------- ------- ------ ------ -------- ------------ --------- ------------ Total 116 (348) (9) (241) $79 ($1,255) ($5) ($1,181) ------- ------- ------ ------ -------- ------------ --------- ------------ Interest-bearing liabilities: Savings accounts 140 (504) (6) (370) ($65) ($1,326) ($4) ($1,395) Short-term borrowings 1 (50) (1) (50) 31 (132) (101) - Advances from FHLB and other borrowings 40 97 (5) 132 (302) 565 5 268 ------- ------- ------ ------ -------- ------------ --------- ------------ Total 181 (457) (12) (288) ($336) ($893) $1 ($1,228) ------- ------- ------ ------ -------- ------------ --------- ------------ Net change in interest income (expense) ($65) $109 $3 $47 $415 ($361) ($6) $47 ======= ======= ====== ====== ======== ============ ========= ============
- - ------------------------------------- (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). Yields Earned and Rates Paid; Certain Ratios The following table sets forth for First Federal the weighted average yields earned on its interest-earning assets, average cost of interest-bearing liabilities and the spread between yields earned and rates paid as of June 30, 1998 and for each of the years ended June 30, 1998, 1997, and 1996.
As of June 30, Year Ended June 30, -------------------- -------------------------------------- 1998 1998 1997 1996 -------------------- -------------------------------------- Weighted average yield on loan portfolio 8.46% 8.51% 8.47% 8.36% Weighted average yield on investment securities, trading account investments, and other short-term deposits 6.06% 6.14% 6.08% 6.25% Weighted average yield on all interest-earning assets 7.91% 7.93% 7.77% 7.75% Weighted average rate paid on deposit accounts 5.56% 5.60% 5.50% 5.54% Weighted average rate paid on FHLB advances and other borrowings 5.44% 5.64% 5.60% 5.89% Weighted average rate on all interest-bearing liabilities 5.50% 5.62% 5.54% 5.67% Net interest margin 2.77% 2.63% 2.52% 2.36%
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. Deposits The Bank has a wide variety of deposit programs designed to attract both short-term and long-term deposits from the general public. These deposit accounts include passbook accounts, NOW accounts, and money market accounts (Super NOW accounts), as well as fixed-rate certificates and money market accounts. The following table sets forth information regarding the types of deposit accounts offered by First Federal at June 30, 1998 in its primary market area:
Interest Rates Type of Deposit Accounts at June 30, 1998 Compounding Minimum - - ------------------------------------------------------------------------------------------------------------------------ NOW 2.90 - 3.10% Simple Varies by type of account MMDA 2.70 - 5.05% Simple Varies by type of account Passbook/Statement Savings 2.70 - 4.00% Simple Varies by type of account Certificates of Deposit: 91 days 3.90% Simple 1,000 182 days 4.40% Simple 500 7-11 months 5.10% Simple 1,000 1 year 5.00% Simple 500 1 1/2 years 5.25% Simple 500 1 1/2 year stepped-rate 5.57% Simple 1,000 2 years 5.40% Simple 500 2 1/2 years 5.50% Simple 500 3 year stepped-rate 5.74% Simple 1,000 3 1/2 years 5.55% Simple 500 5 years 5.65% Simple 500 10 years 5.65% Simple 500 IRA Certificates: 1 years 5.25% Simple 100 2 years 5.40% Simple 100 2 years - variable rate 2.50% below prime rate Simple 100 3 years 5.65% Simple 100 4 years 5.75% Simple 100 5 years 6.00% Simple 100 Negotiable Certificates: Jumbo Certificates of Deposit 5.85%-6.45% Simple 99,000
The large variety of savings accounts offered by the Bank has increased the Bank's ability to retain retail deposits and has allowed it to be more competitive in obtaining new funds; but, it has not eliminated the threat of disintermediation (the flow of funds away from savings institutions into direct investment vehicles, such as government and corporate securities and mutual funds). As customers have become more rate conscious and willing to move funds into higher yielding accounts, the ability of the Bank to attract and maintain deposits and the Bank's cost of funds have been, and will continue to be, significantly affected by money market conditions. 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, ---------------------------------------------------------------------------------- 1998 1997 -------------------------------------- ------------------------------------ % of Wtd. Avg. % of Wtd. Avg. Balance Deposits Rate Balance Deposits Rate -------------------------------------- ------------------------------------ (Dollars in thousands) (Dollars in thousands) Type of account: Statement Savings/NOW/Super NOW Variable Rate Savings Accounts(1) $19,578 16.6% 3.7% $20,193 14.0% 3.8% MMDAs 3,447 2.9% 4.3% 3,015 2.1% 4.1% Certificates of Deposit(2) 94,738 80.5% 6.0% 121,108 83.9% 5.8% -------------------------- ------------------------ Total $117,763 100.0% 5.6% $144,316 100.0% 5.5% ========================== ========================
June 30, ------------------------------------ 1996 ------------------------------------ % of Wtd. Avg. Balance Deposits Rate ------------------------------------ (Dollars in thousands) Type of account: Statement Savings/NOW/Super NOW Variable Rate Savings Accounts(1) $17,170 12.5% 3.2% MMDAs 3,089 2.3% 3.9% Certificates of Deposit(2) 116,889 85.2% 5.8% ------------------------ Total $137,148 100.0% 5.5% ======================== - - ------------ (1) Includes noninterest-bearing accounts. (2) Includes negotiated rate certificates of deposit and IRAs. 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, --------------------------------------------------------------------------------- 1998 1997 -------------------------------------- ------------------------------------ Average % of Wtd. Avg. Average % of Wtd. Avg. Balance Total Rate Balance Total Rate -------------------------------------- ------------------------------------ (Dollars in thousands) (Dollars in thousands) Type of account: Statement Savings/NOW/Super NOW Variable Rate Savings Accounts(1) 20,777 15.8% 3.8% 17,627 12.5% 3.7% MMDAs 3,245 2.5% 4.2% 3,172 2.3% 4.0% Certificates of Deposit(2) 106,480 81.0% 6.0% 118,875 84.5% 5.8% Accrued Interest 935 0.7% - 1,039 0.7% - -------------------------- ------------------------ Total $131,437 100.0% 5.6% $140,713 100.0% 5.5% ========================== ========================
June 30, ------------------------------------- 1996 ------------------------------------ Average % of Wtd. Avg. Balance Total Rate ------------------------------------ (Dollars in thousands) Type of account: Statement Savings/NOW/Super NOW Variable Rate Savings Accounts(1) 26,636 16.2% 2.9% MMDAs 4,098 2.5% 3.1% Certificates of Deposit(2) 133,059 80.9% 6.2% Accrued Interest 769 0.5% - ------------------------ Total $164,562 100.0% 5.5% ======================== - - ----------- (1) Includes noninterest-bearing accounts. (2) Includes negotiated rate certificates of deposit and IRAs. The following table sets forth information relating to the Bank's deposit flows during the years indicated.
Year Ended June 30, ------------------------------------------- 1998 1997 1996 ------------------------------------------- (in thousands) Increase (decrease) in deposits before interest credited ($31,445) $2,734 ($77,909) Interest credited 4,892 4,434 5,252 ---------- ------------ ----------- Net increase (decrease) in deposits ($26,553) $7,168 ($72,657) ---------- ------------ ----------- Total deposits at end of period $117,763 $144,316 $137,148 ========== ============ ===========
The principal methods used by First Federal to attract deposits include the offering of a wide variety of services and accounts, competitive interest rates, and convenient office locations and service hours. In an effort to better serve its primary market area and expand and retain its retail deposit base, the Bank opened a new branch office during fiscal 1997 in Vincennes, Indiana. The primary focus of the new branch office is to better serve the Bank's retail deposit customers. The Bank uses traditional marketing methods to attract new customers and deposits, including mass media advertising and direct mailings. The development of new deposit accounts and services within the past several years has enhanced the Bank's ability to attract deposits. During the fiscal year ended June 30, 1998, the Bank decreased its brokered deposits to $26.2 million from $45.1 million at June 30, 1997. The lower level of brokered deposits was partially offset by an increased level of Federal Home Loan Bank ("FHLB") advances. Advances have been a lower cost source of funds than brokered deposits during the fiscal year. The brokered deposit program continues to serve as an alternative source of funds to compliment the borrowing programs and retail savings programs offered in the Bank's local market. The brokered funds enable the Bank to manage maturities of its deposits in its effort to manage interest rate risk. The following table presents, by various interest rate categories, the contractual maturity of certificates of deposits as of June 30, 1998.
Maturing in the 12 months ending June 30: Balances at June 30, 1998 1999 2000 2001 Thereafter ---------------------------------------------------------------------------------- (in thousands) Certificates of deposit: Less than 4.00% $ 247 $ 247 $ - $ - $ - 4.00% to 4.99% 2,088 2,088 - - - 5.00% to 5.99% 51,675 38,960 7,872 3,324 1,519 6.00% to 6.99% 31,748 14,859 8,324 3,031 5,534 7.00% to 7.99% 8,152 3,893 2,556 481 1,222 8.00% or more 828 659 25 2 142 ---------------------------------------------------------------------------------- Total certificates of deposit $94,738 $60,706 $18,777 $6,838 $8,417 ==================================================================================
As of June 30, 1998, First Federal had $7.1 million of time deposits with balances over $100,000. Maturity of these deposits is as follows: (in thousands) 3 months or less $1,595 Over 3 months through 6 months 1,508 Over 6 months through 12 months 1,325 Over 12 months 2,622 ------ Total $7,050 ====== Borrowings First Federal obtains advances from the FHLB of Indianapolis collateralized by the security of mortgage loans and investment securities it owns. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. Advances from the FHLB are generally available to member institutions to meet seasonal withdrawals and other withdrawals of savings accounts and to expand lending, as well as to aid the efforts of member institutions to establish better asset/liability management strategies. The Bank had $115.4 million in outstanding advances from the FHLB at June 30, 1998. 1ST BANCORP had a $1.5 million loan outstanding from Ambank, Vincennes, Indiana at June 30, 1997. 1ST BANCORP originally borrowed $1.5 million in June, 1991, of which, $1.0 million was used as a capital infusion to First Federal. An additional $1.0 million was borrowed in December, 1994, all of which was used as a capital infusion to First Federal. This borrowing was prepaid in full during the 1998 fiscal year. First Federal also obtains short-term financing through reverse repurchase agreements. These obligations provide another source to meet short-term demands for additional funds. However, at June 30, 1998, there were no reverse repurchase agreements outstanding. The following table sets forth certain information regarding advances from the FHLB and other borrowings, excluding reverse repurchase agreements, by the Corporation at the end of and during the years indicated.
At June 30, ------------------------------------------------ 1998 1997 1996 ------------------------------------------------ Weighted average rate on advances from the Federal Home Loan Bank and other borrowings 5.44% 5.62% 5.56% Year Ended June 30, ------------------------------------------------ 1998 1997 1996 ------------------------------------------------ (Dollars in thousands) Maximum amount of advances from the Federal Home Loan Bank and other borrowings outstanding at any month end $115,381 $100,346 $99,054 Approximate average advances from the Federal Home Loan Bank and other borrowings outstanding $100,955 $99,218 $89,103 Approximate weighted average rate paid on advances from the Federal Home Loan Bank and other borrowings 5.64% 5.60% 5.94%
The weighted average rates in the previous table were computed using the average balance based upon quarter end balances and total interest expense. Effects of Inflation The primary assets and liabilities of savings institutions such as First Federal are monetary in nature. As a result, interest rates have a more significant impact on First Federal's performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturity structures of First Federal's assets and liabilities are critical to the maintenance of acceptable performance levels. The principal effect of inflation, as distinct from levels of interest rates, on First Federal's earnings is in the area of other expense. Such expense items as employee compensation, employee benefits, and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans made by First Federal. First Federal is unable to determine the extent, if any, to which the properties securing its loans have appreciated in dollar value due to inflation. Regulation General First Federal, as a federally chartered stock savings bank, is a member of the Federal Home Loan Bank System (the "FHLB System") and its deposits are insured by the Savings Association Insurance Fund ("SAIF"), which is administered by the FDIC. First Federal is subject to extensive regulation by the OTS. Federal associations may not enter into certain transactions unless certain regulatory tests are met or they obtain prior governmental approval and the associations must file reports with these governmental agencies about their activities and their financial condition. Periodic compliance examinations of the Bank are conducted by the OTS which has, in conjunction with the FDIC in certain situations, enforcement powers. This supervision and regulation is intended primarily for the protection of depositors and federal deposit insurance funds. First Federal is also subject to certain reserve requirements under the Board of Governors of the Federal Reserve System ("FRB" or "Federal Reserve Board") regulations. Congress is considering legislation that would require all federal savings associations, such as First Federal, either to convert to a national bank or a state-chartered bank by a specified date to be determined. In addition, under the legislation, the Corporation likely would no longer be regulated as a savings and loan holding company, but rather as a bank holding company. This proposed legislation would abolish the OTS and transfer its functions among the other federal banking regulators. It cannot be predicted with certainty whether or in what form the legislation will be enacted and what impact it might have on the powers of the Corporation and First Federal. An OTS regulation establishes a schedule for the assessment of fees upon all savings associations to fund the operations of the OTS. The regulation also establishes a schedule of fees for the various types of applications and filings made by savings associations with the OTS. The general assessment, to be paid on a semi-annual basis, is based upon the savings association's total assets, including consolidated subsidiaries, as reported in a recent quarterly thrift financial report. Currently, the quarterly assessment rates range from .01164% of assets for associations with $67 million in assets or less to .00308% for associations with assets in excess of $35 billion. First Federal's current semi-annual assessment, based upon its March 31, 1998 total assets of $259.5 million, was $35,425. The OTS has recently proposed a change to its assessment regulations which would require assessments to be determined generally on the basis of an institution's size, condition, and complexity of operations. The Bank is also subject to federal and state regulation as to such matters as loans to officers, directors, or principal shareholders, required reserves, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuance or retirements of its own securities, and limitations upon other aspects of banking operations. In addition, the activities and operations of the Bank are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust laws. Federal Home Loan Bank System First Federal is a member of the FHLB System, which consists of 12 regional banks. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System, including the FHLB of Indianapolis. The FHLB System provides a central credit facility primarily for member savings associations and savings banks and other member financial institutions. First Federal is required to hold shares of capital stock in the FHLB of Indianapolis in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations at the end of each calendar year, .3% of its assets or 1/20 (or such greater fraction established by the FHLBank) of outstanding FHLB advances, commitments, lines of credit and letters of credit. First Federal is currently in compliance with this requirement. At June 30, 1998, First Federal's investment in FHLB of Indianapolis stock was $5,769,000. In past years, First Federal received dividends on its FHLBank stock. Certain provisions of The Financial Institution Reform, Recovery, and Enforcement Act of 1989, as amended ("FIRREA"), require all 12 FHLBanks to provide funds for the resolution of troubled savings associations and to establish affordable housing programs through direct loans or interest subsidies on advances to members to be used for lending at subsidized interest rates for low-and-moderate-income, owner-occupied housing projects, affordable rental housing, and certain other community projects. For the year ended June 30, 1998, dividends paid to First Federal totaled $414,000, for an annual rate of 8.0%. A reduction in value of such stock may result in a corresponding reduction in First Federal's capital. The FHLB of Indianapolis serves as a reserve or central bank for member institutions within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. It makes advances to members in accordance with policies and procedures established by the FHLB and the Board of Directors of the FHLB of Indianapolis. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. FIRREA prescribes eligible collateral as first mortgage loans less than 90 days delinquent or securities evidencing interests therein, securities (including mortgage-backed securities) issued, insured or guaranteed by the federal government or any agency thereof, FHLB deposits and, to a limited extent, real estate with readily ascertainable value in which a perfected security interest may be obtained. Other forms of collateral may be accepted as overcollateralization or, under certain circumstances, to renew advances. All long-term advances are required to provide funds for residential home financing and the FHLB has established standards of community service that members must meet to maintain access to long-term advances. Currently First Federal has $130.8 million of mortgage loans and $29.1 million of investment securities pledged as collateral for FHLB advances. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. Under current law, savings associations which cease to be Qualified Thrift Lenders are ineligible to receive advances from their FHLB. Liquidity For each calendar month, First Federal is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, specified United States Government, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to an amount not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings during the preceding calendar month. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions, and is currently 4%. Monetary penalties may be imposed for failure to meet these liquidity requirements. The monthly average liquidity of First Federal for June, 1998 was 8.1%. First Federal has never been subject to monetary penalties for failure to meet its liquidity requirements. Real Estate Lending Standards OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits, that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval, and reporting requirements to monitor compliance with the association's real estate lending policies. The Bank's written real estate lending policies must be reviewed and approved by the association's board of directors at least annually. Further, each Bank is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions. Safety and Soundness Standards On February 2, 1995, the federal banking agencies adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. On August 27, 1996, the federal banking agencies added asset quality and earnings standards to the safety and soundness guidelines. Insurance of Deposits Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance fund, the BIF for commercial banks and state savings banks, and the SAIF for savings associations and banks that have acquired deposits from savings associations. The FDIC is required to maintain designated levels of reserves in each fund. As of September 30, 1996, the reserves of the SAIF were below the level required by law, primarily because of a significant portion of the assessments paid into the SAIF have been used to pay the cost of prior thrift failures, while the reserves of the BIF met the levels required by law in May, 1995. However, on September 30, 1996, provisions designed to recapitalize the SAIF and eliminate the premium disparity between the BIF and the SAIF were signed into law. See "--Assessments" below. Assessments. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to the target level within a reasonable time and may decrease these rates if the target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. An institution's risk level is determined based on its capital level and the FDIC's level of supervisory concern about the institution. On September 30, 1996, President Clinton signed into law legislation which included provisions designed to recapitalize the SAIF and eliminate the significant premium disparity between the BIF and SAIF. Under the new law, First Federal was charged a one-time special assessment equal to $0.657 per $100 in assessable deposits at March 31, 1995. First Federal recognized this one-time assessment as a non-recurring operating expense of $1,330,000 before tax during the three-month period ending September 30, 1996, and First Federal paid the assessment on November 27, 1996. The assessment was fully deductible for both federal and state income tax purposes. Beginning January 1, 1997, First Federal's annual deposit insurance premium was reduced from .23% to .0644% of total assessable deposits. BIF institutions pay lower assessments than comparable SAIF institutions because BIF institutions pay only 20% of the rate paid by SAIF institutions on their deposits with respect to obligations issued by the federally-chartered corporation which provided some of the financing to resolve the thrift crisis in the 1980's ("FICO"). The 1996 law also provides for the merger of the SAIF and the BIF by 1999, but not until such time as bank and thrift charters are combined. Until the charters are combined, savings associations with SAIF deposits may not transfer deposits into the BIF system without paying various exit and entrance fees, and SAIF institutions will continue to pay higher FICO assessments. Such exit and entrance fees need not be paid if a SAIF institution converts to a bank charter or merges with a bank, as long as the resulting bank continues to pay applicable insurance assessments to the SAIF, and as long as certain other conditions are met. Regulatory Capital Currently, savings associations are subject to three separate minimum capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital requirement, and (iii) a risk-based capital requirement. The leverage limit requires that savings associations maintain "core capital" of at least 3% of total assets. Core capital is generally defined as common stockholders' equity (including retained income), noncumulative perpetual preferred stock and related surplus, certain minority equity interests in subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing rights, and purchased credit card relationships (subject to certain limitations) less nonqualifying intangibles. Under the tangible capital requirement, a savings association must maintain tangible capital (core capital less all intangible assets except purchased mortgage servicing rights which may be included after making the above-noted adjustments in an amount up to 100% of tangible capital) of at least 1.5% of total assets. Under the risk-based capital requirements, a minimum amount of capital must be maintained by a savings association to account for the relative risks inherent in the type and amount of assets held by the saving association. The risk-based capital requirement requires a savings association to maintain capital (defined generally for these purposes as core capital plus general valuation allowances and permanent or maturing capital instruments such as preferred stock and subordinated debt less assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four categories (0-100%) with a credit risk-free asset such as cash requiring no risk-based capital and an asset with a significant credit risk such as a delinquent commercial loan being assigned a factor of 100%. At June 30, 1998, based on the capital standards then in effect, First Federal was in compliance with the fully phased-in capital requirements. The OTS has delayed implementation of a rule which sets forth the methodology for calculating an interest rate risk component to be incorporated into the OTS regulatory capital rule. Under the rule, only savings associations with "above normal" interest rate risk (institutions whose portfolio equity would decline in value by more than 2% of assets in the event of a hypothetical 200 basis point move in interest rates) will be required to maintain additional capital for interest rate risk under the risk-based capital framework. A savings association with an "above normal" level of exposure will have to maintain additional capital equal to one-half the difference between its measured interest rate risk (the most adverse change in the market value of its portfolio resulting from a 200 basis point move in interest rates divided by the estimated market value of its assets) and 2%, multiplied by the market value of its assets. That dollar amount of capital is in addition to a savings association's existing risk-based capital requirement. Although the OTS has decided to delay implementation of this rule, it will continue to monitor closely the level of interest rate risk at individual savings associations and it retains the authority, on a case-by-case basis, to impose additional capital requirements for individual savings associations with significant interest rate risk. The OTS recently updated its standards regarding the management of interest rate risk to include summary guidelines to assist savings associations in determining their exposure to interest rate risk. In periods of rapidly changing interest rates, the Bank's balance sheet is subject to significant fluctuations in market value (interest rate risk exposure). However, as the delayed interest rate risk rules proposed by the OTS currently read, the Bank at June 30, 1998, would have no additional capital requirement. The Bank's management remains cognizant of the proposed rules and continues to monitor its interest rate risk position. The following is a summary of First Federal's regulatory capital and capital requirements at June, 30 1998: Tangible Core Risk-based Capital Capital Capital ---------- ------------------- ---------- (Dollars in thousands) Regulatory Capital $22,602 $22,602 $23,602 Minimum capital requirement 3,897 7,793 12,633 -------- ------- ------- Excess capital $18,705 $14,809 $10,969 Regulatory capital ratio 8.7% 8.7% 15.0% Minimum capital ratio 1.5% 3.0% 8.0% If an association is not in compliance with its capital requirements, the OTS is required to prohibit asset growth and to impose a capital directive that may restrict, among other things, the payment of dividends and officers' compensation. In addition, the OTS and FDIC generally are authorized to take enforcement actions against a savings association that fails to meet its capital requirements, which actions may include restrictions on operations and banking activities, the imposition of a capital directive, a cease and desist order, civil monetary penalties or harsher measures such as the appointment of a receiver or conservator or a forced merger into another institution. Prompt Corrective Action The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FedICIA") requires, among other things, federal bank regulatory authorities to take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, FedICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At June 30, 1998, the Bank was categorized as "well capitalized" meaning that the Bank's total risk-based capital ratio exceeded 10%, its Tier I risk-based ratio exceeded 6%, and its leverage ratio exceeded 5%, and the Bank was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. Capital Distribution Regulations An OTS regulation imposes limitations upon all "capital distributions" by savings associations, including cash dividends, payments by a savings association to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash- out merger and other distributions charged against capital. The regulation establishes a three-tiered system of regulation, with the greatest flexibility being afforded to well-capitalized institutions. A savings association which has total capital (immediately prior to and after giving effect to the capital distribution) that is at least equal to its fully phased-in capital requirements would be a Tier 1 institution. A savings association that has total capital at least equal to its minimum capital requirements, but less than its fully phased-in capital requirements, would be a Tier 2 institution. A savings association having total capital that is less than its minimum capital requirements would be a Tier 3 institution. However, a savings association which otherwise qualifies as a Tier 1 institution may be designated by the OTS as a Tier 2 or Tier 3 institution if the OTS determines that the savings association is "in need of more than normal supervision." First Federal is currently a Tier 1 institution. A Tier 1 Institution could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year up to the greater of (a) 100% of its net income to date during the calendar year plus an amount that would reduce by one-half its "surplus capital ratio" (the excess over its fully phased-in capital requirements) at the beginning of the calendar year, or (b) 75% of its net income over the most recent four quarter period. Any additional amount of capital distributions would require prior regulatory approval. The OTS has proposed revisions to these regulations which would permit a savings associations, without filing a prior notice or application with the OTS, to make a capital distribution to its shareholders in a maximum amount that does not exceed the association's undistributed net income for the prior two years plus the amount of its undistributed income from the current year. This proposed rule would require a savings association, such as First Federal, that is a subsidiary of a savings and loan holding company to file a notice with the OTS 30 days before making a capital distribution up to the "maximum amount" described above. The proposed rule would also require all savings associations, whether under a holding company or not, to file an application with the OTS prior to making any capital distribution where the association is not eligible for "expedited processing" under the OTS "Expedited Processing Regulation," or where the proposed distribution, together with any other distributions made in the same year, would exceed the "maximum amount" described above. Federal Reserve System Under FRB regulations, First Federal is required to maintain reserves against its transaction accounts (primarily checking and NOW accounts), and non-personal money market deposit accounts. The effect of these reserve requirements is to increase First Federal's cost of funds. First Federal is in compliance with its reserve requirements. A federal savings association, like other depository institutions maintaining reservable accounts, may borrow from the Federal Reserve Bank "discount window," but the FRB's regulations require the savings association to exhaust other reasonable alternative sources, including borrowing from its regional FHLB, before borrowing from the Federal Reserve Bank. FedICIA imposes certain limitations on the ability of undercapitalized depository institutions to borrow from Federal Reserve Banks. Holding Company Regulations Under current law, the Corporation is a savings and loan holding company within the meaning of the Home Owners' Loan Act, as amended ("HOLA"), and is subject to regulatory oversight of the Director of the OTS. As such, the Corporation is registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, First Federal is subject to certain restrictions in its dealings with the Corporation and with other companies affiliated with the Corporation. The HOLA generally prohibits a savings and loan holding company, without prior approval of the Director of the OTS, from (i) acquiring control of any other savings association or savings and loan holding company or controlling the assets thereof or (ii) acquiring or retaining more than 5 percent of the voting shares of a savings association or holding company thereof which is not a subsidiary. Additionally, under certain circumstances, a savings and loan holding company is permitted to acquire, with the approval of the Director of OTS, up to 15 percent of previously unissued voting shares of an under-capitalized savings association for cash without that savings association being deemed controlled by the holding company. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock may also acquire control of any savings association, other than a subsidiary association, or any other savings and loan holding company. The Corporation currently is a unitary savings and loan holding company, and under current law there are generally no restrictions on the activities of a unitary savings and loan holding company. However, if the Director of the OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness, or stability of its subsidiary savings association, the Director of the OTS may impose such restrictions as deemed necessary to address such risk and limiting (i) payment of dividends by the savings association, (ii) transactions between the savings association and its affiliates, and (iii) any activities of the savings association that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings association. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings association subsidiary of such a holding company fails to meet the Qualified Thrift Lender ("QTL") test, then such unitary holding company shall also presently become subject to the activities restrictions applicable to multiple holding companies. (Additional restrictions on securing advances from the Federal Home Loan Bank also apply.) See "-- Qualified Thrift Lender." At June 30, 1998, First Federal's asset composition was in excess of that required to qualify First Federal as a Qualified Thrift Lender. If the Corporation were to acquire control of another savings association other than through merger or other business combination with First Federal, the Corporation would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings association meets the QTL test, the activities of the Corporation and any of its subsidiaries (other than First Federal or other subsidiary savings associations) would thereafter be subject to further restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings association shall commence, or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings association, (iv) holding or managing properties used or occupied by a subsidiary savings association, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by the FSLIC by regulation as of March 5, 1987 to be engaged in by multiple holding companies or (vii) those activities authorized by the FRB as permissible for bank holding companies, unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS prior to being engaged in by a multiple holding company. The Director of the OTS may also approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 5, 1987, or if the laws of the state in which the association to be acquired is located specifically permit associations to be acquired by state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings associations). Also, the Director of the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. No subsidiary savings association of a savings and loan holding company may declare or pay dividends on its permanent or nonwithdrawable stock unless it first gives the Director of OTS thirty days advance notice of such declaration and payment. Any dividend declared during such period, or without the giving of such notice, shall be invalid. Federal Securities Law The shares of Common Stock of the Corporation are registered with the Securities and Exchange Commission (the "SEC") under the 1934 Act. The Corporation is therefore subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the 1934 Act and the rules of the SEC thereunder. Shares of Common Stock held by persons who are affiliates of the Corporation may not be resold without registration or unless sold in accordance with the resale restrictions of Rule 144 under the 1933 Act. If the Corporation meets the current public information requirements under Rule 144, each affiliate of the Corporation who complies with the other conditions of Rule 144 (including a one-year holding period and conditions that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Corporation or (ii) the average weekly volume of trading in such share during the preceding four calendar weeks. Qualified Thrift Lender Savings associations must meet a QTL test which requires a savings association to have at least 65% of its portfolio assets invested in "qualified thrift investments" on a monthly average basis in nine out of every twelve months. Qualified thrift investments under the QTL test include primarily residential mortgages and related investments, including certain mortgage related securities. Portfolio assets under the QTL test include all of an association's assets less (i) goodwill and other intangibles, (ii) the value of property used by the association to conduct its business, and (iii) its liquid assets as required to be maintained under law up to 20% of total assets. A savings association that fails to meet the QTL test must either convert to a bank (although its deposit insurance assessments will continue to be those of, and payments will continue to be made to, the SAIF) or be subject to the following penalties: (i) it may not enter into any new activity except for those permissible for a national bank and for a savings association; (ii) its branching activities shall be limited to those of a national bank; (iii) it shall not be eligible for any new FHLB advances; and (iv) it shall be bound by regulations applicable to national banks respecting payment of dividends. Three years after failing the QTL test the association must (i) dispose of any investment or activity not permissible for a national bank and a savings association and (ii) repay all outstanding FHLB advances. If such a savings association is controlled by a savings and loan holding company, then the holding company must within a prescribed time period become registered as a bank holding company and become subject to all rules and regulations applicable to bank holding companies (including restrictions as to the scope of permissible business activities). A savings association failing to meet the QTL test may requalify as a QTL if it thereafter meets the QTL test. In the event of such requalification, it shall not be subject to the penalties described above. A savings association which subsequently again fails to qualify under the QTL test shall become subject to all of the described penalties without application of any waiting period. At June 30, 1998, 83.0% of First Federal's portfolio assets (as defined on that date) were invested in qualified thrift investments (as defined on that date), and therefore First Federal's asset composition was in excess of that required to qualify First Federal as a QTL. First Federal does not expect to change significantly its lending or investment activities in the near future; and, therefore it expects to continue to qualify as a QTL, although there can be no such assurance. Community Reinvestment Act Matters Under current law, ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") must be disclosed. The disclosure will include both a four-unit descriptive rating - using terms such as satisfactory and unsatisfactory - and a written evaluation of each institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the Community Reinvestment Act and its record of lending to first-time home buyers. The FHLBs have established an "Affordable Housing Program" to subsidize the interest rate of advances to member associations engaged in lending for long-term, low- and moderate-income, owner-occupied and affordable rental housing at subsidized rates. First Federal has participated in such programs in the past and has plans to participate in the future. The examiners have determined that First Federal has a satisfactory record of meeting community credit needs. Taxation Federal Taxation Historically, savings associations, such as First Federal, have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, the Bank is no longer be able to use the percentage of taxable income method of computing its allocable tax bad debt deduction. The Bank is required to compute its allocable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. First Federal will recapture approximately $440,000 over a six year period which began in fiscal 1997. In addition, the pre-1988 reserve, in which no deferred taxes have been recorded, will not have to be recaptured into income unless (i) the Bank no longer qualifies as a bank under the Code, or (ii) excess dividends are paid out by the Bank. Depending on the composition of its items of income and expense, a savings institution may be subject to the alternative minimum tax. A savings institution must pay an alternative minimum tax equal to the amount (if any) by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before this adjustment and before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid that is attributable to most preferences (although not to post-August 7, 1986 tax-exempt interest) can be credited against regular tax due in later years. The Corporation and its subsidiaries file a consolidated federal income tax return, which has the effect of eliminating intercompany distributions, including dividends, in the computation of consolidated taxable income. Income of the Corporation generally would not be taken into account in determining the bad debt deduction allowed to First Federal, regardless of whether a consolidated tax return is filed. However, certain "functionally related" losses of the Corporation would be required to be taken into account in determining the permitted bad debt deduction. The Corporation's federal income tax returns for fiscal years 1997 and 1996 are currently being audited by the Internal Revenue Service. State Taxation For its taxable year beginning January 1, 1990, First Federal became subject to Indiana's Financial Institutions Tax ("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for purposes of FIT, begins with taxable income as defined by Section 63 of the Internal Revenue Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. Competition The Bank's primary market area consists of Knox County, Indiana. A majority of the Bank's savings deposits are received from residents of its primary market area, and a significant portion of its loans are secured by properties in this area. First Federal faces substantial competition both in the attraction of deposits and in the making of mortgage and other loans in its primary market area. Competition for the origination of real estate loans principally comes from other savings institutions, commercial banks, and mortgage banking companies located in its primary market area. Under current law, bank holding companies may acquire savings associations. Savings associations may also acquire banks under federal law. To date, several bank holding company acquisitions of healthy savings associations in Indiana have been completed. Affiliations between banks and healthy savings associations based in Indiana may also increase the competition faced by the Bank and the Corporation. In addition, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of- state branches either through merger or de novo expansion. The State of Indiana enacted legislation establishing interstate branching provisions for Indiana state chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law authorizes Indiana banks to branch interstate by merger or de novo expansion and authorizes out-of-state banks meeting certain requirements to branch into Indiana by merger or de novo expansion provided that acquisitions or de novo formations of branches by out-of-state banks are not permitted unless the laws of their home states permit Indiana banks to acquire or establish branches on a reciprocal basis. The Indiana Branching Law became effective March 15, 1996. The primary factors influencing competition for deposits are interest rates, service and convenience of office locations. The Bank competes for loan originations primarily through the efficiency and quality of services it provides borrowers and through interest rates and loan fees it charges. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels, and other factors that are not readily predictable. Current Accounting Issues In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and displaying comprehensive income and its components in the financial statements. Comprehensive income is the total of net income and all nonowner changes in shareholders' equity. SFAS 130 is effective for fiscal years beginning after December 15, 1997. The Corporation does not anticipate the adoption of SFAS 130 in fiscal 1999 will have any impact on its financial position or results of operations. In June 1997, The FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"), which requires the disclosure of financial and descriptive information about reportable operating segments. Operating segments are components of an enterprise about which financial information is available and is evaluated regularly in deciding how to allocate resources and assess performance. The Corporation does not anticipate the adoption of SFAS 131 in fiscal 1999 will have any impact on its financial position or results of operations. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employer's Disclosures About Pension and Other Postretirement Benefits ("SFAS 132"), which standardizes disclosure requirements for pension and other postretirement benefit plans. As this standard does not change the measurement or recognition of those plans, the Corporation does not anticipate the adoption of SFAS 132 in 1999 will have any impact on its financial position or results of operations. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments. SFAS 133 requires all derivatives to be recognized as either assets or liabilities in the statement of condition at fair value. The accounting for changes in fair value of the derivative depends on the intended use of the derivative and the resulting designation. The Corporation does not anticipate the adoption of SFAS 133 in fiscal 2000 will have a material impact on its financial position or results of operations. Employees As of September 9, 1998, 1ST BANCORP and its subsidiaries had 100 full-time and 7 part-time employees. None of these employees is represented by a collective bargaining agreement or union, and the Corporation believes it enjoys harmonious relations with its personnel. Item 2. Properties. At June 30, 1998, 1ST BANCORP and First Federal conducted their business and operations from the main office located at 101 North Third Street, Vincennes, Indiana; a drive-up branch facility at 1700 Willow Street, Vincennes, Indiana; and the office annex at 102 North Fifth Street, Vincennes, Indiana. The property and buildings are owned by the Bank with a net book value of $2.0 million at June 30, 1998. First Title conducted its business from the office annex located at 102 North Fifth Street, Vincennes, Indiana, at June 30, 1998. First Financial conducted its business from its office located at 626 Veterans Drive, Vincennes, Indiana. This property and building are owned by First Financial and had a net book value of $403,000 at June 30, 1998. A portion of the First Financial building is leased to an independent third party. Item 3. Legal Proceedings. Neither 1ST BANCORP, First Federal, First Financial, nor First Title is involved in any legal proceedings, other than routine proceedings occurring in the ordinary course of its business. Item 4. Submission of Matters to Vote of Security Holders. No matter was submitted to the Corporation's shareholders during the quarter ended June 30, 1998. Item 4.5 Executive Officers of the Corporation. Presented below is certain information regarding the executive officers of the Corporation or the Corporation's wholly owned subsidiary, First Federal Bank, A Federal Savings Bank: Frank Baracani (age 56) has been President and Director of the Corporation and First Federal during the past five years. Donald G. Bell (age 68) has been Vice President and Director of the Corporation; Director of First Federal; and Partner with the law firm of Hart, Bell, Cummings, Ewing & Stuckey, Vincennes, Indiana during the last five years. C. James McCormick (73) has been Chairman of the Board, Director and Chief Executive Officer of the Corporation, and Chairman of the Board and Director of First Federal during the last five years. Mary Lynn Stenftenagel (44) has been Director and Secretary - Treasurer of the Corporation and Director, Executive Vice President, and Chief Financial Officer of First Federal during the last five years. John J. Summers (68) has been Vice Chairman of the Board and Director of the Corporation and Vice Chairman of the Board and Director of First Federal during the last five years. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The information required herein is incorporated by reference from "Shareholder Information" and "Market Information" on page 44 of 1ST BANCORP's 1998 Annual Report to Shareholders (the "Annual Report to Shareholders"). Information concerning dividends paid by 1ST BANCORP is incorporated from "Selected Financial Highlights" on page 3 of the Annual Report to Shareholders. Item 6. Selected Financial Data. The information required herein is incorporated by reference from "Selected Financial Highlights" on page 3 of the Annual Report to Shareholders. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required herein is incorporated by reference from pages 7 to 15 of the Annual Report to Shareholders. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Because the majority of the Corporation's balance sheet consists of interest earning assets and interest bearing liabilities, it is exposed to interest rate risk. Therefore, additional information is being provided regarding the exposure to this interest rate risk. The OTS requires all regulated thrift institutions to calculate the estimated change in the institution's net portfolio value ("NPV") assuming instantaneous, parallel shifts in the Treasury yield curve of 100 to 400 basis points, either up or down, and in 100 basis point increments. The NPV is defined as the present value of expected cash flows from existing assets less the present value of expected cash flows from existing liabilities plus the present value of net expected cash inflows from existing off-balance sheet contracts. The OTS provides all institutions that file a schedule entitled the Consolidated Maturity & Rate schedule ("CMR") as a part of their quarterly Thrift Financial Report with an interest rate sensitivity report of NPV. The OTS simulation model uses a discounted cash flow analysis and an option-based pricing approach to measuring the interest rate sensitivity of NPV. The OTS model estimates the economic value of each type of asset, liability, and off-balance sheet contract under the assumption that the Treasury yield curve shifts instantaneous and parallel up and down 100 to 400 basis points in 100 basis point increments. The OTS allows thrifts under $500 million in total assets to use the results of their interest rate sensitivity model, which is based on information provided by the institution, to estimate the sensitivity of NPV. The OTS model utilizes an option-based pricing approach to estimate the sensitivity of mortgage loans. The most significant embedded option in these types of assets is the prepayment option of the borrowers. The OTS model uses various price indications and prepayment assumptions to estimate sensitivity of mortgage loans. The NPV sensitivity of the structured securities segment of the investment securities portfolio is provided by the Bank to the OTS and is not simulated by the OTS model. The sensitivity to interest rate changes of the Bank's structured securities is obtained by simulation analysis performed by independent third party investment brokers. The remaining investment securities are valued by the OTS model based upon a discounted cash flow approach which assumes semi-annual interest cash flows with principal repaid at maturity. The cash flows are discounted based upon Treasury security yields with similar maturities. In the OTS model, the value of deposit accounts appears on the asset and liability side of the NPV analysis. In estimating the value of certificates of deposit ("CD") accounts, the liability portion of the CD is represented by the implied value when comparing the difference between the CD face rate and available wholesale CD rates. On the asset side of the NPV calculation, the value of the "customer relationship" due to the rollover of retail CD deposits represents an intangible asset in the NPV calculation. Other deposit accounts such as transaction accounts, money market deposit accounts, passbook accounts, and noninterest bearing accounts also are included on the asset and liability side of the NPV calculation in the OTS model. These accounts are valued at 100% of the respective account balances on the liability side. On the asset side of the analysis, the value of the "customer relationship" of the various types of deposit accounts is reflected as a deposit intangible. The NPV sensitivity of borrowed funds is estimated by the OTS model based on a discounted cash flow approach. The cash flows are assumed to consist of monthly or semi-annual interest payments with principal paid at maturity (dependent upon the type of borrowing). These cash flows are discounted based upon London Interbank Offered Rates ("LIBOR"). The OTS model is based only on the Bank level balance sheet. Various asset and liability categories were adjusted to reflect the consolidated NPV of the Corporation. These adjustments were not material to the outcome of the simulation analysis of NPV. The most significant changes in the results of the OTS simulation analysis were primarily due to a downward trend in market interest rates and a change to a larger portfolio of FHLB putable advances in fiscal year 1998. There are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates. Therefore, this analysis is not necessarily intended to be a forecast of the actual effect of a change in market interest rates. The following table sets forth the Corporation's interest rate sensitivity of NPV as measured by the OTS model as of June 30, 1998 and 1997. Interest Rate Sensitivity as of June 30,1998
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 - - ------------------ ---------------------------------------------- ------------------------------------ +200 bp 30,995 (625) -2% 12.10% 19 bp +100 bp 32,075 455 1% 12.27% 36 bp 0 bp 31,620 11.91% -100 bp 29,829 (1,791) -6% 11.10% (81) bp -200 bp 27,576 (4,044) -13% 10.15% (176) bp
Interest Rate Sensitivity 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 - - ------------------ ----------------------------------------------- ------------------------------------ +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
Various strategies are in place to control the Corporation's exposure to interest rate risk. The Corporation has an Asset/Liability Committee ("ALCO") comprised of senior management personnel and directors which is primarily responsible for management of the Corporation's exposure to interest rate risk. The ALCO actively monitors the interest rate risk position and develops strategies to minimize its potential negative effects on the Corporation's financial condition. As its primary strategy to control the potential negative effects of the Corporation's market risk exposure, the ALCO actively adjusts its interest earning asset and interest bearing liability composition and pricing. Item 8. Financial Statements and Supplementary Data. The information required herein is incorporated by reference from pages 16 to 40 of the Annual Report to Shareholders. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no such changes or disagreements during the applicable period. PART III Item 10. Directors and Executive Officers of the Registrant. Information about the Corporation's executive officers is included in Item 4.5 in Part I of this report. The following tables set forth certain information regarding the nominees for the position of director of the Corporation and each director of the Corporation whose term continues, including the principal occupations of such persons during at least the past five years and the number and percent of shares of Common Stock beneficially owned by such persons as of September 9, 1998. No nominee for director or director is related to any other nominee for director or director or executive officer of the Corporation by blood, marriage, or adoption, and there are no arrangements or understandings between any nominee and any other person pursuant to which such nominee was selected. The table also sets forth the number of shares of Corporation Common Stock beneficially owned by all directors and executive officers as a group.
Common Stock Principal Director Director Beneficially Occupation Of the of First Term Owned as of During the Last Corporation Federal To September 9, Name and Age Five Years Since Since Expire 1998(1) - - ------------ ---------- ----- ----- ------ ------- Amount % ------ - Donald G. Vice President and Director 1989 1988 1998 50,889 4.64% Bell of the Corporation; Director (Age 68) of First Federal; Senior Partner with the law firm of Hart, Bell Cummings, Ewing & Stuckey Vincennes, Indiana Ruth Mix Director of the Corporation 1991 1981 1998 5,414 .49% Carnahan and Director and Treasurer (Age 79) of First Federal; Secretary- Treasurer of Carnahan Grain, Inc. Edwardsport, Indiana Rahmi Director of the Corporation 1991 1989 1998 105,112(2) 9.58% Soyugenc and of First Federal; (Age 67) President of Evansville Metal Products, Evansville, Indiana R. William Director of the Corporation 1991 1971 1999 33,050(3) 3.01% Ballard and of First Federal Bank; (Age 64) Retired Sr. Vice President of First Federal Frank D. President and Director of 1989 1984 1999 42,612(4) 3.86% Baracani the Corporation and (Age 56) President, Chief Executive Officer and Director of First Federal
Common Stock Principal Director Director Beneficially Occupation of the of First Term Owned as of During the Last Corporation Federal To September 9, Name and Age Five Years Since Since Expire 1998(1) - - ------------ ---------- ----- ----- ------ ------- Amount % ------ - James W. Director of the Corporation 1993 1993 2000 356(5) .03% Bobe and of First Federal; (Age 54) President, Bobe Farms, Inc. (farming) C. James Chairman of the Board and 1989 1966 2000 39,144(6) 3.55% McCormick Chief Executive Officer of (Age 73) the Corporation and Chairman of the Board of First Federal; Chairman of McCormick, Inc. and Commercial Rentals, Inc. and President of JAMAC Corp., all located in Vincennes, Indiana Mary Lynn Director and Secretary- 1989 1988 2000 34,167(7) 3.09% Stenftenagel Treasurer of the Corporation; (Age 44) Director, Executive Vice President, Secretary and Chief Financial Officer of First Federal John J. Vice Chairman of the Board 1989 1984 1999 28,672(8) 2.61% Summers of the Corporation and First (Age 68) Federal; retired President of Hamilton Glass Products, Inc., Vincennes, Indiana All directors and executive Officers as a 339,415(9) 30.43% group (9 persons)
(1) Based upon information furnished by the respective directors. Unless otherwise indicated, the named beneficial owner has sole voting and dispositive power with respect to the shares. (2) These shares include 4,340 shares held solely by Mr. Soyugenc's wife. (3) Of these shares, 5,909 shares are owned jointly with Mr. Ballard's wife. (4) Of these shares, 25,506 shares are owned jointly by Mr. Baracani and his wife, 51 shares are held in trust for Mr. Baracani's daughter, and 6,300 shares are subject to a stock option granted under the 1ST BANCORP Stock Option Plan ("the Stock Option Plan"). (5) All shares are owned jointly by Mr. Bobe and his wife. (6) These shares include 10,037 owned by each of two of McCormick's adult children, 3,544 owned by a third adult child of Mr. McCormick (collectively these beneficial owners are referred to as the "McCormick Family".) and 6,300 shares subject to a stock option granted under the Stock Option Plan. Except for the shares owned directly to which Mr. McCormick may be considered a beneficial owner, each member of the "McCormick Family" disclaims beneficial ownership of the shares held of record by each other member. (7) Includes 6,300 shares subject to a stock option granted under the Stock Option Plan. (8) All shares are owned by Mr. Summers' wife. (9) Includes stock options for 18,900 shares under the Stock Option Plan. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the 1934 Act requires that the Corporation's officers and directors and persons who own more than 10% of the Corporation's Common Stock file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC"). Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish the Corporation with copies of all Section 16(a) forms that they file. Based solely on its review of the copies of such forms received by it, and/or written representations from certain reporting persons that no Forms 5 were required for those persons, the Corporation believes that during the fiscal year ended June 30, 1998, all filing requirements applicable to its officers, directors and greater than 10% beneficial owners with respect to Section 16(a) of the 1934 Act were satisfied in a timely manner. Item 11. Executive Compensation. During the fiscal year ended June 30, 1998, no cash compensation was paid directly by the Corporation to any of its executive officers. Each of such officers was compensated by First Federal. However, the corporation reimbursed First Federal for certain of these compensation expenses. The following table sets forth information as to annual, long-term and other compensation for services in all capacities to the Corporation and its subsidiaries for the last three fiscal years, of (i) the individual who served as chief executive officer of the Corporation during the fiscal year ended June 30, 1998, and (ii) each executive officer of the Corporation serving as such during the 1998 fiscal year, who earned over $100,000 in salary and bonuses during that year (the "Named Executive Officers").
Summary Compensation Table Long Term Annual Compensation Compensation ------------------------------------------------------------------------ Awards --------------------------- Other Annual Restricted Securities All Name and Principal Fiscal Compensation Stock Underlying Other Position Year Salary($)(1) Bonus($)(2) ($)(3) Awards($) Options(#) Compensation($) - - -------- ---- ------------ ------------------ ---------- ---------- --------------- C. James McCormick 1998 $47,218 $33,000 - - 6,300 - Chairman of the Board 1997 $43,531 $25,000 - - 6,300 - and Chief Executive 1996 41,865 34,729 - - - - Officer of the Corporation and Chairman of the Board of First Federal Frank D. Baracani 1998 $113,008 $91,750 - - 6,518 - President and Director 1997 $105,845 $72,000 - - 6,490 - of the Corporation 1996 101,626 97,000 - - 171 - and First Federal and Chief Executive Officer of First Federal Mary Lynn Stenftenagel 1998 77,816 $58,750 - - 7,027 - Director and Secretary- 1997 72,616 $48,000 - - 6,926 - Treasurer of the 1996 69,471 64,000 - - 555 - Corporation, Director, Executive Vice President, Secretary, and Chief Financial Officer of First Federal
(1) Salary consists of salary and directors' fees. Directors' fees were deferred by these individuals pursuant to the Corporation's Director Deferred Compensation Plan. (2) The bonus amounts are paid pursuant to First Federal's Management Incentive Plan and were accrued in fiscal years to which they relate. (3) The Named Executive Officer of the Corporation receive certain perquisites, but the incremental cost of providing such perquisites does not exceed the lesser of $50,000 or 10% of the officer's salary and bonus. Stock Options The following table sets forth information related to options granted during fiscal year 1998 to each of the Named Executive Officers: Option Grants-Last Fiscal Year
% of Total Options Granted to Exercise or Options Employees Base Price Name Granted (#) in Fiscal Year ($/Share) Expiration Date - - ---------------------- ------------- ------------------ ------------- --------------- C. James McCormick --- ---% $ --- --- Frank D. Baracani 218 (1) 4.86% $16.59 (1) 6/30/98 Mary Lynn Stenftenagel 727 (1) 16.23% $16.59 (1) 6/30/98
(1) Options to acquire shares of the Corporation's Common Stock pursuant to the Corporation's Employee Stock Purchase Plan. The option exercise price equaled 85% of the lower of the market value of a share of Corporation Common Stock on July 1, 1997 and on June 30, 1998, which was $19.52 per share. The following table shows stock option exercises by the Named Executive Officers during fiscal 1998, including the aggregate value realized by such officers on the date of exercise. The following table includes the number of shares covered by stock options held by the Named Executive Officers as of June 30, 1998. Also reported are the values for "in-the-money" options (options whose exercise price is lower than the market value of the shares at fiscal year end) which represent the spread between the exercise price of any such existing stock options and the year-end market price of the stock. Aggregate Option Exercises in Last Fiscal Year and Outstanding Stock Option Grants and Value Realized As of 6/30/98
Number of Securities Value of Unexercised Shares Value Realized Underlying Unexercised In-the-Money Acquired on at Exercise Options at Fiscal Year End Options at Fiscal Year End Name Exercise(#) Date($)(1) Exercisable Unexercisable Exercisable Unexercisable - - ---- ----------- ---------- ----------- ------------- ----------- ------------- C. James McCormick - - 6,300 - $147,672 - Frank D. Baracani 218 $ 5,648 6,300 - $147,672 - Lynn Stenftenagel 727 $ 18,837 6,300 - $147,672 -
(1) Aggregate market value of the shares covered by the option less the aggregate price paid by the Named Executive Officer (2) Amounts reflecting gains on outstanding option are based on the June 30, 1998 closing price of $42.50 per share. Director's Fees Directors of the Corporation are paid $150 for each regular monthly meeting of the Board of Directors. Directors of First Federal are paid $600 for each regular monthly meeting of the Board of directors of First Federal and members of committees of First Federal's Board of Directors who are not employees of the Corporation subsidiaries are paid $300 per Committee meeting attended. Director Deferred Compensation Plan Effective July 1, 1993, First Federal entered into deferred compensation agreements with each of its directors. Under the Agreements, First Federal will defer an amount equal to $600 to which the director would otherwise be entitled from First Federal for each month of the deferral. The director will have the option of apportioning the deferral between a guaranteed investment account which provides a fixed rate of return and a phantom unit account which provides a return equivalent to the appreciation in the Corporation's Common Stock during the period of the deferral. At the time the director reaches his or her normal retirement date, the value of his or her guaranteed account and phantom stock account will be annuitized and provide him or her with 180 monthly payments. There are other provisions in the Agreement which provide for earlier payment in the case of disability or in the case of death. In addition, there is a one time burial benefit equal to $10,000. Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of September 9, 1998, by each person who is known by the Corporation to own beneficially 5% or more of the outstanding shares of Common Stock of the Corporation.
Number of Shares of Name and Address of Common Stock Beneficially Percent of Beneficial Owner Owned (1)(2) Class Rahmi Soyugenc 105,112(3) 9.58% 119 LaDonna Boulevard Evansville, Indiana 47711 Investors of America Limited Partnership 99,176 9.04% (formerly Dierberg Four, L.P.) c/o First Securities America, Inc. 39 Glen Eagles Drive St. Louis, Missouri 63124 Joseph H. 91,500 8.34% Moss 1100 Circle 75 Parkway Suite 800 Atlanta, Georgia 30339
(1) Under applicable regulations, shares are deemed to be beneficially owned by a "person if he or she directly or indirectly has or shares the power to vote or dispose of the shares. Unless otherwise indicated, the named beneficial owner has sole voting and dispositive power with respect to the shares. (2) The information in this chart is based on Schedule 13D Reports and amendments thereto filed by the above listed individuals with the Securities and Exchange Commission (the "SEC") containing information concerning shares held by them, and written communications from the shareholders. It does not reflect any changes in those shareholdings which may have occurred since the date of such filings, amendments, or communications. (3) These shares include 4,340 shares held solely by Mr. Soyugenc's wife. Information concerning the beneficial owners of shares by the Corporation's management is incorporated from Item 10 of this report. Item 13. Certain Relationships and Related Transactions. During fiscal 1998 the Corporation and its subsidiaries retained the law firm of Hart, Bell, Cummings, Ewing & Stuckey ("Hart, Bell"), of which firm Mr. Donald G. Bell, director of the Corporation and First Federal, is a retired partner. Indebtedness of Management Since the beginning of its fiscal year ended June 30, 1998, First Federal had outstanding from time to time loans which were made to the directors and executive officers of the Corporation and their associates, as defined in Regulations of the SEC. First Federal offers loans to its directors, officers and employees. However, all of such loans were made in the ordinary course of business, at substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with nonaffiliated persons and did not involve more than the normal risk of collectibility or present other unfavorable features. PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Documents Filed as Part of this Report The following financial statements are incorporated by reference (see Exhibit 13): Page in the 1998 Annual Report to Financial Statements Shareholders Independent Auditors' Report 16 Consolidated Statements of Financial Condition as of June 30, 1998, and 1997. 17 Consolidated Statements of Earnings for the Years Ended June 30, 1998, 1997, and 1996. 18 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1998, 1997, and 1996. 19 Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1997, and 1996. 20 Notes to Consolidated Financial Statements. 21 (b) There were no reports on Form 8-K filed during the quarter ended June 30, 1998. (c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on page 50. (d) All schedules are omitted as the required information either is not applicable or is included in the Consolidated Financial Statements or related notes. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 1ST BANCORP Date: September 28, 1998 By:/s/ C. James McCormick ------------------------------------- C. James McCormick Chief Executive Officer Date: September 28, 1998 By:/s/ Frank D. Baracani ------------------------------------- Frank D. Baracani Director and President Each person whose individual signature appears below hereby authorizes Frank D. Baracani as attorney-in-fact with full power of substitution to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Form 10-K. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities and on the dates set forth below: /s/ C. James McCormick Date: September 28, 1998 - - ------------------------------------------ C. James McCormick, Chairman of the Board and Chief Executive Officer /s/ John J. Summers Date: September 28, 1998 - - ------------------------------------------ John J. Summers, Vice Chairman of the Board /s/ Frank D. Baracani Date: September 28, 1998 - - ------------------------------------------ Frank D. Baracani, Director, President /s/ Donald G. Bell Date: September 28, 1998 - - ------------------------------------------ Donald G. Bell, Director, Vice President /s/ Mary Lynn Stenftenagel Date: September 28, 1998 - - ------------------------------------------ Mary Lynn Stenftenagel, Director, Secretary/Treasurer (Principal Accounting and Financial Officer) /s/ R. William Ballard Date: September 28, 1998 - - ------------------------------------------ R. William Ballard, Director /s/ Rahmi Soyugenc Date: September 28, 1998 - - ------------------------------------------ Rahmi Soyugenc, Director /s/ Ruth Mix Carnahan Date: September 28, 1998 - - ------------------------------------------ Ruth Mix Carnahan, Director /s/ James W. Bobe Date: September 28, 1998 - - ------------------------------------------ James W. Bobe, Director EXHIBIT INDEX No. Exhibits Page 3a Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Registrant's Registration Statement on Form S-4, Registration No. 33-24587, filed September 28, 1988 (the "Registration Statement"). * 3b Restated By-Laws of 1ST BANCORP (incorporated by reference to Exhibit 3b to the Registrant's Form 10-K for the year ended June 30, 1994). * 10a Incentive Stock Option Plan (incorporated by reference from Exhibit 10a-1 to the Registrant's Form 10-K for the year ended June 30, 1991). * 10b 1ST BANCORP Stock Option Plan (incorporated by reference from Exhibit 10b-1 to the Registrant's Form 10-K for the year ended June 30, 1991). * 10c First Federal Management Incentive Plan for Fiscal Year 1998. * 10d Form of Amended and Restated Director Deferred Compensation Agreement, restated as of December 31, 1997 between First Federal and each of C. James McCormick, John J. Summers, Frank D. Baracani, Mary Lynn Stenftenagel, Robert W. Ballard, Ruth Mix Carnahan, Donald G. Bell, Rahmi Soyugenc, and James W. Bobe. * 10e Form of Executive Supplemental Retirement Income Agreement, dated July 1, 1993, between First Federal and each of C. James McCormick, Frank D. Baracani, Mary Lynn Stenftenagel (incorporated by reference to Exhibit 10d to the Registrant's Form 10-K for the year ended June 30, 1994). First Amendments to the foregoing Agreements Frank D. Baracani and Mary Lynn Stenftenagel are attached. * 13 Annual Report to Shareholders __ 21 Subsidiaries of the Registrant __ 23a Independent Auditors' Consent __ 23b Independent Auditors' Consent __ 23c Independent Auditors' Consent __ 27 Financial Data Schedule (to be filed electronically) (*) Previously filed with the SEC and by this reference incorporated into this Annual Report. EX-10.C 2 MANAGEMENT INCENTIVE AWARD PLAN First Federal Bank, A Federal Savings Bank MANAGEMENT INCENTIVE AWARD PLAN 1998 PLAN YEAR Effective Date: July 1, 1997 Management Incentive Award Plan July 1,1997 SECTION I RESTRICTIONS ON INFORMATION The contents of this Plan shall be disseminated only to the eligible employees of the "Bank,, who are Participants as named on Exhibit "A,, and others on a "need to know" basis. The President may elect a more limited distribution. SECTION II PURPOSE OF THE PLAN The purpose of the Plan is to provide those employees of the Bank, primarily responsible for the development and execution of strategies, management of personnel and programs, innovation, and earning of profits, with an incentive, beyond their salaries, to strive for the long term production of higher than average return on equity for the Bank. In general it is the philosophy of the Board of Directors that base salaries on these employees be held below the prevailing base salaries on Bank peers but, based on results, the sum of base and incentive can approach or even exceed the highest peer's total compensation. This allows a substantial part of compensation to be tied to personal and Bank performance and provides motivation by -- 1. requiring the production of an acceptable level of after-tax profit for the shareholders before employee participation; 2. requiring the establishment of individual year-end performance reviews which compliment those of the Chairman and President and serve to demonstrate the achievement of strategic and personal performance which may or may not reflect in short-term profit; and 3. providing guidance in an equitable method of allocating individual awards based on performance, contribution and achievement. Careful thought has gone into the development of this Plan. It is believed to provide an effective motivational tool for management participants in a safe and sound environment to produce better than average return on equity for the shareholders. - 1 - Management Incentive Award Plan July 1, 1997 SECTION III ADMINISTRATION OF THE PLAN The Plan will be administered by the Personnel and Pension Committee of the Board of Directors with the assistance of the Chairman of the Board and the President. The Committee shall have the right to interpret the Plan and to approve for recommendation to the Board of Directors the list of Participants (Exhibit "A"). The Board of Directors may amend, modify or terminate the Plan at any time prior to the distribution of the incentive payment as set forth in Section VIII. Said amendment, modification, or termination may be retroactive, and no employee shall have any vested rights pursuant to this Plan. The Plan is not and does not become a part of any present or future employment contract. No earned or anticipated incentive payment may be attached, transferred, pledged or assigned. Upon clear evidence of such action, the Board of Directors may, without notification, elect to withhold the payment of all or any part of any individual's payment. Incentive awards shall be treated as an expense in the Fiscal Year in which the awards are earned and not the Fiscal Year in which paid. Proper withholding for taxes shall be applied to all awards under this Plan. First Federal Bank, A F.S.B. shall not merge into or consolidate with another entity or sell all or substantially all of its assets to another entity unless such other entity becomes obligated to perform the terms and conditions relating to awards already earned but not yet paid. SECTION IV PARTICIPANT ELIGIBILITY A Participant must be a management employee as provided for in Exhibit "A" of this Plan and remain in the employ of the Bank through June 30, 1998 for consideration. Except, if a Participant dies, becomes disabled, retires or is granted, in writing, a Leave of Absence under 1ST BANCORP's Personnel Policy, the Chairman of the Board or President may, at their discretion, recommend for the Committee's review and the Board of Directors ultimate approval, a partial award based on Participant's performance, contribution and achievement of goals. Other management employees, such as those employed in branch mortgage origination offices and First Financial Insurance Agency, Inc. are incentive compensated on another basis more directly identifiable with their operations and are not included in this Plan. - 2 - Management Incentive Award Plan July 1, 1997 SECTION V GENERAL PREMISES This Plan is based on four fundamental factors: 1. After tax but before incentive year-end profit as adjusted by the Board of Directors for any extraordinary factors or those which could be perceived as resulting from risk taking to achieve short-term profits. 2. Equity. 3. Maximizing the potential contribution of each Participant based on resources and direction afforded the individual. 4. The appraisal of each Participant's individual job performance and contribution towards the Bank's long-term goals. SECTION VI EVALUATING PERFORMANCE The Board of Directors desires that the organization's management function as a team and strive to achieve results together. Toward this end, while none of us are prescient, we require that personal objectives or areas of work emphasis for the year be identified that are expected to contribute to the whole. By July 30, 1998, each if the participants listed in Exhibit "A", with the exception of the Board Chairman, President and Executive Vice President, shall prepare and submit a chronological listing, with some narrative explanation to define scope and/or benefit to the bank, of their accomplishments during the preceding FY, to the President. The President shall review the submissions of accomplishments and as he deems appropriate consult with both the individuals and supervisors. The President with the Board Chairman and Executive Vice President, shall rank order the submissions and provide copies of the participants' submission, plus their rank order to the Chairman of the Pension and Personnel Committee, for their information no later than August 15th. - 3 - Management Incentive Award Plan July 1, 1997 By August 15th, the Board Chairman, President and Executive Vice President, shall prepare and submit a chronological listing, with some narrative explanation to define scope and/or benefit to the bank, of their accomplishments during the preceding FY, to the Chairman of the Pension and Personnel Committee if so requested. The Pension and Personnel Committee shall meet and after reviewing the accomplishments of the Board Chairman, President and Executive Vice President, allocate their performance bonuses At the August monthly Board of Directors Meeting the Chairman of the Pension and Personnel Committee will submit his recommendations for the allocation of the annual bonus pool. The Pension and Personnel Committee will advise the President of the balance of funds available for allocation among the remaining plan participants no later than August 30th. Following discussion and approval of the recommendations the distribution of the annual bonuses will be affected to all participants in a Special September Payroll on or before September 15th. SECTION VII DETERMINATION OF INCENTIVE AWARD FUND The Board of Directors anticipates each year to contain challenges for the management team. Wanting to continue to emphasize a results based compensation component while first rewarding shareholders, it seems prudent to base the Management Incentive Award Fund on the Bank's Return on Equity. As of June 30, 1998, the Management Incentive Award Fund will be determined as follows: 1. The Board of Directors has determined 1ST BANCORP's equity as of the end of the FY1997, to be $22,332,876. A base Net Income of $781,650 is required for the Management Incentive Award Plan. 2. If 1ST BANCORPS's Net Income exceeds $781,650, then 20% of the excess shall be deemed eligible for and the basis for establishing the Management Incentive Award Fund subject to review by the Board of Directors. 3. The Management Incentive Award Fund is to be reviewed by the Board of Directors and, at their sole discretion, adjusted for extraordinary effects during the Fiscal Year and/or for any transactions that resulted from excessive risk-taking to achieve short- term results. It is understood that there is normally a risk-reward relationship. The Board of Directors' judgment will be employed in the assessment of the limit of "acceptable,, risk-taking. - 4 - Management Incentive Award Plan July 1, 1997 SECTION VIII DISTRIBUTION The Personnel and Pension Committee, none of whom are Participants, will look first at the sum of the year's earnings of all Participants and the difference between that and the annual total compensation of the most recent peer survey(s) of positions most like ours. That compared to the Management Incentive Award Fund generated in Section VII will guide in the overall allocation of the individual awards. The Chairman of the Board, President and Executive Vice President & CFO shall report to the Personnel and Pension Committee on accomplishments of their individual objectives as set forth under Section VI. That, along with the Personnel and Pension Committee's ongoing assessment through Board of Directors and Personnel and Pension Committee meetings, Audit Reports, 10Q's and K's, Examination Reports, and any other factors they deem pertinent, will become the basis for their evaluation and the Chairman of the Board and the President. The Chairman of the Board and the President will be invited to participate in the evaluation of the Executive Vice President & CFO. The Personnel and Pension Committee, with the Chairman of the Board and the President, will recommend to the entire Board of Directors, the individual incentive awards to the Chairman of the Board, President and the Executive Vice President & CFO. The President, with and through his management organization, will evaluate the remaining other Participants' performance based on their synopsis of achievements during the Fiscal Year and any other factors deemed pertinent. Objective achievement will be a significant factor, though we appreciate that evaluation is not an exact science. Other factors that may be considered would be creativity and innovation brought to the job, community involvement, professional development, teamwork, attendance, size of staff, cost consciousness, budgetary responsibility, revenue generation, additional responsibility assumed during the Fiscal Year not otherwise addressed all as a part of a total job performance evaluation. Based on the above individual evaluations and knowing the amount of the Management Incentive Award Fund remaining to be allocated, the President will prepare a listing showing the names of all Plan Participants and the incentive award recommended for each by him. Appropriate explanation and/or interpretation should accompany any unusual situation(s). Final distribution/allocation approval of the Management Incentive Award Fund is reserved for the Board of Directors. Payout of the Management Incentive Award Fund, if generated, will be effected by September 15, 1997. - 5 - Management Incentive Award Plan July 1, 1997 SECTION IX CONCLUSION It is the intention of the First Federal Bank, A F.S.B. to administer the Management Incentive Award Plan so the maximum benefits commensurate with safe and sound business practices will result for all Plan Participants and thereby generously favor the shareholders. All restrictions, provisions for changes and relief are included to provide maximum protection for the administrators and stockholders, and to provide for the continuation of this Plan or some other plan to accomplish the purposes set forth in Section II. The Board of Directors will review the Plan annually, in the light of the then-current conditions and Plan operation. If there are changes called for to better meet the purpose, appropriate revisions will be adopted. Every effort will be made to announce those changes to Participants before the Plan Year, but no later than the end of the first quarter. The Bank reaffirms its commitment to the principles of management participation in setting of goals, and in incentive compensation after shareholder satisfaction in recognition of achievement. The Bank firmly believes that a strong incentive program will produce results for the shareholders. - 6 - Management Incentive Award Plan July 1, 1997 EXHIBIT "A" MANAGEMENT INCENTIVE AWARD PLAN PARTICIPANTS -- 97/98 C. James MCCORMICK, Chairman of the Board Frank D. BARACANI, President & CEO M. Lynn STENFTENAGEL, Executive Vice President & CFO Carroll C. HAMNER, Senior Vice President Gerald R. BELANGER, Senior Vice President Bradley M. RUST, Senior Vice President & Controller Laura E. BOGARD, Vice President Cheryl A. OTTEN, Vice President Paula J. PESCH, Vice President Jay A. BAKER, Assistant Vice President Doris J. BLACKBURN, Assistant Vice President Doralynn ELLIOTT, Assistant Vice President Kelly J. GAY, Assistant Vice President Ruth E. HUNTER, Assistant Vice President Randall W. PRATT, Assistant Vice President Carol A. WITSHORK, Assistant Vice President IN ADDITION TO THE ABOVE LISTED OFFICERS OF FIRST FEDERAL BANK, A F.S.B., AS OF JULY 1, 1997, INDIVIDUALS SUBSEQUENTLY APPOINTED/PROMOTED AS OFFICERS IN THE GRADE OF ASSISTANT VICE PRESIDENT OR ABOVE IN THE COURSE OF THE FISCAL YEAR 1998, SHALL BE DEEMED ELIGIBLE TO PARTICIPATE IN THE MANAGEMENT INCENTIVE AWARD PROGRAM, SUBJECT TO THE RECOMMENDATION OF THE PRESIDENT, AND APPROVAL OF THE BOARD OF DIRECTORS, SUCH PARTICIPATION MAY BE ON A PRO RATA BASIS AS A PERCENTAGE OF THE FISCAL YEAR THAT THEY SERVE IN AN OFFICER CAPACITY. IT IS NOTED THAT CURRENT AND FUTURE OFFICERS ASSIGNED TO MORTGAGE ORIGINATION OFFICES ARE EXCLUDED FROM THE PLAN AND THAT ELIGIBILITY IS CONTINGENT UPON BEING IN A QUALIFIED ACTIVE OFFICER STATUS AT THE END OF THE PLAN YEAR. EX-10.D.1 3 DIRECTOR DEFERRED COMPENSATION AGREEMENT FIRST FEDERAL BANK, AFSB DIRECTOR DEFERRED COMPENSATION AGREEMENT (AS AMENDED AND RESTATED EFFECTIVE DECEMBER 31, 1997) THIS DIRECTOR DEFERRED COMPENSATION AGREEMENT (THE "AGREEMENT"), originally effective as of the 1st day of July, 1993, and as amended and restated effective December 31, 1997 by and between FIRST FEDERAL BANK, AFSB, a banking corporation organized and existing under the laws of the United States (hereinafter referred to as "Bank") and C. James McCormick (hereinafter referred to as "Director"), for the purpose of formalizing the agreement between the Bank and the Director in which the Director defers receipt of fees under the terms and conditions described below. WITNESSETH: WHEREAS, the Director serves the Bank as a member of the Board of Directors; and WHEREAS, the Bank recognizes the valuable services heretofore performed for it by the Director and wishes to encourage continued service; and WHEREAS, the Bank values the efforts, abilities and accomplishments of the Director and recognizes that the Director's services will substantially contribute to its continued growth and profits in the future; and WHEREAS, the Director wishes to defer a certain portion of fees to be earned in the future; and WHEREAS, the parties hereto desire to formalize the terms and conditions upon which the Bank shall pay such deferred compensation to the Director and/or his designated beneficiary; and WHEREAS, the Bank has adopted this Director Deferred Compensation Agreement which controls all issues relating to the deferral of fees as described herein; NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties hereto agree to the following terms and conditions: SECTION I DEFINITIONS When used herein, the following words and phrases shall have the meanings below unless the context clearly indicates otherwise: 1.1 "Accrued Benefit" means the sum of all deferred amounts and interest credited to the Director's Retirement Account and due and owing to the Director or his Beneficiaries pursuant to this Agreement. 1.2 "Bank" means FIRST FEDERAL BANK, AFSB or any successor thereto. 1.3 "Beneficiary" means the person, persons (and their heirs) or other entity designated as Beneficiary in writing to the Bank to whom the share of the deceased Director's Retirement Account is payable in the event of his death. If no Beneficiary is so designated, then the Director's Spouse, if living, will be deemed the Beneficiary. If the Director's Spouse is not living, then the Children of Director will be deemed the Beneficiaries and will take on a per stirpes basis. If there are no living Children, then the Estate of the Director will be deemed the Beneficiary. 1.4 "Board" means the Board of Directors of the Bank. 1.5 "Children" means the Director's children, both natural and adopted, then living at the time payments are due the Children under this Agreement. 1.6 "Deferral Period" means the period in which the Director has in effect a deferral election; provided, however, that the Deferral Period shall automatically terminate on June 30, 1998 or, if earlier, on the date of the Director's Normal Retirement Date. 1.7 "Deferred Compensation Benefit" means that benefit which can be provided by annuitizing the Director's Retirement Account balance as of the Valuation Date immediately preceding the initial distribution date over a one hundred eighty (180) month period. A monthly interest factor of 1.075% shall be used to annuitize the account balance. 1.8 "Disability" means the determination by a duly licensed physician selected by the Bank that because of ill health, accident, disability or general inability because of age, that Director is no longer able, properly and satisfactorily, to perform his duties as a Director. 1.9 "Effective Date" shall be July 1, 1993. 1.10 "Estate" means the Estate (including, when applicable, any irrevocable trust governing the transfer of non-probate assets) of the Director. 1.11 "Guaranteed Investment Contract Account" means book entries maintained by the Bank reflecting deferred amounts with interest being credited at the rate of .667% per month; provided, however, that the existence of such book entries and the existence of the Guaranteed Investment Contract Account shall not create and shall not be deemed to create a trust of any kind, or fiduciary relationship between the Bank and the Director, his designated Beneficiary or Beneficiaries under this Agreement. 1.12 "Normal Retirement Date" means January 1, 1999. 1.13 "Payout Period" means the time frame in which certain benefits payable hereunder shall be distributed. Payments shall be made in equal consecutive monthly installments commencing on the first day of the month coincident with or next following the occurrence of any event which triggers distribution and continuing for a period of one hundred eighty (180) months. 1.14 "Phantom Unit Account" means the total value of all units of phantom stock purchased by the Director, each having a value equal to the fair market value (as determined in the manner provided below) of a share of 1ST BANCORP common stock. The fair market value of the Director's Phantom Unit Account shall be determined as of the Valuation Date immediately preceding the date on which the Director's Retirement Account is annuitized by converting each phantom unit to an amount equal to the closing bid price of 1ST BANCORP's common stock on such Valuation Date. The Director shall purchase phantom units at a price per share equal to eighty-five percent (85%) of the fair market value (as determined above) of a share of 1ST BANCORP's common stock on the Valuation Date immediately preceding the calendar year quarter to which the deferral of fees and purchase relates. The Director's Phantom Unit Account shall also be credited with additional phantom units at each date on which 1ST BANCORP makes a cash dividend or an in kind dividend (other than its common stock) with respect to its shares. The number of units to be credited shall be determined by dividing the amount of the cash dividend or the fair market value of any in kind dividend by 85% of the fair market value (as determined above) of a share of 1ST BANCORP's common stock on the Valuation Date immediately preceding the calendar year quarter in which the dividend is paid with respect to 1ST BANCORP's common stock. 1.15 "Retirement Account" means book entries maintained by the Bank reflecting deferred amounts and equal to the sum of the Guaranteed Investment Contract Account and the Phantom Unit Account. The existence of such book entries and the Retirement Account shall not create and shall not be deemed to create a trust of any kind, or a fiduciary relationship between the Bank and the Director, his designated Beneficiary, or other Beneficiaries under this Agreement. 1.16 "Spouse" means the individual to whom the Director is legally married at the time of the Director's death. 1.17 "Survivor's Benefit" means monthly level payments to the Beneficiary in the amount of Eight Hundred Ten Dollars and Eighty-Three Cents ($810.83) for one hundred eighty (180) months. In the event the Survivor's Benefit is less than the Deferred Compensation Benefit, the Deferred Compensation benefit shall be paid in lieu of the Survivor's Benefit. In no event is it intended for the Director to receive both a Survivor's Benefit and Deferred Compensation Benefit. 1.18 "Valuation Date" means the last business day of March, June, September, December beginning on and after June 30, 1993. SECTION II DEFERRED COMPENSATION Commencing on the Effective Date, and continuing through the end of the Deferral Period, the Director and the Bank agree that the Director shall defer into his Retirement Account monthly Director's fees of Six Hundred ($600.00) Dollars that the Director would otherwise be entitled to receive from the Bank for each month of the Deferral Period. The Director shall direct the apportionment of his monthly deferral between the Guaranteed Investment Contract Account and the Phantom Unit Account. Such allocation shall be in twenty-five (25%) percent increments and shall be evidenced in writing by completion of an Election Form (Exhibit B). If the Director fails to submit an Election Form, one hundred percent (100%) of his monthly deferrals shall be allocated to the Guaranteed Investment Contract Account. The Director shall have the right to change such apportionment once per year for new deferrals and for existing bookkeeping balances held in his Retirement Account, such change becoming effective at the next plan anniversary date (January 1). Any change in the allocation for existing balances may be made in whole dollar amounts or in twenty-five percent (25%) increments. Any such change must also be evidenced in writing to become effective. SECTION III TERMINATION OF ELECTION AND NEW ELECTIONS The Director's election to defer compensation shall continue in effect, pursuant to the terms of this Agreement unless and until the Director files with the Bank a Notice of Discontinuance (Exhibit C attached hereto). A Notice of Discontinuance shall be effective if filed at least twenty (20) days prior to any January 1st. Such Notice of Discontinuance shall be effective commencing with the January 1st following its filing. If the Director discontinues his deferrals, he may reinstate the deferrals as of a January 1st by filing in writing an election to recommence deferrals at least twenty (20) days prior to the January 1st on which the deferrals are to recommence. SECTION IV RETIREMENT BENEFIT 4.1 Retirement Benefit. At Normal Retirement Date, the Bank agrees to commence payment of the Director's Deferred Compensation Benefit. Such payments will be in accordance with the terms of the Payout Period. 4.2 Disability Retirement Benefit. Notwithstanding any other provision hereof, the Director shall be entitled to receive his Deferred Compensation Benefits hereunder prior to his Normal Retirement Date in any case the Director terminates service due to Disability. The benefit shall be distributed in accordance with the Payout Period. In the event the total benefits received by the Director pursuant to this Subsection are less than the total Survivor's Benefit [i.e., One Hundred Forty-Five Thousand Nine Hundred Fifty Dollars ($145,950)], upon Director's death, an additional lump sum payment shall be made to Director's Beneficiary to make up the difference between these two (2) gross benefit amounts. SECTION V DEATH BENEFITS 5.1 Death Prior to Termination of Service. In the event of the Director's death prior to termination of service with the Bank, while covered by the provisions of this Agreement, the Director's Beneficiary shall be paid the Survivor's Benefit. Payments shall be in accordance with the Payout Period. 5.2 Death After Termination of Service. In the event of the Director's death after his termination of service, but prior to commencing receipt of benefit payments under this Agreement, the Director's Beneficiary shall be paid a monthly amount for a period of one hundred eighty (180) months, commencing within thirty (30) days of the Director's death. The amount of such benefit payment shall be determined as follows: (a) If the Director has deferred less than Thirty-Six Thousand Dollars ($36,000), the Director's Beneficiary shall be paid a reduced Survivor's Benefit, which shall be determined by multiplying the Survivor's Benefit (Eight Hundred Ten Dollars and Eighty-Three Cents ($810.83)) by a fraction, the numerator of which shall be equal to the total compensation actually deferred by the Executive and the denominator of which shall be equal to Thirty-Six Thousand Dollars ($36,000). (b) If death occurs after the Director has deferred Thirty-Six Thousand Dollars ($36,000), his Beneficiary shall be paid the Survivor's Benefit. 5.3 Death After Commencement of Benefits. In the event of the Director's death after the commencement of the Deferred Compensation Benefit, but prior to the completion of all such payments due and owing hereunder, the Bank shall continue to make monthly payments to the Director's Beneficiary until a total of one hundred eighty (180) equal monthly payments have been made to the Director and/or his Beneficiary. 5.4 Additional Death Benefit Burial Expense. In addition to the above-described death benefits, upon the Director's death, the Director's Beneficiary shall be entitled to receive a one-time lump sum death benefit in the amount of Ten Thousand ($10,000.00) Dollars; provided, however, that if the Director ceases to be a member of the Board before July 1, 1998 for reasons other than his death or disability, the one-time lump sum election death benefit otherwise provided in this Subsection shall not be payable. SECTION VI CHANGES IN CAPITAL AND CORPORATE STRUCTURE In the event of any change in the outstanding shares of common stock of the Bank by reason of an issuance of additional shares, recapitalization, reclassification, reorganization, stock split, reverse stock split, combination of shares, stock dividend or similar transaction, the Board shall proportionately adjust, in an equitable manner, the number of phantom units in the Director's Phantom Unit Account as well as the purchase price of phantom units. The foregoing adjustments shall be made in a manner that will cause the relationship between the cost and market value of each phantom unit purchased hereunder to remain unchanged as a result of the applicable transaction. SECTION VII BENEFICIARY DESIGNATION The Director shall have the right, at any time, to submit in substantially the form attached hereto as Exhibit A, a written designation of primary and secondary Beneficiaries to whom payment under this Agreement shall be made in the event of his death prior to complete distribution of the benefits due and payable under the Agreement. Each Beneficiary designation shall become effective only when receipt thereof is acknowledged in writing by the Bank. SECTION VIII DIRECTOR'S RIGHT TO ASSETS The rights of the Director, any Beneficiary, or any other person claiming through the Director under this Agreement, shall be solely those of an unsecured general creditor of the Bank. The Director, the Beneficiary, or any other person claiming through the Director, shall only have the right to receive from the Bank those payments as specified under this Agreement. The Director agrees that he, his Beneficiary, or any other person claiming through him shall have no rights or interests whatsoever in any asset of the Bank, including any insurance policies or contracts which the Bank may possess or obtain to informally fund this Agreement. Any asset used or acquired by the Bank in connection with the liabilities it has assumed under this Agreement, except as expressly provided, shall not be deemed to be held under any trust for the benefit of the Director or his Beneficiaries, nor shall any asset be considered security for the performance of the obligations of the Bank. Any such asset shall be and remain, a general, unpledged, and unrestricted asset of the Bank. SECTION IX RESTRICTIONS UPON FUNDING The Bank shall have no obligation to set aside, earmark or entrust any fund or money with which to pay its obligations under this Agreement. The Director, his Beneficiaries or any successor in interest to him shall be and remain simply a general unsecured creditor of the Bank in the same manner as any other creditor having a general claim for matured and unpaid compensation. The Bank reserves the absolute right at its sole discretion to either purchase assets to meet its obligations undertaken by this Agreement or to refrain from the same and to determine the extent, nature, and method of such asset purchases. Should the Bank decide to purchase assets such as life insurance, mutual funds, disability policies or annuities, the Bank reserves the absolute right, in its sole discretion, to terminate such assets at any time, in whole or in part. At no time shall the Director be deemed to have any lien, nor right, title or interest in or to any specific investment or to any assets of the Bank. If the Bank elects to invest in a life insurance, disability or annuity policy upon the life of the Director, then the Director shall assist the Bank by freely submitting to a physical examination and supplying such additional information necessary to obtain such insurance or annuities. SECTION X ALIENABILITY AND ASSIGNMENT PROHIBITION Neither the Director nor any Beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Director or his Beneficiary, nor be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. SECTION XI ACT PROVISIONS 11.1 Named Fiduciary and Administrator. The Bank shall be the named fiduciary and administrator of this Agreement. As administrator, the Bank shall be responsible for the management, control and administration of the Agreement as established herein. The administrator may delegate to others certain aspects of the management and operational responsibilities of the Agreement, including the employment of advisors and the delegation of ministerial duties to qualified individuals. 11.2 Claims Procedure and Arbitration. In the event that benefits under this Agreement are not paid to the Director (or to his Beneficiary in the case of the Director's death) and such claimants feel they are entitled to receive such benefits, then a written claim must be made to the Bank within sixty (60) days from the date payments are refused. The Bank and its Board shall review the written claim and, if the claim is denied, in whole or in part, they shall provide in writing, within ninety (90) days of receipt of such claim, their specific reasons for such denial, reference to the provisions of this Agreement upon which the denial is based, and any additional material or information necessary to perfect the claim. Such written notice shall further indicate the additional steps to be taken by claimants if a further review of the claim denial is desired. If claimants desire a second review, they shall notify the Bank in writing within sixty (60) days of the first claim denial. Claimants may review the Agreement or any documents relating thereto and submit any written issues and comments they may feel appropriate. In its sole discretion, the Bank, through the disinterested member of its Board, shall then review the second claim and provide a written decision within sixty (60) days of receipt of such claim. This decision shall likewise state the specific reasons for the decision and shall include reference to specific provisions of the Agreement upon which the decision is based. If claimants continue to dispute the benefit denial based upon completed performance of the Agreement or the meaning and effect of the terms and conditions thereof, then claimants may submit the dispute to a board of Arbitration for final arbitration. Said board shall consist of one member selected by the claimant, one member selected by the Bank, and the third member selected by the first two members. The board of Arbitration shall operate under any generally recognized set of arbitration rules. The parties hereto agree that they and their heirs, personal representatives, successors and assigns shall be bound by the decision of such arbitration board with respect to any controversy properly submitted to it for determination. SECTION XII MISCELLANEOUS 12.1 No Effect on Directorship Rights. Nothing contained herein will confer upon the Director the right to be retained in the service of the Bank nor limit the right of the Bank to discharge or otherwise deal with the Director without regard to the existence of the Agreement. Pursuant to 12 C.F.R. ss. 563.39(b), the following conditions shall apply to this Agreement: (1) The Board may remove the Director at any time, but any removal by the Board shall not prejudice the Director's vested right to compensation or other benefits under the contract. (2) If the Director is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)) the Bank's obligations under the contract shall be suspended as of the date of termination of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Director all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (3) If the Director is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all obligations of the Bank under the contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (4) If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under the contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (5) All non-vested obligations under the contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the Bank: (i) by the Director or his designee at the time the Federal Deposit Insurance Corporation or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in ss. 13(c) of the Federal Deposit Insurance Act; or (ii) by the Director or his designee, at the time the Director or his designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. 12.2 State Law. The Agreement is established under, and will be construed according to, the laws of the State of Indiana. 12.3 Severability. In the event that any of the provisions of this Agreement or portion thereof, are held to be inoperative or invalid by any court of competent jurisdiction, then: (1) insofar as is reasonable, effect will be given to the intent manifested in the provisions held invalid or inoperative, and (2) the validity and enforceability of the remaining provisions will not be affected thereby. 12.4 Incapacity of Recipient. In the event the Director is declared incompetent and a conservator or other person legally charged with the care of his person or of his estate is appointed, any benefits under the Agreement to which such the Director is entitled shall be paid to such conservator or other person legally charged with the care of his person or his estate. Except as provided above in this paragraph, when the Board, in its sole discretion, determines that the Director is unable to manage his financial affairs, the Board may direct the Bank to make distributions to any person for the benefit of the Director. 12.5 Recovery of Estate Taxes. If the Director's gross estate for federal estate tax purposes includes any amount determined by reference to and on account of this Deferred Compensation Agreement, and if the Beneficiary is other than the Director's Estate, then the Director's Estate shall be entitled to recover from the Beneficiary receiving such benefit under the terms of the Survivor's Benefit an amount by which (x) the total estate tax due by Director's estate, exceeds (y) the total estate tax which would have been payable if the value of such benefit had not been included in the Director's gross Estate. If there is more than one person receiving such benefit, the right of recovery shall be against each such person in proportion to the benefits received by each such person. In the event any Beneficiary has a liability hereunder, such Beneficiary may petition the Bank for a lump sum payment in an amount not to exceed the Beneficiary's liability hereunder. 12.6 Unclaimed Benefit. The Director shall keep the Bank informed of his current address and the current address of his Beneficiaries. The Bank shall not be obligated to search for the whereabouts of any person. If within three (3) years after the actual death of the Director the Bank is unable to locate any Beneficiary of the Director, then the Bank may fully discharge its obligation by payment to the Estate. 12.7 Limitations on Liability. Notwithstanding any of the preceding provisions of the Agreement and except for the benefits otherwise payable under this Agreement, neither the Bank, nor any individual acting as an employee or agent of the Bank, or as a member of the Board shall be liable to the Director or any other person for any claim, loss, liability or expense incurred in connection with the Agreement. 12.8 Gender. Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. 12.9 Affect on Other Corporate Benefit Agreements. Nothing contained in this Agreement shall affect the right of the Director to participate in or be covered by any qualified or non-qualified pension, profit sharing, group, bonus or other supplemental compensation or fringe benefit agreement constituting a part of the Bank's existing or future compensation structure. 12.10 Suicide. Notwithstanding anything to the contrary in this Agreement, the Survivor Benefits otherwise provided herein shall not be payable if the Director's death results from suicide, whether sane or insane, within two (2) years after the execution of this Agreement. If the Director dies during this two year period due to suicide, the balance of the Retirement Account will be paid to the Director's designated Beneficiary in a single payment. Payment is to be made within thirty (30) days after the Director's death is declared a suicide by competent legal authority. Credit shall be given to the Bank for payments made prior to determination of suicide. 12.11 Headings. Headings and sub-headings in this Agreement are inserted for reference and convenience only and shall not be deemed a part of this Agreement. SECTION XIII AMENDMENT/REVOCATION This Agreement shall not be amended, modified or revoked at any time, in whole or part, without the mutual written consent of the Director and the Bank, and such mutual consent shall be required even if the Director is no longer serving the Bank as a member of the Board. SECTION XIV EXECUTION 14.1 This Agreement sets forth the entire understanding of the parties hereto with respect to the transactions contemplated hereby, and any previous agreements or understandings between the parties hereto regarding the subject matter hereof are merged into and superseded by this Agreement. 14.2 This Agreement shall be executed in duplicate, each copy of which, when so executed and delivered, shall be an original, but both copies shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Amended and Restated Agreement to be executed on this 19th day of Dec., 1997. /s/ C. James McCormick C. James McCormick FIRST FEDERAL BANK, AFSB By: Lynn Stenftenagel Executive Vice President (Title) DIRECTOR DEFERRED COMPENSATION AGREEMENT BENEFICIARY DESIGNATION _____________________, under the terms of a certain Director Deferred Compensation Agreement by and between him and FIRST FEDERAL BANK, AFSB, Vincennes, Indiana, dated __________________, 19__, hereby designates the following Beneficiary to receive any guaranteed payments or death benefits under such Agreement, following his death: PRIMARY BENEFICIARY: SECONDARY BENEFICIARY: This Beneficiary Designation hereby revokes any prior Beneficiary Designation which may have been in effect. Such Beneficiary Designation is revocable. DATE: , 19 (WITNESS) , Director (WITNESS) Exhibit A DIRECTOR DEFERRED COMPENSATION AGREEMENT ELECTION FORM NAME: (Please Print) Investment Allocation Election: I hereby elect to have my monthly deferrals credited with earnings or losses based on the following allocation: (Indicate Percentage in Increments of 25% Only) Guaranteed Investment Contract Account _______ % Phantom Unit Account _______ % Total (Must Equal 100%) _______ % DATE , Director Exhibit B DIRECTOR DEFERRED COMPENSATION AGREEMENT NOTICE OF DISCONTINUANCE TO: FIRST FEDERAL BANK, AFSB Attention: I hereby give notice of my election to discontinue deferral of my compensation under that certain Director Deferred Compensation Agreement, by and between Bank and the undersigned, dated the ____ day of __________, 199 . This notice is submitted at least twenty (20) days prior to January 1st and shall be effective as of such date, as specified below. Discontinue deferral as of January 1, 19___. , Director DATE Exhibit C EX-10.D.2 4 DIRECTOR DEFERRED COMPENSATION AGREEMENT FIRST FEDERAL BANK, AFSB DIRECTOR DEFERRED COMPENSATION AGREEMENT (AS AMENDED AND RESTATED EFFECTIVE DECEMBER 31, 1997) THIS DIRECTOR DEFERRED COMPENSATION AGREEMENT (THE "AGREEMENT"), originally effective as of the 1st day of July, 1993, and as amended and restated effective December 31, 1997 by and between FIRST FEDERAL BANK, AFSB, a banking corporation organized and existing under the laws of the United States (hereinafter referred to as "Bank") and Ruth Mix Carnahan (hereinafter referred to as "Director"), for the purpose of formalizing the agreement between the Bank and the Director in which the Director defers receipt of fees under the terms and conditions described below. WITNESSETH: WHEREAS, the Director serves the Bank as a member of the Board of Directors; and WHEREAS, the Bank recognizes the valuable services heretofore performed for it by the Director and wishes to encourage continued service; and WHEREAS, the Bank values the efforts, abilities and accomplishments of the Director and recognizes that the Director's services will substantially contribute to its continued growth and profits in the future; and WHEREAS, the Director wishes to defer a certain portion of fees to be earned in the future; and WHEREAS, the parties hereto desire to formalize the terms and conditions upon which the Bank shall pay such deferred compensation to the Director and/or his designated beneficiary; and WHEREAS, the Bank has adopted this Director Deferred Compensation Agreement which controls all issues relating to the deferral of fees as described herein; NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties hereto agree to the following terms and conditions: SECTION I DEFINITIONS When used herein, the following words and phrases shall have the meanings below unless the context clearly indicates otherwise: 1.1 "Accrued Benefit" means the sum of all deferred amounts and interest credited to the Director's Retirement Account and due and owing to the Director or his Beneficiaries pursuant to this Agreement. 1.2 "Bank" means FIRST FEDERAL BANK, AFSB or any successor thereto. 1.3 "Beneficiary" means the person, persons (and their heirs) or other entity designated as Beneficiary in writing to the Bank to whom the share of the deceased Director's Retirement Account is payable in the event of his death. If no Beneficiary is so designated, then the Director's Spouse, if living, will be deemed the Beneficiary. If the Director's Spouse is not living, then the Children of Director will be deemed the Beneficiaries and will take on a per stirpes basis. If there are no living Children, then the Estate of the Director will be deemed the Beneficiary. 1.4 "Board" means the Board of Directors of the Bank. 1.5 "Children" means the Director's children, both natural and adopted, then living at the time payments are due the Children under this Agreement. 1.6 "Deferral Period" means the period in which the Director has in effect a deferral election; provided, however, that the Deferral Period shall automatically terminate on June 30, 1998 or, if earlier, on the date of the Director's Normal Retirement Date. 1.7 "Deferred Compensation Benefit" means that benefit which can be provided by annuitizing the Director's Retirement Account balance as of the Valuation Date immediately preceding the initial distribution date over a one hundred eighty (180) month period. A monthly interest factor of 1.075% shall be used to annuitize the account balance. 1.8 "Disability" means the determination by a duly licensed physician selected by the Bank that because of ill health, accident, disability or general inability because of age, that Director is no longer able, properly and satisfactorily, to perform his duties as a Director. 1.9 "Effective Date" shall be July 1, 1993. 1.10 "Estate" means the Estate (including, when applicable, any irrevocable trust governing the transfer of non-probate assets) of the Director. 1.11 "Guaranteed Investment Contract Account" means book entries maintained by the Bank reflecting deferred amounts with interest being credited at the rate of .667% per month; provided, however, that the existence of such book entries and the existence of the Guaranteed Investment Contract Account shall not create and shall not be deemed to create a trust of any kind, or fiduciary relationship between the Bank and the Director, his designated Beneficiary or Beneficiaries under this Agreement. 1.12 "Normal Retirement Date" means January 1, 1998. 1.13 "Payout Period" means the time frame in which certain benefits payable hereunder shall be distributed. Payments shall be made in equal consecutive monthly installments commencing on the first day of the month coincident with or next following the occurrence of any event which triggers distribution and continuing for a period of one hundred eighty (180) months. 1.14 "Phantom Unit Account" means the total value of all units of phantom stock purchased by the Director, each having a value equal to the fair market value (as determined in the manner provided below) of a share of 1ST BANCORP common stock. The fair market value of the Director's Phantom Unit Account shall be determined as of the Valuation Date immediately preceding the date on which the Director's Retirement Account is annuitized by converting each phantom unit to an amount equal to the closing bid price of 1ST BANCORP's common stock on such Valuation Date. The Director shall purchase phantom units at a price per share equal to eighty-five percent (85%) of the fair market value (as determined above) of a share of 1ST BANCORP's common stock on the Valuation Date immediately preceding the calendar year quarter to which the deferral of fees and purchase relates. The Director's Phantom Unit Account shall also be credited with additional phantom units at each date on which 1ST BANCORP makes a cash dividend or an in kind dividend (other than its common stock) with respect to its shares. The number of units to be credited shall be determined by dividing the amount of the cash dividend or the fair market value of any in kind dividend by 85% of the fair market value (as determined above) of a share of 1ST BANCORP's common stock on the Valuation Date immediately preceding the calendar year quarter in which the dividend is paid with respect to 1ST BANCORP's common stock. 1.15 "Retirement Account" means book entries maintained by the Bank reflecting deferred amounts and equal to the sum of the Guaranteed Investment Contract Account and the Phantom Unit Account. The existence of such book entries and the Retirement Account shall not create and shall not be deemed to create a trust of any kind, or a fiduciary relationship between the Bank and the Director, his designated Beneficiary, or other Beneficiaries under this Agreement. 1.16 "Spouse" means the individual to whom the Director is legally married at the time of the Director's death. 1.17 "Survivor's Benefit" means monthly level payments to the Beneficiary in the amount of Five Hundred Fifty-Nine Dollars ($559) for one hundred eighty (180) months. In the event the Survivor's Benefit is less than the Deferred Compensation Benefit, the Deferred Compensation benefit shall be paid in lieu of the Survivor's Benefit. In no event is it intended for the Director to receive both a Survivor's Benefit and Deferred Compensation Benefit. 1.18 "Valuation Date" means the last business day of March, June, September, December beginning on and after June 30, 1993. SECTION II DEFERRED COMPENSATION Commencing on the Effective Date, and continuing through the end of the Deferral Period, the Director and the Bank agree that the Director shall defer into his Retirement Account monthly Director's fees of Six Hundred ($600.00) Dollars that the Director would otherwise be entitled to receive from the Bank for each month of the Deferral Period. The Director shall direct the apportionment of his monthly deferral between the Guaranteed Investment Contract Account and the Phantom Unit Account. Such allocation shall be in twenty-five (25%) percent increments and shall be evidenced in writing by completion of an Election Form (Exhibit B). If the Director fails to submit an Election Form, one hundred percent (100%) of his monthly deferrals shall be allocated to the Guaranteed Investment Contract Account. The Director shall have the right to change such apportionment once per year for new deferrals and for existing bookkeeping balances held in his Retirement Account, such change becoming effective at the next plan anniversary date (January 1). Any change in the allocation for existing balances may be made in whole dollar amounts or in twenty-five percent (25%) increments. Any such change must also be evidenced in writing to become effective. SECTION III TERMINATION OF ELECTION AND NEW ELECTIONS The Director's election to defer compensation shall continue in effect, pursuant to the terms of this Agreement unless and until the Director files with the Bank a Notice of Discontinuance (Exhibit C attached hereto). A Notice of Discontinuance shall be effective if filed at least twenty (20) days prior to any January 1st. Such Notice of Discontinuance shall be effective commencing with the January 1st following its filing. If the Director discontinues his deferrals, he may reinstate the deferrals as of a January 1st by filing in writing an election to recommence deferrals at least twenty (20) days prior to the January 1st on which the deferrals are to recommence. SECTION IV RETIREMENT BENEFIT 4.1 Retirement Benefit. At Normal Retirement Date, the Bank agrees to commence payment of the Director's Deferred Compensation Benefit. Such payments will be in accordance with the terms of the Payout Period. 4.2 Disability Retirement Benefit. Notwithstanding any other provision hereof, the Director shall be entitled to receive his Deferred Compensation Benefits hereunder prior to his Normal Retirement Date in any case the Director terminates service due to Disability. The benefit shall be distributed in accordance with the Payout Period. In the event the total benefits received by the Director pursuant to this Subsection are less than the total Survivor's Benefit [i.e., One Hundred Thousand Six Hundred Twenty Dollars ($100,620)], upon Director's death, an additional lump sum payment shall be made to Director's Beneficiary to make up the difference between these two (2) gross benefit amounts. SECTION V DEATH BENEFITS 5.1 Death Prior to Termination of Service. In the event of the Director's death prior to termination of service with the Bank, while covered by the provisions of this Agreement, the Director's Beneficiary shall be paid the Survivor's Benefit. Payments shall be in accordance with the Payout Period. 5.2 Death After Termination of Service. In the event of the Director's death after his termination of service, but prior to commencing receipt of benefit payments under this Agreement, the Director's Beneficiary shall be paid a monthly amount for a period of one hundred eighty (180) months, commencing within thirty (30) days of the Director's death. The amount of such benefit payment shall be determined as follows: (a) If the Director has deferred less than Twenty-Eight Thousand Eight Hundred Dollars ($28,800), the Director's Beneficiary shall be paid a reduced Survivor's Benefit, which shall be determined by multiplying the Survivor's Benefit (Five Hundred Fifty-Nine Dollars ($559)) by a fraction, the numerator of which shall be equal to the total compensation actually deferred by the Executive and the denominator of which shall be equal to Twenty-Eight Thousand Eight Hundred Dollars ($28,800). (b) If death occurs after the Director has deferred Twenty-Eight Thousand Eight Hundred Dollars ($28,800), his Beneficiary shall be paid the Survivor's Benefit. 5.3 Death After Commencement of Benefits. In the event of the Director's death after the commencement of the Deferred Compensation Benefit, but prior to the completion of all such payments due and owing hereunder, the Bank shall continue to make monthly payments to the Director's Beneficiary until a total of one hundred eighty (180) equal monthly payments have been made to the Director and/or his Beneficiary. 5.4 Additional Death Benefit Burial Expense. In addition to the above-described death benefits, upon the Director's death, the Director's Beneficiary shall be entitled to receive a one-time lump sum death benefit in the amount of Ten Thousand ($10,000.00) Dollars; provided, however, that if the Director ceases to be a member of the Board before July 1, 1998 for reasons other than his death or disability, the one-time lump sum election death benefit otherwise provided in this Subsection shall not be payable. SECTION VI CHANGES IN CAPITAL AND CORPORATE STRUCTURE In the event of any change in the outstanding shares of common stock of the Bank by reason of an issuance of additional shares, recapitalization, reclassification, reorganization, stock split, reverse stock split, combination of shares, stock dividend or similar transaction, the Board shall proportionately adjust, in an equitable manner, the number of phantom units in the Director's Phantom Unit Account as well as the purchase price of phantom units. The foregoing adjustments shall be made in a manner that will cause the relationship between the cost and market value of each phantom unit purchased hereunder to remain unchanged as a result of the applicable transaction. SECTION VII BENEFICIARY DESIGNATION The Director shall have the right, at any time, to submit in substantially the form attached hereto as Exhibit A, a written designation of primary and secondary Beneficiaries to whom payment under this Agreement shall be made in the event of his death prior to complete distribution of the benefits due and payable under the Agreement. Each Beneficiary designation shall become effective only when receipt thereof is acknowledged in writing by the Bank. SECTION VIII DIRECTOR'S RIGHT TO ASSETS The rights of the Director, any Beneficiary, or any other person claiming through the Director under this Agreement, shall be solely those of an unsecured general creditor of the Bank. The Director, the Beneficiary, or any other person claiming through the Director, shall only have the right to receive from the Bank those payments as specified under this Agreement. The Director agrees that he, his Beneficiary, or any other person claiming through him shall have no rights or interests whatsoever in any asset of the Bank, including any insurance policies or contracts which the Bank may possess or obtain to informally fund this Agreement. Any asset used or acquired by the Bank in connection with the liabilities it has assumed under this Agreement, except as expressly provided, shall not be deemed to be held under any trust for the benefit of the Director or his Beneficiaries, nor shall any asset be considered security for the performance of the obligations of the Bank. Any such asset shall be and remain, a general, unpledged, and unrestricted asset of the Bank. SECTION IX RESTRICTIONS UPON FUNDING The Bank shall have no obligation to set aside, earmark or entrust any fund or money with which to pay its obligations under this Agreement. The Director, his Beneficiaries or any successor in interest to him shall be and remain simply a general unsecured creditor of the Bank in the same manner as any other creditor having a general claim for matured and unpaid compensation. The Bank reserves the absolute right at its sole discretion to either purchase assets to meet its obligations undertaken by this Agreement or to refrain from the same and to determine the extent, nature, and method of such asset purchases. Should the Bank decide to purchase assets such as life insurance, mutual funds, disability policies or annuities, the Bank reserves the absolute right, in its sole discretion, to terminate such assets at any time, in whole or in part. At no time shall the Director be deemed to have any lien, nor right, title or interest in or to any specific investment or to any assets of the Bank. If the Bank elects to invest in a life insurance, disability or annuity policy upon the life of the Director, then the Director shall assist the Bank by freely submitting to a physical examination and supplying such additional information necessary to obtain such insurance or annuities. SECTION X ALIENABILITY AND ASSIGNMENT PROHIBITION Neither the Director nor any Beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Director or his Beneficiary, nor be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. SECTION XI ACT PROVISIONS 11.1 Named Fiduciary and Administrator. The Bank shall be the named fiduciary and administrator of this Agreement. As administrator, the Bank shall be responsible for the management, control and administration of the Agreement as established herein. The administrator may delegate to others certain aspects of the management and operational responsibilities of the Agreement, including the employment of advisors and the delegation of ministerial duties to qualified individuals. 11.2 Claims Procedure and Arbitration. In the event that benefits under this Agreement are not paid to the Director (or to his Beneficiary in the case of the Director's death) and such claimants feel they are entitled to receive such benefits, then a written claim must be made to the Bank within sixty (60) days from the date payments are refused. The Bank and its Board shall review the written claim and, if the claim is denied, in whole or in part, they shall provide in writing, within ninety (90) days of receipt of such claim, their specific reasons for such denial, reference to the provisions of this Agreement upon which the denial is based, and any additional material or information necessary to perfect the claim. Such written notice shall further indicate the additional steps to be taken by claimants if a further review of the claim denial is desired. If claimants desire a second review, they shall notify the Bank in writing within sixty (60) days of the first claim denial. Claimants may review the Agreement or any documents relating thereto and submit any written issues and comments they may feel appropriate. In its sole discretion, the Bank, through the disinterested member of its Board, shall then review the second claim and provide a written decision within sixty (60) days of receipt of such claim. This decision shall likewise state the specific reasons for the decision and shall include reference to specific provisions of the Agreement upon which the decision is based. If claimants continue to dispute the benefit denial based upon completed performance of the Agreement or the meaning and effect of the terms and conditions thereof, then claimants may submit the dispute to a board of Arbitration for final arbitration. Said board shall consist of one member selected by the claimant, one member selected by the Bank, and the third member selected by the first two members. The board of Arbitration shall operate under any generally recognized set of arbitration rules. The parties hereto agree that they and their heirs, personal representatives, successors and assigns shall be bound by the decision of such arbitration board with respect to any controversy properly submitted to it for determination. SECTION XII MISCELLANEOUS 12.1 No Effect on Directorship Rights. Nothing contained herein will confer upon the Director the right to be retained in the service of the Bank nor limit the right of the Bank to discharge or otherwise deal with the Director without regard to the existence of the Agreement. Pursuant to 12 C.F.R. ss. 563.39(b), the following conditions shall apply to this Agreement: (1) The Board may remove the Director at any time, but any removal by the Board shall not prejudice the Director's vested right to compensation or other benefits under the contract. (2) If the Director is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)) the Bank's obligations under the contract shall be suspended as of the date of termination of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Director all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (3) If the Director is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all obligations of the Bank under the contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (4) If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under the contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (5) All non-vested obligations under the contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the Bank: (i) by the Director or his designee at the time the Federal Deposit Insurance Corporation or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in ss. 13(c) of the Federal Deposit Insurance Act; or (ii) by the Director or his designee, at the time the Director or his designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. 12.2 State Law. The Agreement is established under, and will be construed according to, the laws of the State of Indiana. 12.3 Severability. In the event that any of the provisions of this Agreement or portion thereof, are held to be inoperative or invalid by any court of competent jurisdiction, then: (1) insofar as is reasonable, effect will be given to the intent manifested in the provisions held invalid or inoperative, and (2) the validity and enforceability of the remaining provisions will not be affected thereby. 12.4 Incapacity of Recipient. In the event the Director is declared incompetent and a conservator or other person legally charged with the care of his person or of his estate is appointed, any benefits under the Agreement to which such the Director is entitled shall be paid to such conservator or other person legally charged with the care of his person or his estate. Except as provided above in this paragraph, when the Board, in its sole discretion, determines that the Director is unable to manage his financial affairs, the Board may direct the Bank to make distributions to any person for the benefit of the Director. 12.5 Recovery of Estate Taxes. If the Director's gross estate for federal estate tax purposes includes any amount determined by reference to and on account of this Deferred Compensation Agreement, and if the Beneficiary is other than the Director's Estate, then the Director's Estate shall be entitled to recover from the Beneficiary receiving such benefit under the terms of the Survivor's Benefit an amount by which (x) the total estate tax due by Director's estate, exceeds (y) the total estate tax which would have been payable if the value of such benefit had not been included in the Director's gross Estate. If there is more than one person receiving such benefit, the right of recovery shall be against each such person in proportion to the benefits received by each such person. In the event any Beneficiary has a liability hereunder, such Beneficiary may petition the Bank for a lump sum payment in an amount not to exceed the Beneficiary's liability hereunder. 12.6 Unclaimed Benefit. The Director shall keep the Bank informed of his current address and the current address of his Beneficiaries. The Bank shall not be obligated to search for the whereabouts of any person. If within three (3) years after the actual death of the Director the Bank is unable to locate any Beneficiary of the Director, then the Bank may fully discharge its obligation by payment to the Estate. 12.7 Limitations on Liability. Notwithstanding any of the preceding provisions of the Agreement and except for the benefits otherwise payable under this Agreement, neither the Bank, nor any individual acting as an employee or agent of the Bank, or as a member of the Board shall be liable to the Director or any other person for any claim, loss, liability or expense incurred in connection with the Agreement. 12.8 Gender. Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. 12.9 Affect on Other Corporate Benefit Agreements. Nothing contained in this Agreement shall affect the right of the Director to participate in or be covered by any qualified or non-qualified pension, profit sharing, group, bonus or other supplemental compensation or fringe benefit agreement constituting a part of the Bank's existing or future compensation structure. 12.10 Suicide. Notwithstanding anything to the contrary in this Agreement, the Survivor Benefits otherwise provided herein shall not be payable if the Director's death results from suicide, whether sane or insane, within two (2) years after the execution of this Agreement. If the Director dies during this two year period due to suicide, the balance of the Retirement Account will be paid to the Director's designated Beneficiary in a single payment. Payment is to be made within thirty (30) days after the Director's death is declared a suicide by competent legal authority. Credit shall be given to the Bank for payments made prior to determination of suicide. 12.11 Headings. Headings and sub-headings in this Agreement are inserted for reference and convenience only and shall not be deemed a part of this Agreement. SECTION XIII AMENDMENT/REVOCATION This Agreement shall not be amended, modified or revoked at any time, in whole or part, without the mutual written consent of the Director and the Bank, and such mutual consent shall be required even if the Director is no longer serving the Bank as a member of the Board. SECTION XIV EXECUTION 14.1 This Agreement sets forth the entire understanding of the parties hereto with respect to the transactions contemplated hereby, and any previous agreements or understandings between the parties hereto regarding the subject matter hereof are merged into and superseded by this Agreement. 14.2 This Agreement shall be executed in duplicate, each copy of which, when so executed and delivered, shall be an original, but both copies shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Amended and Restated Agreement to be executed on this ____ day of ___________, 1997. /s/ Ruth Mix Carnahan Ruth Mix Carnahan FIRST FEDERAL BANK, AFSB By: Lynn Stenftenagel Executive Vice President (Title) DIRECTOR DEFERRED COMPENSATION AGREEMENT BENEFICIARY DESIGNATION _________________________, under the terms of a certain Director Deferred Compensation Agreement by and between him and FIRST FEDERAL BANK, AFSB, Vincennes, Indiana, dated __________________, 19__, hereby designates the following Beneficiary to receive any guaranteed payments or death benefits under such Agreement, following his death: PRIMARY BENEFICIARY: SECONDARY BENEFICIARY: This Beneficiary Designation hereby revokes any prior Beneficiary Designation which may have been in effect. Such Beneficiary Designation is revocable. DATE: , 19 (WITNESS) , Director (WITNESS) Exhibit A DIRECTOR DEFERRED COMPENSATION AGREEMENT ELECTION FORM NAME: (Please Print) Investment Allocation Election: I hereby elect to have my monthly deferrals credited with earnings or losses based on the following allocation: (Indicate Percentage in Increments of 25% Only) Guaranteed Investment Contract Account _______ % Phantom Unit Account _______ % Total (Must Equal 100%) _______ % DATE , Director Exhibit B DIRECTOR DEFERRED COMPENSATION AGREEMENT NOTICE OF DISCONTINUANCE TO: FIRST FEDERAL BANK, AFSB Attention: I hereby give notice of my election to discontinue deferral of my compensation under that certain Director Deferred Compensation Agreement, by and between Bank and the undersigned, dated the ____ day of __________, 199 . This notice is submitted at least twenty (20) days prior to January 1st and shall be effective as of such date, as specified below. Discontinue deferral as of January 1, 19___. , Director DATE Exhibit C EX-10.D.3 5 DIRECTOR DEFERRED COMPENSATION AGREEMENT FIRST FEDERAL BANK, AFSB DIRECTOR DEFERRED COMPENSATION AGREEMENT (AS AMENDED AND RESTATED EFFECTIVE DECEMBER 31, 1997) THIS DIRECTOR DEFERRED COMPENSATION AGREEMENT (THE "AGREEMENT"), originally effective as of the 1st day of July, 1993, and as amended and restated effective December 31, 1997 by and between FIRST FEDERAL BANK, AFSB, a banking corporation organized and existing under the laws of the United States (hereinafter referred to as "Bank") and Robert W. Ballard (hereinafter referred to as "Director"), for the purpose of formalizing the agreement between the Bank and the Director in which the Director defers receipt of fees under the terms and conditions described below. WITNESSETH: WHEREAS, the Director serves the Bank as a member of the Board of Directors; and WHEREAS, the Bank recognizes the valuable services heretofore performed for it by the Director and wishes to encourage continued service; and WHEREAS, the Bank values the efforts, abilities and accomplishments of the Director and recognizes that the Director's services will substantially contribute to its continued growth and profits in the future; and WHEREAS, the Director wishes to defer a certain portion of fees to be earned in the future; and WHEREAS, the parties hereto desire to formalize the terms and conditions upon which the Bank shall pay such deferred compensation to the Director and/or his designated beneficiary; and WHEREAS, the Bank has adopted this Director Deferred Compensation Agreement which controls all issues relating to the deferral of fees as described herein; NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties hereto agree to the following terms and conditions: SECTION I DEFINITIONS When used herein, the following words and phrases shall have the meanings below unless the context clearly indicates otherwise: 1.1 "Accrued Benefit" means the sum of all deferred amounts and interest credited to the Director's Retirement Account and due and owing to the Director or his Beneficiaries pursuant to this Agreement. 1.2 "Bank" means FIRST FEDERAL BANK, AFSB or any successor thereto. 1.3 "Beneficiary" means the person, persons (and their heirs) or other entity designated as Beneficiary in writing to the Bank to whom the share of the deceased Director's Retirement Account is payable in the event of his death. If no Beneficiary is so designated, then the Director's Spouse, if living, will be deemed the Beneficiary. If the Director's Spouse is not living, then the Children of Director will be deemed the Beneficiaries and will take on a per stirpes basis. If there are no living Children, then the Estate of the Director will be deemed the Beneficiary. 1.4 "Board" means the Board of Directors of the Bank. 1.5 "Children" means the Director's children, both natural and adopted, then living at the time payments are due the Children under this Agreement. 1.6 "Deferral Period" means the period in which the Director has in effect a deferral election; provided, however, that the Deferral Period shall automatically terminate on June 30, 1998 or, if earlier, on the date of the Director's Normal Retirement Date. 1.7 "Deferred Compensation Benefit" means that benefit which can be provided by annuitizing the Director's Retirement Account balance as of the Valuation Date immediately preceding the initial distribution date over a one hundred eighty (180) month period. A monthly interest factor of 1.075% shall be used to annuitize the account balance. 1.8 "Disability" means the determination by a duly licensed physician selected by the Bank that because of ill health, accident, disability or general inability because of age, that Director is no longer able, properly and satisfactorily, to perform his duties as a Director. 1.9 "Effective Date" shall be July 1, 1993. 1.10 "Estate" means the Estate (including, when applicable, any irrevocable trust governing the transfer of non-probate assets) of the Director. 1.11 "Guaranteed Investment Contract Account" means book entries maintained by the Bank reflecting deferred amounts with interest being credited at the rate of .667% per month; provided, however, that the existence of such book entries and the existence of the Guaranteed Investment Contract Account shall not create and shall not be deemed to create a trust of any kind, or fiduciary relationship between the Bank and the Director, his designated Beneficiary or Beneficiaries under this Agreement. 1.12 "Normal Retirement Date" means the first day of the month following the month during which the Director attains age sixty-five (65). 1.13 "Payout Period" means the time frame in which certain benefits payable hereunder shall be distributed. Payments shall be made in equal consecutive monthly installments commencing on the first day of the month coincident with or next following the occurrence of any event which triggers distribution and continuing for a period of one hundred eighty (180) months. 1.14 "Phantom Unit Account" means the total value of all units of phantom stock purchased by the Director, each having a value equal to the fair market value (as determined in the manner provided below) of a share of 1ST BANCORP Bank's common stock. The fair market value of the Director's Phantom Unit Account shall be determined as of the Valuation Date immediately preceding the date on which the Director's Retirement Account is annuitized by converting each phantom unit to an amount equal to the closing bid price of 1ST BANCORP's common stock on such Valuation Date. The Director shall purchase phantom units at a price per share equal to eighty-five percent (85%) of the fair market value (as determined above) of a share of 1ST BANCORP's common stock on the Valuation Date immediately preceding the calendar year quarter to which the deferral of fees and purchase relates. The Director's Phantom Unit Account shall also be credited with additional phantom units at each date on which 1ST BANCORP makes a cash dividend or an in kind dividend (other than its common stock) with respect to its shares. The number of units to be credited shall be determined by dividing the amount of the cash dividend or the fair market value of any in kind dividend by 85% of the fair market value (as determined above) of a share of 1ST BANCORP's common stock on the Valuation Date immediately preceding the calendar year quarter in which the dividend is paid with respect to 1ST BANCORP's common stock. 1.15 "Retirement Account" means book entries maintained by the Bank reflecting deferred amounts and equal to the sum of the Guaranteed Investment Contract Account and the Phantom Unit Account. The existence of such book entries and the Retirement Account shall not create and shall not be deemed to create a trust of any kind, or a fiduciary relationship between the Bank and the Director, his designated Beneficiary, or other Beneficiaries under this Agreement. 1.16 "Spouse" means the individual to whom the Director is legally married at the time of the Director's death. 1.17 "Survivor's Benefit" means monthly level payments to the Beneficiary in the amount of Nine Hundred Eighty-One Dollars and Eight Cents ($981.08) for one hundred eighty (180) months. In the event the Survivor's Benefit is less than the Deferred Compensation Benefit, the Deferred Compensation benefit shall be paid in lieu of the Survivor's Benefit. In no event is it intended for the Director to receive both a Survivor's Benefit and Deferred Compensation Benefit. 1.18 "Valuation Date" means the last business day of March, June, September, December beginning on and after June 30, 1993. SECTION II DEFERRED COMPENSATION Commencing on the Effective Date, and continuing through the end of the Deferral Period, the Director and the Bank agree that the Director shall defer into his Retirement Account monthly Director's fees of Six Hundred ($600.00) Dollars that the Director would otherwise be entitled to receive from the Bank for each month of the Deferral Period. The Director shall direct the apportionment of his monthly deferral between the Guaranteed Investment Contract Account and the Phantom Unit Account. Such allocation shall be in twenty-five (25%) percent increments and shall be evidenced in writing by completion of an Election Form (Exhibit B). If the Director fails to submit an Election Form, one hundred percent (100%) of his monthly deferrals shall be allocated to the Guaranteed Investment Contract Account. The Director shall have the right to change such apportionment once per year for new deferrals and for existing bookkeeping balances held in his Retirement Account, such change becoming effective at the next plan anniversary date (January 1). Any change in the allocation for existing balances may be made in whole dollar amounts or in twenty-five percent (25%) increments. Any such change must also be evidenced in writing to become effective. SECTION III TERMINATION OF ELECTION AND NEW ELECTIONS The Director's election to defer compensation shall continue in effect, pursuant to the terms of this Agreement unless and until the Director files with the Bank a Notice of Discontinuance (Exhibit C attached hereto). A Notice of Discontinuance shall be effective if filed at least twenty (20) days prior to any January 1st. Such Notice of Discontinuance shall be effective commencing with the January 1st following its filing. If the Director discontinues his deferrals, he may reinstate the deferrals as of a January 1st by filing in writing an election to recommence deferrals at least twenty (20) days prior to the January 1st on which the deferrals are to recommence. SECTION IV RETIREMENT BENEFIT 4.1 Retirement Benefit. At Normal Retirement Date, the Bank agrees to commence payment of the Director's Deferred Compensation Benefit. Such payments will be in accordance with the terms of the Payout Period. 4.2 Disability Retirement Benefit. Notwithstanding any other provision hereof, the Director shall be entitled to receive his Deferred Compensation Benefits hereunder prior to his Normal Retirement Date in any case the Director terminates service due to Disability. The benefit shall be distributed in accordance with the Payout Period. In the event the total benefits received by the Director pursuant to this Subsection are less than the total Survivor's Benefit [i.e., One Hundred Seventy-Six Thousand Five Hundred Ninety-Five Dollars ($176,595), upon Director's death, an additional lump sum payment shall be made to Director's Beneficiary to make up the difference between these two (2) gross benefit amounts. SECTION V DEATH BENEFITS 5.1 Death Prior to Termination of Service. In the event of the Director's death prior to termination of service with the Bank, while covered by the provisions of this Agreement, the Director's Beneficiary shall be paid the Survivor's Benefit. Payments shall be in accordance with the Payout Period. 5.2 Death After Termination of Service. In the event of the Director's death after his termination of service, but prior to commencing receipt of benefit payments under this Agreement, the Director's Beneficiary shall be paid a monthly amount for a period of one hundred eighty (180) months, commencing within thirty (30) days of the Director's death. The amount of such benefit payment shall be determined as follows: (a) If the Director has deferred less than Thirty-Six Thousand Dollars ($36,000), the Director's Beneficiary shall be paid a reduced Survivor's Benefit, which shall be determined by multiplying the Survivor's Benefit (Nine Hundred Eighty-One Dollars and Eight Cents ($981.08)) by a fraction, the numerator of which shall be equal to the total compensation actually deferred by the Executive and the denominator of which shall be equal to Thirty-Six Thousand Dollars ($36,000). (b) If death occurs after the Director has deferred Thirty-Six Thousand Dollars ($36,000), his Beneficiary shall be paid the Survivor's Benefit. 5.3 Death After Commencement of Benefits. In the event of the Director's death after the commencement of the Deferred Compensation Benefit, but prior to the completion of all such payments due and owing hereunder, the Bank shall continue to make monthly payments to the Director's Beneficiary until a total of one hundred eighty (180) equal monthly payments have been made to the Director and/or his Beneficiary. 5.4 Additional Death Benefit Burial Expense. In addition to the above-described death benefits, upon the Director's death, the Director's Beneficiary shall be entitled to receive a one-time lump sum death benefit in the amount of Ten Thousand ($10,000.00) Dollars; provided, however, that if the Director ceases to be a member of the Board before July 1, 1998 for reasons other than his death or disability, the one-time lump sum election death benefit otherwise provided in this Subsection shall not be payable. SECTION VI CHANGES IN CAPITAL AND CORPORATE STRUCTURE In the event of any change in the outstanding shares of common stock of the Bank by reason of an issuance of additional shares, recapitalization, reclassification, reorganization, stock split, reverse stock split, combination of shares, stock dividend or similar transaction, the Board shall proportionately adjust, in an equitable manner, the number of phantom units in the Director's Phantom Unit Account as well as the purchase price of phantom units. The foregoing adjustments shall be made in a manner that will cause the relationship between the cost and market value of each phantom unit purchased hereunder to remain unchanged as a result of the applicable transaction. SECTION VII BENEFICIARY DESIGNATION The Director shall have the right, at any time, to submit in substantially the form attached hereto as Exhibit A, a written designation of primary and secondary Beneficiaries to whom payment under this Agreement shall be made in the event of his death prior to complete distribution of the benefits due and payable under the Agreement. Each Beneficiary designation shall become effective only when receipt thereof is acknowledged in writing by the Bank. SECTION VIII DIRECTOR'S RIGHT TO ASSETS The rights of the Director, any Beneficiary, or any other person claiming through the Director under this Agreement, shall be solely those of an unsecured general creditor of the Bank. The Director, the Beneficiary, or any other person claiming through the Director, shall only have the right to receive from the Bank those payments as specified under this Agreement. The Director agrees that he, his Beneficiary, or any other person claiming through him shall have no rights or interests whatsoever in any asset of the Bank, including any insurance policies or contracts which the Bank may possess or obtain to informally fund this Agreement. Any asset used or acquired by the Bank in connection with the liabilities it has assumed under this Agreement, except as expressly provided, shall not be deemed to be held under any trust for the benefit of the Director or his Beneficiaries, nor shall any asset be considered security for the performance of the obligations of the Bank. Any such asset shall be and remain, a general, unpledged, and unrestricted asset of the Bank. SECTION IX RESTRICTIONS UPON FUNDING The Bank shall have no obligation to set aside, earmark or entrust any fund or money with which to pay its obligations under this Agreement. The Director, his Beneficiaries or any successor in interest to him shall be and remain simply a general unsecured creditor of the Bank in the same manner as any other creditor having a general claim for matured and unpaid compensation. The Bank reserves the absolute right at its sole discretion to either purchase assets to meet its obligations undertaken by this Agreement or to refrain from the same and to determine the extent, nature, and method of such asset purchases. Should the Bank decide to purchase assets such as life insurance, mutual funds, disability policies or annuities, the Bank reserves the absolute right, in its sole discretion, to terminate such assets at any time, in whole or in part. At no time shall the Director be deemed to have any lien, nor right, title or interest in or to any specific investment or to any assets of the Bank. If the Bank elects to invest in a life insurance, disability or annuity policy upon the life of the Director, then the Director shall assist the Bank by freely submitting to a physical examination and supplying such additional information necessary to obtain such insurance or annuities. SECTION X ALIENABILITY AND ASSIGNMENT PROHIBITION Neither the Director nor any Beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Director or his Beneficiary, nor be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. SECTION XI ACT PROVISIONS 11.1 Named Fiduciary and Administrator. The Bank shall be the named fiduciary and administrator of this Agreement. As administrator, the Bank shall be responsible for the management, control and administration of the Agreement as established herein. The administrator may delegate to others certain aspects of the management and operational responsibilities of the Agreement, including the employment of advisors and the delegation of ministerial duties to qualified individuals. 11.2 Claims Procedure and Arbitration. In the event that benefits under this Agreement are not paid to the Director (or to his Beneficiary in the case of the Director's death) and such claimants feel they are entitled to receive such benefits, then a written claim must be made to the Bank within sixty (60) days from the date payments are refused. The Bank and its Board shall review the written claim and, if the claim is denied, in whole or in part, they shall provide in writing, within ninety (90) days of receipt of such claim, their specific reasons for such denial, reference to the provisions of this Agreement upon which the denial is based, and any additional material or information necessary to perfect the claim. Such written notice shall further indicate the additional steps to be taken by claimants if a further review of the claim denial is desired. If claimants desire a second review, they shall notify the Bank in writing within sixty (60) days of the first claim denial. Claimants may review the Agreement or any documents relating thereto and submit any written issues and comments they may feel appropriate. In its sole discretion, the Bank, through the disinterested member of its Board, shall then review the second claim and provide a written decision within sixty (60) days of receipt of such claim. This decision shall likewise state the specific reasons for the decision and shall include reference to specific provisions of the Agreement upon which the decision is based. If claimants continue to dispute the benefit denial based upon completed performance of the Agreement or the meaning and effect of the terms and conditions thereof, then claimants may submit the dispute to a board of Arbitration for final arbitration. Said board shall consist of one member selected by the claimant, one member selected by the Bank, and the third member selected by the first two members. The board of Arbitration shall operate under any generally recognized set of arbitration rules. The parties hereto agree that they and their heirs, personal representatives, successors and assigns shall be bound by the decision of such arbitration board with respect to any controversy properly submitted to it for determination. SECTION XII MISCELLANEOUS 12.1 No Effect on Directorship Rights. Nothing contained herein will confer upon the Director the right to be retained in the service of the Bank nor limit the right of the Bank to discharge or otherwise deal with the Director without regard to the existence of the Agreement. Pursuant to 12 C.F.R. ss. 563.39(b), the following conditions shall apply to this Agreement: (1) The Board may remove the Director at any time, but any removal by the Board shall not prejudice the Director's vested right to compensation or other benefits under the contract. (2) If the Director is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)) the Bank's obligations under the contract shall be suspended as of the date of termination of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Director all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (3) If the Director is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all obligations of the Bank under the contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (4) If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under the contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (5) All non-vested obligations under the contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the Bank: (i) by the Director or his designee at the time the Federal Deposit Insurance Corporation or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in ss. 13(c) of the Federal Deposit Insurance Act; or (ii) by the Director or his designee, at the time the Director or his designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. 12.2 State Law. The Agreement is established under, and will be construed according to, the laws of the State of Indiana. 12.3 Severability. In the event that any of the provisions of this Agreement or portion thereof, are held to be inoperative or invalid by any court of competent jurisdiction, then: (1) insofar as is reasonable, effect will be given to the intent manifested in the provisions held invalid or inoperative, and (2) the validity and enforceability of the remaining provisions will not be affected thereby. 12.4 Incapacity of Recipient. In the event the Director is declared incompetent and a conservator or other person legally charged with the care of his person or of his estate is appointed, any benefits under the Agreement to which such the Director is entitled shall be paid to such conservator or other person legally charged with the care of his person or his estate. Except as provided above in this paragraph, when the Board, in its sole discretion, determines that the Director is unable to manage his financial affairs, the Board may direct the Bank to make distributions to any person for the benefit of the Director. 12.5 Recovery of Estate Taxes. If the Director's gross estate for federal estate tax purposes includes any amount determined by reference to and on account of this Deferred Compensation Agreement, and if the Beneficiary is other than the Director's Estate, then the Director's Estate shall be entitled to recover from the Beneficiary receiving such benefit under the terms of the Survivor's Benefit an amount by which (x) the total estate tax due by Director's estate, exceeds (y) the total estate tax which would have been payable if the value of such benefit had not been included in the Director's gross Estate. If there is more than one person receiving such benefit, the right of recovery shall be against each such person in proportion to the benefits received by each such person. In the event any Beneficiary has a liability hereunder, such Beneficiary may petition the Bank for a lump sum payment in an amount not to exceed the Beneficiary's liability hereunder. 12.6 Unclaimed Benefit. The Director shall keep the Bank informed of his current address and the current address of his Beneficiaries. The Bank shall not be obligated to search for the whereabouts of any person. If within three (3) years after the actual death of the Director the Bank is unable to locate any Beneficiary of the Director, then the Bank may fully discharge its obligation by payment to the Estate. 12.7 Limitations on Liability. Notwithstanding any of the preceding provisions of the Agreement and except for the benefits otherwise payable under this Agreement, neither the Bank, nor any individual acting as an employee or agent of the Bank, or as a member of the Board shall be liable to the Director or any other person for any claim, loss, liability or expense incurred in connection with the Agreement. 12.8 Gender. Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. 12.9 Affect on Other Corporate Benefit Agreements. Nothing contained in this Agreement shall affect the right of the Director to participate in or be covered by any qualified or non-qualified pension, profit sharing, group, bonus or other supplemental compensation or fringe benefit agreement constituting a part of the Bank's existing or future compensation structure. 12.10 Suicide. Notwithstanding anything to the contrary in this Agreement, the Survivor Benefits otherwise provided herein shall not be payable if the Director's death results from suicide, whether sane or insane, within two (2) years after the execution of this Agreement. If the Director dies during this two year period due to suicide, the balance of the Retirement Account will be paid to the Director's designated Beneficiary in a single payment. Payment is to be made within thirty (30) days after the Director's death is declared a suicide by competent legal authority. Credit shall be given to the Bank for payments made prior to determination of suicide. 12.11 Headings. Headings and sub-headings in this Agreement are inserted for reference and convenience only and shall not be deemed a part of this Agreement. SECTION XIII AMENDMENT/REVOCATION This Agreement shall not be amended, modified or revoked at any time, in whole or part, without the mutual written consent of the Director and the Bank, and such mutual consent shall be required even if the Director is no longer serving the Bank as a member of the Board. SECTION XIV EXECUTION 14.1 This Agreement sets forth the entire understanding of the parties hereto with respect to the transactions contemplated hereby, and any previous agreements or understandings between the parties hereto regarding the subject matter hereof are merged into and superseded by this Agreement. 14.2 This Agreement shall be executed in duplicate, each copy of which, when so executed and delivered, shall be a original, but both copies shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Amended and Restated Agreement to be executed on this ____ day of ___________, 1997. /s/ Robert W. Ballard Robert W. Ballard FIRST FEDERAL BANK, AFSB By: /s/ Lynn Stenftenagel Executive Vice President (Title) DIRECTOR DEFERRED COMPENSATION AGREEMENT BENEFICIARY DESIGNATION ________________________, under the terms of a certain Director Deferred Compensation Agreement by and between him and FIRST FEDERAL BANK, AFSB, Vincennes, Indiana, dated __________________, 19__, hereby designates the following Beneficiary to receive any guaranteed payments or death benefits under such Agreement, following his death: PRIMARY BENEFICIARY: SECONDARY BENEFICIARY: This Beneficiary Designation hereby revokes any prior Beneficiary Designation which may have been in effect. Such Beneficiary Designation is revocable. DATE: , 19 (WITNESS) , Director (WITNESS) Exhibit A DIRECTOR DEFERRED COMPENSATION AGREEMENT ELECTION FORM NAME: (Please Print) Investment Allocation Election: I hereby elect to have my monthly deferrals credited with earnings or losses based on the following allocation: (Indicate Percentage in Increments of 25% Only) Guaranteed Investment Contract Account _______ % Phantom Unit Account _______ % Total (Must Equal 100%) _______ % DATE , Director Exhibit B DIRECTOR DEFERRED COMPENSATION AGREEMENT NOTICE OF DISCONTINUANCE TO: FIRST FEDERAL BANK, AFSB Attention: I hereby give notice of my election to discontinue deferral of my compensation under that certain Director Deferred Compensation Agreement, by and between Bank and the undersigned, dated the ____ day of __________, 199 . This notice is submitted at least twenty (20) days prior to January 1st and shall be effective as of such date, as specified below. Discontinue deferral as of January 1, 19___. , Director DATE Exhibit C EX-10.D.4 6 AMENDED AND RESTATED EXCEPTIONS Director Deferred Compensation Agreements, as Amended and Restated Effective December 31, 1997 for Directors Frank D. Baracani, Donald G. Bell, James William Bobe, Rahmi Soyugenc, Mary Lynn Stenftenagel, and John J. Summers, are identical to the Agreement for Robert W. Ballard, except the following Sections: Section ------------------------------------------------------ 1.12 1.17 4.2 5.2(a) Frank D. Baracani $2,103.00 $378,540 $2,103.00 Donald G. Bell 70 $1,079.17 $194,250 $1,079.17 James William Bobe $2,313.25 $416,385 $2,313.25 Rahmi Soyugenc 70 $1,187.08 $213,675 $1,187.08 Mary Lynn Stenftenagel $6,600.17 $1,188,030 $6,600.17 John J. Summers 70 $981.08 $176,595 $981.08 EX-10.E.1 7 AMENDMENT TO BARACANI RETIREMENT AGREEMENT FIRST AMENDMENT TO THE FIRST FEDERAL BANK, A F.S.B. EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT Pursuant to rights reserved under Section XI of the First Federal Bank, A F.S.B. Executive Supplemental Retirement Income Agreement (the "Agreement") entered into as of July 1, 1993 by First Federal Bank, A F.S.B. (the "Bank") and Frank D. Baracani ("Executive") hereby agree to amend Section 1.17 and Section 1.18 of the Agreement effective as of October 1, 1996 to provide, in their entirety, as follows: 1.17 "Supplemental Retirement Income Benefit" means an annual amount equal to Thirty- Five Thousand Seven Hundred Eighteen Dollars ($35,718). This total shall be divided by twelve (12) and paid in equal monthly installments for a period of one hundred eighty (180) months. 1.18 "Survivor's Benefit" means Thirty-Five Thousand Seven Hundred Eighteen Dollars (35,718) per year to be paid in one hundred eighty (180) equal monthly installments. This First Amendment has been entered into this 27th day of March 1997. FIRST FEDERAL BANK, A F.S.B. By: /s/ C. James McCormick ---------------------------------- C. James McCormick Chairman of the Board /s/ Frank D. Baracani ---------------------------------- Frank D. Baracani, Executive EX-10.E.2 8 AMENDMENT TO STENFTENAGEL RETIREMENT AGREEMENT FIRST AMENDMENT TO THE FIRST FEDERAL BANK, A F.S.B. EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT Pursuant to rights reserved under Section XI of the First Federal Bank, A F.S.B. Executive Supplemental Retirement Income Agreement (the "Agreement") entered into as of July 1, 1993 by First Federal Bank, A F.S.B. (the "Bank") and Mary Lynn Stenftenagel ("Executive") hereby agree to amend Section 1.17 and Section 1.18 of the Agreement effective as of October 1, 1996 to provide, in their entirety, as follows: 1.17 "Supplemental Retirement Income Benefit" means an annual amount equal to Thirty- Five Thousand Nine Hundred Seven Dollars ($35,907). This total shall be divided by twelve (12) and paid in equal monthly installments for a period of one hundred eighty (180) months. 1.18 "Survivor's Benefit" means Thirty-Five Thousand Nine Hundred Seven Dollars (35,718) per year to be paid in one hundred eighty (180) equal monthly installments. This First Amendment has been entered into this 25th day of March 1997. FIRST FEDERAL BANK, A F.S.B. By: /s/ Frank D. Baracani ------------------------------------ Frank D. Baracani, President /s/ Mary Lynn Stenftenagel ---------------------------------- Mary Lynn Stenftenagel, Executive EX-13 9 SHAREHOLDER ANNUAL REPORT 1ST BANCORP ANNUAL REPORT 1998 1ST BANCORP AND SUBSIDIARIES Table of Contents Message to the Shareholders...................................................................2 Selected Financial Highlights..................................................3 Business Discussion.....................................................................4 Management's Discussion and Analysis of Results of Operations and Financial Condition..................................7 Independent Auditors' Report..................................................16 Consolidated Statements of Financial Condition................................17 Consolidated Statements of Earnings...........................................18 Consolidated Statements of Stockholders' Equity...............................19 Consolidated Statements of Cash Flows.........................................20 Notes to Consolidated Financial Statements....................................21 Office Locations..............................................................41 Board of Directors............................................................42 Management....................................................................43 Corporate Information.........................................................44 Message to the Shareholders: The announced merger with German American Bancorp overshadows all other events and financial reporting that we normally discuss in this Annual Report. We are excited about the opportunities afforded to the Corporation upon the consummation of the merger. We feel that our addition to the German American Bancorp family will enhance an already solid, profitable, well-managed multi-bank holding company. During 1998, the Corporation generated net earnings of $1,911,000, or $1.73 per share on a diluted basis. This compares to net earnings of $821,000, or $.75 per share during the previous year when earnings were reduced with the special one-time SAIF assessment. During the year, all of the subsidiaries were profitable, including the newest member to our family, First Title Insurance Company. We will continue to remain a community-oriented bank meeting the needs of our current and new customers. The future is bright for our customers, associates, and shareholders! As always, we wish to thank you for your continued loyalty and support. Sincerely, /s/ C. James McCormick C. James McCormick CEO and Chairman of the Board /s/ Frank Baracani Frank Baracani President Selected Financial Highlights
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Summary of Earnings (Dollars in thousands except per share amounts) (for the year ended June 30): Interest Income 19,453 19,694 20,875 19,903 15,506 Interest Expense 13,004 13,292 14,520 13,419 8,955 Provision for Loan Losses 755 373 83 100 75 Non-Interest Income 2,142 3,098 10,391 5,384 3,434 Non-Interest Expense 5,309 8,555 7,528 7,898 7,459 Income Taxes 616 (249) 3,373 1,440 808 Net Earnings 1,911 821 5,762 2,430 1,643 Basic Earnings Per Share (1) $1.75 $0.75 $5.22 $2.24 $1.46 Diluted Earnings Per Share (1) $1.73 $0.75 $5.22 $2.23 $1.46 Financial Condition (as of June 30): Total Assets 260,149 270,490 263,483 312,759 253,560 Securities Available for Sale 15,504 11,588 10,499 - 5,758 Securities Held to Maturity 19,553 44,065 43,624 72,005 51,119 Loans 187,739 174,609 169,339 206,923 176,181 Deposits 117,763 144,316 137,148 209,805 172,791 Borrowings 115,381 100,296 100,885 79,387 59,520 Stockholders' Equity 23,855 22,333 21,729 16,333 13,520 Stockholders' Equity Per Share (1)(2) $21.85 $20.32 $19.71 $14.83 $13.79 Supplemental Data (At or for the year ended June 30): Yield on Interest-Earning Assets 7.93% 7.77% 7.75% 7.22% 6.87% Cost of Interest-Earning Liabilities 5.62% 5.54% 5.67% 5.02% 4.18% Net Interest-Rate Spread 2.31% 2.23% 2.08% 2.20% 2.69% Net Interest-Rate Margin 2.63% 2.52% 2.36% 2.35% 2.89% Return on Average Total Assets 0.73% 0.31% 2.05% 0.84% 0.70% Return on Average Shareholders' Equity 8.28% 3.79% 29.45% 16.62% 12.24% Equity to Assets Ratio 9.17% 8.26% 8.25% 5.22% 5.33% Cash Dividends Per Share (1) $0.26 $0.25 $0.24 $0.11 $0.11 Dividend Payout Ratio 14.86% 33.37% 4.52% 5.13% 7.81%
_______________________ (1) All per share calculations have been adjusted for the 3-for-2 stock split effective November 15, 1997 and the 5% stock dividends issued February 9, 1996, January 10, 1997, and January 23, 1998. (2) Calculated by dividing total equity by number of shares of common stock outstanding at year end. BUSINESS DISCUSSION 1ST BANCORP, an Indiana corporation formed in 1988 (the "Corporation"), is a nondiversified, unitary savings and loan holding company whose principal subsidiary is First Federal Bank, A Federal Savings Bank ("First Federal" or the "Bank"). The Bank operates two retail banking offices in Vincennes, Indiana and a loan production office in Evansville, Indiana. Other Corporation subsidiaries include First Financial Insurance Agency, Inc. ("First Financial" or the "Agency"), a full service insurance agency, and First Title Insurance Company ("First Title"). On August 6, 1998, an Agreement was signed providing for the merger of 1ST BANCORP into German American Bancorp. Under the Agreement, the shareholders of 1ST BANCORP will receive shares of common stock of German American Bancorp with a targeted aggregate market value of $57,120,000 (based on market prices of German American common stock during a period of 15 trading days ending on the second trading date preceding closing) in a tax-free exchange, or approximately $50.94 per 1ST BANCORP share (assuming exercise of all outstanding options). If the German American share price is less than $28 per share or more than $33 per share during the valuation period, however, then the number of shares to be issued in the transaction will be based on a minimum or maximum share price, as the case may be, of $28 or $33. Accordingly, to the extent that German American's share price during the valuation period is less than $28 or more than $33, then the market value of the transaction could vary from the targeted value. The proposed merger is subject to the approval of 1ST BANCORP's and German American's shareholders as well as the appropriate bank regulatory agencies; receipt of a fairness opinion and other conditions. It is contemplated the merger will become effective during the first quarter of calendar year 1999. Lending First Federal continues its commitment to residential mortgage lending, but at the same time, offers ancillary types of lending for customer convenience and to diversify the loan portfolio. The Bank has always put mortgage lending in the forefront of its business opportunities and has a successful track record in efficiently satisfying the housing needs of targeted communities. First Federal funded $118.1 million in loans during fiscal 1998 as compared to $117.0 million in loans during fiscal 1997. Although total fundings during the two years are comparable, there was a shift from nonconforming to conforming and consumer loan production in 1998. During 1998, conforming mortgage loan fundings increased to $61.5 million as compared to $36.5 million in 1997. This increase is attributed mainly to refinance loan activity which resulted from the downward trend in interest rates during the year. Consumer loan production increased to $17.7 million during 1998 from $9.9 million during 1997 mainly because of the newly initiated indirect automobile loan program. Nonconforming mortgage loan fundings decreased to $37.5 million during 1998 as compared to $70.2 million in 1997. This decreased volume resulted from the restructuring of the nonconforming loan production office network in June, 1997 when all except one office was closed. First Federal is committed to efficiently providing the credit needs of the Vincennes and surrounding communities and is successful in that endeavor. However, the Bank continues its focus on the nonconforming mortgage market as well. This market provides loans to a wider range of qualifying mortgage customers. A portion of the highest quality nonconforming mortgage loans are retained in the portfolio for yield. The remainder of the nonconforming loans are sold, servicing released, to other companies, in order to preserve asset quality and to generate non-interest income. During the year, most of the conforming mortgage loans were sold in the secondary market with servicing retained by the Bank; however, a portion of the new conforming lending was placed in the portfolio. Retaining conforming mortgage loans in portfolio served to balance the loan portfolio and also enhanced yield since the rates were higher than for alternative investments. During the year, First Federal sold $55.1 million of residential mortgage loans as compared to the sale of $76.2 million of residential mortgage loans during fiscal 1997. At June 30, 1998, the Bank maintained a loan portfolio with a concentration in residential real estate as shown in the following table: Real Estate Loans: Construction Loans on: 1-4 family dwelling units $ 4,501,000 2.4% Permanent Mortgages on: 1-4 family dwelling units 155,913,000 82.0% 5 or more dwelling units 2,904,000 1.5% Nonresidential property 2,768,000 1.5% Land 1,872,000 1.0% Consumer and Other Loans 22,133,000 11.6% ----------------------------- Total Loans $190,091,000 100.0% Over 95% of the total loan portfolio at June 30, 1998 consisted of residential real estate or consumer loans. Of the total $118.1 million loans processed during fiscal year 1998, over 98% was for residential or consumer purposes. At June 30, 1998, nonperforming assets totaled $3.9 million or 1.5% of total assets This compares to $2.5 million, or .9% of total assets at June 30, 1997. This increase is attributed to several factors, including general economic conditions and the abundance of consumer bankruptcies being experienced throughout the country and in our primary lending area. Loan quality continues to be of major importance and strong effort is being made to ensure a quality portfolio. General valuation allowances have been increased to prepare for potential future losses in the portfolio. Total allowance for loan losses at June 30, 1998 aggregated $1.5 million, or .8% of net loans receivable. This compares to $.1.2 million, or .8% of net loans receivable at June 30, 1997. The provision for loan losses was $755,000 during fiscal 1998 as compared to $373,000 during fiscal 1997. This increase was necessary because of the increased concentration of nonconforming and consumer loans in portfolio which, by their nature, exhibit a greater degree of credit risk. Management believes the allowance is adequate to absorb potential future losses. Retail Banking The Bank operates two banking offices in Vincennes, Indiana. A variety of savings products and conveniences are offered by First Federal. Checking accounts, money market deposit accounts, and savings certificates are offered at competitive interest rates. Wire services, travelers' checks, money orders, savings bonds, ATM services, bank by mail, and automatic transfers are offered for customer convenience. An extensive array of loan products is also offered. Fixed rate, adjustable rate, and balloon mortgages, as well as consumer loan products, credit cards, and overdraft and home equity lines of credit are available. Nonconforming mortgage loans are also offered, thus providing mortgage service for all segments of the communities being served. Insurance First Financial Insurance Agency, Inc. has offices in Vincennes and Princeton, Indiana. The Agency continues to grow in insurance volume and in the number of companies represented. During fiscal years 1997 and 1998, the Agency purchased books of business from two different local insurance agencies, thereby increasing the premium base. At June 30, 1998, the Agency represented 18 property and casualty insurance companies. First Financial provides a full line of insurance products, including home, auto, farm and commercial coverages. The Agency also markets various health and life insurance products through its affiliation with 8 additional companies. Title Insurance First Title Insurance Company had been a dormant corporation until the middle of the fiscal year when the assets of Illiana Abstract Company were purchased. First Title provides title and abstract searches, title insurance, and mortgage closing services. The Company sells insurance as agent for Chicago Title Insurance Company, Stewart Title Guaranty Company, and Ticor Title Insurance Company. MANAGEMENT'S DISCUSSION AND ANALYSIS This report contains certain forward looking statements that inherently involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: general economic conditions in the Corporation's market area, the deterioration in the financial strength of the Corporation's loan customers, increased competition in the nonconforming lending arena, and the announced acquisition by German American Corporation. Results of Operations and Financial Condition 1ST BANCORP's net earnings during fiscal year 1998 were $1,911,000 as compared to $821,000 during fiscal year 1997 and $5,762,000 during fiscal 1996. Diluted earnings per share were $1.73 during 1998, $.75 during 1997, and $5.22 during 1996. Dividends per common share were $. 26 in 1998, $.25 in 1997, and $.24 in 1996. 1ST BANCORP's assets were $260,149,000 at June 30, 1998 as compared to $270,490,000 at June 30, 1997. Stockholders' equity at June 30, 1998 was $23,855,000, an increase of $1,522,000 from stockholders' equity of $22,333,000 at June 30, 1997. Interest Rate Environment and Corporate Strategic Planning The interest rate environment plays an important role in the strategic planning, new business, and earnings of the Corporation. This year, the trend was one of declining interest rates. With the increased volume in nonconforming mortgage originations, the effect of interest rate fluctuations to the Corporation is somewhat mitigated because rates do not move as quickly in the nonconforming mortgage market as in the conforming mortgage market. Net Interest Income
1998 ----------------------------------------------------- Average Yield Balance Interest Rate ASSETS Interest Earning Assets: Short-Term Investments and Interest Bearing Deposits $11,309 $621 5.49% Investment and Trading Account Securities 49,252 3,097 6.29% Loans 184,877 15,735 8.51% ------------------------------------------------- Total Interest Earning Assets 245,438 19,453 7.93% Allowance for Loan Losses (1,172) Other Assets 17,146 ------------ Total Assets 261,412 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Interest Bearing Liabilities: Deposits 130,502 7,308 5.60% Short-Term Borrowings 53 3 5.66% Federal Home Loan Bank Advances and Other Borrowings 100,955 5,693 5.64% ------------------------------------------------- Total Interest Bearing Liabilities 231,510 13,004 5.62% Other Liabilities 6,836 Stockholders' Equity 23,066 ------------ Total Liabilities and Stockholders' Equity 261,412 ============ Net Interest Income / Spread 6,449 2.31% ===================================== Net Interest Margin 2.63% ====================
1997 -------------------------------------------------- Average Yield Balance Interest Rate ASSETS Interest Earning Assets: Short-Term Investments and Interest Bearing Deposits $12,579 $677 5.38% Investment and Trading Account Securities 62,237 3,870 6.22% Loans 178,746 15,147 8.47% ----------------------------------------------------- Total Interest Earning Assets 253,562 19,694 7.77% Allowance for Loan Losses (979) Other Assets 12,764 ------------------- Total Assets 265,347 =================== LIABILITIES AND STOCKHOLDERS' EQUITY Interest Bearing Liabilities: Deposits 139,674 7,678 5.50% Short-Term Borrowings 964 53 5.50% Federal Home Loan Bank Advances and Other Borrowings 99,218 5,561 5.60% ----------------------------------------------------- Total Interest Bearing Liabilities 239,856 13,292 5.54% Other Liabilities 3,821 Stockholders' Equity 21,670 ------------------- Total Liabilities and Stockholders' Equity 265,347 =================== Net Interest Income / Spread 6,402 2.23% ================================== Net Interest Margin 2.52% ================
1996 ---------------------------------------------- Average Yield Balance Interest Rate ASSETS Interest Earning Assets: Short-Term Investments and Interest Bearing Deposits $17,825 $955 5.36% Investment and Trading Account Securities 59,777 3,893 6.51% Loans 191,735 16,027 8.36% ----------------------------------------------- Total Interest Earning Assets 269,337 20,875 7.75% Allowance for Loan Losses (886) Other Assets 13,221 ------------------ Total Assets 281,672 ================== LIABILITIES AND STOCKHOLDERS' EQUITY Interest Bearing Liabilities: Deposits 163,793 9,073 5.54% Short-Term Borrowings 3,368 154 4.57% Federal Home Loan Bank Advances and Other Borrowings 89,103 5,293 5.94% ----------------------------------------------- Total Interest Bearing Liabilities 256,264 14,520 5.67% Other Liabilities 5,842 Stockholders' Equity 19,566 ------------------ Total Liabilities and Stockholders' Equity 281,672 ================== Net Interest Income / Spread 6,355 2.08% ============================= Net Interest Margin 2.36% =============
Net interest income is affected by both the volume and rates of interest earnings assets and interest bearing liabilities. Net interest income before provision for loan losses was $6,449,000 in 1998 as compared to $6,402,000 in 1997 and $6,355,000 in 1996. The increases during the three-year period were due to the increase in the net interest spread and net interest margin during times in which the volume of interest earning assets and interest bearing liabilities decreased. Interest income was $19,453,000 in 1998 as compared to $19,694,000 in 1997 and $20,875,000 in 1996. Interest expense was $13,004,000 in 1998 as compared to $13,292,000 in 1997 and $14,520,000 in 1996. These levels are reflective of the interest rate fluctuations and the various operating strategies implemented during the three year period as discussed below. The annualized average yield on interest earning assets has increased during the past three years because of changes in the economic environment and because of the increased volume of high yielding nonconforming mortgage loans being placed in the portfolio. The average yield on interest earning assets increased to 7.93% during 1998 from 7.77% during 1997 and 7.75% during 1996. The annualized average cost of interest bearing liabilities has fluctuated during the period, increasing to 5.62% during 1998 from 5.54% during 1997 as compared to 5.67% during 1996. The net interest spread has increased to 2.31% in 1998 as compared to 2.23% in 1997 and 2.08% during 1996. Fiscal 1998 vs. Fiscal 1997 Although the average levels of interest earning assets and interest bearing liabilities decreased during 1998 as compared to 1997, there was an increase in net interest income. The average balance of short-term investments and interest bearing deposits decreased to $11,309,000 during 1998 as compared to $12,579,000 during 1997. The average yield stayed relatively stable at 5.49% during 1998 as compared to 5.38% during 1997. Average investment and trading account securities decreased during 1998 to $49,252,000 from $62,237,000 in 1997. The decision was made to allow the investment portfolio to decrease as securities matured or were called and to reinvest funds in portfolio loans which generate a higher rate of interest. The average interest rate on the investment and trading account securities remained relatively constant at 6.29% during 1998 compared to 6.22% during 1997. Average loans increased to $184,877,000 during 1998 from $178,746,000 during 1997 because of the decision to place loans in portfolio for yield purposes. The average yield on loans increased to 8.51% during 1998 as compared to 8.47% during 1997. Although this increase appears insignificant, it occurred during a time of declining interest rates. The increased yield resulted from placing higher yielding nonconforming loans in portfolio during the year. With the increased yields on short-term investments and interest bearing deposits, investment and trading account securities, and loans, the overall yield on total interest earning assets increased to 7.93% during 1998 as compared to 7.77% during 1997. This increase was somewhat offset by the increased cost of interest-bearing liabilities. Because of the fluctuating interest rates experienced in the fiscal year, the cost of average deposits increased to 5.60% during 1998 as compared to 5.50% during 1997. The average balance of deposits declined during the year to $130,502,000 during 1998 from $139,674,000 during 1997. This decrease resulted from normal fluctuations in deposits experienced by the Bank. The cost of Federal Home Loan Bank advances and other borrowed money remained relatively constant at 5.64% during 1998 as compared to 5.60% during 1997. The level of average borrowings increased to $100,955,000 during 1998 compared to $99,218,000 during 1997, as more borrowings were utilized as an alternative to the acquisition of savings deposits. Fiscal 1997 vs. Fiscal 1996 The average levels of interest earning assets and interest bearing liabilities decreased substantially during 1997 as compared to 1996. This was caused by the branch sales which took place in December, 1995. Yet, net interest income actually increased during the period. Cash management was challenging during 1997 because of the fluctuating level of loan fundings on a monthly basis and the timing of loan sales. The average balance of short-term investments and interest bearing deposits decreased to $12,579,000 during 1997 as compared to $17,825,000 in 1996 because of less necessity to keep cash on hand during a time of decreased loan volume. The average yield stayed relatively stable at 5.38% during 1997 as compared to 5.36% in 1996. Average investment and trading account securities increased during 1997 to $62,237,000 from $59,777,000 in 1996. The average interest rate decreased to 6.22% during 1997 from 6.51% during 1996. This occurred because reinvestment of excess cash and proceeds from called investment securities was at lower interest rates due to the decline in interest rates during the year. Average loans decreased to $178,746,000 during 1997 from $191,735,000 during 1996. Offsetting this decline was an increase in the average yield on loans to 8.47% during 1997 from 8.36% during 1996. The decline in the average loan volume resulted from the branch sales, and the increased yield resulted from placing higher yielding nonconforming loans in portfolio during the year. With the increased loan yield, offset by the decline in the yield on investment and trading account securities, the overall yield on total interest earning assets increased to 7.77% during 1997 as compared to 7.75% during 1996. More importantly, however, for net interest income purposes, was the decrease in the average cost of interest bearing liabilities during the year. With the declining interest rate environment, the cost of average deposits decreased to 5.50% during 1997 as compared to 5.54% during 1996. The average balance of deposits also declined during the year to $139,674,000 during 1997 from $163,793,000 during 1996, because of the branch sales in December 1995 and the use of borrowings in lieu of higher cost brokered deposits. Likewise, the cost of Federal Home Loan Bank advances and other borrowed money decreased to 5.60% during the year as compared to 5.94% during 1996 because of the declining interest rate environment. The level of average borrowings increased to $99,218,000 during 1997 as compared to $89,103,000 during 1996 because the price of such borrowings was less than the price of brokered deposits with similar terms. Net interest margin Another factor that must be considered is the contribution of interest free funds on the interest rate spread, which is the basis of the interest rate margin. Average interest earning assets exceeded average interest bearing liabilities by $13,928,000 in 1998, by $13,706,000 in 1997, and by $13,073,000 in 1996. An excess of interest earning assets effectively contributes interest free funds as an integral part of the interest rate margin. Thus, the Corporation's net interest margin exceeded the spread by 32 basis points in 1998, by 29 basis points in 1997, and by 28 basis points in 1996. Non-Interest Income Non-interest income decreased to $2,142,000 in 1998 from $3,098,000 in 1997 and from $10,391,000 in 1996. During the past three years, more emphasis has been placed on interest income, therefore the level of non-interest income continues to decline. The major reason for the $7,293,000 decrease during 1997 was the $7,274,000 gain on sale of the branch offices during 1996. Net gain on sales of loans decreased during 1998 to $831,000 as compared to $2,124,000 during 1997 and $2,026,000 during 1996. The decrease in 1998 was caused by the decision to place loans in portfolio to generate net interest income. Total loan sales aggregated $55,096,000 in 1998, $76,202,000 in 1997, and $161,422,000 in 1996. The greater gain on sale of loans in 1997 and 1996 resulted from sale of nonconforming loans which generate a strong gain on sale and are not as rate sensitive as conforming mortgage loans. Included in the loan sales during 1998, 1997 and 1996, respectively, were $8,163,000, $37,709,000 and $27,910,000 in nonconforming loans. A $32,000 net gain on sales of securities was recognized during 1998 as compared to a net loss of $29,000 during 1997 and a net loss of $111,000 during 1996. The loss in 1996 was incurred because of the opportunity afforded by the issuance of the FASB Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," to restructure the investment portfolio. Lower yielding securities were sold to improve investment yield on the remaining portfolio. Income from fees and service charges decreased to $321,000 during 1998 from $341,000 during 1997 and as compared to $296,000 in 1996. The level of fees is significantly affected by servicing fee income on loans serviced for other owners. The Bank retains .25% servicing fee on fixed rate loans and .375% servicing fee on adjustable rate loans that have been sold in the secondary market. Loans sold to others, with servicing retained by the Bank, totaled $120,811,000 at June 30, 1998, $112,642,000 at June 30, 1997, and $81,353,000 at June 30, 1996. Other non-interest income increased to $958,000 in 1998 from $662,000 in 1997 and as compared to $906,000 in 1996. The increase in 1998 is attributed to the increased income generated by First Financial Insurance Agency, Inc. and by First Title Insurance Company. First Financial recognized insurance income of $437,000 during 1998 as compared to $260,000 in 1997. First Title recognized $93,000 in title-related income during 1998 as compared to no income during 1997 when the company was inactive. Included in the 1996 income is $237,000 which resulted from the sale of FHLMC and FNMA servicing rights. These servicing rights were sold to minimize prepayment risk associated with the projected lowering long term interest rate scenario. Additionally, in years prior to 1996, these servicing rights were sold to recognize currently the value in net income; with the adoption of FAS 122, this is no longer necessary, as the value of the servicing rights is recognized currently. Accordingly, no servicing rights were sold during 1998 or 1997. Non-Interest Expense Non-interest expense decreased substantially to $5,309,000 in 1998 from $8,555,000 in 1997 and from $7,528,000 in 1996. The decrease in 1998 resulted from the closing of the outlying mortgage loan production offices, including reduction in personnel, occupancy, and other expenses. The increase in 1997 is attributed to the one-time pre-tax charge of $1,330,000 to federal insurance premiums for an industry-wide special assessment by the FDIC to recapitalize the SAIF. Compensation and employee benefits, the major component of non-interest expense, decreased to $2,993,000 in 1998 from $4,195,000 in 1997 and from $4,273,000 in 1996. The decrease during 1998 was from the decrease in employees resulting from the closing of the majority of the mortgage loan production offices in late fiscal 1997. Net occupancy decreased to $536,000 in 1998 from $719,000 in 1997 and from $746,000 in 1996. This is also due to the closing of the mortgage loan production offices. Other non-interest expense also decreased in 1998 to $1,619,000 from $2,052,000 in 1997 and from $2,040,000 in 1996. This decrease is attributed to a decrease of ancillary expenses because of the closing of the loan production offices. Income Taxes The Corporation incurred an income tax expense of $616,000 in 1998 as compared to an income tax benefit of $249,000 in 1997 and an income tax expense of $3,373,000 in 1996. The Corporation has invested in an affordable housing senior citizen project that produces tax credits. This significantly lowered the income tax rate during the three fiscal years. In 1997, because of the SAIF assessment which lowered earnings, the total amount of tax credits could not be used as related to fiscal 1997 income, however, tax laws allowed the credits to be carried back to the prior year when income was sufficient for the Corporation to use the full fiscal 1997 allocated credit. Financial Condition The Corporation's assets aggregated $260,149,000 at June 30, 1998, a decrease of $10,341,000 from assets of $270,490,000 at June 30, 1997. Total cash and cash equivalents decreased by $4,131,000 to $16,163,000 at June 30, 1998 from $20,294,000 at June 30, 1997. This decrease was due to a normal fluctuation in cash in conjunction with managing the mortgage loan pipeline. Net loans receivable increased to $185,290,000 at June 30, 1998 from $146,840,000 at June 30, 1997. This increase resulted from the decision during the year to portfolio mortgage loans as the highest yielding investment alternative in the decreasing interest rate environment. Lower yielding conforming loans continued to be sold whereas the higher yielding high quality nonconforming loans were retained in portfolio. The loans held for sale decreased to $2,449,000 at June 30, 1998 from $27,769,000 at June 30, 1997 because of a bulk sale in late 1998 and because of the decision to retain loans in portfolio rather than to include them as held for sale. Securities held to maturity decreased by $24,512,000 during the year to $19,553,000 at June 30, 1998 from $44,065,000 at June 30, 1997. This decrease resulted from securities maturing or being called during the year and the decision to allow the portfolio to shrink to fund the increasing loan portfolio. Securities available for sale increased to $15,504,000 at June 30, 1998 from $11,588,000 at June 30, 1997. Securities purchased during the year for liquidity reasons were placed in the available for sale portfolio. Total deposits decreased by $26,553,000 to $117,763,000 at June 30, 1998 from $144,316,000 at June 30, 1997. This occurred because of greater reliance on borrowed funds rather than use of brokered deposits to supplement savings deposits obtained in the Vincennes area. To somewhat offset this decrease in deposits, advances from FHLB and other borrowings increased by $15,085,000 to $115,381,000 at June 30, 1998 from $100,296,000 at June 30, 1997. Capital Resources At June 30, 1998, stockholders' equity was $23,855,000, an increase of $1,522,000 over total stockholders' equity of $22,333,000 at June 30, 1997. The Corporation is subject to regulation as a savings and loan holding company by the Office of Thrift Supervision. The Bank, as a subsidiary of a savings and loan holding company, is subject to certain restrictions in its dealings with the Corporation. The Bank is also subject to the regulatory requirements applicable to a federal savings bank. Current capital regulations require savings institutions to have minimum tangible capital equal to 1.5% of total assets and a minimum 3% core capital ratio. Additionally, savings institutions are required to meet a risk-based capital ratio equal to 8% of risk-weighted assets. At June 30, 1998, the Bank exceeded all capital requirements. Minimum capital standards place savings institutions into one of five categories, from "critically undercapitalized" to "well-capitalized," depending on levels of three measures of capital. A well-capitalized institution, as defined by the regulations, would have a total risk-based capital ratio of at least 10%, a Tier 1 (core) risk-based capital ratio of at least 6%, and a leverage (core) risk-based capital ratio of at least 5%. At June 30, 1998, First Federal was classified as "well-capitalized." The following is a summary of the Bank's regulatory capital and capital requirements at June 30, 1998:
Core/ Tier 1 Total GAAP Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital 1ST BANCORP GAAP Capital $23,855,000 First Federal GAAP Capital $22,603,000 $22,603,000 $22,603,000 $22,603,000 $22,603,000 $22,603,000 Capital Adjustments: Unrealized Loss on Investment Securities 36,000 36,000 36,000 36,000 36,000 General Valuation Allowance 1,000,000 Disallowed (37,000) (37,000) (37,000) (37,000) (37,000) ------------------------------------------------------------------------- Regulatory Computed Capital 22,602,000 22,602,000 22,602,000 22,602,000 23,602,000 ========================================================================= Total Assets: Adjusted Total Assets 259,779,000 259,779,000 259,779,000 - - Risk-Weighted Assets - - - 157,919,000 157,919,000 ------------------------------------------------------------------------- Regulatory Computed Assets 259,779,000 259,779,000 259,779,000 157,919,000 157,919,000 ========================================================================= Regulatory Capital Ratio 8.70% 8.70% 8.70% 14.31% 14.95% ==== ==== ==== ===== ===== Regulatory Capital Category: OTS Minimum Requirements 1.50% 3.00% 8.00% ==== ==== ==== Prompt Corrective Action Requirements: Not Critically Undercapitalized Equal to 2.00% ==== Well Capitalized Equal to or Greater Than 5.00% 6.00% 10.00% ==== ==== =====
Asset and Liability Management Thrift institutions are subject to interest rate risk to the degree that interest-bearing liabilities, primarily deposits and borrowings with relatively short-term maturities, mature or reprice more rapidly, or on a different basis, than interest-earning assets. While having liabilities that mature or reprice more frequently on average than assets will be beneficial in times of declining interest rates, such an asset/liability structure will result in lower net income or net losses during periods of rising interest rates, unless offset by other factors such as non-interest income. Thus, the Corporation's operating results are affected by changes in the level of market rates of interest. An asset/liability management program has been designed and implemented to stabilize and improve earnings by managing interest rate risk without adversely affecting asset quality. This program involves the coordination of sources and uses of funds and the evaluation of changing market rate relationships. In this process, the Corporation's interest rate risk is analyzed using gap analysis and simulation analysis produced by the OTS. Management closely monitors the asset/liability mix and adjusts policies and strategies to manage the impact of fluctuating interest rates on operating results. The following table sets forth the repricing of the Corporation's interest earning assets and interest bearing liabilities at June 30, 1998. Prepayment assumptions and decay rates have been applied to more accurately reflect the asset/liability gap.
At June 30, 1998 Maturing or Repricing Within ----------------------------------------------------------------------------------------------- Average 1 Year 1 to 3 3 to 5 More than Rate Total Or Less Years Years 5 Years ----------------------------------------------------------------------------------------------- (Dollars in Thousands) Rate Sensitive Assets - - ----------------------------------------------------------------------------------------------------------------------------------- Loans Receivable (1) Adjustable Rate Mortgage loans 8.39% $80,425 $34,969 $35,950 $8,034 $1,472 Fixed Rate Mortgage loans 8.39% 89,982 22,303 24,006 15,620 28,053 Nonmortgage Loans 8.97% 22,133 8,763 8,113 4,240 1,017 Investments 6.06% 56,657 31,813 9,679 5,470 9,695 --------------------------------------------------------------------------------------------- Total Rate Sensitive Assets 7.91% $249,197 $97,848 $77,748 $33,364 $40,237 =================================================================================================================================== Rate Sensitive Liabilities - - ----------------------------------------------------------------------------------------------------------------------------------- Deposits Fixed Maturity Deposits 5.99% $94,738 $60,706 $25,615 $6,365 $2,052 Other Deposits (2) 3.79% 23,023 17,059 2,341 1,339 2,284 FHLB Advances and Other Borrowings 5.44% 115,381 26,209 19,000 45,000 25,172 --------------------------------------------------------------------------------------------- Total Rate Sensitive Liabilities 5.50% $233,142 $103,974 $46,956 $52,704 $29,508 =================================================================================================================================== Total Asset/Liability Gap $16,055 ($6,126) $30,792 ($19,340) $10,729 Cumulative Asset/Liability Gap $16,055 ($6,126) $24,666 $5,326 $16,055 Cumulative Gap as a Percentage of Total Assets - 1998 -2.35% 9.48% 2.05% 6.17% Cumulative Gap as a Percentage of Total Assets - 1997 -8.26% -16.44% -9.71% 4.99%
- - --------------------------------------------- (1) The distribution of fixed rate loans is based upon contractual maturity and scheduled contractual repayments adjusted for estimated prepayments. For adjustable rate loans, interest rates adjust at intervals of one month to seven years. (2) A portion of these transaction account balances has been included in the More Than 5 Years category to reflect management's assumption that these accounts are not rate sensitive. Liquidity The Corporation conducts substantially all its business through its thrift subsidiary. The main source of funds for 1ST BANCORP is dividends from the Bank. The Corporation's primary sources of funds are the Bank's deposits, which totaled $117,763,000 at June 30, 1998, and borrowings, which totaled $115,381,000 at June 30, 1998. During the year, cash flow needs were also supplied by loan payments, proceeds from sales of loans and securities, and proceeds from maturities and calls of securities. Scheduled loan payments are a relatively stable source of funds, but loan payoffs, the sale of loans, and deposit inflows and outflows fluctuate significantly, depending on market interest rates and economic conditions. Management does not expect any of these items to occur in amounts that would exert pressure on the Corporation's ability to meet consumer demand for liquidity or the regulatory liquidity requirements. Historically, the Bank has maintained its liquid assets above the minimum requirements imposed by OTS regulations and at a level believed by management adequate to meet requirements of normal daily activities. Regulations require thrift institutions to maintain minimum levels of certain liquid investments. At June 30, 1998, First Federal's regulatory liquidity exceeded the 4% requirement. Year 2000 Compliance The Year 2000 issue is the result of potential problems with the programming code in existing computer systems as the Year 2000 approaches. An assessment of the impact of the Year 2000 issue on the Corporation's computer systems has been completed. Management is closely monitoring the progress of the systems in place toward Year 2000 compliance. The Bank's records are primarily maintained by a third-party data center. The Corporation also relies on third party vendors to provide data processing capabilities. Formal communications from the data center and other service providers indicate reprogramming will be completed within a sufficient time frame to allow adequate testing to ensure continuing operations in the Year 2000. Completion of testing for Year 2000 compliance is expected by June 30, 1999. Management believes the Year 2000 issue will not pose significant operational problems for the Corporation's computer systems. Expenses related to upgrading the computer systems and software for Year 200 compliance is estimated to be $200,000. At June 30, 1998, approximately $130,000 of this amount had already been expended in connection with Year 2000 compliance. Management does not consider the cost to the Corporation of these Year 2000 compliance activities to be material to the financial position or results of operations in any given year. Independent Auditors' Report The Board of Directors 1ST BANCORP: We have audited the accompanying consolidated statements of financial condition of 1ST BANCORP and subsidiaries as of June 30, 1998 and 1997 and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three year period ended June 30, 1998. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 1ST BANCORP and subsidiaries as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three year period ended June 30, 1998 in conformity with generally accepted accounting principles. Indianapolis, Indiana July 23, 1998 except as to note 17, which is as of August 6, 1998 1ST BANCORP AND SUBSIDIARIES Consolidated Statements of Financial Condition June 30, 1998 and 1997
Assets 1998 1997 Cash and cash equivalents: Interest bearing deposits $ 15,831,000 19,771,000 Non-interest bearing deposits 332,000 523,000 ----------------- ----------------- Cash and cash equivalents 16,163,000 20,294,000 ----------------- ----------------- Securities available for sale (note 2) 15,504,000 11,588,000 Securities held to maturity (market value of $19,514,000 and $43,556,000) (note 3) 19,553,000 44,065,000 Loans receivable, net (notes 4 and 8) 185,290,000 146,840,000 Loans held 2,449,000 27,769,000 for sale Accrued interest receivable: Securities 524,000 1,081,000 Loans 1,205,000 1,099,000 Stock in FHLB of Indianapolis, at cost 5,769,000 4,941,000 Office premises and equipment (note 6) 3,077,000 3,225,000 Real estate 930,000 397,000 owned Prepaid expenses and other assets 9,685,000 9,191,000 ----------------- ----------------- 260,149,000 270,490,000 ================= ================= Liabilities and Stockholders' Equity Liabilities: Deposits 117,763,000 144,316,000 (note 7) Advances from FHLB and other borrowings (note 8) 115,381,000 100,296,000 Advance payments by borrowers for taxes and insurance 362,000 304,000 Accrued interest payable on deposits 598,000 1,194,000 Accrued expenses and other liabilities 2,190,000 2,047,000 ----------------- ----------------- 236,294,000 248,157,000 ----------------- ----------------- Stockholders' equity (note 9): Preferred stock, no par value; shares authorized of 2,000,000, none outstanding - - Common stock, $1 par value; shares authorized of 5,000,000; shares issued and outstanding of 1,091,710 and 1,099,187 1,092,000 698,000 Paid-in 2,084,000 2,642,000 capital Retained earnings, substantially restricted 20,715,000 19,102,000 Unrealized depreciation on securities available for sale (note 2) (36,000) (109,000) ----------------- ----------------- 23,855,000 22,333,000 ----------------- ----------------- Commitments (note 14) $ 260,149,000 270,490,000 ================= =================
See accompanying notes to consolidated financial statements. 1ST BANCORP AND SUBSIDIARIES Consolidated Statements of Earnings Years ended June 30, 1998, 1997 and 1996
1998 1997 1996 Interest income: Loans $ 15,735,000 15,147,000 16,027,000 Securities 3,093,000 3,852,000 3,890,000 Trading account securities 4,000 18,000 3,000 Other short-term investments and interest bearing deposits 621,000 677,000 955,000 --------------- --------------- --------------- Total interest income 19,453,000 19,694,000 20,875,000 --------------- --------------- --------------- Interest expense: Deposits (note 7) 7,308,000 7,678,000 9,073,000 Short-term borrowings 3,000 53,000 154,000 FHLB advances and other borrowings 5,693,000 5,561,000 5,293,000 --------------- --------------- --------------- Total interest expense 13,004,000 13,292,000 14,520,000 --------------- --------------- --------------- Net interest income before provision for loan losses 6,449,000 6,402,000 6,355,000 Provision for loan losses (note 4) 755,000 373,000 83,000 --------------- --------------- --------------- Net interest income after provision for loan losses 5,694,000 6,029,000 6,272,000 --------------- --------------- --------------- Non-interest income: Fees and service charges 321,000 341,000 296,000 Net gain (loss) on sales of securities available for sale and trading account securities (note 2) 32,000 (29,000) (111,000) Net gain on sales of loans 831,000 2,124,000 2,026,000 Net gain on sale of branch offices (note 13) - - 7,274,000 Other (note 5) 958,000 662,000 906,000 --------------- --------------- --------------- Total non-interest income 2,142,000 3,098,000 10,391,000 --------------- --------------- --------------- Non-interest expense: Compensation and employee benefits 2,993,000 4,195,000 4,273,000 Net occupancy 536,000 719,000 746,000 Federal insurance premiums (note 7) 161,000 1,589,000 469,000 Other 1,619,000 2,052,000 2,040,000 --------------- --------------- --------------- Total non-interest expense 5,309,000 8,555,000 7,528,000 --------------- --------------- --------------- Earnings before income taxes 2,527,000 572,000 9,135,000 Income taxes (note 12) 616,000 (249,000) 3,373,000 --------------- --------------- --------------- Net earnings $ 1,911,000 821,000 5,762,000 =============== =============== =============== Basic earnings per share (note 10) $ 1.75 .75 5.22 =============== =============== =============== Diluted earnings per share (note 10) $ 1.73 .75 5.22 =============== =============== ===============
See accompanying notes to consolidated financial statements. 1ST BANCORP AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended June 30, 1998, 1997 and 1996
Unrealized depreciation on securities Total Common Paid-in Retained available stockholders' stock capital earnings for sale equity Balance at June 30, 1995 $ 634,000 2,825,000 13,064,000 (190,000) 16,333,000 Issuance of common stock through employee stock purchase plan (note 9) 5,000 77,000 - - 82,000 Issuance of common stock through dividend reinvestment and shareholder stock purchase plan 2,000 53,000 - - 55,000 Purchase and retirement of common stock (note 9) (6,000) (176,000) - - (182,000) Issuance of 33,111 shares of common stock at par value for 5% stock dividend plus cash in lieu of fractional shares 32,000 (32,000) (5,000) - (5,000) Dividends ($.24 per share) - - (261,000) - (261,000) Change in net unrealized depreciation on securities available for sale (note 2) - - - (55,000) (55,000) Net earnings - - 5,762,000 - 5,762,000 ----------- ------------- ------------- ----------- -------------- Balance at June 30, 1996 667,000 2,747,000 18,560,000 (245,000) 21,729,000 Issuance of common stock through employee stock purchase plan (note 9) 3,000 76,000 - - 79,000 Issuance of common stock through dividend reinvestment and shareholder stock purchase plan 2,000 52,000 - - 54,000 Purchase and retirement of common stock (note 9) (7,000) (200,000) - - (207,000) Issuance of 33,013 shares of common stock at par value for 5% stock dividend plus cash in lieu of fractional shares 33,000 (33,000) (5,000) - (5,000) Dividends ($.25 per share) - - (274,000) - (274,000) Change in net unrealized depreciation on securities available for sale (note 2) - - - 136,000 136,000 Net earnings - - 821,000 - 821,000 ----------- ------------- ------------- ----------- -------------- Balance at June 30, 1997 698,000 2,642,000 19,102,000 (109,000) 22,333,000 Issuance of common stock through employee stock purchase plan (note 9) 3,000 72,000 - - 75,000 Issuance of common stock through dividend reinvestment and shareholder stock purchase plan 1,000 35,000 - - 36,000 Purchase and retirement of common stock (note 9) (10,000) (295,000) - - (305,000) Issuance of 51,705 shares of common stock at par value for 5% stock dividend plus cash in lieu of fractional shares 52,000 (52,000) (5,000) - (5,000) Issuance of 345,741 shares of common stock at par value for 3 for 2 stock split plus cash in lieu of fractional shares 346,000 (346,000) (5,000) - (5,000) Exercise of stock options to purchase 1,575 shares of common stock at $19.07 per share (note 9) 2,000 28,000 - - 30,000 Dividends ($0.26 per share) - - (288,000) - (288,000) Change in net unrealized depreciation on securities available for sale (note 2) - - - 73,000 73,000 Net earnings - - 1,911,000 - 1,911,000 ----------- ------------- ------------- ----------- -------------- Balance at June 30, 1998 $ 1,092,000 2,084,000 20,715,000 (36,000) 23,855,000 =========== ============= ============= =========== ==============
See accompanying notes to consolidated financial statements. 1ST BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended June 30, 1998, 1997 and 1996
1998 1997 1996 Net cash flows from operating activities: Net earnings $ 1,911,000 821,000 5,762,000 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation and amortization 479,000 348,000 300,000 Amortization of mortgage servicing rights 242,000 153,000 107,000 Gain on sale of loans (831,000) (2,124,000) (2,026,000) Loss (gain) on sale of securities (32,000) 29,000 111,000 Gain on sale of branch - - (7,274,000) Loss on sale of equipment - 54,000 - Net change in loans held for sale 25,320,000 (9,179,000) (13,486,000) Provision for loan losses 755,000 373,000 83,000 Change in accrued interest receivable 451,000 35,000 107,000 Change in prepaid expenses and other assets (634,000) (476,000) 635,000 Change in accrued expenses and other liabilities (501,000) (79,000) (1,646,000) Loss on investment in limited partnership 113,000 122,000 263,000 ------------- --------------- -------------- Net cash provided (used) by operating activities 27,273,000 (9,923,000) (17,064,000) ------------- --------------- -------------- Cash flows from investing activities: Purchases of securities held to maturity - (3,519,000) (34,262,000) Proceeds from maturities of securities held to maturity 24,510,000 3,062,000 16,872,000 Purchases of securities available for sale (49,709,000) (31,913,000) (46,074,000) Proceeds from maturity of securities available for sale 10,530,000 1,192,000 5,015,000 Proceeds from sale of securities available for sale 35,339,000 29,826,000 76,159,000 Change in loans, net (39,213,000) 1,159,000 (12,834,000) Purchase of life insurance policies - (35,000) - Purchase of stock of FHLB of Indianapolis (828,000) (77,000) (988,000) Purchases of office premises and equipment (161,000) (615,000) (154,000) Proceeds from sale of office premises and equipment-branch sales - - 1,316,000 Proceeds from sale of loans-branch sales - - 28,875,000 Sale of deposits-branch sales - - (77,406,000) Proceeds from bulk sale of loans - - 37,937,000 ------------- --------------- -------------- Net cash used by investing activities (19,532,000) (920,000) (5,544,000) ------------- --------------- -------------- Cash flows from financing activities: Net (decrease) increase in deposits (26,553,000) 7,168,000 11,017,000 Proceeds from FHLB advances and other borrowings 81,996,000 83,768,000 202,544,000 Repayment of FHLB advances and other borrowings (66,911,000) (84,357,000) (181,046,000) Proceeds from issuance of common stock 141,000 133,000 137,000 Purchase and retirement of common stock (305,000) (207,000) (182,000) Payment of dividends on common stock (298,000) (279,000) (266,000) Increase (decrease) in advance payments by borrowers for interest and taxes 58,000 (188,000) (1,829,000) ------------- --------------- -------------- Net cash provided (used) by financing activities (11,872,000) 6,038,000 30,375,000 ------------- --------------- -------------- Net increase (decrease) in cash and cash equivalents (4,131,000) (4,805,000) 7,767,000 Cash and cash equivalents at beginning of year 20,294,000 25,099,000 17,332,000 ------------- --------------- -------------- Cash and cash equivalents at end of year $ 16,163,000 20,294,000 25,099,000 ============= =============== ============== Additional disclosures: Interest paid $ 13,567,000 12,917,000 14,170,000 ============= =============== ============== Income taxes paid $ 996,000 287,000 4,700,000 ============= =============== ============== Transfer of investment securities held to maturity to available for sale account $ - - 45,838,000 ============= =============== ============== Transfer of loans receivable to prepaid expenses and other assets $ 3,863,000 4,111,000 - ============= =============== ==============
See accompanying notes to consolidated financial statements. 1ST BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 (1) Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of 1ST BANCORP (the "Corporation") and its subsidiaries, First Federal Bank, A Federal Savings Bank and subsidiary (the "Bank"), First Financial Insurance Agency, Inc. and First Title Insurance Company. All significant intercompany transactions and balances have been eliminated in consolidation. The accounting and reporting policies of the Corporation and the Bank conform to generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and consolidated statement of earnings for the period. Actual results could differ significantly from those estimates. The Bank is subject to competition from other financial institutions and is regulated by certain federal agencies and undergoes periodic examination by those regulatory authorities. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. Securities Held to Maturity and Available for Sale Securities classified as available for sale are securities that the Corporation intends to hold for an indefinite period of time, but not necessarily until maturity, and include securities that management might use as part of its asset-liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital or other similar factors, and which are carried at market value. Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount as a separate component of stockholders' equity until realized. Securities classified as held to maturity are securities that the Corporation has both the ability and positive intent to hold to maturity and are carried at cost adjusted for amortization of premium or accretion of discount. Gains and losses on securities are computed on a specific identification basis. Loans Receivable and Real Estate Owned Loans receivable are considered long-term investments, and accordingly, are carried at historical cost. The Bank provides specific valuation allowances for estimated losses on loans and real estate owned when a significant and permanent decline in value occurs. Loans considered to be impaired are reduced to the present value of expected future cash flows or to fair value of collateral by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to require an increase, allocations are considered in relation to the overall adequacy of the allowance for loan losses and subsequent adjustment to the loss provision. In providing valuation allowances, through a charge to operations, the estimated net realizable value of the underlying collateral and the costs of holding real estate are considered. Non-specific valuation allowances for estimated losses are established based on management's judgment of current economic conditions and the credit risk of the loan portfolio and real estate owned. 2 1ST BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Management believes the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions and borrower circumstances. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Loans are placed on non-accrual status when the collection of interest becomes doubtful. Interest previously accrued but not deemed collectible is reserved. Loan Fees and Related Costs Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized over the contractual life of the related loan as an adjustment of the loan's yield using the interest method. Mortgage Banking Activities The Bank originates and purchases certain mortgage loans for sale in the secondary market. During the origination and purchase period, mortgage loans are designated as held either for investment purposes or for sale. Mortgage loans held for sale are carried at the lower of amortized cost or market value determined on an aggregate basis. Gains and losses on the sale of loans are reflected in operations at the time of sale and are determined by the difference between net sales proceeds and the carrying value of the loans, adjusted for normal servicing fees. The Bank recognizes, as separate assets, rights to service mortgage loans for others however those servicing rights are acquired. The Bank hedges its interest rate risk on fixed rate loan commitments expected to close and the inventory of mortgage loans held for sale. Related hedging gains and losses are recognized at the time gains or losses are recognized on the related loans sold. The Bank does not anticipate any loss on open commitments at June 30, 1998. As of July 1, 1995, the Bank adopted the provisions of Statement of Financial Accounting Standards No. 122, Accounting for Servicing Rights ("SFAS 122"). For servicing retained loan sales, SFAS 122 requires the capitalization of the cost of mortgage service rights, regardless of whether those rights were acquired through purchase or origination. Effective December 31, 1996, SFAS 122 was superseded by Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities ("SFAS 125"). The Bank's accounting for mortgage servicing rights was not changed by SFAS 125. Prior to the adoption of SFAS 122 and SFAS 125, only purchased servicing rights were capitalized. Beginning with the adoption of SFAS 122, the total cost of mortgage loans, whether originated or purchased, with the intent to sell is allocated between the loan servicing right and the mortgage loan without servicing based on their relative fair values at the date of sale. The capitalized cost of loan servicing rights is amortized in proportion to and over the period of, estimated net servicing revenue. Mortgage servicing rights are periodically evaluated for impairment by stratifying them based on the predominant risk characteristics of the underlying serviced loan. 3 1ST BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements Office Premises and Equipment Office premises and equipment are stated at cost, less accumulated depreciation provided on the straight-line basis over the estimated useful lives of the various classes of assets. FHLB Stock Federal law requires a member institution of the Federal Home Loan Bank System to hold common stock of its district FHLB according to a predetermined formula. This investment is stated at cost, which represents redemption value. Pension Plan Pension expense for the Bank's defined benefit pension plan is computed on the basis of accepted actuarial methods. It is the Bank's policy to fund pension costs accrued. Income Taxes The Corporation and its subsidiaries file consolidated income tax returns. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130), which establishes standards for reporting and displaying comprehensive income and its components in the financial statements. Comprehensive income is the total of net income and all nonowner changes in equity. The statement is effective for fiscal years beginning after December 15, 1997. The Corporation does not anticipate the adoption of SFAS 130 in fiscal 1999 will have any impact on its financial position or results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, Disclosure About Segments of an Enterprise and Related Information (SFAS 131) which requires the disclosure of financial and descriptive information about reportable operating segments. Operating segments are components of an enterprise about which financial information is available and is evaluated regularly in deciding how to allocate resources and assess performance. The Corporation does not anticipate the adoption of SFAS 131 in fiscal 1999 will have any impact on its financial position or results of operations. In February 1998, the FASB issued Statement of Financial Accounting Standard No. 132, Employers' Disclosures About Pension and Other Postretirement Benefits (SFAS 132) which standardizes disclosure requirements for pension and other postretirement benefit plans. As this standard does not change the measurement or recognition of those plans, the Corporation does not anticipate the adoption of SFAS 132 in 1999 will have any impact on its financial position or results of operations. 4 1ST BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) which establishes accounting and reporting standards for derivative instruments. SFAS 133 requires all derivatives to be recognized as either assets or liabilities in the statement of financial condition at fair value. The accounting for changes in fair value of the derivative depends on the intended use of the derivative and the resulting designation. The Corporation does not anticipate the adoption of SFAS 133 in fiscal 2000 will have a material impact on its financial position or results of operations. Reclassifications Certain amounts in the 1997 and 1996 consolidated financial statements have been reclassified to conform to the 1998 presentation. (2) Securities Available for Sale Securities available for sale consist of the following at June 30:
1998 ----------------------------------------------------------------------- Amortized Unrealized Unrealized Market Cost Gains Losses Value Mortgage-backed securities: FHLMC $ 1,723,000 - (2,000) 1,721,000 GNMA 9,245,000 - (60,000) 9,185,000 Investments: U.S. Treasury and agency obligations 4,596,000 6,000 (4,000) 4,598,000 --------------- -------------- -------------- --------------- $ 15,564,000 6,000 (66,000) 15,504,000 =============== ============== ============== =============== 1997 ---------------------------------------------------------------------- Amortized Unrealized Unrealized Market Cost Gains Losses Value Mortgage-backed securities: FHLMC 2,206,000 - (33,000) 2,173,000 Investments: U.S. Treasury and agency obligations 9,563,000 - (148,000) 9,415,000 -------------- -------------- ------------- --------------- 11,769,000 - (181,000) 11,588,000 ============== ============== ============= ===============
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, 1998, gross realized gains and gross realized losses on sales of investment securities available for sale were $7,000 and $13,000, respectively and from the sales of mortgage-backed securities available for sale were $35,000 and $4,000, respectively. For the year ended June 30, 1997, gross realized losses from the sales of investment securities available for sale were $19,000. For the year ended June 30, 1996, gross realized gains and gross realized losses from the sales of investment securities available for sale were $118,000 and $294,000, respectively, and from the sales of mortgage-backed securities available for sale were $57,000 and $4,000, respectively. For the year ended June 30, 1998, gross realized gains and gross realized losses on sales of trading account securities were $18,000 and $11,000, respectively. For the year ended June 30, 1997, gross realized gains and gross realized losses on sales of trading account securities were $13,000 and $23,000. For the year ended June 30, 1996, gross realized gains and gross realized losses were $13,000 and $1,000, respectively. At June 30, 1998, the contractual maturity of securities available for sale follows: Amortized Market cost value Due after one year through five years $ 1,998,000 1,994,000 Due after five years through ten years 601,000 600,000 Due after ten years 1,997,000 2,004,000 Mortgage-backed securities 10,968,000 10,906,000 ------------ ---------- $15,564,000 15,504,000 =========== ========== (3) Securities Held to Maturity Securities held to maturity at June 30 consist of:
1998 --------------------------------------------------------------------- Amortized Unrealized Unrealized Market Cost Gains Losses Value U.S. Treasury and agency obligations $ 19,258,000 2,000 (46,000) 19,214,000 Mortgage-backed securities 295,000 5,000 - 300,000 --------------- -------------- ------------- -------------- $ 19,553,000 7,000 (46,000) 19,514,000 =============== ============== ============= ============== 1997 --------------------------------------------------------------------- Amortized Unrealized Unrealized Market Cost Gains Losses Value U.S. Treasury and agency obligations 43,747,000 41,000 (553,000) 43,235,000 Mortgage-backed securities 318,000 5,000 (2,000) 321,000 ------------- -------------- -------------- -------------- 44,065,000 46,000 (555,000) 43,556,000 ============= ============== ============== ==============
At June 30, 1998, the contractual maturity of securities held to maturity follows:
Amortized Market cost value Due within one year $ 8,450,000 8,436,000 Due after one year through five years 8,808,000 8,776,000 Due after five years through ten years 1,000,000 1,000,000 Due after ten years 1,000,000 1,002,000 Mortgage-backed securities 295,000 300,000 -------------- -------------- $ 19,553,000 19,514,000 ============== ============== (4) Loans Receivable Loans receivable at June 30 consist of: 1998 1997 ---- ---- Real estate loans: Mortgage $ 163,457,000 135,189,000 Construction 4,501,000 2,038,000 Consumer and other loans 22,133,000 12,748,000 --------------- ---------------- 190,091,000 149,975,000 --------------- ---------------- Less: Undisbursed loan funds (3,475,000) (1,536,000) Deferred loan fees and unamortized premiums and discounts, net 139,000 (441,000) Allowance for loan losses (1,465,000) (1,158,000) --------------- ---------------- (4,801,000) (3,135,000) --------------- ---------------- $ 185,290,000 146,840,000 =============== ================ 8.46% 8.53% =============== ================
At June 30, 1998, the majority of the Bank's residential and consumer loans receivable are located in central and southern Indiana and southern Illinois. Activity in the allowance for loan losses for the years ended June 30 consists of:
1998 1997 1996 ---- ---- ---- Balance at beginning of year $ 1,158,000 896,000 878,000 Provision charged to operations 755,000 373,000 83,000 Loans charged off, net of recoveries (448,000) (111,000) (65,000) -------------- ------------- ------------ Balance at end of year $ 1,465,000 1,158,000 896,000 ============== ============= ============
Non accrual loans amounted to $3,491,000 and $2,330,000 at June 30, 1998 and 1997, respectively. The Bank makes loans to its officers and directors in the normal course of business. These loans are made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other customers and do not involve more than the normal risk of collectibility. Activity in these loans for the year ended June 30, 1998 consists of: Balance at beginning of year $ 614,000 Loans originated 132,000 Repayments (482,000) =========== Balance at end of year $ 264,000 =========== (5) Mortgage Banking The amount of loans serviced by the Bank for the benefit of others was $120,811,000, $112,642,000, and $81,353,000 at June 30, 1998, 1997 and 1996, respectively. At June 30, 1998 and 1997, unamortized loan servicing rights totaled $1,012,000 and $819,000, respectively, and are included in prepaid expenses and other assets in the Consolidated Statement of Financial Condition. For the years ended June 30, 1998, 1997, and 1996, the Bank capitalized $426,000, $366,000, and $454,000, respectively, of servicing rights on loans that were originated through its loan origination network and retail banking offices. The Bank had definitive plans to sell these mortgage loans and retain the servicing rights. During the year ended June 30, 1996, the Bank sold approximately $161,082,000 of its FHLMC and FNMA loan servicing portfolio which resulted in a gain of $237,000. All such gains and losses are included in other non-interest income in the Consolidated Statements of Earnings. No sales of the Bank's loan servicing portfolio occurred in 1998 or 1997. (6) Office Premises and Equipment Office premises and equipment at June 30 consist of: 1998 1997 ---- ---- Land and improvements $ 345,000 345,000 Buildings and improvements 2,956,000 2,952,000 Furniture and equipment 1,949,000 1,986,000 ------------- ------------- 5,250,000 5,283,000 Less accumulated depreciation 2,173,000 2,058,000 ------------- ------------- $ 3,077,000 3,225,000 ============= ============= (7) Deposits Deposits at June 30 consist of:
1998 1997 Statement savings accounts (2.87% and 2.86% at June 30, 1998 and 1997) 6,340,000 6,766,000 Variable rate savings accounts (6.00% at June 30, 1998 and 1997) 8,776,000 9,163,000 NOW and Super NOW accounts (0.00%-3.10% and 0.00%-3.25% at June 30, 1998 and 1997) 3,447,000 3,015,000 Money market accounts (weighted average rate of 4.29% ------------------- ---------------- and 4.06% at June 30, 1998 and 1997) 23,025,000 23,208,000 ------------------- ---------------- Certificates: Less than 4% 247,000 191,000 4% - 4.99% 2,088,000 4,435,000 5% - 5.99% 51,675,000 77,581,000 6% - 6.99% 31,748,000 25,478,000 7% - 7.99% 8,152,000 12,228,000 8% or more 828,000 1,195,000 ------------------- ---------------- 94,738,000 121,108,000 ------------------- ---------------- Weighted average cost of all deposits 117,763,000 144,316,000 ============== ============== 5.56% 5.49% ============== ==============
Scheduled maturities of certificates at June 30, 1998 are summarized as follows: Year ending June 30, 1999 $ 60,706,000 2000 18,777,000 2001 6,838,000 2002 1,875,000 2003 4,490,000 Thereafter 2,052,000 ---------------- $ 94,738,000 ================ Included in certificates at June 30, 1998 and 1997 are approximately $7,050,000 and $8,828,000, respectively, of certificates greater than $100,000. Eligible savings accounts are insured by the full faith and credit of the United States government up to $100,000 under the Federal Deposit Insurance Corporation's Savings Association Insurance Fund (SAIF) at June 30, 1998. Interest expense by type of deposit for the years ended June 30 follows:
1998 1997 1996 ---- ---- ---- Statement Savings and variable rate savings accounts $ 552,000 316,000 392,000 NOW, Super NOW and Money Market 381,000 375,000 652,000 Certificates 6,375,000 6,987,000 8,029,000 -------------- ------------- ------------- $ 7,308,000 7,678,000 9,073,000 ============== ============= =============
Net earnings for the year ended June 30, 1997 include a one-time pre-tax charge of $1,330,000 to federal insurance premiums for an industry-wide special assessment by the FDIC to recapitalize SAIF, which insures the Bank's customers' deposits. As a result of this one-time assessment, the Bank's deposit insurance premiums were reduced in 1998 and will continue to be reduced in the future. (8) Advances From FHLB and Other Borrowings Advances from FHLB and other borrowings at June 30 consist of:
1998 1997 ---- ---- Advances from FHLB collateralized by qualifying mortgages, investment securities and mortgage-backed securities (as defined) equal to 125% of FHLB advances $ 115,381,000 98,815,000 Promissory note with interest payable at prime rate (as defined) plus 1/2% (9.0% at June 30, 1997) with principal payments of $49,375 due quarterly through December 30, 2004. Collateralized by 100% of the common stock of the-Bank. Prepaid in November 1997 --- 1,481,000 ---------------- ---------------- $ 115,381,000 100,296,000 ================ ================
The interest rates on the advances from FHLB at June 30, 1998 were as follows: $5,000,000 at 4.88%, $13,209,000 at 4.96%, $10,000,000 at 5.00%, $10,000,000 at 5.35%, $10,000,000 at 5.39%, $10,000,000 at 5.50%, $10,000,000 at 5.55%, $5,000,000 at 5.60%, $10,000,000 at 5.62%, $10,000,000 at 5.68%, $10,000,000 at 5.72%, $3,000,000 at 5.83%, $9,000,000 at 5.85%, and $172,000 at 5.91%. Although all of these advances are at fixed interest rates, the FHLB has the option at various times of converting $87,000,000 of the advances to variable interest rates. The interest rates on the advances from FHLB at June 30, 1997 were as follows: $5,000,000 at 5.46%, $5,000,000 at 5.43%, $3,617,000 at 4.96%, $10,000,000 at 5.62%, $13,000,000 at 5.66%, $10,000,000 at 5.39%, $198,000 at 5.91%, $10,000,000 at 5.50%, $9,000,000 at 5.85%, $3,000,000 at 5.83%, $10,000,000 at 5.72%, and $20,000,000 of variable rate advances with a rate at June 30, 1997 of 5.775%. The weighted average interest rate of all borrowings was 5.44% and 5.62% at June 30, 1998 and 1997, respectively. Securities sold under agreements to repurchase ("reverse repurchases") represent an indebtedness of the Bank secured by U.S. Treasury and agency obligations, to be repurchased upon maturity. Reverse repurchases averaged $964,000, and $2,956,000 for the years ended June 30, 1997 and 1996, respectively, with maximum amounts outstanding at any month-end of $4,020,000, and $8,838,000 during the years ended June 30, 1997 and 1996, respectively. Advances from FHLB at June 30, 1998 are contractually scheduled to mature as follows: Maturity 1999 $ 26,209,000 2000 19,000,000 2001 - 2002 10,000,000 2003 35,000,000 Thereafter 25,172,000 =============== $ 115,381,000 =============== (9) Stockholders' Equity The Corporation is subject to regulation as a savings and loan holding company by the Office of Thrift Supervision ("OTS"). The Bank, as a subsidiary of a savings and loan holding company, is subject to certain restrictions in its dealings with the Corporation. The Bank is further subject to the regulatory requirements applicable to a federal savings bank. Thrift institutions are required to maintain risk-based capital of 8.0% of risk-weighted assets. At June 30, 1998, the Bank's risk-based capital ratio of 15.0% exceeded the required amount. Risk-based capital is defined as the Bank's core capital adjusted by certain items. Risk weighting of assets is derived from assigning one of four risk-weighted categories to an institution's assets, based on the degree of credit risk associated with the asset. The categories range from zero percent for low-risk assets (such as United States Treasury securities) to 100% for high-risk assets (such as real estate owned). The carrying value of each asset is then multiplied by the risk weighting applicable to the asset category. The sum of the products of the calculation equals total risk-weighted assets. Savings institutions are also required to maintain a minimum leverage ratio under which core capital must equal at least 3% of total assets, but no less than the minimum required by the Office of the Comptroller of the Currency ("OCC") for national banks which minimum currently stands between 4% and 5% for other than the highest rated institutions. The Bank's primary regulator, OTS, is expected to adopt the OCC minimum. The components of core capital are the same as those set by the OCC for national banks, and consist of common equity plus non-cumulative preferred stock and minority interests in consolidated subsidiaries, minus certain intangible assets. At June 30, 1998, the Bank's core capital and leverage ratio of 8.7% were in excess of the required amounts. The OTS has minimum capital standards that place savings institutions into one of five categories, from "critically undercapitalized" to "well-capitalized," depending on levels of three measures of capital. A well-capitalized institution as defined by the regulations has a total risk-based capital ratio of at least 10 percent, a Tier 1 (core) risk-based capital ratio of at least six percent, and a leverage (core) capital ratio of at least five percent. At June 30, 1998, the Bank was classified as well-capitalized with a total risked based capital ratio of 15.0%, a Tier 1 risked-based capital ratio of 14.3% and a leverage (core) capital ratio of 8.7%. The OTS has regulations governing dividend payments, stock redemptions, and other capital distributions, including upstreaming of dividends by a savings institution to a holding company. Under these regulations, the Bank may, without prior OTS approval, make distributions to the Corporation of up to 100% of its net earnings during the calendar year, plus an amount that would reduce by half its excess capital over its fully phased-in capital requirement at the beginning of the calendar year. The Corporation is not subject to any regulatory restrictions regarding payments of dividends to its shareholders, other than restrictions under Indiana law. The following is a summary of the Bank's regulatory capital and capital requirements at June 30, 1998 and 1997.
To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions --------------------------- ------------------------- -------------------------- Amount Ratio Amount Ratio Amount Ratio -------------- --------- ------------- ------- ------------- --------- As of June 30, 1998: Total capital to risk-weighted assets 23,602,000 15.0% 12,633,000 8.0% 15,792,000 10.0% Tier 1 capital to risk-weighted assets 22,602,000 14.3% 6,317,000 4.0% 9,475,000 6.0% Tier 1 capital to adjusted total 22,602,000 8.7% 10,391,000 4.0% 12,989,000 5.0% assets As of June 30, 1997: Total capital to risk-weighted assets 23,086,000 16.0% 11,555,000 8.0% 14,444,000 10.0% Tier 1 capital to risk-weighted assets 22,436,000 15.5% 5,778,000 4.0% 8,666,000 6.0% Tier 1 capital to adjusted total assets 22,436,000 8.3% 10,823,000 4.0% 13,528,000 5.0%
At the time of conversion from mutual to stock in 1987, the Bank established a liquidation account which equaled the Bank's retained earnings as of the date of the latest Statement of Financial Condition included in the offering document. The liquidation account will be maintained for the benefit of depositors, as of the eligibility record date, who continue to maintain their deposits in the Bank after conversion. In the event of a complete liquidation (and only in such event), each eligible depositor will be entitled to receive a liquidation distribution from the liquidation account, in the proportionate amount to the then current adjusted balance for deposits then held, before any liquidation distribution may be made with respect to the stockholders. Except for the repurchase of stock and payment of dividends by the Bank, the existence of the liquidation account does not restrict the use or application of such retained earnings. On October 23, 1997, the Board of Directors approved a 3-for-2 stock split. On December 18, 1997, the Board of Directors approved a 5% common stock dividend. Also, on November 22, 1996 and December 21, 1995, the Board of Directors approved 5% common stock dividends. All share and per share data have been retroactively restated to reflect the stock split and stock dividends. Stock Option Plans The Corporation has a stock option plan under which 260,465 authorized but unissued shares of common stock were reserved. Under the plan, 151,938 non-qualified stock options were granted at $3.45 per share to outside directors and 65,117 incentive stock options and 16,279 non-qualified stock options were granted at $3.45 and $3.54 per share, respectively, to certain key employees. Of the 65,117 incentive stock options granted to certain key employees, 2,605 options were canceled in 1994. All options granted had been exercised or canceled as of June 30, 1996. In 1997, 26,775 incentive stock options were granted at $19.07 to certain key employees. In 1998, no incentive stock options were granted. Shares available and options outstanding under the plans are as follows:
Shares available for future Options Price per grant outstanding share Balance at June 30, 1995 and 1996 29,736 - - Granted in 1997 (26,775) 26,775 19.07 ------------- -------------- Balance at June 30, 1997 2,961 26,775 19.07 Exercised in 1998 - (1,575) 19.07 ============= ============== Balance at June 30, 1998 2,961 25,200 19.07 ============= ============== ==============
SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair value method of accounting for stock options and similar equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period which is usually the vesting period. Companies are encouraged, but not required to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, but are required to disclose in a note to the financial statements pro-forma net earnings and earnings per share as if the company had applied the new method of accounting. The Company applied APB No. 25 in accounting for its stock-based compensation plans. Had compensation cost been determined on the basis of fair value pursuant to SFAS No. 123, for options granted in 1997, net earnings and basic earnings per share would have been as follows: 1998 1997 ---- ---- Net earnings: As reported $ 1,911,000 821,000 ============= ============ Pro forma $ 1,911,000 724,000 ============= ============ Basic earnings per share: As reported $ 1.75 .75 ============= ============ Pro forma $ 1.75 .66 ============= ============ The following weighted average assumptions were used in 1997 in the option pricing model: a risk free interest rate of 6.39%; an expected life of the options of 5 years; an expected dividend yield of 1.33%; and a volatility factor of .27. Stock Purchase Plans The Corporation maintains an Employee Stock Purchase Plan whereby full-time employees of 1ST BANCORP and subsidiaries can purchase the Corporation's common stock at a discount. The purchase price of the shares under this plan is 85% of the fair market value of such stock at the beginning or end of the offering period, whichever is lesser. A total of 24,522 authorized but unissued shares were reserved for issuance under this plan. In 1998, 5,613 shares were issued and purchased by employees. The Board of Directors suspended this plan effective June 30, 1998 for plan years 1999 and beyond. Under a former plan, with identical terms as the existing plan, a total of 5,904 and 8,621 shares were issued and purchased by employees in 1997 and 1996, respectively. Stock Repurchase Plan In August 1996, the Board authorized the repurchase of up to 5% of the outstanding shares of common stock (1,108,230 shares were outstanding at the time), subject to market conditions, over a two year period which expires in August 1998. During the years ended June 30, 1998 and 1997, 15,750 and 11,628 shares, respectively, of common stock were repurchased at an average price per share of $19.37 and $17.80, respectively. Under a similar plan, 10,516 shares were repurchased in 1996 at an average price of $17.28. (10) Earnings Per Share In February 1997, the FASB issued Statement of Financial Accounting Standard No. 128, Earnings Per Share (FAS 128). FAS 128 provides computation, presentation, and disclosure requirements for earnings per share and supersedes Accounting Principles Board Opinion 15. Basic earnings per share for 1998, 1997, and 1996, were computed by dividing net earnings by the weighted average shares of common stock outstanding (1,090,922, 1,101,724, and 1,103,539 in 1998, 1997, and 1996, respectively). Diluted earnings per share for 1998, 1997, and 1996 were computed by dividing net earnings by the weighted average shares of common stock and common stock that would have been outstanding assuming the issuance of all dilutive potential common shares outstanding (1,099,293, 1,101,724, and 1,103,539 in 1998, 1997, and 1996, respectively.) Dilution of the per-share calculation relates to stock options. Diluted earnings per share for 1998, 1997, and 1996 are the same as primary earnings per share calculated and reported under superseded APB 15. Fully diluted earnings per share as previously reported under APB 15 are no longer required. (11) Employee Benefit Plans Substantially all employees are covered under a noncontributory defined benefit pension plan. Net periodic pension expense (benefit) for the years ended June 30 consists of the following:
1998 1997 1996 ---- ---- ---- Service cost $ 81,000 128,000 177,000 Interest cost 77,000 79,000 124,000 Actual return on assets (279,000) (173,000) (87,000) Net amortization and deferral (15,000) 76,000 (34,000) -------------- ------------- ----------- Net periodic pension expense (benefit) $ (136,000) 110,000 180,000 ============== ============= ===========
Prior service cost is being amortized over the average remaining service period of active employees.
Accumulated plan benefit information for the Bank's plan is as follows: 1998 1997 ---- ---- Actuarial present value of projected benefit obligations: Vested benefit obligation $ 747,000 721,000 Nonvested benefit obligation 31,000 60,000 -------------- ---------------- Total accumulated benefit obligation 778,000 781,000 Additional benefits based upon estimated future salary levels 192,000 190,000 -------------- ---------------- Total projected benefit obligation 970,000 971,000 Fair market value of plan assets 1,526,000 1,336,000 -------------- ---------------- Fair market value of plan assets over projected benefit obligation 556,000 365,000 Unrecognized prior service cost (25,000) (28,000) Unrecognized gain (350,000) (355,000) Unrecognized transition asset 5,000 6,000 -------------- ---------------- Accrued pension asset (liability) $ 186,000 (12,000) ============== ================
The weighted-average assumed rate of return used in determining the net periodic pension cost for 1998 and 1997 was 8.0% and in determining the actuarial present value of accumulated benefit obligations at June 30, 1998 and 1997 was 7.5%. The weighted-average rate of increase in future compensation levels used for 1998 and 1997 was 5.0%. The Bank has an Incentive Bonus Plan for certain salaried employees. The bonus pool for the years ended June 30, 1998, 1997 and 1996 was $278,000, $220,000, and $300,000, respectively. Effective July 1, 1993, the Board of Directors approved a supplemental retirement plan (Officer Plan) for certain key officers. The Officer Plan provides a target benefit to eligible employees based on their projected salary at time of retirement. Effective July 1, 1993, the Board of Directors also approved a deferred compensation agreement for the directors (Directors Plan). The Directors Plan allows the directors to defer their monthly director fee. The deferred fees accrue interest and will be paid out over a fifteen-year period once the director reaches normal retirement age. Both plans provide certain additional survivor benefits in the case of death before retirement. In connection with the plans, on July 1, 1993 the Bank purchased life insurance policies on certain of the officers and directors participating in the plans. During the years ended June 30, 1998, 1997 and 1996, the Bank expensed $256,000, $102,000, and $99,000, respectively, under the plans and recognized $66,000, $65,000, and $41,000, respectively, related to life insurance policy cash surrender values. In addition to the expense for the year ended June 30, 1996, $133,000 related to benefits for officers terminated as a result of the branch sales was charged against the gain on sale of branches. (12) Income Taxes The components of the provision (benefit) for income taxes for the years ended June 30 consist of:
1998 1997 1996 ---- ---- ---- Current: Federal $ 510,000 (213,000) 2,881,000 State income taxes 236,000 71,000 843,000 Deferred (130,000) (107,000) (351,000) -------------- ------------- -------------- $ 616,000 (249,000) 3,373,000 ============== ============= ==============
The differences between the effective income tax rate and the statutory Federal corporate rate consist of:
1998 1997 1996 ---- ---- ---- Statutory Federal income tax rate 34.0% 34.0% 34.0% Increase (decrease) in taxes resulting from: State taxes, net of federal benefit 6.2 8.2 6.1 Affordable, housing tax credit (13.6) (60.0) - Refund of prior year taxes - (26.0) - Increase in cash surrender value of life insurance (0.9) (3.8) (0.2) Other (1.3) 4.1 (3.0) ---------- ----------- ---------- Effective tax rate 24.4% (43.5)% 36.9% ========== =========== ==========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30 consist of:
1998 1997 ---- ---- Deferred tax assets: Deferred loan fees $ 20,000 41,000 Securities available for sale 24,000 72,000 Allowance for loan losses for financial reporting purposes 400,000 260,000 Deferred compensation and benefits 307,000 270,000 Uncollected interest 89,000 - Other 16,000 26,000 ----------- ----------- 856,000 669,000 ----------- ----------- Deferred tax liabilities: Mortgage servicing 405,000 327,000 Excess tax depreciation 86,000 85,000 FHLB stock dividend 52,000 52,000 Allowance for loan losses for tax purposes in excess of base year allowance 80,000 125,000 Partnership loss 53,000 - Other 64,000 46,000 ----------- ----------- 740,000 635,000 ----------- ----------- Net deferred tax asset $ 116,000 34,000 =========== ===========
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, 1998, includes approximately $2,300,000 for which no provision for federal income taxes has been made. This amount represents allocations of income for allowable bad debt deductions. Reduction of amounts so allocated for purposes other than tax bad debt losses will create taxable income which will be subject to the then current corporate income tax rate. It is not contemplated that amounts allocated to bad debt deductions will be used in any manner to create taxable income. Financial Services of Southern Indiana Corp. ("Financial Services"), a subsidiary of the Bank, became a limited partner in House Investments, Shady Oak, L.P. during 1994. Under the terms of the partnership agreement, Financial Services contributed capital of $2,500,000 in 1995. The Partnership owns and operates an apartment complex which qualifies for affordable housing tax credits. The investment is being accounted for using the equity method. The Bank also provided a mortgage loan to the partnership in August 1996 which had a balance of $2,269,000 and $2,287,000 at June 30, 1998 and 1997, respectively. (13) Sale of Branches On December 16, 1995, the Corporation completed the sale of certain assets and certain liabilities of two of the Bank's full-service retail branch offices in Tipton and Kokomo, Indiana resulting in a pre-tax gain of $7,274,000. The transaction consisted of the sale of certain mortgage and consumer loans, office premises and equipment and the transfer of certain deposit liabilities. (14) Commitments and Contingencies The Bank had outstanding commitments to originate and sell loans and mortgage-backed securities of $18,143,000 and $5,255,000, and $1,674,000 and $2,555,000 at June 30, 1998 and 1997, respectively. The Bank had no outstanding commitments to purchase loans, mortgage-backed securities, and investments at June 30, 1998. These commitments, which are subject to certain limitations, extend over varying periods of time with the majority to be fulfilled over a 12-month period. The Bank does not project any losses will be incurred as a result of these commitments. The majority of the commitments to originate loans are for fixed rate mortgage loans at rates ranging from 6.75% to 10.40% and adjustable rate mortgage loans at rates ranging from 7.25% to 10.25% at June 30, 1998. (15) Parent Company Financial Information Following is condensed financial information of the Corporation: Condensed Statements of Financial Condition
June 30, ---------------------------------- Assets 1998 1997 ------ ---- ---- Cash $ 330,000 691,000 Investment in subsidiaries 23,513,000 23,091,000 Due from subsidiary 14,000 33,000 Other assets - 16,000 --------------- --------------- $ 23,857,000 23,831,000 =============== =============== Liabilities and Stockholders' Equity Long-term debt - 1,481,000 Accounts payable and accrued expenses 2,000 17,000 --------------- --------------- 2,000 1,498,000 Stockholders' equity 23,855,000 22,333,000 --------------- --------------- $ 23,857,000 23,831,000 =============== ===============
Condensed Statements of Earnings
Year ended June 30, ------------------------------------------------- 1998 1997 1996 ---- ---- ---- Dividend from subsidiaries $ 1,800,000 1,600,000 550,000 Other operating income 21,000 27,000 38,000 Operating expenses (168,000) (242,000) (263,000) -------------- ------------- -------------- 1,653,000 1,385,000 325,000 Income tax benefit 58,000 85,000 89,000 -------------- ------------- -------------- Income before equity in undistributed earnings of subsidiaries 1,711,000 1,470,000 414,000 Equity in undistributed earnings (loss) of subsidiaries 200,000 (649,000) 5,348,000 -------------- ------------- -------------- Net earnings $ 1,911,000 821,000 5,762,000 ============== ============= ==============
Condensed Statements of Cash Flows
Year ended June 30, -------------------------------------------------- 1998 1997 1996 ---- ---- ---- Net cash flows from operating activities: Net earnings $ 1,911,000 821,000 5,762,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (200,000) 649,000 (5,348,000) Change in accounts payable and accrued expenses (15,000) - - Change in due from subsidiary 19,000 (12,000) 25,000 Change in other assets 16,000 3,000 1,000 --------------- ------------- --------------- Net cash provided by operating activities 1,731,000 1,461,000 440,000 --------------- ------------- --------------- Cash flows from investing activities: Capital contributions to subsidiaries (149,000) (500,000) - --------------- ------------- --------------- Net cash used by investing activities (149,000) (500,000) - --------------- ------------- --------------- Cash flows from financing activities: Repayment of long-term debt (1,481,000) (198,000) (197,000) Dividends to stockholders (298,000) (279,000) (266,000) Purchase of common shares (305,000) (207,000) (182,000) Proceeds from issuance of common stock 141,000 133,000 137,000 --------------- ------------- --------------- Net cash used by financing activities (1,943,000) (551,000) (508,000) --------------- ------------- --------------- Net increase (decrease) in cash and cash equivalents (361,000) 410,000 (68,000) Cash and cash equivalents at beginning of year 691,000 281,000 349,000 --------------- ------------- --------------- Cash and cash equivalents at end of year $ 330,000 691,000 281,000 =============== ============= ===============
(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.
1998 1997 ----------------------------- ------------------------------ Carrying Estimated Carrying Estimated (In thousands) amount fair value amount fair value Assets Cash and cash equivalents $ 16,163 16,163 20,294 20,294 Securities including securities available for sale 35,057 35,018 55,653 55,144 Loans receivable including loans held for sale, net 187,739 189,022 174,609 173,651 Accrued interest receivable 1,729 1,729 2,180 2,180 Stock in FHLB of Indianapolis 5,769 5,769 4,941 4,941 Residential mortgage loan servicing 1,012 1,165 819 1,005 Liabilities Deposits 117,763 117,569 144,316 143,241 Borrowings FHLB advances 115,381 115,735 98,815 97,599 Long-term borrowing - - 1,481 1,481 Advance payments by borrowers for taxes and insurance 362 362 304 304 Accrued interest payable 856 856 1,409 1,409
The following valuation methods and assumptions were used by the Corporation in estimating the fair value of its financial instruments. Cash and Cash Equivalents. The fair value of cash and cash equivalents approximates carrying value. Securities. Fair values are based on quoted market prices. Loans Receivable Including Loans Held for Sale, Net. The fair value of loans is estimated by discounting the estimated future cash flows using market rates at which similar loans would be made to borrowers with similar credit ratings and similar maturities. Contractual cash flows for all types of loans were adjusted for prepayment estimates consistent with those used by the Office of Thrift Supervision. Accrued Interest Receivable. The fair value of these financial instruments approximates carrying value. Stock in FHLB of Indianapolis. The fair value of FHLB stock is based on the price at which it may be resold to the FHLB. Residential Mortgage Loan Servicing. The fair value of residential mortgage loan servicing rights is determined based on an internal valuation using the estimated discounted net cash flows to be received less the estimated cost of servicing. Deposits. The fair value of deposits is calculated using a discounted cash flow analysis that applies market interest and decay estimates consistent with those used by the Office of Thrift Supervision for similar deposit accounts. FHLB Advances. Fair values for fixed-maturity fixed-rate FHLB advances and fix-maturity variable rate advances are calculated using either fair market valuations provided by the FHLB of Indianapolis or a discounted cash flow analysis applying market interest rates for similar borrowings. Long-term Borrowing. The long-term borrowing is an adjustable instrument tied to the prime interest rate. Fair value approximates carrying value. Advance Payments by Borrowers for Taxes and Insurance. The fair value approximates carrying value. Accrued Interest Payable. The fair value of these financial instruments approximates carrying value. (17) Subsequent Event On August 6, 1998, the Corporation announced that it had entered into a definitive agreement to merge the Corporation with and into German American Bancorp. Under the terms of the agreement, the shareholders of the Corporation are targeted to receive shares of common stock of German American Bancorp with an equivalent value of approximately $50.94 for each 1ST BANCORP share, subject to certain changes in the market value of German American Bancorp shares. The proposal is subject to approval by the shareholders of both the Corporation and German American Bancorp, approval by appropriate bank regulatory agencies and other conditions outlined in the agreement. The Corporation anticipates the merger will become effective during the first calendar quarter of 1999. In connection with the definitive agreement, the Corporation also entered into a Stock Option Agreement with German American Bancorp, which gives German American Bancorp an option to purchase 19.9% of the Corporation's outstanding shares at $50.94 per share upon the occurrence of certain events that create the potential for another party to acquire control of the Corporation. 1ST BANCORP AND SUBSIDIARIES OFFICE LOCATIONS 1ST BANCORP Corporate Headquarters: 101 N. Third Street Vincennes, Indiana 47591 (812) 885-2255 (800) 688-3865 First Federal Bank, A Federal Savings Bank Main Office: 101 N. Third Street Vincennes, Indiana 47591 (812) 882-4528 (800) 688-4528 Willow Street Drive Up Branch: 1700 Willow Street Vincennes, Indiana 47591 (812) 885-6085 Main Office Annex: 102 N. Fifth Street Vincennes, Indiana 47591 (812) 885-2255 (800) 688-3865 Evansville Loan Origination Office: 125 N. Weinbach, Suite 730 Evansville, Indiana 47711 (812) 476-4441 (888) 476-4441 First Financial Insurance Agency, Inc. Main Office: 626 Veterans Drive Vincennes, Indiana 47591 (812) 886-7283 Princeton Office: 108 South 5th Ave. Princeton, Indiana 47670 (812) 385-2659 First Title Insurance Company 102 N. Fifth Street Vincennes, Indiana 47591 (812) 882-7837 1ST BANCORP AND SUBSIDIARIES DIRECTORS AND OFFICERS OF 1ST BANCORP C. James McCormick, Chairman & CEO* Chairman of the Board - McCormick, Inc., Bestway Express, Inc., and President of JAMAC Corp. John J. Summers, Vice Chairman Retired President, Hamilton Glass Products, Inc. Frank Baracani, President* President and Chief Executive Officer, First Federal Bank, A Federal Savings Bank Donald G. Bell, Vice President Retired Senior Partner - Hart, Bell, Cummings, Ewing & Stuckey, Attorneys-at-Law Lynn Stenftenagel, Secretary/Treasurer* Executive Vice President, Secretary, and Chief Financial Officer, First Federal Bank, A Federal Savings Bank R. William Ballard Retired Senior Vice President, First Federal Bank, A Federal Savings Bank James W. Bobe Farmer and County Commissioner Ruth Mix Carnahan Secretary-Treasurer, Carnahan Grain, Inc. Rahmi Soyugenc Chairman of the Board and President - Evansville Metal Products, Inc., President - National Anodizing & Plating, Keller Street Corporation All directors of 1ST BANCORP are also directors of First Federal Bank, A Federal Savings Bank *Also director and officer of First Financial Insurance Agency, Inc. and First Title Company 1ST BANCORP AND SUBSIDIARIES MANAGEMENT Officers of First Federal Bank, A Federal Savings Bank C. James McCormick, Chairman of the Board Frank Baracani, President and Chief Executive Officer Lynn Stenftenagel, Executive Vice President, Chief Financial Officer and Secretary Ruth Mix Carnahan, Treasurer Bradley M. Rust, Senior Vice President/Controller Gerald R. Belanger, Senior Vice President Jay A. Baker, Vice President Laura E. Bogard, Vice President Rana M. Lee, Vice President Cheryl A. Otten, Vice President Paula J. Pesch, Vice President Doris J. Blackburn, Assistant Vice President Scott E. Blackburn, Assistant Vice President Lynn Elliott, Assistant Vice President Kelly J. Gay, Assistant Vice President Ruth Etta Hunter, Assistant Vice President Randall W. Pratt, Assistant Vice President Karen K. Tolliver, Assistant Vice President Carol A. Witshork, Assistant Vice President Glenda L. Berryman, Assistant Secretary Katherine E. Coleman, Assistant Secretary Denise A. Loudermilk, Assistant Secretary Shirley S. Rose, Assistant Secretary Shawn M. Thomas, Assistant Secretary Officers of First Financial Insurance Agency, Inc. C. James McCormick, Chairman of the Board Frank Baracani, President and Chief Executive Officer J. Timothy Tresslar, Vice President and General Manager Lynn Stenftenagel, Secretary and Treasurer Officers of First Title Insurance Company C. James McCormick, Chairman of the Board Frank Baracani, President and Chief Executive Officer Lynn Stenftenagel, Secretary and Treasurer Kathy V. Frey, General Manager 1ST BANCORP AND SUBSIDIARIES CORPORATE INFORMATION Corporate Headquarters 101 North Third Street, Vincennes, Indiana 47591 Annex - 102 North Fifth Street, Vincennes, Indiana 47591 (812) 885-2255 General Counsel Hart, Bell, Cummings, Ewing & Stuckey, Vincennes, Indiana Special Counsel Barnes & Thornburg, Indianapolis, Indiana Transfer Agent Fifth Third Bank Corporate Trust Operations 38 Fountain Square Plaza MD#1050F5 Cincinnati, Ohio 45202 (800) 837-2755 Independent Public Accountants KPMG Peat Marwick LLP, Indianapolis, Indiana Statement of Policy 1ST BANCORP is an equal opportunity employer. Form 1O-K Report Forms 1O-K and 1O-Q, as filed with the SEC, are available without charge by writing to Lynn Stenftenagel, 1ST BANCORP, 101 North Third Street, Vincennes, Indiana 47591 or by calling (812) 885-2255. Shareholder Information At July 31, 1998, there were 385 shareholders of record and 1,096,189 shares of common stock outstanding. Market Information 1ST BANCORP common stock is traded on NASDAQ under the symbol FBCV. The following table sets forth the high and low bid prices per share of common stock for the periods indicated. This information was furnished by the NASD. Quarter Ended High Low June 1998 45.00 26.50 March 1998 29.25 25.00 December 1997 40.50 26.00 September 1997 43.50 29.00 June 1997 33.25 30.00 March 1997 32.00 28.50 December 1996 31.50 27.25 September 1996 32.00 26.00 Internet Address http://www.businesswire.com/cnn/fbcv.htm EX-21 10 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.A 11 INDEPENDENT AUDITOR'S CONSENT Independent Auditors Consent The Board of Directors 1ST BANCORP: We consent to incorporation by reference in the registration statement (No. 33-13145) on Form S-8 of 1ST BANCORP of our report dated July 23, 1998 except as to note 13, which is as of August 6, 1998, relating to the consolidated statements of financial condition of 1ST BANCORP and subsidiaries as of June 30, 1998 and 1997 and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1998, which report appears in the June 30, 1998 annual report on Form 10-K of 1ST BANCORP. Indianapolis, Indiana September 28, 1998 EX-23.B 12 INDEPENDENT AUDITOR'S CONSENT Independent Auditors Consent The Board of Directors 1ST BANCORP: We consent to incorporation by reference in the registration statement (No. 33-38404) on Form S-8 of 1ST BANCORP of our report dated July 23, 1998 except as to note 13, which is as of August 6, 1998, relating to the consolidated statements of financial condition of 1ST BANCORP and subsidiaries as of June 30, 1998 and 1997 and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1998, which report appears in the June 30, 1998 annual report on Form 10-K of 1ST BANCORP. Indianapolis, Indiana September 28, 1998 EX-23.C 13 INDEPENDENT AUDITOR'S CONSENT Independent Auditors Consent The Board of Directors 1ST BANCORP: We consent to incorporation by reference in the registration statement (No. 33-60162) on Form S-8 of 1ST BANCORP of our report dated July 23, 1998 except as to note 13, which is as of August 6, 1998, relating to the consolidated statements of financial condition of 1ST BANCORP and subsidiaries as of June 30, 1998 and 1997 and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1998, which report appears in the June 30, 1998 annual report on Form 10-K of 1ST BANCORP. Indianapolis, Indiana September 28, 1998 EX-27 14 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-30-1998 JUL-1-1997 JUN-30-1998 1.000 332 15,831 0 0 15,504 19,553 19,514 189,204 1,465 260,149 117,763 0 3,150 115,381 1,092 0 0 22,763 260,149 15,735 3,097 621 19,453 7,308 13,004 6,449 755 32 5,309 2,527 2,527 0 0 1,911 $1.75 $1.73 7.93 3,491 353 0 139 1,158 461 13 1,465 465 0 1,000
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