FBEI First Bancorp Ind New (MM)

FIRST BANCORP OF INDIANA, INC.

(Name of small business issuer in its charter)

Indiana	35-2061832
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
5001 Davis Lant Drive, Evansville, Indiana	47715
(Address of principal executive offices)	(Zip Code)

PART I

Item 1.   DESCRIPTION OF BUSINESS

General

First Bancorp of Indiana, Inc. (“First Bancorp”), headquartered in Evansville, Indiana, is the holding company for First Federal Savings Bank (“First Federal”). First Bancorp’s sole business activity is the ownership of all of First Federal’s capital stock. First Bancorp does not transact any material business other than through its subsidiary, First Federal. First Bancorp is subject to the regulation of the Office of Thrift Supervision (“OTS”) and the Securities and Exchange Commission (“SEC”). The common stock of First Bancorp is listed on the Nasdaq Global Market under the symbol FBEI.

First Federal operates as a community-oriented financial institution. First Federal is regulated by the OTS and the Federal Deposit Insurance Corporation (“FDIC”). First Federal’s deposits have been federally insured by the FDIC since 1934 and are currently insured by the FDIC under the Deposit Insurance Fund. First Federal has been a member of the Federal Home Loan Bank (“FHLB”) System since 1934.

Effective October 1, 2006, First Bancorp completed its acquisition of Home Building Bancorp, Inc. (“Home Building Bancorp”), the parent company of Home Building Savings Bank, FSB, pursuant to an Agreement and Plan of Merger dated April 25, 2006. Concurrent with the acquisition, Home Building Savings Bank merged with and into First Federal.  The merger was undertaken to further First Bancorp’s strategic growth plans by providing another market in which First Federal could offer its broad array of products and services. The aggregate merger consideration included approximately $5.6 million in cash, 293,946 shares of First Bancorp stock valued at $18.39, and acquisition costs approximating $356,000. First Federal operates these branches under the Home Building Savings Bank name.

Market Area and Competition

First Federal conducts its operations through nine offices located in southwest Indiana. Most of First Federal’s depositors live in the areas surrounding its branches, and most of First Federal’s loans are made to persons in Evansville and the surrounding counties. Evansville is in the southwest corner of Indiana. The service sector (primarily medical services) is the largest source of employment. However, manufacturing has played an increasingly larger role in recent years with the addition or reopening of several plants. The area’s largest manufacturers produce pharmaceuticals, home appliances, aluminum and plastic products, and automobiles. Employers include Whirlpool Corporation, Bristol-Myers Squibb, Alcoa, AK Steel, General Electric and Toyota Motor Corp. Unemployment is currently low and First Federal believes the outlook for the area’s economy is positive.

First Federal faces intense competition for the attraction of deposits and origination of loans in its market area. Its most direct competition for deposits has historically come from the several financial institutions operating in First Federal’s market area and, to a lesser extent, from other financial service companies, such as brokerage firms, credit unions and insurance companies. At June 30, 2006, which is the most recent date for which data is available from the FDIC, First Federal held 3.27% of the deposits in the Evansville, Indiana - Henderson, Kentucky Metropolitan Statistical Area. First Federal’s competition for loans comes primarily from financial institutions in its market area, and to a lesser extent from other financial service providers, such as mortgage companies and mortgage brokers. Additionally, competition for loans has increased due to the increasing number of non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies and specialty finance companies. First Federal expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Some of the institutions with which First Federal competes are significantly larger than First Federal and, therefore, have significantly greater resources to devote to marketing and technological advancements. While the competition for deposits and the origination of loans could limit First Federal’s future growth, First Federal allocates the resources necessary to maintain what it believes to be a state-of-the-art product line.

 

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Lending Activities

The following table sets forth the composition of First Federal’s loan portfolio at the dates indicated.

		At June 30,
		2007						2006						2005
		Amount			Percent of Total			Amount			Percent of Total			Amount			Percent of Total
		(Dollars in thousands)
Mortgage loans:
One- to four-family		$	102,293			43.66	%	$	78,803			42.00	%	$	79,725			50.61	%
Construction			3,420			1.46			2,622			1.40			4,213			2.67
Commercial and multi-family			28,740			12.27			19,536			10.41			10,151			6.44
Total mortgage loans			134,453			57.39			100,961			53.81			94,089			59.72
Consumer lines of credit			5,310			2.27			5,540			2.95			5,992			3.80
Savings account loans			317			0.14			168			0.09			129			0.08
Commercial business loans			17,233			7.36			9,025			4.81			7,587			4.82
Consumer loans			76,971			32.84			71,930			38.34			49,741			31.58
Total loans			234,284			100.00	%		187,624			100.00	%		157,538			100.00	%
Less:
Undisbursed loan funds			265						232						2,012
Net deferred loan (fees) costs			(283	)					(196	)					125
Allowance for loan losses			1,065						836						855
Net loans		$	233,237					$	186,752					$	154,546

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		At June 30,
		2004						2003
		Amount			Percent of Total			Amount			Percent of Total
		(Dollars in thousands)
Mortgage loans:
One- to four-family		$	76,178			45.46	%	$	65,716			46.77	%
Construction			7,863			4.69			6,131			4.36
Commercial and multi-family			4,540			2.71			2,897			2.06
Total mortgage loans			88,581			52.86			74,744			53.19
Consumer lines of credit			5,358			3.20			4,358			3.10
Savings account loans			157			0.09			170			0.12
Commercial business loans			5,467			3.26			7,519			5.35
Consumer loans			68,003			40.59			53,721			38.24
Total loans			167,566			100.00	%		140,512			100.00	%
Less:
Undisbursed loan funds			3,731						4,224
Net deferred loan (fees) costs			70						165
Allowance for loan losses			1,078						1,101
Net loans		$	162,687					$	135,022

The following table sets forth certain information at June 30, 2007 regarding the dollar amount of loans maturing in First Federal’s portfolio based on their scheduled contractual principal repayments. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances do not include undisbursed loan funds, deferred loan fees and allowance for loan losses.

		Amount Due
		Within One Year			After One Year Through Three Years			After Three Years Through Five Years			After Five Years Through 10 Years			Beyond 10 Years			Total
		(In thousands)
Mortgage loans:
One- to four-family		$	11,781		$	16,196		$	12,658		$	23,705		$	37,953		$	102,293
Construction			1,659			1,581			8			27			145			3,420
Commercial and multi-family			9,400			11,401			4,314			1,996			1,629			28,740
Consumer lines of credit			169			439			498			96			4,108			5,310
Savings account loans			317			-			-			-			-			317
Commercial business loans			8,901			5,502			2,462			300			68			17,233
Consumer loans			21,234			36,136			19,487			114			-			76,971
Total		$	53,461		$	71,255		$	39,427		$	26,238		$	43,903		$	234,284

 

 

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The following table sets forth, as of June 30, 2007, the dollar amount of all loans due or repricing after June 30, 2008, based on their scheduled contractual principal payments, which have fixed interest rates and have floating or adjustable interest rates.

		Fixed-Rate			Floating or Adjustable Rate
		(In thousands)
Mortgage loans:
One- to four-family		$	76,693		$	13,819
Construction			1,761			-
Commercial and multi-family			14,975			4,365
Consumer lines of credit			15			5,126
Savings account loans			-			-
Commercial business loans			7,707			625
Consumer loans			55,723			14
Total		$	156,874		$	23,949

Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is substantially less than their contractual terms because of prepayments. In addition, due-on-sale clauses on loans generally give First Federal the right to declare loans immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase, however, when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, decreases when rates on existing mortgage loans are substantially higher than current mortgage loan market rates.

Residential Real Estate Loans. First Federal offers a variety of fixed and adjustable-rate mortgage loan products. The loan fees charged, interest rates and other provisions of First Federal’s mortgage loans are determined by First Federal on the basis of its own pricing criteria and market conditions. Generally, loans originated by First Federal conform to Fannie Mae underwriting standards. First Federal’s fixed-rate loans typically have maturities of 15 to 30 years. Recent increases in rates have caused 30 year loans to be the largest percentage of originations. First Federal also offers five- and seven-year balloon mortgages based on a 30-year amortization schedule. First Federal’s adjustable-rate mortgage (“ARM”) loans are typically based on a 30-year amortization schedule. Interest rates and payments on First Federal’s ARM loans generally are adjusted annually after a specified period ranging from one to ten years to a rate typically equal to 2.75% above the one-year constant maturity U.S. Treasury index. First Federal may offer ARM loans with initial rates below those which would prevail under the foregoing computation, determined by First Federal based on market factors and competitive rates for loans having similar features offered by other lenders for such initial periods. The maximum amount by which the interest rate may be increased or decreased in a given period on First Federal’s ARM loans is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan. First Federal qualifies the borrower based on the borrower’s ability to repay the ARM loan based on the maximum interest rate at the first adjustment, in the case of one-year ARM loans, and based on the initial interest rate in the case of ARM loans that adjust after three or more years. First Federal does not originate negative amortization loans. The terms and conditions of the ARM loans offered by First Federal, including the index for interest rates, may vary from time to time. First Federal believes that the annual adjustment feature of its ARM loans also provides flexibility to meet competitive conditions as to initial rate concessions while preserving First Federal’s return on equity objectives by limiting the duration of the initial rate concession.

Borrower demand for ARM loans versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed-rate mortgage loans and ARM loans that can be originated at any time is largely determined by the demand for each in a competitive environment.

The retention of ARM loans in First Federal’s loan portfolio helps reduce First Federal’s exposure to changes in interest rates. There are, however, unquantifiable credit risks resulting from the potential of increased costs due to changed rates to be paid by the customer. It is possible that, during periods of rising interest rates, the risk of default on ARM loans may increase as a result of repricing and the increased costs to the borrower. Furthermore, because the ARM loans originated by First Federal may provide, as a marketing incentive, for initial rates of interest below the rates that would apply were the adjustment index used for pricing initially (discounting), these loans are subject to increased risks of default or delinquency. Another consideration is that although ARM loans allow First Federal to increase the sensitivity of its asset base to changes in interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limits. Because of these considerations, First Federal has no assurance that yields on ARM loans will be sufficient to offset increases in First Federal’s cost of funds.

 

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While fixed-rate, single-family residential real estate loans are normally originated with 15- to 30-year terms, and First Federal may permit its ARM loans to be assumed by qualified borrowers, such loans typically remain outstanding for substantially shorter periods. This is because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. In addition, substantially all mortgage loans in First Federal’s loan portfolio contain due-on-sale clauses providing that First Federal may declare the unpaid amount due and payable upon the sale of the property securing the loan. First Federal enforces these due-on-sale clauses to the extent permitted by law and as business judgment dictates. Thus, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.

Construction Loans. First Federal originates loans to individuals for the construction of their personal residence. First Federal also makes loans to local home builders. Construction loans to individuals are made on the same terms as First Federal’s residential mortgage loans, but provide for the payment of interest only during the construction phase, which is usually six months. At the end of the construction phase, the loan converts to a permanent mortgage loan. First Federal’s construction loans to builders generally have fixed interest rates and are for a term of up to 18 months. Loans to builders may be made on a speculative basis, which means that the builder has not identified a purchaser for the home at the time the loan is made. Builders are evaluated on a case-by-case basis to establish a maximum credit limit. At June 30, 2007, First Federal had $2.7 million of outstanding loans to builders for the construction of single family residences. First Federal occasionally originates loans for the purchase of residential building lots. These loans have fixed interest rates and most have terms of five years or less. At June 30, 2007, First Federal had six such loans outstanding for $102,000. First Federal also provides financing for the development of residential and commercial building lots. These land development loans, together with loans for the purchase of commercial building lots, totaled $2.0 million at June 30, 2007.

Construction lending is generally considered to involve a higher degree of risk than single-family permanent mortgage lending because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost of the project. The nature of these loans is such that they are generally more difficult to evaluate and monitor. If the estimate of construction cost proves to be inaccurate, First Federal may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value upon completion proves to be inaccurate, First Federal may be confronted with a project whose value is insufficient to assure full repayment. Projects may also be jeopardized by disagreements between borrowers and builders and by the failure of builders to pay subcontractors. Loans to builders to construct homes for which no purchaser has been identified carry more risk because the payoff for the loan is dependent on the builder’s ability to sell the property prior to the time that the construction loan is due.

First Federal has attempted to minimize the foregoing risks by, among other things, monitoring the project and controlling the disbursement of funds. Prior to making a commitment to fund a construction loan, First Federal requires an appraisal of the property. First Federal also reviews and inspects each project prior to disbursement of funds during the term of the construction loan. In most cases, loan proceeds are disbursed after inspection of the project based on percentage of completion.

Commercial and Multi-Family Real Estate Loans. First Federal has steadily increased its levels of commercial and multi-family real estate loans. The maximum loan-to-value ratio for a commercial or multi-family real estate loan is 75%. The maximum term for a commercial or multi-family real estate loan is generally 15 years and the maximum exposure to a single borrower generally is $2.5 million.

 

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Loans secured by commercial and multi-family real estate generally are larger and involve greater risks than one- to four-family residential mortgage loans. Payments on loans secured by such properties are often dependent on successful operation or management of the properties. Repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. First Federal seeks to minimize these risks in a variety of ways, including limiting the size of such loans and strictly scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. The properties securing First Federal’s commercial and multi-family real estate loans are inspected by First Federal’s lending personnel before the loan is made. First Federal also obtains appraisals on each property in accordance with applicable regulations.

Commercial Business Loans. First Federal offers a variety of commercial loan products that include term loans for equipment financing and business acquisitions and revolving lines of credit secured by inventory and/or accounts receivable. In most cases, fixed-rate loans have terms up to five years and are generally amortized over a five to ten year period. Revolving lines of credit generally will have adjustable rates of interest and are governed by a borrowing base certificate, payable on demand, subject to annual review and renewal. Business loans with variable rates of interest adjust on a daily basis and are generally indexed to prime rate as published in The Wall Street Journal . Furthermore, as circumstances warrant, First Federal may utilize a loan agreement for commercial loans.

In making commercial business loans, First Federal considers a number of factors, including the financial condition of the borrower, the nature of the borrower’s business, economic conditions affecting the borrower, First Federal’s market area, the management experience of the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the collateral. Commercial loans are generally secured by a variety of collateral, including equipment, inventory and accounts receivable and supported by personal guarantees.

Unlike mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are larger in amount and of higher risk and typically are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may be substantially dependent on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value. To manage these risks, First Federal performs a credit analysis for each commercial loan at least annually.

Consumer and Other Loans. First Federal originates unsecured consumer loans and consumer loans secured by automobiles and, occasionally, boats and other recreational vehicles. Automobile loans are secured by both new and used cars and light trucks. Both new and used cars are financed for a period of up to 84 months and the rate on such loans is fixed for the term of the loan.

Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various Federal and state laws, including Federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of such loans such as First Federal, and a borrower may be able to assert against such assignee claims and defenses that it has against the seller of the underlying collateral.

First Federal originates automobile loans through approximately 181 automobile dealers in southern Indiana, Kentucky and southern Illinois. These dealers provide First Federal applications to finance vehicles sold by their dealerships. Although the majority of the dealers through which First Federal originates loans sell both new and used automobiles, most of the loans First Federal originates are secured by used automobiles. First Federal processes loan applications through “Origenate,” an automated underwriting program by First American Credit Management Solutions, Inc. Applications processed through “Origenate” receive a score which, along with other underwriting criteria, determines if the application will be approved, denied or approved at an increased interest rate or on other terms.

 

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During the year ended June 30, 2007, First Federal originated $42.8 million in automobile loans. At June 30, 2007, indirect automobile loans constituted 30.0% of total loans.

First Federal believes that it benefits from the higher yields earned on consumer loans and that the shorter duration of consumer loans improves First Federal’s interest rate risk position. However, consumer loans tend to have a higher rate of default than mortgage loans and full repayment of defaulted loans is less likely when the loan is secured by a depreciating asset like an automobile.

First Federal originates home equity loans in the form of lines of credit and fixed-rate term loans. At June 30, 2007, First Federal had $5.3 million of credit line equity loans and unused commitments to extend credit under credit line equity loans of $11.1 million. Most of these loans are made to existing customers. First Federal’s home equity line of credit loans have variable interest rates tied to the prime lending rate. First Federal imposes a maximum loan-to-value ratio of 100% after considering both the first and second mortgage loans. First Federal’s home equity loans may have greater credit risk than one- to four-family residential mortgage loans because they are secured by mortgages subordinated to an existing first mortgage on the property, which, in most cases, is held by First Federal.

First Federal makes savings account loans for up to 90% of the depositor’s account balance. The interest rate is normally 2.0% or 3.0% above the rate paid on the deposit account, depending on the type of account, and the account must be pledged as collateral to secure the loan. Savings account loans are payable on demand, although interest must be paid every six months.

Loan Solicitation and Processing. Mortgage loan applicants come to First Federal through its marketing efforts, through direct solicitation by First Federal’s loan officers and by referrals from realtors and past and present customers. All types of loans may be originated and closed in any of First Federal’s offices. Mortgage loans are serviced from First Federal’s main office.

Loans can be approved by various employees and the Board of Directors on a scale which requires approval by individuals or groups of individuals with progressively higher levels of responsibility as the loan amount increases.

Loan Originations, Sales and Purchases. In an effort to manage its interest rate risk position, First Federal generally sells the fixed-rate mortgage loans with terms in excess of 15 years that it originates. The sale of loans in the secondary mortgage market reduces First Federal’s risk that the interest rates paid to depositors will increase while First Federal holds long-term, fixed-rate loans in its portfolio. It also allows First Federal to continue to fund loans when savings flows decline or funds are not otherwise available. First Federal generally sells loans without recourse to Fannie Mae or the Federal Home Loan Bank with servicing retained. Gains, net of origination expense, from the sale of such loans are recorded at the time of sale.

As of June 30, 2007, First Federal serviced pools of consumer loans with balances totaling $9.4 million sold to institutional investors. These pools, consisting of indirect automobile loans, were sold with servicing retained, thus allowing First Federal to earn a servicing fee. Of the current sold loan total, $525,000 were participations sold without recourse, whereby First Federal retains 10% of the loan balance and earns a set servicing fee on the portion sold. The remaining loans were sold with recourse. For the loans sold with recourse, First Federal typically earns a servicing fee approximating the contract interest rate net of a pass-through interest rate and loan losses. In fiscal 2005, First Federal repurchased a $6.9 million pool of automobile loan participations after the investor determined it was unable to hold the loans due to regulatory restrictions. No pools were repurchased in fiscal 2007 and 2006.

In June 2005, First Federal completed a securitization of automobile installment loans. The transaction involved the sale of approximately $50.8 million of receivables for which First Federal continues to provide servicing.

 

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In the past, First Federal has supplemented its loan originations through the purchase of whole loans and loan participations. Except for the aforementioned repurchase, or in conjunction with branch acquisitions in November 2000 and the bank acquisition in October 2006, First Federal has not purchased any loans or loan participations in many years.

At June 30, 2007, First Federal was servicing mortgage loans for others (Fannie Mae and the Federal Home Loan Bank) amounting to approximately $40.0 million. First Federal also serviced consumer loans for others totaling $25.2 million. Servicing loans for others generally consists of collecting payments, disbursing payments to investors, processing default actions, and, in the case of mortgage loans, maintaining escrow accounts. The retained servicing interest in the sold consumer loans is accounted for in accordance with SFAS No. 140.

Nonperforming Assets and Delinquencies. First Federal generates reports regarding delinquent loans at regular intervals each month to enable management to track their status. First Federal also generates a series of notices at regular intervals to inform mortgage loan borrowers when a required payment is past due. In most cases, delinquencies are cured promptly; however, if by the 91st day of delinquency, or sooner if the borrower is chronically delinquent and all reasonable means of obtaining payment on time have been exhausted, foreclosure, according to the terms of the security instrument and applicable law, is approved by the Board of Directors.

When a consumer loan borrower fails to make a required payment on a consumer loan by the payment due date, First Federal institutes collection procedures. In most cases, delinquencies are cured promptly; however, if, by the 45th day following the grace period of delinquency no progress has been made, a written notice is mailed informing the borrowers of their right to cure the delinquency within 10 days and of First Federal’s intent to begin legal action if the delinquency is not corrected. Depending on the type of property held as collateral, First Federal either obtains a judgment in small claims court or takes action to repossess the collateral.

Loans are generally placed on nonaccrual status when they become 90 days past due. Although nonaccrual loans generally are returned to accrual status when they become less than 90 days past due, restructured loans remain on nonaccrual status pending establishment of a satisfactory six month payment history.

The following table sets forth information with respect to First Federal’s nonperforming assets and troubled debt restructurings within the meaning of Statement of Financial Accounting Standards No. 15 at the dates indicated.

		At June 30,
		2007			2006			2005			2004			2003
		(Dollars in thousands)
Loans accounted for on a nonaccrual basis		$	311		$	757		$	408		$	305		$	388
Accruing loans past due 90 days or more			14			-			-			-			-
Nonperforming loans			325			757			408			305			388
Real estate owned (net)			10			63			-			-			-
Other repossessed assets			33			5			45			43			29
Total nonperforming assets			368			825			453			348			417
Troubled debt restructurings			29			31			670			624			-
Troubled debt restructurings and total nonperforming assets		$	397		$	856		$	1,123		$	972		$	417
Total loans delinquent 90 days or more to net loans			0.14	%		0.40	%		0.26	%		0.19	%		0.28	%
Total loans delinquent 90 days or more to total assets			0.09	%		0.26	%		0.15	%		0.12	%		0.21	%
Total nonperforming assets and troubled debt restructurings to total assets			0.11	%		0.29	%		0.40	%		0.37	%		0.22	%

Other than disclosed in the above table, there are no other loans at June 30, 2007 that management has serious doubts about the ability of the borrowers to comply with the present loan repayment terms.

 

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Interest income that would have been recorded for the year ended June 30, 2007 had nonaccruing loans been current according to their original terms amounted to $36,000. No interest related to nonaccrual loans was included in interest income for the year ended June 30, 2007.

Real Estate Owned. Real estate acquired by First Federal as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid principal balance of the related loan plus foreclosure costs, or net realizable value. Subsequent to foreclosure, the property is carried at the lower of the foreclosed amount or fair value. Upon receipt of a new appraisal and market analysis, the carrying value is written down through a charge to income, if appropriate. At June 30, 2007, First Federal owned one such   property.

Asset Classification. The OTS has adopted various regulations regarding problem assets of savings institutions. The regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OTS examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. Substandard assets must have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution without establishment of a specific reserve is not warranted. If an asset or portion thereof is classified loss, the insured institution establishes specific allowances for loan losses for the full amount of the portion of the asset classified loss. A portion of general loan loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution’s regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. OTS regulations also require that assets that do not currently expose an institution to a sufficient degree of risk to warrant classification as loss, doubtful or substandard but do possess credit deficiencies or potential weakness deserving management’s close attention shall be designated “special mention” by either the institution or its examiners.

First Federal reviews and classifies its assets on a monthly basis. At June 30, 2007, First Federal classified as substandard $1.4 million of loans and no other assets. Assets classified as doubtful totaled $33,000 as of that date. At such date First Federal had loans aggregating $1.1 million designated as special mention.   First Federal had no significant impaired loans at June 30, 2007, 2006 or 2005.

Allowance for Loan Losses. In originating loans, First Federal recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. The allowance method is used in providing for loan losses: all loan losses are charged to the allowance and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses charged to First Federal’s income. The provision for loan losses is based on management’s periodic evaluation of First Federal’s past loan loss experience, changes in the composition of the portfolio, the current condition and amount of loans outstanding and the probability of collecting all amounts due.

At June 30, 2007, First Federal had an allowance for loan losses of $1.1 million, which represented 0.45% of total loans. Management believes that the amount maintained in the allowances will be adequate to absorb losses inherent in the portfolio. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations. While First Federal believes it has established its existing allowance for loan losses in accordance with generally accepted accounting principles, there can be no assurance that First Federal’s regulators, in reviewing First Federal’s loan portfolio, will not request First Federal to increase significantly its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect First Federal’s financial condition and results of operations.

 

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The following table sets forth an analysis of First Federal’s allowance for loan losses for the periods indicated.

		Years Ended June 30,
		2007			2006			2005			2004			2003
		(Dollars in thousands)
Allowance at beginning of period		$	836		$	855		$	1,078		$	1,101		$	831
Provision for loan losses			400			362			360			360			563
Loans transferred to held-for-sale			-			-			(254	)		(134	)		-
Allowance added via bank acquisition			266			-			-			-			-
Recoveries			118			96			89			39			14
Charge-offs			(555	)		(477	)		(418	)		(288	)		(307	)
Net charge-offs			(437	)		(381	)		(329	)		(249	)		(293	)
Allowance at end of period		$	1,065		$	836		$	855		$	1,078		$	1,101
Ratio of allowance to total loans outstanding at the end of the period			0.45	%		0.45	%		0.55	%		0.66	%		0.81	%
Ratio of net charge-offs to average loans outstanding during the period			0.20	%		0.22	%		0.18	%		0.17	%		0.24	%
Allowance for loan losses to nonperforming loans			326.69	%		110.44	%		209.56	%		353.44	%		284.50	%

 

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The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.

		At June 30,
		2007						2006						2005
		Amount			% of Loans in Each Category to Total Loans			Amount			% of Loans in Each Category to Total Loans			Amount			% of Loans in Each Category to Total Loans
		(Dollars in thousands)
Mortgage loans		$	488			45.12	%	$	336			43.40	%	$	374			53.28	%
Consumer and other loans			375			35.25			301			41.38			281			35.46
Commercial loans			202			19.63			199			15.22			200			11.26
Unallocated			-			N/A			-			N/A			-			N/A
Total allowance for loan losses		$	1,065			100.00	%	$	836			100.00	%	$	855			100.00	%

		At June 30,
		2004						2003
		Amount			% of Loans in Each Category to Total Loans			Amount			% of Loans in Each Category to Total Loans
		(Dollars in thousands)
Mortgage loans		$	374			50.15	%	$	419			51.13	%
Consumer and other loans			504			43.88			532			41.46
Commercial loans			200			5.97			150			7.41
Unallocated			-			N/A			-			N/A
Total allowance for loan losses		$	1,078			100.00	%	$	1,101			100.00	%

Investment Activities

First Federal is permitted under applicable law to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, deposits at the FHLB-Indianapolis, certificates of deposit of federally insured institutions, certain bankers’ acceptances and federal funds. Subject to various restrictions, savings institutions may also invest a portion of their assets in commercial paper, corporate debt securities and mutual funds. Savings institutions like First Federal are also required to maintain an investment in FHLB stock.

First Federal must categorize its investments as “held to maturity,” “trading” or “available for sale,” based on management’s intent as to the ultimate disposition of each security. Debt securities may be classified as “held to maturity” and reported in financial statements at amortized cost only if First Federal has the positive intent and ability to hold those securities to maturity. Securities that might be sold in response to changes in market interest rates, changes in the security’s prepayment risk, increases in loan demand or other similar factors cannot be classified as “held to maturity.” Debt and equity securities held for current resale are classified as “trading.” Such securities are reported at fair value, and unrealized gains and losses on such securities would be included in earnings. First Federal does not currently use or maintain a trading account. Debt and equity securities not classified as either “held to maturity” or “trading” are classified as “available for sale.” Such securities are reported at fair value, and unrealized gains and losses on such securities are excluded from earnings and reported as a net amount in a separate component of equity.

 

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First Federal’s management determines appropriate investments in accordance with the Board of Directors’ approved investment policies and procedures. Investments are made following certain considerations, which include First Federal’s liquidity position and anticipated cash needs and sources, which in turn include outstanding commitments, upcoming maturities, estimated deposits and anticipated loan amortization and repayments. Further, the effect that the proposed investment would have on First Federal’s credit and interest rate risk, and risk-based capital is given consideration during the evaluation. The interest rate, yield, settlement date and maturity are also reviewed. The Board of Directors ratifies all investment purchases at its first meeting subsequent to the transactions.

First Federal purchases investments to provide necessary liquidity for day-to-day operations and to manage First Federal’s interest rate risk and overall credit risk profile. In addition, First Federal may, from time to time, purchase investment securities using wholesale funds in a strategy of leveraging First Federal’s strong capital position to generate additional net interest income. First Federal has limited its purchases under these leveraging strategies to mortgage-backed securities, federal agency debt securities and highly-rated municipal securities.

First Federal maintains a significant portfolio of mortgage-backed and related securities. Almost all of these securities were issued by Fannie Mae, Freddie Mac or Ginnie Mae. Of First Federal’s $35.5 million mortgage-backed securities portfolio at June 30, 2007, $2.2 million had contractual maturities within ten years and $33.3 million had contractual maturities over ten years. However, the actual maturity of a mortgage-backed security may be less than its stated maturity due to prepayments of the underlying mortgages. Prepayments that are faster than anticipated may shorten the life of the security and may result in a loss of any premiums paid and thereby reduce the net yield on such securities. Although prepayments of underlying mortgages depend on many factors, including the type of mortgages, the coupon rate, the age of mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of declining mortgage interest rates, if the coupon rate of the underlying mortgages exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Under such circumstances, First Federal may be subject to reinvestment risk because, to the extent that First Federal’s mortgage-backed securities amortize or prepay faster than anticipated, First Federal may not be able to reinvest the proceeds of such repayments and prepayments at a comparable rate. In contrast to mortgage-backed securities in which cash flow is received (and hence, prepayment risk is shared) pro rata by all securities holders, the cash flow from the mortgages or mortgage-backed securities underlying REMICs are segmented and paid in accordance with a predetermined priority to investors holding various tranches of such securities or obligations. A particular tranche of REMICs may therefore carry prepayment risk that differs from that of both the underlying collateral and other tranches.

A portion of First Federal’s investment portfolio may from time to time consist of corporate securities and commercial paper. First Federal’s investment policy requires that such investments have one of the three highest ratings by a nationally recognized rating agency such as Standard & Poor’s or Moody’s. A high credit rating indicates only that the rating agency believes there is a low risk of default. However, all of First Federal’s investment securities, including those that have high credit ratings, are subject to market risk insofar as increases in market rates of interest may cause a decrease in their market value. Corporate securities are also subject to credit risk insofar as the payment obligations on such securities are dependent on the successful operation of the issuer’s business.

 

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The following table sets forth First Bancorp’s investment securities portfolio at carrying value at the dates indicated.

		At June 30,
		2007			2006			2005
		(In thousands)
Available for sale:
U.S. Government agency obligations		$	27,691		$	18,594		$	10,634
Corporate obligations			4,502			4,496			2,000
Mortgage-backed securities			32,928			33,038			45,645
Total available for sale			65,121			56,128			58,279
Held to maturity:
Collateralized auto receivable			929			881			836
Municipal bonds			11,480			10,105			350
Mortgage-backed securities			2,568			3,607			5,854
Total held to maturity			14,977			14,593			7,040
Total		$	80,098		$	70,721		$	65,319

At June 30, 2007, First Bancorp did not have any investments in a single company or entity (other than U.S. Government-sponsored entity securities) that had an aggregate book value in excess of 10% of its equity at June 30, 2007.

The following table sets forth the maturities and weighted average yields of the securities comprising First Bancorp’s investment securities portfolio at June 30, 2007. Expected maturities of mortgage-backed securities will differ from contractual maturities due to scheduled repayments and because borrowers may have the right to call or prepay obligations with or without prepayment penalties.

		One Year or Less						More Than One to Five Years						More Than Five to Ten Years						More Than Ten Years
		Amount			Yield			Amount			Yield			Amount			Yield			Amount			Yield
		(Dollars in thousands)
Available for sale:
U.S. Government agency obligations		$	3,460			5.20	%	$	3,405			5.03	%	$	12,477			5.02	%	$	8,349			6.23	%
Corporate obligations			99			4.65			378			5.39			-			-			4,025			6.60
Mortgage-backed securities			7			6.59			27			6.20			664			4.10			32,230			4.63
Total available for sale		$	3,566			5.19	%	$	3,810			5.07	%	$	13,141			4.98	%	$	44,604			5.11	%
Held to maturity:
Collateralized auto obligation		$	-			0.00	%	$	929			5.25	%	$	-			0.00	%	$	-			0.00	%
Municipal bonds			495			5.49			766			5.41			138			5.10			10,081			6.16
Mortgage-backed securities			-			0.00			374			5.85			1,154			6.21			1,040			7.01
Total held to maturity			495			5.49			2,069			5.42			1,292			6.09			11,121			6.24
Total		$	4,061			5.23	%	$	5,879			5.20	%	$	14,433			5.08	%	$	55,725			5.33	%

Deposit Activities and Other Sources of Funds

General. Deposits and loan repayments are the major sources of First Federal’s funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and money market conditions. Borrowing from FHLB-Indianapolis is used to compensate for reductions in the availability of funds from other sources. First Federal also entered into an $8.0 million reverse repurchase agreement with Citigroup Global Markets during the fiscal year ended June 30, 2007.

 

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Deposit Accounts. Deposits are attracted from within First Federal’s market area through the offering of a broad selection of deposit instruments, including NOW checking accounts, commercial checking accounts, money market deposit accounts, regular savings accounts, certificates of deposit and retirement savings plans. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of its deposit accounts, First Federal considers current market interest rates, profitability to First Federal, matching deposit and loan products and its customer preferences and concerns. First Federal generally reviews its deposit mix and pricing weekly. In recent years, First Federal has offered some of the highest deposit rates in its market area in order to compete with larger financial institutions that provide a wider range of products and services. As a means of attracting lower cost funding, First Federal has expanded its demand account programs to include internet banking with online bill pay to all personal and small business customers. First Federal also offers a comprehensive online business banking and cash management product for commercial customers.

In addition, First Federal solicits certificates of deposits through several brokers. The brokered certificates of deposit do not permit early withdrawal and are priced comparably to FHLB advances. Furthermore, the use of brokered certificates of deposit, which may not be offered within the state of Indiana by agreement with the brokers, enables management to target precisely specific terms without impacting the local rate market.

The following table indicates the amount of First Federal’s jumbo and brokered certificates of deposit by time remaining until maturity as of June 30, 2007. Jumbo certificates of deposit represent minimum deposits of $100,000.

Maturity Period		Amount
		(In thousands)
Three months or less		$	34,866
Over three through six months			20,600
Over six through twelve months			39,869
Over twelve months			26,642
Total		$	121,977

The following table sets forth the balances and changes in dollar amounts of deposits in the various types of accounts offered by First Federal between the dates indicated.

		At June 30,
		2007									2006									2005
		Amount			Percent of Total			Increase/ Decrease			Amount			Percent of Total			Increase/ Decrease			Amount			Percent of Total			Increase/ Decrease
		(Dollars in thousands)
Demand deposits		$	37,283			14.84	%	$	2,212		$	35,071			18.52	%	$	2,127		$	32,944			16.83	%	$	(803	)
Savings deposits			30,554			12.16			8,300			22,254			11.75			248			22,006			11.24			8,925
Certificates which mature:
Within 1 year			142,454			56.70			53,944			88,510			46.76			(3,540	)		92,050			47.03			40,705
After 1 year, but within 2 years			29,886			11.90			(2,499	)		32,385			17.10			(2,776	)		35,161			17.96			(22,419	)
After 2 years, but within  5 years			10,468			4.17			(138	)		10,606			5.60			(2,271	)		12,877			6.58			(13,338	)
Certificates maturing thereafter			589			0.23			74			515			0.27			( 180	)		695			0.36			(77	)
Total		$	251,234			100.00	%	$	61,893		$	189,341			100.00	%	$	(6,392	)	$	195,733			100.00	%	$	12,993

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Borrowings. First Federal has the ability to use advances from the FHLB-Indianapolis to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB-Indianapolis functions as a central reserve bank providing credit for savings and loan associations and certain other member financial institutions. As a member, First Federal is required to own capital stock in the FHLB-Indianapolis and is authorized to apply for advances on the security of such stock and certain of its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the U.S. Government) provided certain creditworthiness standards have been met. Advances are made under several different credit programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit. At June 30, 2007, First Federal had remaining borrowing capacity of $25.8 million based on available collateral.

The following table sets forth certain information regarding First Federal’s use of borrowings during the periods indicated.

		Years Ended June 30,
		2007			2006			2005
		(Dollars in thousands)
Maximum balance at any month end		$	80,000		$	76,000		$	57,000
Average balance			74,775			64,526			45,342
Period end balance			72,500			73,000			45,000
Weighted average interest rate:
At end of period			4.61	%		4.25	%		4.02	%
During the period			4.47	%		4.21	%		3.80	%

First Bancorp has supported its growth through the issuance of subordinated debentures from a special purpose trust that is a wholly-owned subsidiary of First Bancorp. At August 31, 2007, First Bancorp had outstanding subordinated debentures totaling $5.2 million. Payments of principal and interest on the subordinated debentures of this special purpose trust are unconditionally guaranteed by First Bancorp. Further, the accompanying junior subordinated debentures First Bancorp issued to the special purpose trust are senior to our shares of common stock.

Personnel

As of June 30, 2007, First Federal had 83 full-time employees and 8 part-time employees. The employees are not represented by a collective bargaining unit and First Federal believes its relationship with its employees is good.

Subsidiary Activities  

First Bancorp has two wholly-owned subsidiaries, First Federal and First Bancorp of Indiana Statutory Trust I (the “Trust”). The Trust is a special purpose trust through which First Bancorp issues trust preferred securities. First Federal operates two branches under the Home Building Savings Bank name and has two active subsidiaries, White River Service Corporation and FFSL Service Corporation, Inc. (“FFSL”). Federal savings associations generally may invest up to 3% of their assets in service corporations, provided that any amount in excess of 2% is used primarily for community, inner-city and community development projects. At June 30, 2007, First Federal’s equity investment in its subsidiaries was in compliance with these limitations. White River Service Corporation, which was acquired via Home Building Savings Bank, generated income by compiling loan origination data. First Federal used the FFSL service corporation in 1994 to purchase a $500,000 equity interest in a limited partnership organized to build, own and operate a 44-unit low-income apartment complex. The limited partnership generated low-income housing credits of approximately $73,000 per year over ten years, with the last of the credits claimed in 2004. During fiscal 2005, the service corporation sold its minority interest in a local title company. First Federal has one inactive subsidiary, FFSB Financial Corporation.

 

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REGULATION AND SUPERVISION

General

As a savings and loan holding company, First Bancorp is required by federal law to report to, and otherwise comply with the rules and regulations of, the OTS. First Federal is subject to extensive regulation, examination and supervision by the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer. First Federal is a member of the FHLB and, with respect to deposit insurance, of the Deposit Insurance Fund managed by the FDIC. First Federal must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions. The OTS conducts periodic examinations to test First Federal’s safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OTS, the FDIC or Congress, could have a material adverse impact on First Bancorp, First Federal and their operations. Certain regulatory requirements applicable to First Federal and to First Bancorp are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth in this Form 10-KSB does not purport to be a complete description of such statutes and regulations and their effects on First Federal and First Bancorp.

Holding Company Regulation  

First Bancorp is a nondiversified unitary savings and loan holding company within the meaning of federal law. Under prior law, a unitary savings and loan holding company, such as First Bancorp, was not generally restricted as to the types of business activities in which it may engage, provided that First Federal continued to be a qualified thrift lender. See “ Federal Savings Institution Regulation - QTL Test. ” The Gramm-Leach-Bliley Act of 1999 provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below. Further, the Gramm-Leach-Bliley Act specifies that existing savings and loan holding companies may only engage in such activities. The Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for activities with respect to unitary savings and loan holding companies existing prior to May 4, 1999, so long as the holding company’s savings association subsidiary continues to comply with the QTL Test. The Company does qualify for the grandfathering. Upon any non-supervisory acquisition by First Bancorp of another savings institution or savings bank that meets the qualified thrift lender test and is deemed to be a savings institution by the OTS, First Bancorp would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would generally be limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the OTS, and certain activities authorized by OTS regulation. However, the OTS has issued an interpretation concluding that multiple savings and loan holding companies may also engage in activities permitted for financial holding companies.

A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company, without prior written approval of the OTS and from acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS considers the financial and managerial resources and future prospects of First Bancorp and institution involved, the effect of the acquisition on the risk to the deposit insurance funds, the convenience and needs of the community and competitive factors.

The OTS may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

 

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Although savings and loan holding companies are not currently subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions as described below. The Bank must notify the OTS 30 days before declaring any dividend to First Bancorp. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.

Acquisition of First Bancorp . Under the Federal Change in Bank Control Act (“CIBCA”), a notice must be submitted to the OTS if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings and loan holding company. Under certain circumstances, a change in control may occur, and prior notice is required, upon the acquisition of 10% or more of First Bancorp’s outstanding voting stock, unless the OTS has found that the acquisition will not result in a change of control of First Bancorp. Under the CIBCA, the OTS has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that acquires control would then be subject to regulation as a savings and loan holding company.

Federal Savings Institution Regulation

Business Activities. The activities of federal savings banks are governed by federal law and regulations. These laws and regulations delineate the nature and extent of the activities in which federal savings banks may engage. In particular, certain lending authority for federal savings banks, e.g. , commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institution’s capital or assets.

Capital Requirements . The OTS capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital to total assets ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The OTS regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank.

The risk-based capital standard for savings institutions requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the OTS capital regulation based on the risks believed inherent in the type of asset. Core (Tier 1) capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.

The OTS also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the particular circumstances, including where an institution has a high degree of exposure to interest rate risk or is experiencing growth that presents supervisory problems. At June 30, 2007, First Federal met each of its capital requirements.

 

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Prompt Corrective Regulatory Action.   The OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, a savings institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “undercapitalized.” A savings institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the OTS is required to appoint a receiver or conservator with specified time frames for an institution within specified time frames that is “critically undercapitalized.” The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date a savings institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

Insurance of Deposit Accounts.       Deposits of First Federal are insured by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. The FDIC determines insurance premiums based on a number of factors, primarily the risk of loss that insured institutions pose to the Deposit Insurance Fund. Recent legislation eliminated the minimum 1.25% reserve ratio for the insurance funds, the mandatory assessments when the ratio fall below 1.25% and the prohibition on assessing the highest quality banks when the ratio is above 1.25%. The FDIC has the ability to adjust the new insurance fund’s reserve ratio between 1.15% and 1.5%, depending on projected losses, economic changes and assessment rates at the end of a calendar year. The FDIC has adopted regulations that set assessment rates that took effect at the beginning of 2007. The new assessment rates for most banks vary between five cents and seven cents for every $100 of deposits. A change in insurance premiums could have an adverse effect on the operating expenses and results of operations of First Federal. We cannot predict what insurance assessment rates will be in the future. Assessment credits have been provided to institutions that paid high premiums in the past. As a result, First Federal will have credits that offset all of its premiums in 2007.

Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation or the Office of Thrift Supervision. We do not know of any practice, condition or violation that might lead to termination of deposit insurance.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund.

Loans to One Borrower. Federal law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. Generally, subject to certain exceptions, a savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral.

QTL Test . Federal law requires savings institutions to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period.

A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. As of June 30, 2007, First Federal met the qualified thrift lender test to the extent to which education loans, credit card loans and small business loans may be considered “qualified thrift investments.”

 

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Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the OTS is required prior to any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under OTS regulations ( i.e. , generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the OTS. If an application is not required, the institution must still provide prior notice to the OTS of the capital distribution if, like First Federal, it is a subsidiary of a holding company. In the event First Federal’s capital fell below its regulatory requirements or the OTS notified it that it was in need of increased supervision, First Federal’s ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice.

Transactions with Related Parties. The Bank’s authority to engage in transactions with “affiliates” ( e.g ., any company that controls or is under common control with an institution, including First Bancorp and its non-savings institution subsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low quality assets from affiliates is generally prohibited. The transactions with affiliates must be on terms and under circumstances, that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

The Sarbanes-Oxley Act of 2002 generally prohibits loans by First Bancorp to its executive officers and directors. However, that act contains a specific exception for loans by First Federal to its executive officers and directors in compliance with federal banking laws. Under such laws, First Federal’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited. The law limits both the individual and aggregate amount of loans First Federal may make to insiders based, in part, on First Federal’s capital position and requires certain board approval procedures to be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees.

Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS determines that a savings institution fails to meet any standard prescribed by the guidelines, the OTS may require the institution to submit an acceptable plan to achieve compliance with the standard.

Federal Home Loan Bank System

The Bank is a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in that FHLB. The Bank was in compliance with this requirement with an investment in FHLB stock at June 30, 2007 of $4.6 million.

 

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FEDERAL AND STATE TAXATION

Federal Taxation

General . First Bancorp and First Federal are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly First Federal’s reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to First Bancorp or First Federal. For its 2007 taxable year, First Bancorp is subject to a maximum federal income tax rate of 34.0%.

Bad Debt Reserves . For fiscal years beginning prior to December 31, 1995, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans (generally secured by interests in real property improved or to be improved) under (I) the percentage of taxable income method or (ii) the experience method. The reserve for nonqualifying loans was computed using the experience method.

Congress repealed the reserve method of accounting for bad debts for tax years beginning after 1995 and required savings institutions to recapture ( i.e. , take into income) certain portions of their accumulated bad debt reserves. Thrift institutions eligible to be treated as “small banks” (assets of $500 million or less) are allowed to use the experience method applicable to such institutions, while thrift institutions that are treated as large banks (assets exceeding $500 million) are required to use only the specific charge-off method. Thus, the percentage of taxable income method of accounting for bad debts is no longer available for any financial institution.

A thrift institution required to change its method of computing reserves for bad debts will treat such change as a change in method of accounting, initiated by the taxpayer, and having been made with the consent of the Internal Revenue Service. Any Section 481(a) adjustment required to be taken into income with respect to such change generally will be taken into income ratably over a six-taxable year period, beginning with the first taxable year beginning after 1995, subject to a 2-year suspension if the “residential loan requirement” is satisfied.

Under the residential loan requirement provision, the required recapture will be suspended for each of two successive taxable years, beginning with First Federal’s 1996 taxable year, in which First Federal originates a minimum of certain residential loans based upon the average of the principal amounts of such loans made by First Federal during its six taxable years preceding its current taxable year.

Distributions. If First Federal makes “non-dividend distributions” to First Bancorp, such distributions will be considered to have been made from First Federal’s unrecaptured tax bad debt reserves (including the balance of its reserves as of December 31, 1987) to the extent thereof, and then from First Federal’s supplemental reserve for losses on loans, to the extent thereof, and an amount based on the amount distributed (but not in excess of the amount of such reserves) will be included in First Federal’s income. Non-dividend distributions include distributions in excess of First Federal’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of First Federal’s current or accumulated earnings and profits will not be so included in its income.

The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if First Federal makes a non-dividend distribution to First Bancorp, approximately one and one-half times the amount of such distribution (but not in excess of the amount of such reserves) would be includable in income for federal income tax purposes, assuming a 35% federal corporate income tax rate. First Federal does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves.

State Taxation

Indiana imposes an 8.5% franchise tax based on a financial institution’s adjusted gross income as defined by statute. In computing adjusted gross income, deductions for municipal interest, U.S. Government interest, the bad debt deduction computed using the reserve method and pre-1990 net operating losses are disallowed. First Federal’s state franchise tax returns have not been audited for the past five tax years.

 

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EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information regarding the executive officers of First Bancorp.

Name			Age (1)		Position
Michael H. Head			49		President and Chief Executive Officer
Kirby W. King			53		Vice President
George J. Smith			51		Treasurer and Chief Financial Officer

 

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(1) As of June 30, 2007

The following table sets forth certain information regarding the executive officers of First Federal.

Name			Age (1)		Position
Michael H. Head			49		President and Chief Executive Officer
Kirby W. King			53		Executive Vice President and Chief Operating Officer
George J. Smith			51		Executive Vice President and Chief Financial Officer
Monica L. Stinchfield			51		Senior Vice President
Dale Holt			53		Senior Vice President
Jeff Sims			45		Senior Vice President
Richard S. Witte			54		Senior Vice President

 

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(1)	As of June 30, 2007

The executive officers of First Bancorp and First Federal are elected annually and hold office until their successors have been elected and qualified or until they are removed or replaced.

Biographical Information

Michael H. Head joined First Federal in 1980. From 1984 to 1994, he served as Vice President and manager of the loan department. In 1994, he became Senior Vice President. In 1996, Mr. Head became Executive Vice President and in 1998 added the title of Chief Operating Officer. In October 2000, Mr. Head was named President and Chief Operating Officer of First Federal. From 1999 to 2004, he served as Vice President of First Bancorp. In July 2004, Mr. Head was named President and Chief Executive Officer of First Bancorp and First Federal.

Kirby W. King joined First Federal in January 1999 as Senior Vice President-Consumer Lending and was named Executive Vice President in October 2000. In July 2004, Mr. King was named Vice President of First Bancorp and Executive Vice President and Chief Operating Officer of First Federal. He was previously employed by United Fidelity Bank as Senior Vice President.

George J. Smith joined First Bancorp and First Federal in July 2001 as Treasurer of First Bancorp and Senior Vice President and Chief Financial Officer of First Federal. In July 2004, Mr. Smith was named as Treasurer and Chief Financial Officer of First Bancorp and Executive Vice President and Chief Financial Officer of First Federal. Previously, he was employed by the OTS for 15 years in financial analyst and examiner positions. Mr. Smith retired from the United States Army Reserve in 2004 following 26 years of service.

Monica L. Stinchfield joined First Federal in 1980. From 1985 to 1993 she served as Assistant Vice President and from 1993 to September 1998, she served as Vice President. In 1996, Ms. Stinchfield became the manager of the loan department and secondary market activity. In September 1998, Ms. Stinchfield became Senior Vice President.

 

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Dale Holt joined First Federal in January 1999 as Vice President-Consumer Lending and was named Senior Vice President-Consumer Lending in October 2000. He was previously employed by United Fidelity Bank as Vice President.

Jeff Sims joined First Federal in February 2005 and currently serves as Senior Vice President of Commercial Lending. Prior to joining First Federal, Mr. Sims was employed by Old National Bancorp for 19 years.

Richard S. Witte joined First Federal in 1997 and in October 1998 became Vice President. Mr. Witte is responsible for information technology. Mr. Witte was named Senior Vice President in November 2004. Prior to joining First Federal, Mr. Witte was employed by Evansville Federal Savings Bank for 21 years.

ITEM 2.   DESCRIPTION OF PROPERTY

First Federal currently conducts its business through its   nine full service banking offices, including its main banking office, all of which it owns. First Federal has six offices in Evansville, Indiana and one office in Newburgh, Indiana. Home Building Savings Bank, a division of First Federal, operates from branches in Washington, Indiana and Petersburg, Indiana.

ITEM 3.   LEGAL PROCEEDINGS

Periodically, there have been various claims and lawsuits involving First Federal, mainly as a defendant, such as claims to enforce liens, condemnation proceedings on properties in which First Federal holds security interests, claims involving the making and servicing of real property loans and other issues incident to First Federal’s business. The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings in the aggregate, are believed by management to be immaterial to First Bancorp’s financial condition or results of operations.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5.   MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

First Bancorp’s common stock is listed on the Nasdaq Global Market under the symbol FBEI. According to the records of its transfer agent, First Bancorp had approximately 407 stockholders of record as of   July 31, 2007. This number does not reflect stockholders who hold their shares in “street name.” The following table sets forth the high and low sale price of First Bancorp’s common stock as of the close of market and dividends paid in each of the fiscal quarter’s in the years ended June 30, 2007 and 2006.

 

		High			Low			Dividends
Fiscal 2006:
First Quarter		$	22.45		$	19.77		$	0.30
Second Quarter			22.50			20.90			-
Third Quarter			22.58			20.50			0.30
Fourth Quarter			21.50			18.28			-
Fiscal 2007:
First Quarter		$	20.14		$	17.45		$	0.30
Second Quarter			20.17			18.42			-
Third Quarter			19.29			17.55			0.30
Fourth Quarter			18.38			15.07			-

 

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The following table reports information regarding stock repurchases of First Bancorp’s common stock during the fourth quarter of 2007 and the stock repurchase plans approved by its Board of Directors.

Period		Total number of Shares (or Units) Purchased			Average Price Paid per Share (or Unit)			Total Number of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs			Maximum Number (or Appropriate Dollar Value) of Shares (or units) that May Yet Be Purchased Under the Plans or Programs(1)(2)
April 1, 2007 through April 30, 2007			-			N/A			-			59,359
May 1, 2007 through May 31, 2007			-			N/A			-			59,359
June 1, 2007 through June 30, 2007			-			N/A			-			59,359
Total			-			N/A			-

 

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(1)	On August 24, 2006, First Bancorp announced the adoption of its third stock repurchase program to acquire up to 77,000, or 5%, of First Bancorp’s outstanding shares of common stock.

(2)	No repurchase plan or program has expired or been terminated during the fourth quarter of 2007.

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ITEM 6.   MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of First Bancorp. The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes contained in this report.

Overview

Income. First Bancorp generates two sources of pre-tax income. The first is net interest income. Net interest income is the difference between interest income - which is the income that First Bancorp earns on is loans and investments - and interest expense - which is the interest that First Bancorp pays on its deposits and borrowings.

First Bancorp’s second source of pre-tax income is noninterest income. This includes fee income (the compensation First Bancorp receives from providing products and services) and gains on the sale of loans. Most of First Bancorp’s fee income comes from service charges and overdraft fees. Other items of noninterest income include the increase in the cash surrender value of life insurance polices.

First Bancorp may occasionally recognize a gain or loss as a result of the sale of investment securities or foreclosed real estate. These gains and losses are not a regular part of First Bancorp’s income.

Expenses. The expenses First Bancorp incurs in operating its business consist of salaries and employee benefits, occupancy and equipment expenses, deposit insurance premiums, data processing fees and other miscellaneous expenses.

Salaries and employee benefits consist primarily of the salaries and wages paid to our employees, as well as expenses for retirement and other employee benefits.

Occupancy and equipment expenses, the fixed and variable costs of building and equipment, consist of primarily of depreciation of property and equipment, lease payments, real estate taxes, maintenance and insurance.

Deposit insurance premiums are calculated as a percentage of assessable deposits. Data processing fees depend on the number of accounts and transaction volume.

Other expenses consist of professional fees, advertising and other miscellaneous operating expenses.

Operating Strategy

First Federal’s strategy is to operate as an independent, community-oriented financial institution dedicated to meeting the credit and deposit needs of consumers and small businesses in its market area. First Federal’s operating philosophy has been to be conservative with respect to its underwriting standards and maintain a high level of asset quality, while generating profits, remaining well capitalized and providing a high level of customer service. First Federal’s current business strategy includes an emphasis on building its mortgage loan, consumer loan, commercial loan and loan servicing portfolios. First Federal also intends to maintain a substantial investment portfolio consisting primarily of federal agency and investment grade mortgage-backed securities. In addition, First Federal continues to seek business and personal deposit growth from within the communities it serves.

Critical Accounting Policies

Allowance for Loan Losses.   The allowance for loan losses is established through a provision for loan losses charged to earnings at the time losses are estimated to have occurred. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

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The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that First Federal will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, First Federal does not separately identify individual consumer and residential loans for impairment disclosures.

Mortgage Servicing Rights. Mortgage servicing rights on originated loans that have been sold are capitalized by allocating the total cost of the mortgage loans between the mortgage servicing rights and the loans based on their relative fair values. Capitalized servicing rights are amortized in proportion to and over the period of estimated servicing revenues. Impairment of mortgage-servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights are stratified based on the predominant risk characteristics of the underlying loans. The predominant characteristic currently used for stratification is type of loan. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value.

Goodwill. Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements.

Comparison of Financial Condition at June 30, 2007 and June 30, 2006

At $363.0 million, total consolidated assets at June 30, 2007, were $68.4 million, or 23.2%, greater than the $294.6 million at June 30, 2006. Assets acquired in the merger with Home Building Bancorp, Inc. accounted for most of the increase.

Cash and cash equivalents, which are composed chiefly of demand deposits at the Federal Home Loan Bank (FHLB) of Indianapolis, increased $5.1 million to $14.9 million at June 30, 2007, from $9.7 million at June 30, 2006. Certificates of deposit with other financial institutions totaled $1.6 million at June 30, 2007, compared to $229,000 a year earlier. This change was attributed solely to certificates acquired in the merger.

The $10.0 million of investment securities, excluding investment CDs, acquired via the merger were major contributors to the investment portfolio’s 13.3% increase in fiscal 2007. The $80.1 million investment portfolio at June 30, 2007, was composed entirely of mortgage-related securities, federal agency notes, municipal bonds, and investment grade asset-backed paper.

Net loans, including the $39.6 million acquired in the merger, totaled $233.2 million at June 30, 2007, a 24.8% increase from the $186.8 million balance at June 30, 2006. Due to steady production throughout fiscal 2007, the proportion of commercial-purpose loans increased significantly even though the mix of loans added in the merger was more heavily weighted toward owner-occupied residential mortgage loans. For example, commercial real estate mortgage loans, including those secured by nonowner-occupied, one- to four-family residences, increased to 20.5% of gross loans at June 30, 2007, from 17.3% a year earlier. During the same period, commercial business loans increased to 7.4% from 4.8% of gross loans. The consumer loan portfolio was reduced to 33.0% of gross loans at June 30, 2007, from 38.4% at June 30, 2006, due in part to the lower ratio of consumer loans acquired in the merger. Indirect automobile loan production totaled $39.5 million in fiscal 2007 from which $5.0 million was sold. Also, $6.6 million of newly originated permanent single family residential mortgage loans, or 57.2% of total production, were sold in fiscal 2007. For the foreseeable future, management intends to continue building the mortgage loan servicing portfolio through the origination and sale of loans. Consumer loan retention is subject to First Federal's liquidity needs, as well as internal and regulatory asset diversification limitations.

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The allowance for loan losses totaled $1.1 million at June 30, 2007, a $229,000 increase from the preceding fiscal year end. The change was composed of $400,000 in provisions for losses, $437,000 in net charge-offs, and $266,000 of allowances associated with the loans acquired in the merger. The Company’s allowance for loan losses represented 0.45% of total loans at June 30, 2007, virtually unchanged from the level at June 30, 2006. The allowance for loan losses increased to 326.7% of nonperforming loans at June 30, 2007, from 110.4% at June 30, 2006.

Total deposits increased $61.9 million to $251.2 million at June 30, 2007, from $189.3 million at June 30, 2006. Home Building Bancorp deposits were valued at $44.5 million at the effective date of the merger. The remaining deposit growth was attributed primarily to a $19.7 million increase in brokered funds. Borrowings, which consisted mainly of FHLB products, decreased slightly to $72.5 million and included an $8.0 million reverse repurchase agreement of similar structure to the FHLB putable advance it replaced. First Federal believes that it has substantial resources to increase its borrowing capacity with the FHLB.

At $695,000, escrow balances at June 30, 2007, were 21.9% above the levels a year earlier due to a greater volume of loans serviced, including loans acquired from Home Building Bancorp. During fiscal 2007, other liabilities, which include accrued expenses and miscellaneous short-term payables, increased $916,000, or 26.7%. The change was attributed primarily to accrued interest on time deposits.

Total stockholders’ equity increased $6.0 million to $34.2 million at June 30, 2007, from $28.2 million at June 30, 2006. The 293,946 shares of First Bancorp common stock issued in the merger added $5.4 million based on an $18.39 share price. In addition to the $518,000 of net income, other significant components of the change in equity included 31,399 shares of First Bancorp common stock repurchased at a total cost of $584,000 and semiannual cash dividends totaling $1.0 million. Also affecting stockholders’ equity were $276,000 in allocations of ESOP shares, $218,000 of tax benefit associated with employee benefit plans, and $224,000 from the exercise of stock options. Finally, an unrealized gain, adjusted for deferred taxes, of $976,000 was recognized on the portfolio of available-for-sale securities.

Comparison of Operating Results for the Years Ended June 30, 2007 and 2006

General.   Earnings for year ended June 30, 2007, compared unfavorably to the preceding fiscal year due primarily to a decline in the net interest margin and a large gain recorded in fiscal 2006 from the sale of a branch facility. Although routine noninterest revenues were generally on par with the levels last year, noninterest expenses increased substantially due to personnel and facilities added in the merger, costs associated with the new corporate headquarters, and the continued growth of the commercial lending function. In addition, an impairment write-down was taken in fiscal 2007 on a residual asset associated with securitized automobile loans.

Overall, the $518,000 of net income in fiscal 2007 was 61.3% below net income in fiscal 2006. Consequently, the return on average assets declined to 0.15% from 0.48% for the respective fiscal years. Similarly, the return on average equity decreased to 1.59% from 4.62%.

Net Interest Income.   At $7.3 million, net interest income for the year ended June 30, 2007, increased 10.3% from the preceding year. Total interest income increased 35.6% between the comparative fiscal years due in part to the assets acquired in the merger with Home Building Bancorp coupled with a 62 basis point improvement in the average yield on interest-earning assets. These increases were partially offset by the effects of an 87 basis point increase in the average rate on interest-bearing liabilities in fiscal 2007 on the larger funding base. Consequently, the net interest margin declined 25 basis points to 2.32% for fiscal 2007 from 2.57% in fiscal 2006.

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Provision for Loan Losses.   The provision for loan losses is intended to establish an allowance adequate to cover losses inherent in the loan portfolio as of the balance sheet date based upon management's periodic analysis of information available at that time. At $400,000, the provision for loan losses for the year ended June 30, 2007, was $38,000 more than for the year ended June 30, 2006. Net charge-offs totaled $437,000 in fiscal 2007 versus $381,000 in fiscal 2006. Fiscal 2007 net charge-offs comprised $226,000 of consumer loans, $171,000 of mortgage loans, and $40,000 of commercial credits. In addition to the increase in net charge-offs, the higher concentration of commercial loans also warranted the increased level of provisions. While management believes the allowance for loan losses to be sufficient given current information, future events, conditions, or regulatory directives could necessitate additions to the allowance for loan losses that may adversely affect net income.

Noninterest Income. Noninterest income totaled $2.0 million for the twelve months ended June 30, 2007, compared to $2.7 million for the preceding year. The sale of a branch office facility in December 2005 accounted for most of the variance. Routine noninterest revenues were comparable between the comparative fiscal years.

Noninterest Expense.   At $8.3 million, total noninterest expense for the year ended June 30, 2007, increased 19.9% from the fiscal 2006 total. The absorption of the former Home Building Savings Bank staff accounted for the largest portion of the increase in salaries and employee benefits. In addition to the facilities acquired via the merger, net occupancy and equipment expenses also reflected the impact of the new corporate headquarters that was placed in service in April 2006. The amortization of intangible assets increased 76.8% due to the $942,000 core deposit intangible that resulted from the merger. This asset is being amortized using the straight-line method over a ten year period. Finally, the Company recognized a $271,000 charge to income on a residual asset associated with the securitization of automobile loans in fiscal 2005. Previously, the impairment, net of deferred taxes, had been reflected in the accumulated unrealized loss component of stockholder’s equity. Despite these items, noninterest expenses relative to average assets declined five basis points to 2.40%.

 

Income Tax Expense. Effective tax rates for fiscal years ended June 30, 2007 and 2006 approximated 10.3% and 31.7%, respectively. The variance between the comparable quarters was attributed to the tax benefits generated by bank-qualified municipal securities relative to the levels of income before taxes.

Comparison of Operating Results for the Years Ended June 30, 2006 and 2005

General. At $1.3 million, net income for the year ended June 30, 2006, declined $192,000 from the $1.5 million recognized in the year ended June 30, 2005. The lower earnings resulted from a narrowing of the net interest margin that was only partially offset by a gain on the sale of a branch facility and greater routine noninterest revenues. In addition, noninterest expenses were moderately higher in fiscal 2006. Consequently, the return on average assets decreased to 0.48% for fiscal 2006 compared to 0.55% the preceding year. Similarly, the return on average equity declined to 4.62% for fiscal 2006 from 5.19% in fiscal 2005.

Net Interest Income. The Company generated net interest income of $6.6 million in the year ended June 30, 2006, a decrease of $1.1 million, or 14.5%, from the year ended June 30, 2005.

Total interest income increased $528,000 to $14.2 million for the year ended June 30, 2006, as the yield on earning assets improved 27 basis points to 5.56%. Despite the sale and securitization of $50.8 million of automobile loans just before the end of fiscal 2005, net loans outstanding averaged $174.3 million with an average yield of 6.10% in fiscal 2006 compared to an average balance of $180.3 million and an average yield of 5.84% in fiscal 2005. Consumer and commercial loan demand was steady throughout the year. Additionally, the yield on the investment securities portfolio improved to 4.44% for fiscal 2006 from 4.13% in fiscal 2005 on average balances of $71.8 million and $70.5 million, respectively.

At $7.6 million, total interest expense in fiscal 2006 was 27.4% greater than in the fiscal year ended June 30, 2005 as rates for deposits and borrowings rose steadily over the past two years. Deposits averaged $183.7 million in fiscal 2006 compared to $198.7 million in fiscal 2005, and the average cost of those deposits increased to 2.67% from 2.10% for the respective periods. In addition, the average cost of FHLB advances increased to 4.21% on an average balance of $64.5 million during fiscal 2006 from 3.80% on a $45.3 million average balance the preceding fiscal year.

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Provision for Loan Losses. First Bancorp recorded $362,000 of provisions for loan losses in the year ended June 30, 2006, compared to $106,000 the preceding year. The prior year’s provision was net of a $254,000 reduction in allowances associated with the automobile loans sold in the securitization transaction. Net charge-offs, which typically are related to the automobile loan portfolio, totaled $381,000 for the 2006 fiscal year versus $329,000 in fiscal 2005 during which time the Company revised its treatment of seriously delinquent loans to borrowers who have filed for Chapter 13 bankruptcy protection. Nonperforming loans represented just 0.40% of total loans at June 30, 2006, compared to 0.27% a year earlier.

Noninterest Income. Noninterest income totaled $2.7 million for the twelve months ended June 30, 2006, compared to $1.4 million for the same period the preceding year. The 2006 fiscal year included a $686,000 gain from the sale in December 2005 of a branch office facility. The fiscal 2005 total included a $160,000 loss from the securitization transaction. Excluding the gain from the branch sale and the securitization loss, noninterest income increased 24.1% due largely to numerous income items related to the servicing of sold consumer loans. In addition, service charges on deposit accounts increased 14.8% between the comparative fiscal years due primarily to fee schedule changes.

Noninterest Expense.   Total noninterest expense increased 4.9% to $6.9 million for the year ended June 30, 2006. At $3.8 million, salaries and employee benefits in fiscal 2006 were slightly below the preceding year’s total as routine pay increases, personnel additions, and higher medical insurance costs were offset by the savings realized upon the final vesting of stock awards in April 2005. In addition, the first nine months in fiscal 2005 included a $61,000 reduction in the liability, and likewise the expense, associated with the withdrawal from the First Bancorp’s defined benefit pension plan. Net occupancy expenses, which increased 56.6% in fiscal 2006, were the largest contributor to the higher noninterest expenses. The new administrative office and banking center that was placed in service in April 2006 along with the new St. Philip branch were responsible for the higher occupancy expenses. Equipment expenses were reduced 11.1% between the comparative fiscal years due to a $48,000 decrease in software licensing expenses. Increased legal and audit-related fees triggered the higher professional fees. Advertising expenses rose 23.5% due to the Company’s coordinated media campaign to promote brand awareness. Other noninterest expenses increased 11.9% with the increase distributed among numerous expense categories, the most notable being indirect consumer loan processing expenses.

 

Income Tax Expense. First Bancorp reported a $621,000 income tax expense for the fiscal year ended June 30, 2006, compared to a $897,000 tax expenses in fiscal 2005. Effective tax rates for the comparative years were 31.7% and 36.9%, respectively, with the rate reduction attributed to investments in bank-qualified municipal securities.

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Average Balances, Interest and Average Yields/Cost

The following table sets forth for the years ended June 30, 2007, 2006 and 2005 information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

 

		Years Ended June 30,
		2007									2006									2005
		Average Balance			Interest and Dividends			Yield/ Cost			Average Balance			Interest and Dividends			Yield/ Cost			Average Balance			Interest and Dividends			Yield/ Cost
		(Dollars in thousands)																		(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)		$	220,641		$	14,863			6.74	%	$	174,267		$	10,623			6.10	%	$	180,316		$	10,532			5.84	%
Investment securities			79,003			3,836			4.86			71,770			3,189			4.44			70,509			2,910			4.13
Deposits with financial institutions			7,952			374			4.70			3,944			151			3.83			3,061			90			2.94
Federal funds sold			231			12			5.19			2,505			97			3.87			2,501			49			1.96
Other			4,410			210			4.76			3,603			168			4.66			2,770			119			4.30
Total interest-earning assets			312,237			19,295			6.18			256,089			14,228			5.56			259,157			13,700			5.29
Non-interest-earning assets			32,314									25,967									19,277
Total assets		$	344,551								$	282,056								$	278,434
Interest-bearing liabilities:
Demand and savings accounts		$	52,669		$	889			1.69		$	42,548		$	570			1.34		$	44,673		$	410			0.92
Certificates of deposit			165,748			7,718			4.66			129,208			4,326			3.35			143,117			3,760			2.63
Total deposits			218,417			8,607			3.94			171,756			4,896			2.85			187,790			4,170			2.22
Borrowings			74,775			3,341			4.47			64,526			2,715			4.21			45,342			1,725			3.80
Other			822			91			11.07			1,028			100			9.73			1,085			108			9.95
Capitalized interest			-			-			-			-			(64	)		-			-			-			-
Total interest-bearing liabilities			294,014			12,039			4.09			237,310			7,647			3.22			234,217			6,003			2.56
Non-interest-bearing demand deposits			12,968									11,895									10,898
Other non-interest bearing liabilities			4,935									3,855									3,822
Stockholders’ equity			32,634									28,996									29,497
Total liabilities and stockholders’ equity		$	344,551								$	282,056								$	278,434
Net interest income					$	7,256								$	6,581								$	7,697
Interest rate spread (2)									2.09	%								2.34	%								2.73	%
Net interest margin (3)									2.32	%								2.57	%								2.97	%
Ratio of average interest-earning assets to average interest-bearing liabilities			106.20	%								107.91	%								110.65	%

 

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(1)	Average loans receivable includes nonperforming loans. Interest income includes interest and fees on loans, but does not include interest on loans 90 days or more past due.

(2)	Yield on interest-earning assets less cost of interest-bearing liabilities.

(3)	Net interest income as a percentage of average interest-earning assets.

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Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on net interest income of First Bancorp for the years ended June 30, 2007, 2006 and 2005. Information is provided with respect to: (1) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); and (2) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes attributable to the combined input of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

		2007 vs. 2006									2006 vs. 2005
		Increase (Decrease) Due to									Increase (Decrease) Due to
		Rate			Volume			Net			Rate			Volume			Net
		(In thousands)
Interest-earning assets:
Loans receivable, net		$	1,200		$	3,040		$	4,240		$	451		$	(360	)	$	91
Investment securities			310			337			647			226			53			279
Deposits with financial institutions			41			182			223			31			30			61
Federal funds sold			25			(110	)		(85	)		48			0			48
Other			4			38			42			11			38			49
Total net change in income on interest-earning assets			1,580			3,487			5,067			767			(239	)		528
Interest-bearing liabilities:
Demand and savings accounts			167			152			319			168			(8	)		160
Certificates of deposit			1,968			1,424			3,392			958			(392	)		566
Total deposits			2,135			1,576			3,711			1,126			(400	)		726
Borrowings			176			450			626			198			792			990
Other			13			(22	)		(9	)		(2	)		(6	)		(8	)
Capitalized interest			-			64			64			-			(64	)		(64	)
Total net change in expense on Interest-bearing liabilities			2,324			2,068			4,392			1,322			322			1,644
Net change in net interest income		$	(744	)	$	1,419		$	675		$	(555	)	$	(561	)	$	(1,116	)

 

Market Risk Analysis

Quantitative Aspects of Market Risk. First Bancorp does not maintain a trading account for any class of financial instrument nor does it engage in hedging activities or purchase high-risk derivative instruments. Furthermore, First Bancorp is not subject to foreign currency exchange rate risk or commodity price risk. For information regarding the sensitivity to interest rate risk of First Bancorp’s interest-earning assets and interest-bearing liabilities, see the tables under Part I, Item 1, “Description of Business - Lending Activities - Loan Portfolio Composition,” “- Investment Activities” and “- Deposit Activities and Other Sources of Funds - Deposit Accounts.”

First Bancorp uses interest rate sensitivity analysis to measure its interest rate risk by computing changes in net portfolio value of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained increase or decrease in market interest rates with no effect given to any steps that management might take to counter the effect of that interest rate movement. First Bancorp measures interest rate risk by modeling the change in net portfolio value over a variety of interest rate scenarios.

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The following table sets forth the change in First Bancorp’s net portfolio value at June 30, 2007 that would occur in the event of an immediate change in interest rates, with no effect given to any steps that management might take to counteract that change.

 

		Interest Rate Sensitivity of Net Portfolio Value
Basis Point (“bp”)		Net Portfolio Value									Portfolio Value of Assets
Change in Rates		$ Amount			$ Change			% Change			NPV Ratio			Change
		(Dollars in thousands)
+300bp		$	13,965		$	(18,750	)		(57.00	)%		4.13	%		(494	)	bp
+200			20,763			(11,952	)		(37.00	)		6.00			(306	)	bp
+100			27,415			(5,300	)		(16.00	)		7.75			(132	)	bp
+50			30,092			(2,623	)		(8.00	)		8.42			(64	)	bp
0			32,715									9.07
-50			34,162			1,447			4.00			9.38			32		bp
-100			35,431			2,716			8.00			9.65			59		bp
-200			36,242			3,527			11.00			9.73			67		bp

The above table indicates that in the event of a sudden and sustained increase in prevailing market interest rates, First Bancorp’s net portfolio value would be expected to decrease.

Certain assumptions were utilized in preparing the preceding table. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the market values of certain assets under differing interest rate scenarios, among others.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.

Qualitative Aspects of Market Risk. First Bancorp’s principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. First Federal has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. In order to reduce the exposure to interest rate fluctuations, First Federal has developed strategies to manage its liquidity and shorten its effective maturities of certain interest-earning assets.

Management has sought to decrease the average maturity of its assets by:

(1)

offering a variety of adjustable-rate residential mortgage, consumer and commercial loans, all of which are retained by First Federal for its portfolio;

(2)

establishing an indirect automobile lending program through which it originates short-term, fixed-rate automobile loans;

(3)

purchasing mortgage-backed and related securities with adjustable rates or estimated lives of five to ten years or less; and

(4)

purchasing short- to intermediate-term investment securities.

 

In addition, First Federal sells a portion of its long-term, fixed-rate single-family residential mortgage loans for cash in the secondary market. The retention of ARM loans and adjustable-rate mortgage-backed securities, which reprice at regular intervals, helps to ensure that the yield on First Federal’s loan portfolio will be sufficient to offset increases in First Federal’s cost of funds. However, periodic and lifetime interest rate adjustment limits may prevent ARM loans from repricing to market interest rates during periods of rapidly rising interest rates. First Federal does not use any hedging techniques to manage the exposure of its assets to fluctuating market interest rates. First Federal relies on retail deposits as its primary source of funds and maintains a moderate proportion of lower-costing passbook, NOW and money market accounts. First Federal has attempted to lengthen the term of deposits by offering certificates of deposit with terms of up to ten years.

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Liquidity and Capital Resources

First Federal’s principal sources of funds are proceeds from maturities of investment securities, principal payments received on mortgage-backed and related securities, loan repayments and deposits. While scheduled payments from the amortization of loans, investment securities and interest-bearing time deposits are relatively predictable sources of funds, deposit flows and loan or investment security prepayments are greatly influenced by general interest rates, economic conditions and competition. First Federal has generally been able to generate sufficient cash through its deposits. Funds borrowed from the FHLB and deposits obtained through brokers are often matched against higher yielding assets of like amounts with similar maturities to provide a built-in margin of interest to First Federal.

First Federal must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, to satisfy other financial commitments and to take advantage of investment opportunities. First Federal invests excess funds in overnight deposits and other short-term interest-earning assets to provide liquidity to meet these needs. At June 30, 2007, cash and cash equivalents totaled $14.9 million, or 4.1% of total assets. At June 30, 2007, First Federal had outstanding commitments to originate loans of $3.2 million. At the same time, certificates of deposit which are scheduled to mature in one year or less totaled $142.5 million. Based upon historical experience, management believes the majority of maturing certificates of deposit will remain with First Federal. In addition, management of First Federal believes that it can adjust the offering rates of certificates of deposit to retain deposits in changing interest rate environments. If a significant portion of these deposits are not retained by First Federal, First Federal would be able to utilize FHLB advances to fund deposit withdrawals, which could result in an increase in interest expense to the extent that the average rate paid on such advances sometimes exceeds the average rate paid on deposits of similar duration.

The primary investing activities of First Federal are originating loans and purchasing investments and mortgage-backed securities. In fiscal 2007, First Federal increased its loan portfolio by originating $73.3 million of loans.

First Federal’s significant financing activities are generally deposit accounts and FHLB borrowings. First Federal entered into an $8 million structured repurchase agreement, whereby investment securities are pledged as collateral against the borrowings.

On August 24, 2006, First Bancorp announced a stock repurchase program to acquire up to 77,000 shares, or 5%, of the Company’s outstanding shares of common stock. This repurchase program, as with the previous programs, has been undertaken to enhance shareholder value and to provide liquidity for the otherwise thinly traded shares. The repurchase programs generally have been conducted through open market purchases, although unsolicited negotiated transactions or other types of repurchases have been considered. As of June 30, 2007, First Bancorp had repurchased 17,641 shares under the current program. The repurchase program is not expected to effect First Federal’s status as a well-capitalized institution or negatively impact First Bancorp’s liquidity position. See “ Item 5 - Market for Common Equity and Related Stockholder Matters” for additional information regarding the Company’s stock repurchases.

Management believes its ability to generate funds internally will satisfy its liquidity requirements. If First Federal requires funds beyond its ability to generate them internally, it has the ability to borrow funds from the FHLB. Based on collateral at June 30, 2007, First Federal had approximately $25.8 million remaining available to it under its borrowing arrangement with the FHLB. At June 30, 2007, First Federal had $64.5 million of borrowings from the FHLB.

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The following tables disclose contractual obligations of First Bancorp as of June 30, 2007 (in thousands):

 

		Payments due by period
Contractual Obligations		Total			Less Than 1 Year			1 - 3 Years			3 - 5 Years			More than 5 Years
Long-Term Debt Obligations		$	72,500		$	7,000		$	12,500		$	10,000		$	43,000
Total		$	72,500		$	7,000		$	12,500		$	10,000		$	43,000

 

OTS regulations require First Federal to maintain specific amounts of capital. As of June 30, 2007, First Federal complied with all regulatory capital requirements as of that date with tangible, core and risk-based capital ratios of 7.16%, 7.23% and 10.81%, respectively. For a detailed discussion of regulatory capital requirements, see Part I, Item 1, “Regulation and Supervision - Federal Savings Institution Regulation - Capital Requirements.”

Off-Balance Sheet Arrangements

In the normal course of operations, First Bancorp engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in its financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit, and letters of credit.

For the year ended June 30, 2007, First Bancorp engaged in no off-balance-sheet transactions reasonably likely to have a material effect on its financial condition, results of operations or cash flows.

Effect of Inflation and Changing Prices

The consolidated financial statements and related financial data presented in this prospectus have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of First Federal’s operations. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

ITEM 7.   FINANCIAL STATEMENTS

The financial statements required by this Item are incorporated by reference to First Bancorp’s Audited Consolidated Financial Statements beginning at page F-2 of this Form 10-KSB.

ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 8A.   CONTROL AND PROCEDURES

First Bancorp’s management, including First Bancorp’s principal executive officer and principal financial officer, have evaluated the effectiveness of First Bancorp’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, First Bancorp’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that First Bancorp files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to First Bancorp’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

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There have not been any changes in First Bancorp’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal year to which this report relates that have materially affected, or are reasonably likely to materially affect, First Bancorp’s internal control over financial reporting.                

ITEM 8B.   OTHER INFORMATION

None.

PART III

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Directors and Executive Officers

The information relating to the directors and executive officers of First Bancorp is incorporated herein by reference to the section captioned “Item 1 - Election of Directors” in the Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders and to Part I, Item 1, “Description of Business—Executive Officers of the Registrant” in this report.

Compliance with Section 16(a) of the Exchange Act

For information regarding compliance with Section 16(a) of the Exchange Act, the section captioned “Section 16(a) Beneficial Ownership Compliance” in the Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders is incorporated by reference.

Disclosure of Audit Committee Financial Expert

For information concerning the audit committee financial expert, reference is made to the section captioned “Corporate Governance-Committees of the Board of Directors of Equitable Financial-Audit Committee” in the Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders.

Code of Ethics and Business Conduct

First Bancorp has adopted a Code of Business Conduct that applies to First Bancorp’s directors, executive officers and all other employees. A copy of First Bancorp’s Code of Business Conduct is available to any person without charge upon written request made to the Corporate Secretary at 5001 Davis Lant Drive, Evansville, Indiana 47715.

ITEM 10.   EXECUTIVE COMPENSATION

The information regarding executive and director compensation is incorporated herein by reference to First Bancorp’s Proxy Statement for the 2007 Annual Meeting of Shareholders.

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ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the section captioned “Stock Ownership” in First Bancorp’s Proxy Statement for the 2007 Annual Meeting of Stockholders.

Equity Compensation Plan Information as of June 30, 2007

The following table provides information as of June 30, 2007 for compensation plans under which equity securities may be issued.

Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)			Weighted-average exercise price of outstanding options, warrants and rights (b)			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders			89,563		$	13.02			42,276
Equity compensation plans not approved by security holders			-			-			-
Total			89,563		$	13.02			42,276

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Certain Relationships and Related Transactions

 

For information regarding certain relationships and related party transactions, the section captioned “Transactions with Related Persons” in the Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders is incorporated by reference.

Director Independence

For information regarding director independence, the section captioned “Proposal 1 - Election of Directors” in the Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders is incorporated by reference.

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PART IV

ITEM 13.   EXHIBITS

 

The following documents are filed as part of this report.

3.1		Articles of Incorporation of First Bancorp of Indiana, Inc.(1)
3.2		Amended Bylaws of First Bancorp of Indiana, Inc.(2)
4.1		Form of Stock Certificate of First Bancorp of Indiana, Inc.(1)
4.2		Terms of common shares of First Bancorp of Indiana, Inc. found in the Articles of  Incorporation for First Bancorp of Indiana, Inc. are incorporated by reference to Exhibit 3.1
10.1		*First Federal Savings Bank Employee Stock Ownership Plan Trust Agreement(2)
10.2		*Employment Agreement between First Bancorp of Indiana, Inc., First Federal Savings Bank and Michael H. Head(2)
10.3		*First Federal Savings Bank Employee Severance Compensation Plan, as amended and restated(3)
10.4		*First Federal Savings Bank Director Deferred Compensation Plan(1)
10.5		*First Bancorp of Indiana, Inc. 1999 Stock-Based Incentive Plan, as amended(3)
10.6		*Deferred Compensation Agreement for Michael H. Head effective as of October 1, 2005(4)
10.7		*Deferred Compensation Agreement for Kirby King effective as of October 1, 2005.(4)
10.8		*Restated and Amended Executive Supplemental Retirement Income Master Agreement(1)
21.0		List of Subsidiaries
23.0		Consent of independent auditors
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0		Section 1350 Certifications

 

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*

Management contract or compensatory plan, contract or arrangement.

(1)

Incorporated herein by reference to the Exhibits to the Registration Statement on Form S-1 and amendments thereto, initially filed on December 11, 1998, Registration No. 333-68793.

(2)

Incorporated herein by reference to the Exhibits to the Annual Report on Form 10-K for the year ended June 30, 1999.

(3)

Incorporated herein by reference to the Exhibits to the Annual Report on Form 10-KSB for the year ended June 30, 2004.

 

(4)

Incorporated herein by reference to the Exhibits to the Registration Statement on Form S-4 and amendments thereto, initially filed on July 20, 2006, Registration No. 333-135892.

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by this item is incorporated herein by reference to First Bancorp’s Proxy Statement for the 2007 Annual Meeting of Shareholders to be held on November 21, 2007.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	First Bancorp of Indiana, Inc.
Date:  September 27 , 2007	By:	/s/ Michael H. Head
		Michael H. Head
		President and Chief Executive Officer

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

/s/ Michael H. Head
Michael H. Head	President, Chief Executive Officer and Director (principal executive officer)	September 27, 2007
/s/ George J. Smith
George J. Smith	Treasurer and Chief Financial Officer (principal financial and accounting officer)	September 27, 2007
/s/ Harold Duncan
Harold Duncan	Chairman of the Board	September 27, 2007
/s/ Timothy A. Flesch
Timothy A. Flesch	Director	September 27, 2007
/s/ David E. Gunn
David E. Gunn	Director	September 27, 2007
/s/ Gregory L. Haag
Gregory L. Haag	Director	September 27, 2007
/s/ Daniel L. Schenk
Daniel L. Schenk	Director	September 27, 2007
/s/ Jerome A. Ziemer
Jerome A. Ziemer	Director	September 27, 2007

 

39

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Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors

and Stockholders

First Bancorp of Indiana, Inc.

Evansville, Indiana

We have audited the accompanying consolidated balance sheets of First Bancorp of Indiana, Inc. (Company) as of June 30, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2007, in conformity with accounting principles generally accepted in the United States of America.

 

Evansville, Indiana

September 20, 2007

F-1

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First Bancorp of Indiana, Inc.

Consolidated Balance Sheets

June 30, 2007 and 2006

 

		2007			2006
Assets
Cash and due from banks		$	7,455,076		$	6,656,560
Interest-bearing demand deposits with banks			7,395,910			3,056,142
Federal funds sold			—			25,000
Cash and cash equivalents			14,850,986			9,737,702
Interest-bearing deposits			1,616,000			229,000
Available-for-sale securities			65,120,545			56,128,031
Held-to-maturity securities			14,976,789			14,593,296
Loans, net of allowance for loan losses of $1,065,000 and $836,000 at June 30, 2007 and 2006, respectively			233,236,981			186,751,535
Premises and equipment			9,322,801			8,543,424
Federal Home Loan Bank stock			4,564,700			4,013,800
Goodwill			6,229,152			1,786,297
Core deposit intangible			894,431			86,690
Other assets			12,179,690			12,681,440
Total assets		$	362,992,075		$	294,551,215

Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest-bearing		$	11,503,688		$	15,698,051
Interest-bearing			239,730,019			173,643,103
Total deposits			251,233,707			189,341,154
Borrowings			72,495,874			73,000,000
Advances from borrowers for taxes and insurance			695,051			570,357
Other liabilities			4,349,605			3,433,356
Total liabilities			328,774,237			266,344,867
Commitments and Contingencies			—			—
Stockholders’ Equity
Preferred stock, $0.01 par value; authorized and unissued 1,000,000 shares
Common stock, $0.01 par value; authorized 9,000,000 shares;  issued 2007 and 2006 - 2,566,346 and 2,272,400 shares			25,663			22,724
Additional paid-in capital			27,959,954			22,360,757
Retained earnings			18,801,944			19,305,925
Accumulated other comprehensive loss
Unrealized depreciation on available-for-sale securities, net of income taxes 2007 - $(419,000); 2006 - $(1,028,000)			(683,548	)		(1,659,119	)
			46,104,013			40,030,287
Unreleased employee stock ownership plan shares 2007 - 53,020 shares; 2006 - 68,170 shares			(541,241	)		(695,893	)
Treasury stock, at cost 2007 - 725,445 shares; 2006 - 717,632 shares			(11,344,934	)		(11,128,046	)
Total stockholders’ equity			34,217,838			28,206,348
Total liabilities and stockholders’ equity		$	362,992,075		$	294,551,215

See Notes to Consolidated Financial Statements

First Bancorp of Indiana, Inc.

Consolidated Statements of Income

Years Ended June 30, 2007, 2006 and 2005

 

		2007			2006			2005
Interest Income
Loans		$	14,863,159		$	10,622,829		$	10,531,017
Investment securities			3,835,793			3,188,571			2,910,266
Deposits with banks			373,967			151,482			90,207
Federal funds sold			12,311			97,091			49,336
Other			209,928			168,148			118,831
Total interest income			19,295,158			14,228,121			13,699,657
Interest Expense
Deposits			8,607,024			4,896,467			4,169,876
Borrowings			3,341,032			2,714,889			1,724,679
Capitalized interest			—			(63,598	)		—
Other			91,107			99,567			108,468
Total interest expense			12,039,163			7,647,325			6,003,023
Net Interest Income			7,255,995			6,580,796			7,696,634
Provision for Loan Losses			400,000			362,000			106,037
Net Interest Income After Provision for Loan Losses			6,855,995			6,218,796			7,590,597
Noninterest Income
Service charges on deposit accounts			425,656			426,402			371,467
Net gains on sales of loans			156,679			158,079			40,089
ATM transaction and POS interchange fees			258,883			243,215			230,967
Increase in cash surrender value of life insurance			203,372			208,071			211,170
Net gain on sales of premises and equipment			71,954			685,647			—
Other			891,180			930,826			570,722
Total noninterest income			2,007,724			2,652,240			1,424,415
Noninterest Expense
Salaries and employee benefits			4,157,869			3,800,142			3,827,607
Impairment of securitization residual			270,928			—			—
Net occupancy expense			693,656			401,638			256,563
Equipment expense			422,885			385,801			434,013
Data processing fees			448,201			364,308			370,141
Legal and professional fees			217,841			189,431			134,688
Amortization of intangible assets			134,435			76,050			76,050
Advertising			246,882			308,627			249,992
Other			1,693,454			1,384,310			1,237,089
Total noninterest expense			8,286,151			6,910,307			6,586,143
Income Before Income Taxes			577,568			1,960,729			2,428,869
Provision for Income Taxes			59,291			620,965			896,610
Net Income		$	518,277		$	1,339,764		$	1,532,259
Basic Earnings Per Share		$	0.30		$	0.90		$	1.02
Diluted Earnings Per Share		$	0.30		$	0.87		$	0.98

First Bancorp of Indiana, Inc.

Consolidated Statements of Stockholders’ Equity

Years Ended June 30, 2007, 2006 and 2005

(continued)

 

		Comprehensive Income (Loss)			Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Unallocated ESOP Shares			Unvested MRP Shares			Treasury Stock			Total
Balance, June 30, 2006 (Carried Forward)					$	22,724		$	22,360,757		$	19,305,925		$	(1,659,119	)	$	(695,893	)	$	0		$	(11,128,046	)	$	28,206,348
Net income		$	518,277			—			—			518,277			—			—			—			—			518,277
Dividends on common stock, $.60 per share			—			—			—			(1,022,258	)		—			—			—			—			(1,022,258	)
Purchase of treasury stock (31,399 shares)			—			—			—			—			—			—			—			(584,478	)		(584,478	)
Exercise of stock options (23,586 shares)			—			—			(143,429	)		—			—			—			—			367,590			224,161
Employee Stock Ownership Plan shares allocated (15,150 shares)			—			—			121,557			—			—			154,652			—			—			276,209
Tax benefit of employee benefit plans			—			—			218,341			—			—			—			—			—			218,341
Stock issued for acquisition (293,946 shares)			—			2,939			5,402,728			—			—			—			—			—			5,405,667
Change in unrealized depreciation on available-for-sale securities, net of income tax expense of $609,000			975,571			—			—			—			975,571			—			—			—			975,571
Comprehensive income		$	1,493,848
Balance, June 30, 2007					$	25,663		$	27,959,954		$	18,801,944		$	(683,548	)	$	(541,241	)	$	0		$	(11,344,934	)	$	34,217,838

First Bancorp of Indiana, Inc.

Consolidated Statements of Cash Flows

Years Ended June 30, 2007, 2006 and 2005

(continued)

 

		2007			2006			2005
Financing Activities
Net increase (decrease) in demand deposits, money market, NOW and savings accounts		$	(5,485,658	)	$	2,375,413		$	8,122,037
Net increase (decrease) in certificates of deposit			22,837,885			(8,766,795	)		4,870,643
Net decrease in short-term borrowings			—			—			(12,500,000	)
Proceeds from issuance of long-term debt			12,000,000			41,000,000			15,000,000
Repayments of long-term debt			(21,500,000	)		(13,000,000	)		(5,666,667	)
Net increases in advances from borrowers for taxes and insurance			87,050			25,177			27,081
Dividends paid			(1,022,258	)		(951,898	)		(958,346	)
Purchase of treasury stock			(584,478	)		(1,669,506	)		(1,250,740	)
Exercise of stock options			224,161			459,334			362,603
Windfall tax benefit of stock options exercised			142,937			—			—
Net cash provided by financing activities			6,699,639			19,471,725			8,006,611
Increase (Decrease) in Cash and Cash Equivalents			5,113,284			(25,598,162	)		27,240,994
Cash and Cash Equivalents, Beginning of Year			9,737,702			35,335,864			8,094,870
Cash and Cash Equivalents, End of Year		$	14,850,986		$	9,737,702		$	35,335,864
Supplemental Cash Flows Information
Interest paid		$	11,231,392		$	7,551,309		$	5,826,715
Income taxes paid, net of refunds		$	175,000		$	615,000		$	725,000

		2005
Net income, as reported		$	1,532
Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes			(85	)
Pro forma net income		$	1,447
Earnings per share
Basic - as reported		$	1.02
Basic - pro forma		$	0.96
Diluted - as reported		$	0.98
Diluted - pro forma		$	0.92

Cash and cash equivalents		$	3,356
Interest-bearing time deposits			5,638
Investment securities			10,032
Loans			39,581
Premises and equipment			618
Core deposits			942
Goodwill			4,443
Other assets			1,496
Total assets acquired			66,106
Deposits			44,540
Long-term debt			8,993
Other liabilities			1,255
Total liabilities assumed			54,788
Net assets acquired		$	11,318

Note 4:

Investments

 

Available-for-Sale Securities

 

The amortized cost and approximate fair values of securities classified as available for sale are as follows:

 

		June 30, 2007
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized (Losses)			Approximate Fair Value
Mortgage-backed securities		$	33,691		$	54		$	(817	)	$	32,928
U.S. Government agencies			28,060			—			(369	)		27,691
Corporate obligations			4,480			25			(3	)		4,502
		$	66,231		$	79		$	(1,189	)	$	65,121

		Available for Sale
		Amortized			Fair
		Cost			Value
Within one year		$	3,565		$	3,559
One to five years			3,807			3,783
Five to ten years			12,674			12,477
After ten years			12,494			12,374
			32,540			32,193
Mortgage-backed securities			33,691			32,928
		$	66,231		$	65,121

Held-to-Maturity Securities

 

The amortized cost and approximate fair values of securities classified as held to maturity are as follows:

 

		June 30, 2007
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized (Losses)			Approximate Fair Value
Mortgage-backed securities		$	2,568		$	25		$	—		$	2,593
Municipal bonds			11,480			—			(315	)		11,165
Collateralized auto obligations			929			—			(15	)		914
		$	14,977		$	25		$	(330	)	$	14,672

		Held to Maturity
		Amortized			Fair
		Cost			Value
Within one year		$	495		$	494
One to five years			1,695			1,670
Five to ten years			138			133
Over ten years			10,081			9,782
			12,409			12,079
Mortgage-backed securities			2,568			2,593
		$	14,977		$	14,672

		Less than 12 Months						12 Months or More						Total
Description of Securities		Fair Value			Unrealized Losses			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
June 30, 2007
U.S. Government agencies		$	9,810		$	(77	)	$	17,881		$	(292	)	$	27,691		$	(369	)
Mortgage-backed securities			1,723			(6	)		23,929			(811	)		25,652			(817	)
Municipal bonds			6,466			(166	)		4,700			(149	)		11,166			(315	)
Corporate obligations			99			(1	)		378			(2	)		477			(3	)
Collateralized loan obligations			914			(15	)		—			—			914			(15	)
Total temporarily impaired securities		$	19,012		$	(265	)	$	46,888		$	(1,254	)	$	65,900		$	(1,519	)

 

		Less than 12 Months						12 Months or More						Total
Description of Securities		Fair Value			Unrealized Losses			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
June 30, 2006
U.S. Government agencies		$	13,135		$	(396	)	$	5,458		$	(164	)	$	18,593		$	(560	)
Mortgage-backed securities			3,091			(93	)		31,370			(1,702	)		34,461			(1,795	)
Municipal bonds			9,707			(398	)		—			—			9,707			(398	)
Corporate obligations			1,386			(2	)		—			—			1,386			(2	)
Total temporarily impaired securities		$	27,319		$	(889	)	$	36,828		$	(1,866	)	$	64,147		$	(2,755	)

		2007			2006			2005
Balance, beginning of year		$	836		$	855		$	1,078
Provision charged to expense			400			362			106
Allowance added in acquisition			266			—			—
Losses charged off, net of recoveries of $118 for 2007, $96 for 2006 and $89 for 2005			(437	)		(381	)		(329	)
Balance, end of year		$	1,065		$	836		$	855

		June 30, 2007
		Principal Balance			Loans Past Due Over 30 Days
Total managed automobile loans		$	101,228		$	1,518
Less: automobile loans securitized			15,718			479
Less: automobile loans sold to other investors			9,380			59
Total automobile loans held in portfolio		$	76,130		$	980

					2007			2006
Proceeds from securitization					$	0		$	0
Servicing fees received					$	115		$	198
Purchases of delinquent or foreclosed assets					$	0		$	0

		Fair Value			Weighted-average Life (in months)			Monthly Prepayment Speed (% ABS)			Expected Cumulative Credit Losses			Annual Discount Rate			Weighted-average Coupon
Interest-only strip
As of the date of securitization		$	2,985			54			1.60	%		0.65	%		8.0	%		7.34	%
As of June 30, 2007		$	1,601			34			1.60	%		1.00	%		8.0	%		7.24	%
Decline in fair value of 10% adverse change		$	0			0		$	32		$	8		$	18		$	0
Decline in fair value of 20% adverse change		$	0			0		$	67		$	15		$	36		$	0
Servicing asset
As of the date of securitization		$	170			54			1.60	%		0.65	%		8.0	%		0
As of June 30, 2007*		$	55			34			1.60	%		1.00	%		8.0	%		0
Decline in fair value of 10% adverse change		$	0			0		$	3		$	0		$	0		$	0
Decline in fair value of 20% adverse change		$	0			0		$	7		$	0		$	0		$	0

Note 7:

Premises and Equipment

 

Major classifications of premises and equipment, stated at cost, are as follows:

 

		2007			2006
Land		$	2,108		$	2,051
Buildings			7,343			6,869
Equipment			2,140			1,920
			11,591			10,840
Less accumulated depreciation			2,268			2,297
Net premises and equipment		$	9,323		$	8,543

Note 9:

Other Intangible Assets

 

The carrying basis and accumulated amortization of recognized intangible assets at June 30 were:

		2007						2006
		Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount			Accumulated Amortization
Core deposit intangible		$	1,474		$	(580	)	$	532		$	(445	)

2008		$	117
2009			94
2010			94
2011			94
2012			94
Thereafter			401
		$	894

		2007			2006
Mortgage servicing rights
Balances, beginning of year		$	402		$	340
Servicing rights capitalized			78			99
Amortization of servicing rights			(42	)		(37	)
Balance, end of year		$	438		$	402

		2007			2006
Consumer servicing rights
Balance, beginning of year		$	370		$	479
Servicing rights capitalized			211			206
Amortization of servicing rights			(304	)		(315	)
Balance, end of year		$	277		$	370

First Bancorp of Indiana, Inc.

Notes to Consolidated Financial Statements

June 30, 2007, 2006 and 2005

(Table Dollar Amounts in Thousands, Except Share Data)

 

Note 11:

Other Assets and Other Liabilities

 

		2007			2006
Other assets
Interest receivable
Investment securities		$	750		$	582
Loans			1,052			715
Cash surrender value of life insurance			5,332			5,129
Investment in limited partnership			76			77
Net deferred tax asset			539			1,282
Retained interest in auto loan securitization			1,601			1,998
Mortgage and consumer servicing rights			715			772
Prepaid expenses and other			2,115			2,126
Total other assets		$	12,180		$	12,681

Other liabilities
Interest payable
Deposits		$	896		$	234
Other borrowings			181			230
Deferred directors’ fees and officers’ compensation			784			930
Payments due investors on sold consumer loans			624			740
Accounts payable - dealer fees			167			239
Accrued expenses and other			1,698			1,060
Total other liabilities		$	4,350		$	3,433

First Bancorp of Indiana, Inc.

Notes to Consolidated Financial Statements

June 30, 2007, 2006 and 2005

(Table Dollar Amounts in Thousands, Except Share Data)

 

Note 12:

Deposits

 

		2007			2006
Demand deposits		$	37,283		$	35,071
Savings deposits			30,554			22,254
Certificates of deposit of $100,000 or more			121,977			82,702
Other certificates of deposit			61,420			49,314
Total deposits		$	251,234		$	189,341

2008		$	142,454
2009			29,886
2010			6,054
2011			2,777
2012			1,637
Thereafter			589
		$	183,397

First Bancorp of Indiana, Inc.

Notes to Consolidated Financial Statements

June 30, 2007, 2006 and 2005

(Table Dollar Amounts in Thousands, Except Share Data)

 

Note 13:

Income Taxes

 

The provision for income taxes includes these components:

 

		2007			2006			2005
Taxes currently payable
Federal		$	103		$	412		$	670
State			33			90			97
Deferred income taxes
Federal			(67	)		103			94
State			(10	)		16			36
Income tax expense		$	59		$	621		$	897

		2007			2006			2005
Computed at the statutory rate (34%)		$	196		$	667		$	826
Increase (decrease) resulting from
State income taxes, net of federal benefit			16			70			87
Cash surrender value of life insurance			(69	)		(71	)		(72	)
Tax-exempt interest			(146	)		(110	)		—
Nondeductible expenses			71			77			—
Other			(9	)		(12	)		56
Actual tax expense		$	59		$	621		$	897

First Bancorp of Indiana, Inc.

Notes to Consolidated Financial Statements

June 30, 2007, 2006 and 2005

(Table Dollar Amounts in Thousands, Except Share Data)

 

The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:

 

		2007			2006
Deferred tax assets
Differences in accounting for loan losses		$	399		$	313
Deferred compensation and directors’ fees			354			414
Deposit-based intangibles			—			93
Exercise of nonqualified options			58			81
Unrealized losses on available-for-sale securities			419			1,028
Accrued vacation			64			45
Impairment of retained interest			102			—
Other adjustments from acquisition			84			—
State net operating loss carryforward			75			—
Other			14			22
			1,569			1,996
Deferred tax liabilities
Differences in depreciation methods			(70	)		(51	)
Federal Home Loan Bank dividends			(160	)		(156	)
Mortgage servicing rights			(164	)		(151	)
Consumer servicing rights			(26	)		(53	)
State taxes			(11	)		(13	)
Deposit-based intangibles			(241	)		—
Goodwill			(264	)		(216	)
Prepaid intangibles			(94	)		(74	)
			(1,030	)		(714	)
Net deferred tax asset		$	539		$	1,282

First Bancorp of Indiana, Inc.

Notes to Consolidated Financial Statements

June 30, 2007, 2006 and 2005

(Table Dollar Amounts in Thousands, Except Share Data)

 

Note 14:

Borrowings

 

Borrowings consisted of the following components:

 

		2007			2006
FHLB advances
Fixed rate of 5.31%, due in June 2008		$	4,000		$	—
Fixed rate of 4.35%, due in September 2015			10,000			10,000
Fixed rate of 3.70%, due in September 2015			10,000			10,000
Fixed rate of 5.24%, due in May 2007			—			1,000
Fixed rate of 5.04%, due in March 2007			—			2,000
Fixed rate of 4.18%, due in March 2016			—			15,000
Fixed rate of 3.05%, due in July 2006			—			2,000
Fixed rate of 3.27%, due in January 2015			—			8,000
Fixed rate of 3.52%, due in May 2015			—			5,000
Fixed rate of 5.37%, due in February 2011			10,000			10,000
Fixed rate of 4.83%, due in July 2011			10,000			10,000
Fixed rate of 4.61%, due in June 2017			15,000			—
Fixed rate of 4.98%, due in December 2010			2,000			—
Floating at three month LIBOR rate, due in March 2008			2,500			—
Fixed rate of 3.29%, due in August 2007			500			—
Fixed rate of 4.30%, due in June 2010			500			—
Structured Repurchase Agreement 4.285%, due in January 2017			8,000			—
Discount on purchased borrowings			(4	)		—
Total borrowings		$	72,496		$	73,000

First Bancorp of Indiana, Inc.

Notes to Consolidated Financial Statements

June 30, 2007, 2006 and 2005

(Table Dollar Amounts in Thousands, Except Share Data)

 

Aggregate annual maturities of borrowings at June 30, 2007, were:

 

2008		$	6,996
2009			—
2010			500
2011			12,000
2012			10,000
Thereafter			43,000
		$	72,496

Note 15:

Other Comprehensive Income (Loss)

 

Other comprehensive income (loss) components and related taxes were as follows:

 

		2007			2006			2005
Unrealized gains (losses) on securities available for sale and equity securities		$	1,314		$	(2,203	)	$	981
Reclassification for realized amount included in income			271			—			—
Other comprehensive income (loss) before tax effect			1,585			(2,203	)		981
Tax expense (benefit)			609			(844	)		373
Other comprehensive income (loss)		$	976		$	(1,359	)	$	608

		Actual						For Capital Adequacy Purposes						To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount			Ratio			Amount			Ratio			Amount			Ratio
As of June 30, 2007
Total capital (to risk-weighted assets)		$	25,680			10.81	%	$	19,010			8.00	%	$	23,763			10.00	%
Tier I capital (to risk-weighted assets)		$	25,675			10.40	%	$	9,505			4.00	%	$	14,258			6.00	%
Core capital (to adjusted total assets)		$	25,675			7.23	%	$	14,200			4.00	%	$	17,750			5.00	%
Core capital (to adjusted tangible assets)		$	25,675			7.23	%	$	7,100			2.00	%		N/A			N/A
Tangible capital (to adjusted total assets)		$	25,398			7.16	%	$	5,321			1.50	%		N/A			N/A

As of June 30, 2006
Total capital (to risk-weighted assets)		$	25,930			12.66	%	$	16,387			8.00	%	$	20,483			10.00	%
Tier I capital (to risk-weighted assets)		$	26,407			12.28	%	$	8,193			4.00	%	$	12,290			6.00	%
Core capital (to adjusted total assets)		$	26,407			8.99	%	$	11,743			4.00	%	$	14,679			5.00	%
Core capital (to adjusted tangible assets)		$	26,407			8.99	%	$	5,872			2.00	%		N/A			N/A
Tangible capital (to adjusted total assets)		$	26,037			8.88	%	$	4,398			1.50	%		N/A			N/A

		2007			2006
Allocated shares			95,006			80,150
Shares committed to be released			1,415			2,230
Unreleased shares			60,583			75,736
Total ESOP shares			157,004			158,116
Fair value of unallocated shares at June 30		$	912,986		$	1,417,778

		2007			2006			2005
Risk-free interest rate			N/A			N/A			4.2	%
Dividend yield			N/A			N/A			3.0	%
Volatility factor of expected market price of common stock			N/A			N/A			13.1	%
Weighted-average expected life of the options			N/A			N/A			10 years

Options		Shares			Weighted-average Exercise Price			Weighted-average Remaining Contractual Term			Aggregate Intrinsic Value
Outstanding, beginning of year			113,149		$	12.29
Granted			—		$	0
Exercised			(23,586	)	$	9.50
Forfeited/expired			—		$	0
Outstanding, end of year			89,563		$	13.02			4.4 years		$	280
Options exercisable at year end			89,563		$	13.02			4.4 years		$	280

Note 19:

Earnings Per Share

 

Earnings per share (EPS) were computed as follows:

		Year Ended June 30, 2007
		Income			Weighted-average Shares			Per Share Amount
Net income		$	518
Basic earnings per share
Income available to common stockholders		$	518			1,708,422		$	0.30
Effect of dilutive securities
Stock options			—			29,610
Diluted earnings per share
Income available to common stockholders and assumed conversions		$	518			1,738,032		$	0.30

First Bancorp of Indiana, Inc.

Notes to Consolidated Financial Statements

June 30, 2007, 2006 and 2005

(Table Dollar Amounts in Thousands, Except Share Data)

 

		Year Ended June 30, 2006
		Income			Weighted-average Shares			Per Share Amount
Net income		$	1,340
Basic earnings per share
Income available to common stockholders		$	1,340			1,494,710		$	0.90
Effect of dilutive securities
Stock options			—			48,324
Diluted earnings per share
Income available to common stockholders and assumed conversions		$	1,340			1,543,034		$	0.87

 

		Year Ended June 30, 2005
		Income			Weighted-average Shares			Per Share Amount
Net income		$	1,532
Basic earnings per share
Income available to common stockholders		$	1,532			1,505,960		$	1.02
Effect of dilutive securities
Stock options			—			60,539
Diluted earnings per share
Income available to common stockholders and assumed conversions		$	1,532			1,566,499		$	0.98

		June 30, 2007						June 30, 2006
		Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets
Cash and cash equivalents		$	14,851		$	14,851		$	9,738		$	9,738
Interest-bearing deposits			1,616			1,616			229			229
Available-for-sale securities			65,121			65,121			56,128			56,128
Held-to-maturity securities			14,977			14,672			14,593			14,219
Loans, net of allowance for loan losses			233,237			232,294			186,752			188,147
Interest receivable			1,802			1,802			1,297			1,297
FHLB stock			4,565			4,565			4,014			4,014
Retained interest in securitized loans			1,601			1,601			1,998			1,998
Financial liabilities
Deposits		$	251,234		$	250,585		$	189,341		$	187,831
Borrowings			72,496			71,713			73,000			71,354
Advances from borrowers for taxes and insurance			695			695			570			570
Interest payable			1,077			1,077			465			465
Unrecognized financial instruments, net of contract amount
Commitments to extend credit			0			0			0			0
Letters of credit			0			0			0			0
Lines of credit			0			0			0			0

First Bancorp of Indiana, Inc.

Notes to Consolidated Financial Statements

June 30, 2007, 2006 and 2005

(Table Dollar Amounts in Thousands, Except Share Data)

 

The aggregate amount of loans, as defined, to such related parties was as follows:

 

		2007			2006
Balances, beginning of year		$	2,615		$	1,041
New loans			519			1,919
Repayments			(194	)		(137	)
Other changes			214			(208	)
Balances, end of year		$	3,154		$	2,615

Note 24:

Condensed Financial Information (Parent Company Only)

 

Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:

 

Condensed Balance Sheets

 

		2007			2006
Assets
Cash and cash equivalents		$	507		$	335
Investment in common stock of subsidiary			32,187			26,698
Loans to First Federal Savings Bank			702			870
Other assets			911			367
Total assets		$	34,307		$	28,270
Liabilities - Other liabilities		$	89		$	64
Stockholders’ Equity			34,218			28,206
Total liabilities and stockholders’ equity		$	34,307		$	28,270

First Bancorp of Indiana, Inc.

Notes to Consolidated Financial Statements

June 30, 2007, 2006 and 2005

(Table Dollar Amounts in Thousands, Except Share Data)

 

Condensed Statements of Income

 

		2007			2006			2005
Income
Dividends from subsidiaries		$	1,500		$	2,000		$	1,500
Other income			82			106			98
			1,582			2,106			1,598
Expense - Other expenses			390			215			136
Income Before Income Tax and Equity in Undistributed Income of Subsidiary			1,192			1,891			1,462
Income tax benefit			(122	)		(43	)		(15	)
Income Before Equity in Undistributed Income of Subsidiary			1,314			1,934			1,477
Equity in Undistributed Income (Distributions in Excess of Equity in Income) of Subsidiary			(796	)		(594	)		55
Net Income		$	518		$	1,340		$	1,532

First Bancorp of Indiana, Inc.

Notes to Consolidated Financial Statements

June 30, 2007, 2006 and 2005

(Table Dollar Amounts in Thousands, Except Share Data)

 

Condensed Statements of Cash Flows

 

		2007			2006			2005
Operating Activities
Net income		$	518		$	1,340		$	1,532
Adjustments to reconcile net income to net cash provided by operating activities
Distributions in excess of income (equity in undistributed income) of subsidiary			796			594			(55	)
Tax benefit of employee benefit plans			218			43			117
Net change in
Other assets			194			(185	)		(169	)
Other liabilities			(175	)		17			7
Net cash provided by operating activities			1,551			1,809			1,432
Investing Activities
Repayments of loans to subsidiary			168			156			145
Acquisition of bank, net of cash received			(165	)		—			—
Net cash provided by investing activities			3			156			145
Financing Activities
Cash dividends			(1,022	)		(952	)		(958	)
Purchase of treasury stock			(584	)		(1,670	)		(1,251	)
Exercise of stock options			224			459			363
Net cash used in financing activities			(1,382	)		(2,163	)		(1,846	)
Net Change in Cash and Equivalents			172			(198	)		(269	)
Cash and Cash Equivalents, Beginning of Year			335			533			802
Cash and Cash Equivalents, End of Year		$	507		$	335		$	533

Note 26:

Quarterly Financial Data

 

The following is a summary of selected quarterly results of operations for the years ended June 30:

 

		Quarter Ended (unaudited)
Fiscal 2007		June 30			March 31			December 31			September 30
Interest income		$	5,101		$	5,085		$	5,058		$	4,051
Interest expense			3,265			3,237			3,098			2,439
Provision for loan losses			100			105			100			95
Net gains on sales of securities			0			0			0			0
Noninterest income			556			492			459			501
Noninterest expense			2,475			1,996			2,015			1,800
Income before income tax			(183	)		239			304			218
Net income			(74	)		190			228			174
Basic earnings per share		$	(0.06	)	$	0.11		$	0.13		$	0.12
Diluted earnings per share			(0.04	)		0.10			0.13			0.11

First Bancorp of Indiana, Inc.

Notes to Consolidated Financial Statements

June 30, 2007, 2006 and 2005

(Table Dollar Amounts in Thousands, Except Share Data)

 

		Quarter Ended (unaudited)
Fiscal 2006		June 30			March 31			December 31			September 30
Interest income		$	3,804		$	3,606		$	3,530		$	3,288
Interest expense			2,143			2,013			1,869			1,622
Provision for loan losses			140			65			82			75
Net gains on sales of securities			0			0			0			0
Noninterest income			481			501			1,153			517
Noninterest expense			1,766			1,677			1,744			1,723
Income before income tax			236			352			988			385
Net income			183			254			657			246
Basic earnings per share		$	0.13		$	0.17		$	0.44		$	0.16
Diluted earnings per share			0.12			0.17			0.42			0.16