Item 1. Business
General
1ST BANCORP, an Indiana Corporation (the "Corporation" or "1ST BANCORP"), is a nondiversified, unitary savings and loan holding company. The principal asset of the Corporation is the outstanding stock of First Federal Bank, A Federal Savings Bank, ("First Federal" or the "Bank") and the Bank's subsidiary, Financial Services of Southern Indiana Corporation. Other subsidiaries of the Corporation include First Financial Insurance Agency, Inc. ("First Financial"), a full service insurance agency, and First Title Company ("First Title"), a currently inactive company incorporated for the purpose of providing title search services for mortgage lenders.
First Federal is a federally-chartered stock savings bank that was converted to the stock form of ownership and to a federal savings bank in May, 1987. The Bank is primarily engaged in attracting deposits from the general public and applying these funds, together with borrowings, to the origination of residential mortgage loans and consumer loans.
First Federal's revenue is primarily derived from interest on, and fees received in connection with, real estate and other loans. The Bank also experienced gains on the sale of its mortgage loans as part of its continuing operations and asset/liability management efforts. The Bank's principal expenses are interest on deposits and borrowings and general and administrative expenses.
The principal sources of funds for First Federal's lending activities are its deposits, amortization and prepayments of outstanding loans, sales of mortgage loans and borrowings from the Federal Home Loan Bank of Indianapolis ("FHLB" or "FHLB of Indianapolis").
The Bank's deposits are insured by the full faith and credit of the United States government by the Federal Deposit Insurance Corporation's ("FDIC") Savings Association Insurance Fund ("SAIF"). Deposit accounts in First Federal are generally insured by the SAIF to a maximum of $100,000 for each insured depositor. The Bank is a member of the FHLB of Indianapolis and is subject to comprehensive regulation, examination, and supervision by the Office of Thrift Supervision ("OTS") and the FDIC.
First Federal offers a full range of banking services through its two banking offices located in Vincennes, Indiana. Additionally, the Bank operates one loan origination office in Evansville Indiana. During the fourth quarter of fiscal year 1997, the Bank closed loan origination offices in Indianapolis, Indiana, Louisville, Kentucky, and suburbs of Cincinnati and Dayton, Ohio. One additional loan origination office located in a suburb of Cleveland, Ohio was closed earlier in fiscal year 1997. The office closures were undertaken to centralize all administrative loan functions in the Vincennes offices, to afford more standardized procedures and controls, and to decrease overhead expenses in the nonconforming loan operations.
The Bank's principal market area is Knox County in Indiana. The Bank's deposits are obtained primarily from persons who are residents of its primary market area. However, to supplement local deposits, the Bank also makes use of brokered deposits which range in original maturity from one to three years with rates ranging from 5.5% to 6.4%. The program serves as an alternative source of funds to compliment the borrowing program and retail savings programs offered in the Bank's local market. The brokered funds enable the Bank to manage maturities of its deposits in its effort to manage interest rate risk.
During fiscal 1997, First Financial purchased the book of business of an existing independent insurance agency. The book of business was merged with the existing customer base of First Financial. As a result of the acquisition, First Financial opened a full service insurance office in Princeton, Indiana in addition to its existing full service office in Vincennes, Indiana.
Lending Activities
General
First Federal has traditionally concentrated its lending activities on conventional first mortgage loans secured by residential property. Conventional loans are neither insured by the Federal Housing Administration ("FHA") nor partially guaranteed by the Veteran's Administration ("VA"). At June 30, 1997, First Federal's net loan portfolio aggregated $146.8 million, representing 54.3% of total assets at that date. This compares to the Bank's net loan portfolio of $150.7 million at June 30, 1996 representing 57.2% of total assets.
The Bank has historically concentrated on the origination and purchase of conforming conventional mortgage lending. This market is represented by loans conforming to documentation and underwriting standards dictated by the Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC") and the Federal National Mortgage Association ("Fannie Mae" or "FNMA"). The Bank continues to originate conforming loan product but in the past two fiscal years has also concentrated on the origination of nonconforming mortgage loans. Nonconforming loans meet alternative documentation and underwriting requirements dictated by a secondary market made up of companies other than FHLMC and FNMA. Such loans are made to a broader customer base and are graded "A" through "D." Creditworthiness, collateral, equity, and other factors are weighed in the grading of the nonconforming loans and interest rates charged are commensurate with risk.
The Bank offers both fixed rate mortgage and adjustable rate mortgage ("AML") loans. In addition to residential real estate lending, as part of its asset and liability management strategy, First Federal continues its lending activities in other shorter-term interest rate sensitive loans, including consumer loans, which accounted for 8.7% of the total loan portfolio at June 30, 1997 as compared to 6.6% of the total loan portfolio at June 30, 1996.
The following table (which excludes the loans held for sale portfolio) sets forth the composition of the Bank's loan portfolio by type of loan at the dates indicated:
Contractual Maturities of Loans
The following table summarizes the contractual maturities of First Federal's loan portfolio due for the fiscal periods indicated as of June 30, 1997 by type of loan:
Fiscal Periods Indicated as of June 30, 1997
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:
Residential Mortgage Loans
To the extent deemed appropriate, in view of market forces, First Federal intends to continue to originate AMLs in order to reduce the impact of rapid increases in market rates of interest on its operations and the market value of its equity. Although critical to maintaining an asset/liability matching program and a reasonable interest rate risk posture, adjustable-rate loans generally do not adjust as rapidly as changes in the Bank's cost of funds.
The Bank also continues to be an originator of fixed rate mortgage loans. Fixed rate conforming residential mortgages currently originated by the Bank generally are made with 15 and 30 year amortization schedules. Fixed rate nonconforming residential mortgages currently originated by the Bank generally are made with 15 year or less amortization schedules. The Bank also originates fixed-rate residential mortgages with balloon payments, with the balloon payment being due generally in five or seven years for conforming loans and 15 years for nonconforming loans.
A portion of the conforming fixed rate and adjustable rate residential mortgage loans currently being originated by First Federal is sold to FHLMC. These loans are typically sold with the servicing rights retained by the Bank. A portion of the fixed rate nonconforming mortgage loans is also sold on a non-recourse basis in the nonconforming secondary market. The nonconforming loans are typically sold with the servicing rights released. However, the highest quality nonconforming loans are being retained in portfolio in order to enhance the net interest margin. Adjustable rate nonconforming mortgage loans are currently originated and placed in the held for sale portfolio. Sales of adjustable rate nonconforming loans was limited during fiscal year 1997.
Of the $115.0 million loans originated in fiscal year 1997, $70.2 million were nonconforming mortgage loan originations. This compares to the origination of $65.9 million of nonconforming mortgage loans of the total $144.9 million loan originations during fiscal year 1996. At June 30, 1997, $66.5 million nonconforming loans were included in the loan portfolio as compared to $23.3 million in portfolio at June 30, 1996. The increased level of nonconforming loans in portfolio is an integral part of the Bank's strategy to expand the net interest margin in an orderly manner.
The Bank also originates second mortgages, the majority of which are on real estate in which it also holds the first mortgage. The loans have either adjustable rate or fixed rate features with terms similar to first mortgage loans. The second mortgage, when combined with the balance of the first mortgage, normally does not exceed 80% of the value of the real estate. During fiscal year 1997, the Bank discontinued a program of granting second mortgage loans up to 100% of appraised value. The program was discontinued due to the inherent credit risk associated with that type of lending. The Bank offers 100% financing programs with the first mortgage retained by the Bank, and a concurrent second mortgage being closed and retained at another financial institution.
First Federal offers residential construction loans to both individuals and builders. Such loans accounted for approximately 3.2% of the total amount of loans originated by the Bank in fiscal year 1997. The construction loans are generally for a period of 6 to 12 months, and the Bank may receive personal guarantees from the principals. An independent appraiser inspects all sites prior to origination of the loans as required by OTS regulations.
The Bank also provides the permanent financing on construction projects for residential housing. The Bank normally grants a commitment for permanent financing concurrent with the origination of the construction loan. Such commitments are generally market rate commitments and require the borrower to satisfy the Bank's normal underwriting criteria at the time the loan is made. Terms are similar to those established for other first mortgage loans. Interest rates are generally adjustable and are set at the time of the origination of the construction loan. In the case of an AML, the construction period is included in the time frame upon which the interest rate adjustment is based.
In many instances, construction loans have a commitment for permanent financing either from the Bank or another financial institution prior to closing the construction loan. In other cases, the Bank does grant "spec" residential construction loans to builders on a limited basis. The number of "spec" loans to each builder is limited by the amount and number of projects that such builder has in process at any one time. These limits are established and regularly monitored by the Board of Directors.
Under policies adopted by the Bank's Board of Directors, the Bank limits the loan-to-value ratio to 100% on residential mortgage loans. The Bank generally requires all conventional loans with loan-to-value ratios in excess of 80% to carry private mortgage insurance which insures First Federal against default on a portion of the principal amount of the loan. Nonconforming mortgage loans generally may not exceed 85% of the value of the secured property. Commercial real estate loans generally may not exceed 75% of the value of the secured property. Construction loans generally may not exceed 80% of the value of the secured property and generally are made for 80% or less of the appraised value of the property upon completion.
It is the Bank's policy to obtain title insurance policies insuring that First Federal has a valid lien on mortgaged real estate. Borrowers also must obtain hazard insurance policies prior to closing and, when required by the Department of Housing and Urban Development, flood insurance policies.
Commercial Real Estate Loans
At June 30, 1997, First Federal's commercial real estate loan portfolio (including loans secured by nonresidential property, land, and five or more dwelling units) aggregated $9.2 million, or 6.1% of the total loan portfolio. During the early 1980s, First Federal originated and purchased a number of commercial real estate loans. Such activity has been very limited in the past several years. Land development loans are generally limited to less than 75% of the market value of the improved land and are granted as revolving lines of credit. Interest rates generally are 2% above the prime rate, recalculated on a monthly basis. As lot sales occur, the Bank generally requires a payment equal to 75% of the gross sale proceeds. The land development loans have been granted in communities currently or previously served by various First Federal offices.
Consumer Lending
The Bank also originates consumer loans, which include savings account loans, student loans, automobile loans, property improvement loans, home equity loans, mobile home loans, credit card loans, and other secured and unsecured consumer loans. Applicable laws and regulations permit the Bank to make secured and unsecured consumer loans up to 35% of the institution's total assets. At June 30, 1997, such loans constituted $12.7 million, or 8.7% of the total loan portfolio.
The maximum term of automobile loans is generally five years, with the rate and term dependent upon whether the vehicle is new or used. During fiscal year 1997, the Bank initiated an indirect auto lending program through a selected number of new and used automobile dealers in its primary market area. The indirect auto lending program will serve to augment the traditional auto lending program of the Bank. Terms are similar for the traditional and indirect auto programs. Home equity loans are variable rate and are treated as revolving lines of credit. At June 30, 1997, home equity loans aggregated $4.2 million, available balances averaged $10,271, and approved credit line balances averaged $20,255. Savings account loans generally do not exceed 90% of the savings account balance which collateralizes the loan and demand an interest rate generally equal to 2.0% above the rate paid on the savings account.
Origination, Purchase and Sale of Loans and Participations
As a federally-chartered savings institution, First Federal has general authority to make real estate loans secured by properties located throughout the United States. Through its loan origination office network, the Bank's lending market was expanded beyond its traditional areas. However, at June 30, 1997, a majority of First Federal's total loans receivable were secured by real estate located in central and southern Indiana and southern Illinois.
During the mid-1980s, First Federal purchased a limited number of participations in loans originated by other financial institutions. In such instances, First Federal purchased a portion of a loan from a lead lender which services the loan and remits to the Bank its pro-rata share of interest and principal payments received from the borrower. First Federal pays a fee from .25% to .50% of the interest earned on the loan to the lead lender for servicing the loan. This operating strategy was undertaken because of an inadequate supply of loans in the Bank's primary lending area. Since that time, few participations have been purchased. The Bank has expanded its origination and purchasing operations for mortgage loans and currently has an adequate supply of loans in its market areas. The Bank is continually looking for new market areas into which it can expand.
Historically, conforming mortgage loans have been originated by the Bank primarily through referrals from real estate brokers, builders and walk-in customers, as well as through refinancing for existing customers. The Bank carefully monitors interest rates in its market areas and believes that it is competitive in such areas. First Federal continues to obtain its market share of loans in its primary market area. In addition, through mortgage banking services, additional loans are granted in other communities. The mortgage banking services for the past three fiscal years have been primarily concentrated in the nonconforming loan markets.
During fiscal 1997, the Bank originated $104.7 million of residential real estate loans (including construction loans) as compared to $132.2 million of residential real estate loans in 1996 and $95.3 million of residential real estate loans in 1995. The decreased volume of residential real estate loan originations during fiscal 1997 resulted from reduced retail conforming loan originations. The decreased conforming loan originations were largely attributable to the sale of two retail banking branches in Tipton and Kokomo, Indiana during December 1995 (the "Branch Sales"). In addition, the decline was attributable to the general economic conditions which depressed loan activity in the Bank's primary lending area during fiscal 1997. However, nonconforming loan originations increased slightly during fiscal year 1997. Volume increased in fiscal 1996 as compared with fiscal 1995 primarily due to the increased production of nonconforming loans from the Bank's loan origination office network .
Conforming loans purchased through a wholesale correspondent network decreased to $2.0 million during fiscal 1997 as compared to $27.6 million during 1996 and $13.7 million during fiscal 1995. The conforming wholesale correspondent loan program was discontinued during fiscal 1997 due to pricing constraints. The increase in loan purchases during 1996 was attributable to a program designed to replace the loan production from the branches sold during the year. Additionally, the Bank originated and sold FHA and VA loans in the secondary mortgage market.
During 1997, the Bank sold $32.1 million in conforming loans to FHLMC as compared to the sale of $67.6 million in loans to FHLMC in fiscal year 1996. The Bank continues to service most of the loans sold in fiscal 1997 and retains a portion of the interest received (.250% to .375%) as a servicing fee. A total of $6.4 million in FHA/VA loans were sold to private investors during fiscal year 1997. These loans were sold servicing released. During fiscal 1996, $28.4 million in loans were sold in conjunction with the Branch Sales and $37.5 million in conforming loans and FHA/VA loans were sold to private investors. An aggregate of $37.7 million in nonconforming loans were sold to various investors during fiscal 1997 as compared to $27.9 million in nonconforming loan sales in fiscal 1996. These loans are generally sold servicing released.
The following table shows total loan originations, purchases, sales and repayment activities (including loans held for sale) of the Bank during the periods indicated:
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(1) Construction loans originated are residential.
(2) Consumer loans consist primarily of home equity, savings account, signature, automobile, and property improvement loans.
Income from Lending Activities
Interest rates charged by First Federal on mortgage loans are primarily determined by competitive loan rates offered in its market areas. Mortgage loan rates reflect factors such as general interest rate levels, the supply of money available to the savings industry and the demand for such loans. These factors are, in turn, affected by general economic conditions, the monetary policies of the federal government, (including the Board of Governors of the Federal Reserve Board), the general supply of money in the economy, tax policies and governmental budget matters.
In addition to interest earned on loans and the income from servicing of loans, the Bank receives income through fees in connection with late payments, changes of property ownership and for miscellaneous services related to its loans. Income from these activities varies from period to period with the volume and type of loans originated, modified, sold or purchased, which in turn is dependent on prevailing mortgage interest rates and their effect on the demand for loans in markets serviced by the Bank.
In its lending, the Bank may charge loan origination fees which are calculated as a percentage of the amount borrowed. Loan origination fees and certain related direct loan origination costs are offset and the resulting net amount is deferred and amortized over the lives of the related loans as an adjustment to the yield of such related loans. However, in the event the related loan is sold, any net deferred loan fees remaining with respect to such loans are taken into income. In addition, commitment fees are offset against related direct costs and recognized over the life of the related loans as an adjustment of yield, if the commitment is exercised, or, if the commitment expires unexercised, the commitment fees are recognized in income upon expiration of the commitment.
The following table sets forth certain information concerning loan origination and commitment fees and deferred loan origination and commitment fees on First Federal's mortgage loan portfolio for each of the periods or as of the dates indicated.
1997 1996 1995 ---------------------------- (in thousands)
Loan origination, commitment fees and service fees earned during the year ended June 30 $137 $140 $780
Net deferred loan origination and commitment fees on mortgage loans at end of year $476 $611 $360
Purchased and originated mortgage servicing rights at end of year $819 $591 $1,432
Asset Quality
Collection Practices
When a borrower fails to make a required payment on a loan, the Bank attempts to cause the deficiency to be cured by contacting the borrower and seeking payment. Contacts are generally made after a payment is more than 16 days past due and a late charge is assessed at such time for conforming mortgage loans. In the case of nonconforming mortgage loans, contact is generally made after a payment is five days past due. For nonconforming loans, as with conforming loans, late charges are assessed at which time a payment is more than 16 days past due. If the delinquency exceeds 120 days and is not cured through the Bank's normal collection procedures, the Bank will generally institute measures to remedy the default, including commencing a foreclosure action or accepting from the mortgagor a voluntary deed of the secured property in lieu of foreclosure. If a foreclosure action is instituted and the loan is not reinstated, paid in full, or refinanced, the property is sold pursuant to statutory requirements after obtaining a judgment of foreclosure from the appropriate court. The property is then included in the Bank's "real estate owned" account until it is sold. The Bank is permitted by federal regulations to finance the sales of these properties by loans or contracts to facilitate the sale of real estate owned, which involve a lower down payment or a longer term than would be generally allowed by the Bank's underwriting standards.
Nonaccrual Loans and Real Estate Owned
At June 30, 1997, nonaccrual loans and real estate owned totaled $2.7 million, or 1.01% of total assets. The increased delinquencies are attributable to several factors including general economic conditions and the abundance of consumer bankruptcies being experienced throughout the Bank's lending areas. The upward trend in nonaccrual loans is largely attributable to one-to-four family mortgage loans becoming more than 90 days past due. The upward trend in loan delinquencies relates to both conforming and nonconforming mortgage loans. Loan quality continues to be of major importance to the Bank and strong efforts are being made to ensure loan quality. In an effort to mitigate potential losses and reduce non-performing assets mortgage loan collection personnel have been expanded, more stringent collection practices have been implemented, and certain higher risk lending programs have been discontinued. In addition, loan loss allowances have been increased to prepare for potential future losses in the loan portfolio.
Two commercial mortgage loans with outstanding principal balances of $975,000 at June 30, 1994 and $1,000,000 at June 30, 1993 in which the Bank purchased participating interests became non-performing in fiscal year 1993, and are included in the schedule below for 1994 and 1993. The participation loans were disposed of during fiscal year 1995 at no loss to the Bank.
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.
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(1) Approximately $200,000 in gross interest income would have been recorded in the year ended June 30, 1997 if the loans had been current in accordance with their original terms and had been outstanding throughout the year, or since origination if held for part of the period. Approximately $99,000 in interest income was actually recognized in the year.
(2) Troubled loans acquired through foreclosure or deed-in-lieu of foreclosure are included in the Statement of Financial Condition as real estate owned.
Loss and Delinquency Experience
During the year ended June 30, 1997, the Bank realized net charge-offs on loans aggregating $111,000. At June 30, 1997, 1.04% of the outstanding principal balance of loans in the Bank's portfolio was delinquent between 61 and 90 days and 1.63% was delinquent 91 days or more. The Bank's loss experience on its loan portfolio for the years shown is summarized in the following tables:
Year Ended June 30, --------------------------------------------- 1997 1996 1995 -------------------------------------------- (Dollars in thousands) Loans receivable, net $146,840 $150,749 $201,819 Net losses (charge-offs) $111 $65 $39 Percent delinquent 61 days or more at end of year 2.67% 1.76% 1.14% Total dollar amount foreclosed $686 $180 $691 Percent foreclosed 0.47% 0.12% 0.34%
Analysis of the Allowance for Loan Losses
Additional information regarding the allowance for loan losses is as follows:
First Federal regularly reviews the status of non-performing assets to evaluate the adequacy of the allowances for loan and real estate owned losses. The allowance for loan losses is maintained through the provision for loan losses, which is charged to earnings.
In addition to the general loan loss allowance, specific valuation allowances have been established for loans and contracts. An asset would warrant such an allowance because the loan balance exceeds the appraised value or because of other reasons to anticipate a loss. At June 30, 1997, specific valuation allowance balances were $508,000 of which approximately 95% was for one real estate contract acquired in a merger with United Savings Association of Central Indiana, F.A., in 1989. The loan balance at June 30, 1997 was $1.3 million. This specific valuation allowance was established at the time the loan was acquired; the loan is current in its payments and as the loan continues to pay down the specific valuation allowance is released. The remainder of the specific valuation allowances are for single family residential mortgage loans in which the Bank anticipates losses to be realized in the future.
Investment Activities
The Bank is required under federal regulations to maintain a minimum amount of liquid assets which may be invested in specified short-term securities and the Bank is also permitted to make certain other securities investments. Investment decisions are made by authorized officers of First Federal within policies established by First Federal's Board of Directors.
At June 30, 1997, First Federal's investment securities portfolio aggregated $44.1 million, consisting exclusively of U.S. agency obligations. See Note 3 of the Notes to the Consolidated Financial Statements for a description of investment securities owned at June 30, 1997. At June 30, 1997, the Bank's investment securities available for sale portfolio aggregated $11.6 million, consisting of U.S. Treasury and agency obligations. See Note 2 of the Notes to the Consolidated Financial Statements for a description of investment securities available for sale owned at June 30, 1997.
The current investment policy of the Bank includes the use of both long-term and short-term U.S. government obligations to protect against interest rate fluctuations. The short-term portfolio is managed by the Bank to maximize the earnings on investable funds while also maintaining an adequate level of liquidity. The Bank has the ability and intention to hold its current investment portfolio to maturity.
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
(1) There are no tax-exempt securities included in the above totals.
Available for Sale Portfolio
(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.
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(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, 1997 and for each of the years ended June 30, 1997, 1996, and 1995. Average balances are based on quarter-end balances.
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, 1997 in its primary market area:
The large variety of savings accounts offered by the Bank has increased the Bank's ability to retain retail deposits and has allowed it to be more competitive in obtaining new funds; but, it has not eliminated the threat of disintermediation (the flow of funds away from savings institutions into direct investment vehicles, such as government and corporate securities). As customers have become more rate conscious and willing to move funds into higher yielding accounts, the ability of the Bank to attract and maintain deposits and the Bank's cost of funds have been, and will continue to be, significantly affected by money market conditions.
The following table shows the distribution and weighted average rate of First Federal's deposits by type of deposits as of the dates indicated.
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(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, ------------------------------------------ ------------------------------------------ Average % of Wtd. Avg. Balance Total Rate ------------------------------------------ (Dollars in thousands) Type of account: Passbook/NOW/Super NOW Variable Rate Savings Accounts(1) $47,455 24.7% 3.1% MMDAs 5,406 2.8% 2.8% Certificates of Deposit(2) 138,489 72.2% 5.3% Accrued Interest 504 0.3% - ------------------------
Total $191,854 100.0% 4.7% ======================== - --------------------------
(1) Includes noninterest-bearing accounts. (2) Includes negotiated rate certificates of deposit and IRAs.
The following table sets forth information relating to the Bank's deposit flows during the years indicated.
The principal methods used by First Federal to attract deposits include the offering of a wide variety of services and accounts, competitive interest rates, and convenient office locations and service hours. In an effort to better serve its primary market area and expand and retain its retail deposit base, the Bank opened a new branch office during fiscal 1997 in Vincennes, Indiana. The primary focus of the new branch office is to better serve the Bank's retail deposit customers. The Bank uses traditional marketing methods to attract new customers and deposits, including mass media advertising and direct mailings. The development of new deposit accounts and services within the past several years has enhanced the Bank's ability to attract deposits.
During the fiscal year ended June 30, 1997, the Bank increased its brokered deposits to $45.1 million from $34.1 million. The brokered deposit program serves as an alternative source of funds to compliment the borrowing programs and retail savings programs offered in the Bank's local market. The brokered funds enable the Bank to manage maturities of its deposits in its effort to manage interest rate risk.
The following table presents, by various interest rate categories, the contractual maturity of certificates of deposits as of June 30, 1997.
As of June 30, 1997, First Federal had $8.8 million of time deposits with balances over $100,000. Maturity of these deposits is as follows:
(in thousands)
3 months or less $2,568 Over 3 months through 6 months 322 Over 6 months through 12 months 3,370 Over 12 months 2,568 ----------------
Total $8,828 ================
Borrowings
First Federal obtains advances from the FHLB of Indianapolis collateralized by the security of mortgage loans and investment securities it owns. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. Advances from the FHLB are generally available to member institutions to meet seasonal withdrawals and other withdrawals of savings accounts and to expand lending, as well as to aid the efforts of member institutions to establish better asset/liability management strategies. The Bank had $98.8 million in outstanding advances from the FHLB at June 30, 1997.
1ST BANCORP had a $1.5 million loan outstanding from Ambank, Vincennes, Indiana at June 30, 1997. 1ST BANCORP originally borrowed $1.5 million in June, 1991, of which, $1.0 million was used as a capital infusion to First Federal. An additional $1.0 million was borrowed in December, 1994, all of which was used as a capital infusion to First Federal.
First Federal also obtains short-term financing through reverse repurchase agreements. These obligations provide another source to meet short-term demands for additional funds. However, at June 30, 1997, there were no reverse repurchase agreements outstanding.
The following table sets forth certain information regarding advances from the FHLB and other borrowings, excluding reverse repurchase agreements, by the Corporation at the end of and during the years indicated.
At June 30, ----------------------------------------------- 1997 1996 1995 -----------------------------------------------
Weighted average rate on advances from the Federal Home Loan Bank and other borrowings 5.67% 5.56% 6.01%
Year Ended June 30, ------------------------------------------------ 1997 1996 1995 ------------------------------------------------ (Dollars in thousands) Maximum amount of advances from the Federal Home Loan Bank and other borrowings outstanding at any month end $100,346 $99,054 $91,617
Approximate average advances from the Federal Home Loan Bank and other borrowings outstanding $99,218 $89,103 $69,645
Approximate weighted average rate paid on advances from the Federal Home Loan Bank and other borrowings 5.60% 5.94% 5.83%
The weighted average rates in the previous table were computed using the average balance based upon quarter end balances and total interest expense.
Effects of Inflation
The primary assets and liabilities of savings institutions such as First Federal are monetary in nature. As a result, interest rates have a more significant impact on First Federal's performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturity structures of First Federal's assets and liabilities are critical to the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest rates, on First Federal's earnings is in the area of other expense. Such expense items as employee compensation, employee benefits, and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans made by First Federal. First Federal is unable to determine the extent, if any, to which the properties securing its loans have appreciated in dollar value due to inflation.
Regulation
General
First Federal, as a federally chartered stock savings bank, is a member of the Federal Home Loan Bank System (the "FHLB System") and its deposits are insured by the Savings Association Insurance Fund ("SAIF"), which is administered by the FDIC. First Federal is subject to extensive regulation by the OTS. Federal associations may not enter into certain transactions unless certain regulatory tests are met or they obtain prior governmental approval and the associations must file reports with these governmental agencies about their activities and their financial condition. Periodic compliance examinations of the Bank are conducted by the OTS which has, in conjunction with the FDIC in certain situations, enforcement powers. This supervision and regulation is intended primarily for the protection of depositors and federal deposit insurance funds. First Federal is also subject to certain reserve requirements under the Board of Governors of the Federal Reserve System ("FRB" or "Federal Reserve Board") regulations.
Congress is considering legislation that would require all federal savings associations, such as First Federal, either to convert to a national bank or a state-chartered bank by a specified date to be determined. In addition, under the legislation, the Corporation likely would no longer be regulated as a savings and loan holding company, but rather as a bank holding company. This proposed legislation would abolish the OTS and transfer its functions among the other federal banking regulators. It cannot be predicted with certainty whether or in what form the legislation will be enacted.
An OTS regulation establishes a schedule for the assessment of fees upon all savings associations to fund the operations of the OTS. The regulation also establishes a schedule of fees for the various types of applications and filings made by savings associations with the OTS. The general assessment, to be paid on a semi-annual basis, is based upon the savings association's total assets, including consolidated subsidiaries, as reported in a recent quarterly thrift financial report. Currently, the quarterly assessment rates range from .01164% of assets for associations with $67 million in assets or less to .00308% for associations with assets in excess of $35 billion. First Federal's current semi-annual assessment, based upon its March 31, 1997 total assets of $273.2 million, was $36,660.
The Bank is also subject to federal and state regulation as to such matters as loans to officers, directors, or principal shareholders, required reserves, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuance or retirements of its own securities, and limitations upon other aspects of banking operations. In addition, the activities and operations of the Bank are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust laws.
Federal Home Loan Bank System
First Federal is a member of the FHLB System, which consists of 12 regional banks. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System, including the FHLB of Indianapolis. The FHLB System provides a central credit facility primarily for member savings associations and savings banks and other member financial institutions. First Federal is required to hold shares of capital stock in the FHLB of Indianapolis in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations at the end of each calendar year, .3% of its assets or 1/20 (or such greater fraction established by the FHLBank) of outstanding FHLB advances, commitments, lines of credit and letters of credit. First Federal is currently in compliance with this requirement. At June 30, 1997, First Federal's investment in FHLB of Indianapolis stock was $4,941,000.
In past years, First Federal received dividends on its FHLBank stock. Certain provisions of The Financial Institution Reform, Recovery, and Enforcement Act of 1989, as amended ("FIRREA"), require all 12 FHLBanks to provide funds for the resolution of troubled savings associations and to establish affordable housing programs through direct loans or interest subsidies on advances to members to be used for lending at subsidized interest rates for low-and-moderate-income, owner-occupied housing projects, affordable rental housing, and certain other community projects. These contributions and obligations have reduced the level of FHLB dividends paid and could adversely affect the value of FHLB stock in the future. For the year ended June 30, 1997, dividends paid to First Federal totaled $382,000, for an annual rate of 7.8%. A reduction in value of such stock may result in a corresponding reduction in First Federal's capital.
The FHLB of Indianapolis serves as a reserve or central bank for member institutions within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. It makes advances to members in accordance with policies and procedures established by the FHLB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. FIRREA prescribes eligible collateral as first mortgage loans less than 90 days delinquent or securities evidencing interests therein, securities (including mortgage-backed securities) issued, insured or guaranteed by the federal government or any agency thereof, FHLB deposits and, to a limited extent, real estate with readily ascertainable value in which a perfected security interest may be obtained. Other forms of collateral may be accepted as overcollateralization or, under certain circumstances, to renew advances. All long-term advances are required to provide funds for residential home financing and the FHLB has established standards of community service that members must meet to maintain access to long-term advances. Currently First Federal has $87.5 million of mortgage loans and $41.3 million of investment securities pledged as collateral for FHLB advances.
Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. Under current law, savings associations which cease to be Qualified Thrift Lenders are ineligible to receive advances from their FHLB.
Liquidity
For each calendar month, First Federal is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, specified United States Government, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to an amount not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings during the preceding calendar month. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions, and is currently 5% although the OTS has proposed a reduction of the percentage to 4%. OTS regulations also require each member savings association to maintain an average daily balance of short-term liquid assets at a specified percentage (currently 1%) of the total of its net withdrawable deposit accounts and short-term borrowings during the preceding calendar month. The OTS has proposed abolishing this latter requirement. Monetary penalties may be imposed for failure to meet these liquidity requirements. The monthly average liquidity of First Federal for June, 1997 was 10.44% and its average short-term liquidity ratio at June 30, 1997 was 6.95%. First Federal has never been subject to monetary penalties for failure to meet its liquidity requirements.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits, that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval, and reporting requirements to monitor compliance with the associations's real estate lending policies.
The Bank's written real estate lending policies must be reviewed and approved by the associations's board of directors at least annually. Further, each Bank is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. On August 27, 1996, the federal banking agencies added asset quality and earnings standards to the safety and soundness guidelines.
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, 1997, based on the capital standards then in effect, First Federal was in compliance with the fully phased-in capital requirements.
The OTS has delayed implementation of a rule which sets forth the methodology for calculating an interest rate risk component to be incorporated into the OTS regulatory capital rule. Under the rule, only savings associations with "above normal" interest rate risk (institutions whose portfolio equity would decline in value by more than 2% of assets in the event of a hypothetical 200 basis point move in interest rates) will be required to maintain additional capital for interest rate risk under the risk-based capital framework. A savings association with an "above normal" level of exposure will have to maintain additional capital equal to one-half the difference between its measured interest rate risk (the most adverse change in the market value of its portfolio resulting from a 200 basis point move in interest rates divided by the estimated market value of its assets) and 2%, multiplied by the market value of its assets. That dollar amount of capital is in addition to a savings association's existing risk-based capital requirement. Although the OTS has decided to delay implementation of this rule, it will continue to monitor closely the level of interest rate risk at individual savings associations and it retains the authority, on a case-by-case basis, to impose additional capital requirements for individual savings associations with significant interest rate risk.
In periods of rapidly changing interest rates, the Bank's balance sheet is subject to significant fluctuations in market value (interest rate risk exposure). However, as the delayed interest rate risk rules proposed by the OTS currently read, the Bank at June 30, 1997, would have no additional capital requirement. The Bank's management remains cognizant of the proposed rules and continues to monitor its interest rate risk position.
The following is a summary of First Federal's regulatory capital and capital requirements at June, 30 1997:
Tangible Core Risk-based Capital Capital Capital --------------- -------------- ----------- (Dollars in thousands)
Regulatory Capital $22,436 $22,436 $23,086 Minimum capital requirement 4,059 8,117 11,555 ------------------------------------------ Excess capital $18,377 $14,319 $11,531
Regulatory capital ratio 8.3% 8.3% 16.0%
Minimum capital ratio 1.5% 3.0% 8.0%
If an association is not in compliance with its capital requirements, the OTS is required to prohibit asset growth and to impose a capital directive that may restrict, among other things, the payment of dividends and officers' compensation. In addition, the OTS and FDIC generally are authorized to take enforcement actions against a savings association that fails to meet its capital requirements, which actions may include restrictions on operations and banking activities, the imposition of a capital directive, a cease and desist order, civil monetary penalties or harsher measures such as the appointment of a receiver or conservator or a forced merger into another institution.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FedICIA") requires, among other things, federal bank regulatory authorities to take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, FedICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At June 30, 1997, the Bank was categorized as "well capitalized" meaning that the Bank's total risk-based capital ratio exceeded 10%, its Tier I risk-based ratio exceeded 6%, and its leverage ratio exceeded 5%, and the Bank was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure.
Capital Distribution Regulations
An OTS regulation imposes limitations upon all "capital distributions" by savings associations, including cash dividends, payments by a savings association to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash- out merger and other distributions charged against capital. The regulation establishes a three-tiered system of regulation, with the greatest flexibility being afforded to well-capitalized institutions. A savings association which has total capital (immediately prior to and after giving effect to the capital distribution) that is at least equal to its fully phased-in capital requirements would be a Tier 1 institution. A savings association that has total capital at least equal to its minimum capital requirements, but less than its fully phased-in capital requirements, would be a Tier 2 institution. A savings association having total capital that is less than its minimum capital requirements would be a Tier 3 institution. However, a savings association which otherwise qualifies as a Tier 1 institution may be designated by the OTS as a Tier 2 or Tier 3 institution if the OTS determines that the savings association is "in need of more than normal supervision." First Federal is currently a Tier 1 institution.
A Tier 1 Institution could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year up to 100% of its net income to date during the calendar year plus an amount that would reduce by one-half its "surplus capital ratio" (the excess over its fully phased-in capital requirements) at the beginning of the calendar year. Any additional amount of capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit savings associations to declare dividends in amounts which would assure that they remain adequately capitalized following the dividend declaration. Savings associations in a holding company system which are rated Camel 1 or 2 and which are not in troubled condition would need to file a prior notice with the OTS concerning such dividend declaration.
Federal Reserve System
Under FRB regulations, First Federal is required to maintain reserves against its transaction accounts (primarily checking and NOW accounts), and non-personal money market deposit accounts. The effect of these reserve requirements is to increase First Federal's cost of funds. First Federal is in compliance with its reserve requirements. A federal savings association, like other depository institutions maintaining reservable accounts, may borrow from the Federal Reserve Bank "discount window," but the FRB's regulations require the savings association to exhaust other reasonable alternative sources, including borrowing from its regional FHLB, before borrowing from the Federal Reserve Bank. FedICIA imposes certain limitations on the ability of undercapitalized depository institutions to borrow from Federal Reserve Banks.
Holding Company Regulations
The Corporation is a savings and loan holding company within the meaning of the Home Owners' Loan Act, as amended ("HOLA"), and is subject to regulatory oversight of the Director of the OTS. As such, the Corporation is registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, First Federal is subject to certain restrictions in its dealings with the Corporation and with other companies affiliated with the Corporation.
The HOLA generally prohibits a savings and loan holding company, without prior approval of the Director of the OTS, from (i) acquiring control of any other savings association or savings and loan holding company or controlling the assets thereof or (ii) acquiring or retaining more than 5 percent of the voting shares of a savings association or holding company thereof which is not a subsidiary. Additionally, under certain circumstances, a savings and loan holding company is permitted to acquire, with the approval of the Director of OTS, up to 15 percent of previously unissued voting shares of an under-capitalized savings association for cash without that savings association being deemed controlled by the holding company. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock may also acquire control of any savings association, other than a subsidiary association, or any other savings and loan holding company.
The Corporation currently is a unitary savings and loan holding company, and there are generally no restrictions on the activities of a unitary savings and loan holding company. However, if the Director of the OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness, or stability of its subsidiary savings association, the Director of the OTS may impose such restrictions as deemed necessary to address such risk and limiting (i) payment of dividends by the savings association, (ii) transactions between the savings association and its affiliates, and (iii) any activities of the savings association that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings association.
Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings association subsidiary of such a holding company fails to meet the Qualified Thrift Lender ("QTL") test, then such unitary holding company shall also presently become subject to the activities restrictions applicable to multiple holding companies. (Additional restrictions on securing advances from the Federal Home Loan Bank also apply.) See "-- Qualified Thrift Lender." At June 30, 1997, First Federal's asset composition was in excess of that required to qualify First Federal as a Qualified Thrift Lender.
If the Corporation were to acquire control of another savings association other than through merger or other business combination with First Federal, the Corporation would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings association meets the QTL test, the activities of the Corporation and any of its subsidiaries (other than First Federal or other subsidiary savings associations) would thereafter be subject to further restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings association shall commence, or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings association, (iv) holding or managing properties used or occupied by a subsidiary savings association, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by the FSLIC by regulation as of March 5, 1987 to be engaged in by multiple holding companies or (vii) those activities authorized by the FRB as permissible for bank holding companies, unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS prior to being engaged in by a multiple holding company.
The Director of the OTS may also approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 5, 1987, or if the laws of the state in which the association to be acquired is located specifically permit associations to be acquired by state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings associations). Also, the Director of the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions.
No subsidiary savings association of a savings and loan holding company may declare or pay dividends on its permanent or nonwithdrawable stock unless it first gives the Director of OTS thirty days advance notice of such declaration and payment. Any dividend declared during such period, or without the giving of such notice, shall be invalid.
Federal Securities Law
The shares of Common Stock of the Corporation are registered with the Securities and Exchange Commission (the "SEC") under the 1934 Act. The Corporation is therefore subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the 1934 Act and the rules of the SEC thereunder.
Shares of Common Stock held by persons who are affiliates of the Corporation may not be resold without registration or unless sold in accordance with the resale restrictions of Rule 144 under the 1933 Act. If the Corporation meets the current public information requirements under Rule 144, each affiliate of the Corporation who complies with the other conditions of Rule 144 (including a one-year holding period and conditions that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Corporation or (ii) the average weekly volume of trading in such share during the preceding four calendar weeks.
Qualified Thrift Lender
Savings associations must meet a QTL test which requires a savings association to have at least 65% of its portfolio assets invested in "qualified thrift investments" on a monthly average basis in nine out of every twelve months. Qualified thrift investments under the QTL test include: (i) loans made to purchase, refinance, construct, improve or repair domestic residential housing or manufactured housing; (ii) home equity loans; (iii) mortgage-backed securities; (iv) direct or indirect existing obligations of either the FDIC or the FSLIC for ten years from the date of issuance, if issued prior to July 1, 1989; (v) obligations of the FDIC, FSLIC Resolution Fund and the Resolution Trust Corporation for a five year period from July 1, 1989, if issued after such date; (vi) FHLB stock; (vii) 50% of the dollar amount of residential mortgage loans originated and sold within 90 days or origination; (viii) investments in service corporations that derive at least 80% of their gross revenues from activities directly related to purchasing, refinancing, constructing, improving or repairing domestic residential real estate or manufacturing housing; (ix) 200% of the dollar amount of loans and investments made to acquire, develop and construct one-to four-family residences that are valued at no more than 60% of the median value of homes constructed in the area; (x) 200% of the dollar amount of loans for the acquisition or improvement of residential real property, churches, schools, and nursing homes located within, and loans for any purpose to any small business located within, an area where credit needs of its low and moderate income residents are determined not to have been adequately met; (xi) loans for the purchase, construction, improvement or upkeep of churches, schools, nursing homes and hospitals not qualified under (x); (xii) up to 10% of portfolio assets held in consumer loans or loans for educational purposes; and (xiii) FHLMC and FNMA stock. However, the aggregate amount of investments in categories (vii)-(xiii) which may be taken into account for the purpose of whether an institution meets the QTL test cannot exceed 15% of portfolio assets. Portfolio assets under the QTL test include all of an association's assets less (i) goodwill and other intangibles, (ii) the value of property used by the association to conduct its business, and (iii) its liquid assets as required to be maintained under law up to 20% of total assets.
A savings association that fails to meet the QTL test must either convert to a bank (although its deposit insurance assessments will continue to be those of, and payments will continue to be made to, the SAIF) or be subject to the following penalties: (i) it may not enter into any new activity except for those permissible for a national bank and for a savings association; (ii) its branching activities shall be limited to those of a national bank; (iii) it shall not be eligible for any new FHLB advances; and (iv) it shall be bound by regulations applicable to national banks respecting payment of dividends. Three years after failing the QTL test the association must (i) dispose of any investment or activity not permissible for a national bank and a savings association and (ii) repay all outstanding FHLB advances. If such a savings association is controlled by a savings and loan holding company, then the holding company must within a prescribed time period become registered as a bank holding company and become subject to all rules and regulations applicable to bank holding companies (including restrictions as to the scope of permissible business activities).
A savings association failing to meet the QTL test may requalify as a QTL if it thereafter meets the QTL test. In the event of such requalification, it shall not be subject to the penalties described above. A savings association which subsequently again fails to qualify under the QTL test shall become subject to all of the described penalties without application of any waiting period.
At June 30, 1997, 76.2% of First Federal's portfolio assets (as defined on that date) were invested in qualified thrift investments (as defined on that date), and therefore First Federal's asset composition was in excess of that required to qualify First Federal as a QTL. First Federal does not expect to change significantly its lending or investment activities in the near future; and, therefore it expects to continue to qualify as a QTL, although there can be no such assurance.
Community Reinvestment Act Matters
Under current law, ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") must be disclosed. The disclosure will include both a four-unit descriptive rating - using terms such as satisfactory and unsatisfactory - and a written evaluation of each institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the Community Reinvestment Act and its record of lending to first-time home buyers. The FHLBs have established an "Affordable Housing Program" to subsidize the interest rate of advances to member associations engaged in lending for long-term, low- and moderate-income, owner-occupied and affordable rental housing at subsidized rates. First Federal has participated in such programs in the past and has plans to participate in the future. The examiners have determined that First Federal has a satisfactory record of meeting community credit needs.
Taxation
Federal Taxation
Historically, savings associations, such as First Federal, have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, the Bank is no longer be able to use the percentage of taxable income method of computing its allocable tax bad debt deduction. The Bank is required to compute its allocable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. First Federal will recapture approximately $440,000 over a six year period beginning in fiscal 1997. In addition, the pre-1988 reserve, in which no deferred taxes have been recorded, will not have to be recaptured into income unless (i) the Bank no longer qualifies as a bank under the Code, or (ii) excess dividends are paid out by the Bank.
Depending on the composition of its items of income and expense, a savings institution may be subject to the alternative minimum tax. A savings institution must pay an alternative minimum tax equal to the amount (if any) by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before this adjustment and before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid that is attributable to most preferences (although not to post-August 7, 1986 tax-exempt interest) can be credited against regular tax due in later years.
The Corporation and its subsidiaries file a consolidated federal income tax return, which has the effect of eliminating intercompany distributions, including dividends, in the computation of consolidated taxable income. Income of the Corporation generally would not be taken into account in determining the bad debt deduction allowed to First Federal, regardless of whether a consolidated tax return is filed. However, certain "functionally related" losses of the Corporation would be required to be taken into account in determining the permitted bad debt deduction.
The Corporation's federal income tax returns have not been audited in the last five years.
State Taxation
For its taxable year beginning January 1, 1990, First Federal became subject to Indiana's Financial Institutions Tax ("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for purposes of FIT, begins with taxable income as defined by Section 63 of the Internal Revenue Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes.
Competition
The Bank's primary market area consists of Knox County, Indiana. A majority of the Bank's savings deposits are received from residents of its primary market area, and a majority of its loans are secured by properties in this area.
First Federal faces substantial competition both in the attraction of deposits and in the making of mortgage and other loans in its primary market area. Competition for the origination of real estate loans principally comes from other savings institutions, commercial banks, and mortgage banking companies located in its primary market area.
Under current law, bank holding companies may acquire savings associations. Savings associations may also acquire banks under federal law. To date, several bank holding company acquisitions of healthy savings associations in Indiana have been completed. Affiliations between banks and healthy savings associations based in Indiana may also increase the competition faced by the Bank and the Corporation.
In addition, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of- state branches either through merger or de novo expansion. The State of Indiana enacted legislation establishing interstate branching provisions for Indiana state chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law authorizes Indiana banks to branch interstate by merger or de novo expansion and authorizes out-of-state banks meeting certain requirements to branch into Indiana by merger or de novo expansion. The Indiana Branching Law became effective March 15, 1996. This new legislation may also result in increased competition for the Corporation and the Bank.
The primary factors influencing competition for deposits are interest rates, service and convenience of office locations. The Bank competes for loan originations primarily through the efficiency and quality of services it provides borrowers and through interest rates and loan fees it charges. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels, and other factors that are not readily predictable.
Current Accounting Issues
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 provides computation, presentation, and disclosure requirements for earnings per share. The requirements for the presentation of primary and fully diluted earnings per share will be replaced with basic and diluted earnings per share. SFAS 128 Statement is effective for financial statements for both interim and annual periods ending after December 15, 1997, and earlier application is not permitted. Due to the Corporation's current capital structure and limited common stock equivalents, the Statement is not expected to have a material impact on the financial statements or results of operations of the Corporation.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"). SFAS 129 was issued in connection with SFAS 128 and establishes standards for disclosing information about an entity's capital structure. SFAS 129 is effective for periods ending after December 15, 1997. The adoption of SFAS 129 is not expected to have any impact on the financial statements or results of operations of the Corporation.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and displaying comprehensive income and its components in the financial statements. Comprehensive income is the total of net income and all nonowner changes in shareholders' equity. SFAS 130 is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. The Statement will require new disclosures by the Corporation, but is not expected to have a material impact on the financial statements or results of operations of the Corporation.
In June 1997, The FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"), which introduces new guidance on segment reporting. SFAS 131 is effective for fiscal years beginning after December 15, 1997, with earlier application encouraged. The Statement is not expected to have a material impact on the financial statements or results of operations of the Corporation.
Employees
As of September 9, 1997, 1ST BANCORP and its subsidiaries had 81 full-time and 6 part-time employees. None of these employees is represented by a collective bargaining agreement or union, and the Corporation believes it enjoys harmonious relations with its personnel.
Item 2.
Item 2. Properties.
At June 30, 1997, 1ST BANCORP and First Federal conducted their business and operations from the main office located at 101 North Third Street, Vincennes, Indiana; a drive-up branch facility at 1700 Willow Street, Vincennes, Indiana; and its office annex at 102 North Fifth Street, Vincennes, Indiana. The property and buildings are owned by the Bank with a net book value of $2.0 million at June 30, 1997. First Financial conducted its business from its office located at 626 Veterans Drive, Vincennes, Indiana. This property and building are owned by First Financial and had a net book value of $412,000 at June 30, 1997. A portion of the First Financial building is leased to an independent third party.
Item 3.
Item 3. Legal Proceedings.
Neither 1ST BANCORP, First Federal, nor First Financial is involved in any legal proceedings, other than routine proceedings occurring in the ordinary course of its business.
Item 4.
Item 4. Submission of Matters to Vote of Security Holders.
No matter was submitted to the Corporation's shareholders during the quarter ended June 30, 1997.
Item 4.5 Executive Officers of the Corporation.
Presented below is certain information regarding the executive officers of the Corporation or the Corporation's wholly owned subsidiary, First Federal Bank, A Federal Savings Bank:
Frank Baracani (age 55) has been President and Director of the Corporation and First Federal during the past five years.
Donald G. Bell (age 67) has been Vice President and Director of the Corporation; Director of First Federal; and Partner with the law firm of Hart, Bell, Cummings, Ewing & Stuckey, Vincennes, Indiana during the last five years.
C. James McCormick (72) has been Chairman of the Board, Director and Chief Executive Officer of the Corporation, and Chairman of the Board and Director of First Federal during the last five years.
Mary Lynn Stenftenagel (43) has been Director and Secretary - Treasurer of the Corporation and Director and Chief Financial Officer of First Federal during the last five years. Ms. Stenftenagel has been Executive Vice President and Secretary of First Federal since October, 1993 and for one year prior she served as Senior Vice President of First Federal.
John J. Summers (67) has been Vice Chairman of the Board and Director of the Corporation and Vice Chairman of the Board and Director of First Federal during the last five years.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information required herein is incorporated by reference from "Market Information" on page 40 of 1ST BANCORP's 1997 Annual Report to Shareholders (the "Annual Report to Shareholders").
Item 6.
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.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The information required herein is incorporated by reference from pages 7 to 14 of the Annual Report to Shareholders.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
Because the majority of the Corporation's balance sheet consists of interest earning assets and interest bearing liabilities, it is exposed to interest rate risk. Therefore, additional information is being provided regarding the exposure to this interest rate risk.
The OTS requires all regulated thrift institutions to calculate the estimated change in the institution's net portfolio value ("NPV") assuming instantaneous, parallel shifts in the Treasury yield curve of 100 to 400 basis points, either up or down, and in 100 basis point increments. The NPV is defined as the present value of expected cash flows from existing assets less the present value of expected cash flows from existing liabilities plus the present value of net expected cash inflows from existing off-balance sheet contracts.
The OTS provides all institutions that file a schedule entitled the Consolidated Maturity & Rate schedule ("CMR") as a part of their quarterly Thrift Financial Report with an interest rate sensitivity report of NPV. The OTS simulation model uses a discounted cash flow analysis and an option-based pricing approach to measuring the interest rate sensitivity of NPV. The OTS model estimates the economic value of each type of asset, liability, and off-balance sheet contract under the assumption that the Treasury yield curve shifts instantaneous and parallel up and down 100 to 400 basis points in 100 basis point increments. The OTS allows thrifts under $500 million in total assets to use the results of their interest rate sensitivity model, which is based on information provided by the institution, to estimate the sensitivity of NPV.
The OTS model utilizes an option-based pricing approach to estimate the sensitivity of mortgage loans. The most significant embedded option in these types of assets is the prepayment option of the borrowers. The OTS model uses various price indications and prepayment assumptions to estimate sensitivity of mortgage loans. At June 30, 1997, the price indications for adjustable rate mortgage loans ranged from 87% to 108% of the underlying mortgage balances. The price indications for fixed rate mortgage loans securities varied from 69% to 120% of the underlying mortgage balances. Prepayment rates for mortgage loans ranged from 4% to 76% Constant Prepayment Rate ("CPR") as of June 30, 1997.
The NPV sensitivity of the structured securities segment of the investment securities portfolio is provided by the Bank to the OTS and is not simulated by the OTS model. The sensitivity to interest rate changes of the Bank's structured securities is obtained by simulation analysis performed by independent third party investment brokers. The remaining investment securities are valued by the OTS model based upon a discounted cash flow approach which assumes semi-annual interest cash flows with principal repaid at maturity. The cash flows are discounted based upon Treasury security yields with similar maturities.
In the OTS model, the value of deposit accounts appears on the asset and liability side of the NPV analysis. In estimating the value of certificates of deposit ("CD") accounts, the liability portion of the CD is represented by the implied value when comparing the difference between the CD face rate and available wholesale CD rates. On the asset side of the NPV calculation, the value of the "customer relationship" due to the rollover of retail CD deposits represents an intangible asset in the NPV calculation.
Other deposit accounts such as transaction accounts, money market deposit accounts, passbook accounts, and noninterest bearing accounts also are included on the asset and liability side of the NPV calculation in the OTS model. These accounts are valued at 100% of the respective account balances on the liability side. On the asset side of the analysis, the value of the "customer relationship" of the various types of deposit accounts is reflected as a deposit intangible.
The NPV sensitivity of borrowed funds is estimated by the OTS model based on a discounted cash flow approach. The cash flows are assumed to consist of monthly or semi-annual interest payments with principal paid at maturity (dependent upon the type of borrowing). These cash flows are discounted based upon London Interbank Offered Rates ("LIBOR").
The OTS model is based only on the Bank level balance sheet. Various asset and liability categories were adjusted to reflect the consolidated NPV of the Corporation. These adjustments were not material to the outcome of the simulation analysis of NPV. The following table sets forth the Corporation's interest rate sensitivity of NPV as of June 30, 1997.
Various strategies are in place to control the Corporation's exposure to interest rate risk. The Corporation has an Asset/Liability Committee ("ALCO") comprised of senior management personnel which is primarily responsible for management of the Corporation's exposure to interest rate risk. The ALCO actively monitors the interest rate risk position and develops strategies to minimize its potential negative effects on the Corporation's financial condition. As its primary strategy to control the potential negative effects of the Corporation's market risk exposure, the ALCO actively adjusts its interest earning asset and interest bearing liability composition and pricing.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages 16 to 37 of the Annual Report to Shareholders.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.
There were no such changes or disagreements during the applicable period.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The information required herein with respect to directors is incorporated by reference from the definitive proxy statement of 1ST BANCORP, dated September 26, 1997 (the "Proxy Statement") under "Proposal I - Election of Directors" on pages 4 to 5 of the Proxy Statement. Information required herein pursuant to Item 405 of Regulation S-K (Para. 229.405 of this chapter) is incorporated by reference from page 10 of the Proxy Statement. Information concerning the Corporation's executive officers is included in Item 4.5 in Part I of this report.
Item 11.
Item 11. Executive Compensation.
The information required herein is incorporated by reference from pages 7 to 9 of the Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference from pages 3 to 6 of the Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from page 10 of the Proxy Statement.
PART IV.
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents Filed as Part of this Report
The following financial statements are incorporated by reference (see Exhibit 13):
Page in the 1997 Annual Report to Financial Statements Shareholders
Independent Auditors' Report 15
Consolidated Statements of Financial Condition as of June 30, 1997, and 1996. 16
Consolidated Statements of Earnings for the Years Ended June 30, 1997, 1996, and 1995. 17
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1997, 1996, and 1995. 18
Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1996, and 1995. 19
Notes to Consolidated Financial Statements. 20
(b) There were no reports on Form 8-K filed during the quarter ended June 30, 1997.
(c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on page 43.
(d) All schedules are omitted as the required information either is not applicable or is included in the Consolidated Financial Statements or related notes.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
1ST BANCORP
Date: September 24, 1997 By:/s/ C. James McCormick --------------------------------- C. James McCormick Chief Executive Officer
Date: September 24, 1997 By:/s/ Frank D. Baracani --------------------------------- Frank D. Baracani Director and President
Each person whose individual signature appears below hereby authorizes Frank D. Baracani as attorney-in-fact with full power of substitution to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities and on the dates set forth below:
/s/ C. James McCormick Date: September 24, 1997 - ------------------------------------------ C. James McCormick, Chairman of the Board and Chief Executive Officer
/s/ John J. Summers Date: September 24, 1997 - ------------------------------------------ John J. Summers, Vice Chairman of the Board
/s/ Frank D. Baracani Date: September 24, 1997 - ------------------------------------------ Frank D. Baracani, Director, President
/s/ Donald G. Bell Date: September 24, 1997 - ------------------------------------------ Donald G. Bell, Director, Vice President
/s/ Mary Lynn Stenftenagel Date: September 24, 1997 - ------------------------------------------ Mary Lynn Stenftenagel, Director, Secretary/Treasurer (Principal Accounting and Financial Officer)
/s/ R. William Ballard Date: September 24, 1997 - ------------------------------------------ R. William Ballard, Director
/s/ Rahmi Soyugenc Date: September 24, 1997 - ------------------------------------------ Rahmi Soyugenc, Director
/s/ Ruth Mix Carnahan Date: September 24, 1997 - ------------------------------------------ Ruth Mix Carnahan, Director
/s/ James W. Bobe Date: September 24, 1997 - ------------------------------------------ James W. Bobe, Director
EXHIBIT INDEX
No. Exhibits Page
3a Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Registrant's Registration Statement on Form S-4, Registration No. 33-24587, filed September 28, 1988 (the "Registration Statement") *
3b Restated By-Laws of 1ST BANCORP (incorporated by reference to Exhibit 3b to the Registrant's Form 10-K for the year ended June 30, 1994). *
10a Incentive Stock Option Plan (incorporated by reference from Exhibit 10a-1 to the Registrant's Form 10-K for the year ended June 30, 1991). *
10b 1ST BANCORP Stock Option Plan (incorporated by reference from Exhibit 10b-1 to the Registrant's Form 10-K for the year ended June 30, 1991). *
10c First Federal Management Incentive Plan for Fiscal Year 1994 (incorporated by reference to Exhibit 10c to the Registrant's Form 10-K for the year ended June 30, 1994). *
10d Form of Director Deferred Compensation Agreement, dated July 1, 1993, between First Federal and each of C. James McCormick, John J. Summers, Frank D. Baracani, Mary Lynn Stenftenagel, Robert W. Ballard, Ruth Mix Carnahan, Donald G. Bell, Rahmi Soyugenc, and James W. Bobe (incorporated by reference to Exhibit 10d to the Registrant's Form 10-K for the year ended June 30, 1994). *
10e Form of Executive Supplemental Retirement Income Agreement, dated July 1, 1993, between First Federal and each of C. James McCormick, Frank D. Baracani, Mary Lynn Stenftenagel, Robert W. Ballard, Carroll C. Hamner, Wayne P. Kaufman, and Ronald E. McGill (incorporated by reference to Exhibit 10d to the Registrant's Form 10-K for the year ended June 30, 1994). *
10f 1ST BANCORP 1997 Employee Stock Purchase Plan (incorporated by reference to Exhibit A to the Registrant's 1996 Proxy Statement).
13 Annual Report to Shareholders __
21 Subsidiaries of the Registrant __
23.1 Independent Auditors' Consent __
23.2 Independent Auditors' Consent __
23.3 Independent Auditors' Consent __
27 Financial Data Schedule (to be filed electronically)
(*) Previously filed with the SEC and by this reference incorporated into this Annual Report.