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Fellow Stockholders, For more than three years our national economy has been mired by high unemployment, low consumer demand for durable goods, a lagging housing market and investment rates of return less than 1.00%. Although not many new jobs are being created in southwestern Indiana, our unemployment rate seems to be stabilizing as fewer companies are laying off employees. In 2009, 140 banks insured by the Federal Deposit Insurance Corporation (FDIC) failed, and that number increased to 156 in 2010. As of this writing, 71 banks have been closed in 2011. The bank failure crisis affected us locally as Integra Bank, founded in 1850, surrendered its charter to the FDIC on July 29, 2011, and was then acquired by Old National Bank. We continue to be challenged by historically low interest rates. As it was a year ago, the quoted rate on a 30-year, fixed-rate mortgage loan is below 4.00%. Recent action taken by the Federal Reserve Open Market Committee (FOMC) has resulted in the yield on the ten-year Treasury note dropping to 1.85% compared to 2.50% twelve months ago. The FOMC has substantially exhausted its quiver of arrows regarding monetary policy, but at its recent meeting decided to implement Operation Twist. Operation Twist involves the Federal Reserve selling short-term securities and purchasing longer-term securities. The net effect of this policy will be to raise short-term interest rates and reduce longer-term rates which, in theory, would 1) stimulate a stagnant housing market through lower mortgage rates, 2) induce corporations to invest in plant expansion and hire additional employees, 3) lower unemployment, 4) lead to a higher consumer confidence level and, ultimately, cause the economy to rebound. The Federal Reserve has also publicly stated that the federal funds rate will remain near zero percent until at least the middle of 2013. The Consumer Financial Protection Bureau, which was created by Dodd-Frank Financial Reform Act, has started operations and is charged with creating and enforcing regulations designed to protect consumers from predatory bank practices. The 2,100 page law is anticipated to spawn over 5,000 pages of consumer regulation. Even though First Federal has not engaged in the practices this legislative action was intended to prevent, we have expanded the Compliance Department to two full-time positions in anticipation of the additional regulatory burden. Clearly, the failure of a local bank is not good for its community, employees or shareholders. Nonetheless, it presents our Company with opportunities for both personal/retail and commercial relationship growth. The Company has taken an aggressive approach and has hired four additional staff members in the Evansville market – four former Integra branch managers with commercial relationship banking backgrounds. For the Petersburg/Washington area, we have hired Max Elliott, who will lead the Home Building Saving Bank branches, along with a new commercial/agricultural lender. We expect all of the new officers to immediately fuel branch growth and expand commercial relationships. The Company is also exploring the possibility of additional branch locations to better service our existing customer base and to pursue future growth. The credit quality of our loan portfolio appears to be stabilizing. Nevertheless, the Company remains committed to maintaining prudent loan loss reserves to combat unforeseen future portfolio problems. The Company did have charges of $739,200 for the other-than-temporary impairment (OTTI) of certain investment securities purchased prior to the disruptions in the financial markets. These charges do not represent a realized loss but rather the difference between the carrying value and the present value of the assumed cash flows. Unfortunately, under GAAP rules the securities cannot be written back up should the respective cash flow projections improve. Due in part to the OTTI charge, earnings for fiscal 2011 were $903,000 or $0.52 per fully diluted share down from $1,391,000 or $0.80 per fully diluted share in fiscal 2010. Management continues to assess all departments in the bank to increase revenues and/or reduce expenses. In particular, we believe expanding our commercial lending presence is a key to generating greater interest and fee income. First Federal’s risk-based capital ratio of 15.46% at June 30, 2011, compared favorably to the 14.25% a year earlier. At 9.09%, the bank’s core capital ratio was little changed from the 9.22% at June 30, 2010. These ratios far exceeded the minimum regulatory capital requirements of 4% for core capital and 8% for risk-based capital, and qualify First Federal as “well-capitalized” by interagency regulatory standards. Harold Duncan, who has served the bank for 47 years, first as an officer, then as President and Chief Executive Officer, and finally as Chairman of the Board of Directors, will retire from active Board service, due to the age limitations in the Company’s By-Laws. Mr. Duncan will remain a part of the First Bancorp and First Federal Savings Bank family serving as a Director Emeritus. We thank him for his leadership, commitment and many contributions to our Company’s success. In the face of the uncertain and likely volatile times ahead, management will remain vigilant on ways to increase efficiencies, improve profitability and, ultimately, enhance shareholder value. One such step is the pending conversion of First Federal from a federal savings bank to an Indiana-chartered commercial bank. The new charter will convey powers to expand the bank’s product offerings while reducing the cost of regulatory oversight. As always, on behalf of the Board of Directors and the Company’s dedicated employees, I thank you for your investment in First Bancorp of Indiana, Inc. |
