<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 1996
OR
--- TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 0-28020
FIRST FEDERAL FINANCIAL BANCORP, INC.
- -------------------------------------------------------------------------------
(Name of Small Business Issuer in its charter)
Delaware 31-1456058
- --------------------------------- ----------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
415 Center Street
Ironton, Ohio 45638
- --------------------------------- ----------------------------
(Address of Principal (Zip Code)
Executive Offices)
Issuer's telephone number, including area code: (614) 532-6845
Securities registered under Section 12(b) of the Exchange Act:
NOT APPLICABLE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK (PAR VALUE $0.01 PER SHARE)
- -------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
----
Issuer's revenues for its most recent fiscal year: $3.9 million
As of December 20, 1996, the aggregate value of the 557,682 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
114,101 shares held by all directors and executive officers of the Registrant as
a group, was approximately $6.6 million. This figure is based on the last
known trade price of $11.75 per share of the Registrant's Common Stock on
December 20, 1996.
Number of shares of Common Stock outstanding as of December 20, 1996: 671,783
Transitional Small Business Disclosure Format: Yes No X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-KSB into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year ended
September 30, 1996 are incorporated into Parts II and IV.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III.
<PAGE>
PART I.
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
First Federal Financial Bancorp, Inc. (the "Company") is a Delaware
corporation and sole stockholder of First Federal Savings Bank of Ironton
(the "Savings Bank") which converted from a federally-chartered mutual
savings and loan association to a federally-chartered stock savings bank in
June 1996. The only significant assets of the Company are the capital stock
of the Savings Bank, the Company's loan to an employee stock ownership plan,
and the balance of the net conversion proceeds retained by the Company. The
business of the Company initially consists of the business of the Savings
Bank. At September 30, 1996, the Company had $56.6 million in total
consolidated assets, $45.7 million in total consolidated liabilities and
$10.9 million in total consolidated stockholders' equity.
The Savings Bank began conducting business in 1935. The Savings Bank
conducts business from its main office in Ironton, Ohio and one branch office
located in Chesapeake, Ohio. The Savings Bank's deposits are insured by the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC") to the maximum extent permitted by law.
The Savings Bank is a community oriented savings bank which has
traditionally offered a variety of savings products to its retail customers.
The Savings Bank has concentrated its lending activities on originating real
estate loans secured by single-family residential properties in the local
markets it serves. See "-Competition." At September 30, 1996, the total
gross loan portfolio amounted to $36.3 million, or 64.1%, of total
consolidated assets, of which $32.7 million, or 90.0%, were single-family
residential mortgage loans, $.2 million, or .6%, were multi-family
residential loans, $1.7 million, or 4.9%, were commercial real estate loans
and $1.7 million, or 4.5%, were comprised of other loans, including home
improvement loans, automobile loans and loans secured by savings accounts.
The Company also invests its funds in U.S. Government and agency
securities, as well as mortgage-backed and related securities (hereinafter
"mortgage-backed securities"), municipal and corporate debt securities and
other short-term investments. At September 30, 1996, investment securities
(both "held to maturity" as well as "available for sale") were $11.5 million,
or 20.3% of total consolidated assets, and mortgage-backed securities (both
"held to maturity" as well as "available for sale") were $7.8 million, or
13.7% of total consolidated assets. The Savings Bank derives its income
principally from interest earned on loans, securities and its other
investments and, to a lesser extent, from fees received in connection with
the origination of loans and for other services. The Savings Bank's primary
expenses are interest expense on deposits and noninterest expenses. Funds
are provided primarily by deposits, amortization and prepayments of
outstanding loans and mortgage-backed securities and other sources.
<PAGE>
Operating characteristics of the Company and the Savings Bank in recent
years include the following:
- PROFITABILITY. For the year ended September 30, 1996, the Company
had net income of $217,000, as compared to the Savings Bank's net
income of $353,000 and $374,000 for the years ended September 30,
1995 and 1994, respectively. The Company's net income was negatively
impacted by a one-time assessment of $177,780, net of related tax
benefits, to recapitalize the SAIF, as described under "- Regulation
- Insurance of Accounts." Without such special assessment net income
would have been $394,000. The Company's net income is primarily
dependent on its net interest income, the difference between interest
income on interest-earning assets and interest expense on
interest-bearing liabilities. Net interest income amounted to $1.5
million, $1.4 million and $1.4 million for the years ended September
30, 1996, 1995 and 1994, respectively. The interest rate spreads were
2.36%, 2.62% and 2.79% for the years ended September 30, 1996, 1995
and 1994, respectively. Return on assets has been relatively stable
during the periods presented, amounting to .41% (.75% without the
SAIF assessment), 0.73% and 0.79% for the years ended September 30,
1996, 1995 and 1994, respectively.
- NONINTEREST EXPENSE. The Company's profitability has been
enhanced by management's emphasis on operating efficiency. The
Company's ratio of noninterest expense to average total consolidated
assets amounted to 2.5% for the year ended September 30, 1996 and
averaged 2.1% for the three years ended September 30, 1996.
Non-interest income historically has not been a source of
profitability.
- ASSET QUALITY. Management of the Company believes that good asset
quality is the key to long-term financial strength and, as a result,
the Company's investments are intended to maintain asset quality and
control credit risk. In accordance with this approach, the Company
has predominantly emphasized single-family residential real estate
loans, which comprised 90.0% of total loans receivable at September
30, 1996. As of such date, total non-performing assets constituted
$142,000, or .3% of total consolidated assets.
- STRONG CAPITAL POSITION. At September 30, 1996, the Company had
total stockholders' equity of $10.9 million. The Savings Bank
exceeded all of its regulatory capital requirements, with tangible,
core and risk-based capital ratios of 15.3%, 15.3% and 35.5%,
respectively, as compared to the minimum requirements of 1.5%, 3.0%
and 8.0%, respectively.
The Company, as a registered savings and loan holding company, is
subject to examination and regulation by the Office of Thrift Supervision
("OTS") and is subject to various reporting and other requirements of the
Securities and Exchange Commission
2
<PAGE>
("SEC"). The Savings Bank is subject to examination and comprehensive
regulation by the OTS, which is the Savings Bank's chartering authority and
primary regulator. The Savings Bank is also regulated by the FDIC, the
administrator of the SAIF. The Savings Bank is also subject to certain
reserve requirements established by the Board of Governors of the Federal
Reserve System and is a member of the Federal Home Loan Bank ("FHLB") of
Cincinnati, which is one of the 12 regional banks comprising the FHLB System.
LENDING ACTIVITIES
GENERAL. The Savings Bank's primary lending emphasis has been, and
continues to be, the origination of conventional loans secured by first liens
on single-family residences located primarily in Lawrence County, Ohio.
Conventional residential real estate loans are loans which are neither
insured by the Federal Housing Administration ("FHA") nor partially
guaranteed by the Veterans Administration ("VA"). The Savings Bank does not
originate either FHA-insured or VA-guaranteed real estate loans. The Savings
Bank's single-family residential loans constituted 90.0% of the total loan
portfolio at September 30, 1996. To a significantly lesser extent, the
Savings Bank's loan portfolio also includes loans secured by multi-family
residential properties and commercial real estate, loans secured by savings
deposits, automobile loans, home improvement loans and miscellaneous other
loans.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the Savings Bank's loan portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------------------
1996 1995 1994
-------------- -------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
------ -- ------ -- ------ --
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential $32,673 90.0% $30,536 89.7% $26,461 89.5%
Multi-family residential 230 .6 251 .7 668 2.3
Commercial real estate 1,734 4.9 1,748 5.2 1,252 4.1
------- ----- ------- ----- ------- -----
Total real estate loans 34,637 95.5 32,535 95.6 28,381 95.9
------- ----- ------- ----- ------- -----
Non-real estate loans:
Loans secured by savings
accounts 703 1.9 567 1.7 502 1.7
Home improvement 86 .2 74 0.2 96 0.3
Automobile 463 1.3 387 1.1 216 0.7
Other(1) 397 1.1 486 1.4 386 1.4
------- ----- ------- ----- ------- -----
Total other loans 1,649 4.5 1,514 4.4 1,200 4.1
------- ----- ------- ----- ------- -----
Total loans 36,286 100.0% 34,049 100.0% 29,581 100.0%
------- ----- ------- ----- ------- -----
----- ----- -----
Less:
Unearned interest (118) (117) (79)
Loans in process (909) (1,016) (453)
Deferred loan fees (21) (29) (36)
Allowance for loan losses (283) (278) (266)
------- ------- -------
Net loans $34,955 $32,609 $28,747
------- ------- -------
------- ------- -------
</TABLE>
______________________
(1) Comprised primarily of unsecured consumer loans.
3
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CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth certain information at September 30, 1996 regarding the dollar
amount of loans maturing in the Savings Bank's total loan portfolio, based on
the contractual terms to maturity. Demand loans and loans having no stated
schedule of repayments and no stated maturity are reported as due in one year
or less.
<TABLE>
<CAPTION>
Due 15 years
Due 1-3 years Due 3-5 years Due 5-10 years Due 10-15 years and more
Due 1 after after after after 9/30/96
year or less 9/30/96 9/30/96 9/30/96 9/30/96 after Total
------------ ------------- ------------- -------------- --------------- ------------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Single-family
residential $1,572 $2,836 $2,913 $6,933 $9,740 $8,679 $32,673
Multi-family
residential -- -- -- 230 -- -- 230
Commercial real
estate 2 4 26 192 719 791 1,734
Non-real estate 895 435 222 97 -- -- 1,649
------ ------ ------ ------ ------- ------ -------
Total $2,469 $3,275 $3,161 $7,452 $10,459 $9,470 $36,286
------ ------ ------ ------ ------- ------ -------
------ ------ ------ ------ ------- ------ -------
</TABLE>
4
<PAGE>
The following shows for the total loans due after one year from September
30, 1996 the type and amount which have fixed interest rates and those which
have adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Floating or
Rates Adjustable-Rates Total
-------- ---------------- --------
(In Thousands)
<S> <C> <C> <C>
Real estate loans:
Single-family residential $5,514 $25,587 $31,101
Multi-family residential -- 230 230
Commercial real estate 130 1,602 1,732
------ ------- -------
Total real estate loans 5,644 27,419 33,063
------ ------- -------
Non-real estate loans:
Loan secured by savings
accounts -- -- --
Home improvement 69 -- 69
Automobile 376 -- 376
Other(1) 309 -- 309
------ ------- -------
Total other loans 754 -- 754
------ ------- -------
Total loans $6,398 $27,419 $33,817
------ ------- -------
------ ------- -------
</TABLE>
- ----------------
(1) Comprised primarily of unsecured consumer loans.
Scheduled contractual amortization of loans does not reflect the expected
term of the Savings Bank's loan portfolio. The average life of loans is
substantially less than their contractual terms because of prepayments. The
Savings Bank also has the right under its mortgage loan documentation to
declare a conventional loan 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. However, depending on whether it is
profitable for the Savings Bank to do so, the Savings Bank will also permit
loan assumptions subject to the acceptability of the assignee from a full
credit underwriting standpoint. The average life of mortgage loans tends to
increase when current mortgage loan rates are higher than rates on existing
mortgage loans and, conversely, decrease when rates on existing mortgage
loans are lower than current mortgage loan rates (due to refinancings of
adjustable-rate and fixed-rate loans at lower rates). Under the latter
circumstances, the weighted average yield on loans decreases as
higher-yielding loans are repaid or refinanced at lower rates.
5
<PAGE>
LOAN ACTIVITY. The following table shows total loans originated and repaid
during the periods indicated. There were no loans purchased or sold during the
periods.
Year Ended September 30,
--------------------------
1996 1995 1994
------ ------ ------
(In Thousands)
Loan originations:
Single-family residential $8,481 $ 9,802 $8,557
Multi-family residential 70 -- --
Commercial real estate 324 165 566
Non-real estate 991 979 852
------ ------- ------
Total loans originated 9,866 10,946 9,975
Loan principal reductions (6,257) (5,677) (5,993)
------ ------- ------
Net increase (decrease)
before other items 3,609 5,269 3,982
Decrease due to other
items, net (1,263) (1,407) (1,862)
------ ------- ------
Net increase in loan portfolio $2,346 $3,862 $2,120
------ ------- ------
------ ------- ------
The lending activities of the Savings Bank are subject to underwriting
standards and loan origination procedures established by the Savings Bank's
Board of Directors. After a loan application is taken, the Savings Bank
begins the process of obtaining credit reports, appraisals (with respect to a
mortgage loan) and other documentation involved with the loan. With respect
to loans on property, the Savings Bank generally requires that a property
appraisal be obtained in connection with all new mortgage loans, which are
performed by independent appraisers designated by the Board of Directors.
The Savings Bank also requires that hazard insurance be maintained on all
security properties and that flood insurance be maintained if the property is
within a designated flood plain. The Savings Bank receives a title opinion
from an attorney in connection with closing a mortgage loan.
Residential mortgage loan applications are primarily developed from
referrals, existing customers and walk-in customers and advertising.
Commercial real estate loan applications are primarily attributable to
walk-in customers and referrals. Consumer loan applications are primarily
obtained through existing and walk-in customers and advertising.
Applications for residential mortgage loans are required to be approved
by either the Loan Committee of the Board of Directors, which is comprised of
at least three directors (for loans of $50,000 or less) or a majority of the
Board of Directors (for loans with greater principal balances). The Savings
Bank's President has authority to approve consumer loans in amounts of up to
$25,000 (on a secured basis) and $10,000 (on an unsecured basis) provided
that the Savings Bank's underwriting requirements are otherwise satisfied.
6
<PAGE>
Most of the Savings Bank's single-family residential mortgage loans are
originated for up to 80% of the lesser of the purchase price or appraised
value (although the Savings Bank will originate such loans for up to a lesser
of 95% of the appraised value of the property securing a single-family
residential loan or the purchase price of the property) for terms of up to 20
years and 30 years for fixed-rate and adjustable-rate loans, respectively.
The Savings Bank will originate multi-family residential loans up to 70% of
the value of the security property for terms of up to 15 years and commercial
real estate loans for up to 60% of the appraised value for terms of up to 15
years. Share loans are originated in an amount up to 95% of the savings
account balance at 2% over the rate paid on the account. Automobile loans
are for up to five years for new cars and shorter terms for loans on used
cars.
Under applicable federal regulations, the permissible amount of loans to
one borrower may not exceed 15% of unimpaired capital and surplus. Loans in
an amount equal to an additional 10% of unimpaired capital and surplus also
may be made to a borrower if the loans are fully secured by readily
marketable securities. At September 30, 1996, the Savings Bank's five
largest loans or groups of loans to one borrower, including related entities,
ranged from an aggregate of $255,000 to $404,000 and the Savings Bank's
loans-to-one-borrower limit was $1.3 million at such date. All of such loans
were performing as of September 30, 1996.
SINGLE-FAMILY RESIDENTIAL LOANS. The Savings Bank's single-family
residential mortgage loans consist almost exclusively of conventional loans.
The Savings Bank originates solely for portfolio retention and has never sold
any loans originated. The single-family residential mortgage loans offered
by the Savings Bank currently consist of fixed-rate and adjustable-rate
loans. Fixed-rate loans have maturities of up to 20 years and are fully
amortizing with monthly loan payments sufficient to repay the total amount of
the loan with interest by the end of the loan term. At September 30, 1996,
$6.3 million, or 19.2%, of the Savings Bank's single-family residential
mortgage loans were fixed-rate loans.
The adjustable-rate loans currently offered by the Savings Bank have
maturities which range up to 30 years, with interest rates which adjust every
year in accordance with a Federal Home Loan Bank index of national contract
averages of single-family loans closed in the prior month, plus a margin.
The margin established by the Savings Bank may be more or less than the
Federal Housing Finance Board index rate. The Savings Bank's adjustable-rate
residential loans generally have a cap of 1% on any increase or decrease in
the interest rate at any adjustment date and 5% over the life of the loan.
The Savings Bank's adjustable-rate loans require that any payment adjustment
resulting from a change in the interest rate be fully amortized by the end of
the loan term and, thus, do not permit so-called negative amortization. With
the decline in market rates of interest over the past few years, the Savings
Bank's customers have shown a preference for adjustable-rate loans.
Originations of adjustable-rate residential loans constituted 85.3%, 90.1%
and 96.2% of total origination of single-family residential loans during the
years ended September 30, 1996, 1995 and 1994, respectively. At September
30, 1996, $26.4 million or 80.8% of the Savings Bank's single-family
residential mortgage loans were adjustable-rate loans.
7
<PAGE>
Adjustable-rate loans decrease the risks to the Savings Bank of holding
long-term mortgages, but involve other risks. In a rising interest rate
environment, as interest rates increase, the loan payment by the borrower
increases to the extent permitted by the terms of the loan, thereby
increasing the potential for default. Moreover, as interest rates increase,
the marketability of the underlying collateral property may be adversely
affected by higher interest rates. The Savings Bank believes that these
risks, which have not had a material adverse effect on the Savings Bank to
date because of the generally declining interest rate environment in recent
years, generally are less than the risks associated with holding fixed-rate
loans in an increasing interest rate environment.
The Savings Bank currently will lend up to the lesser of 95% of the
appraised value of the property securing a single-family residential loan or
the purchase price of the property. Most loans are made for up to 80% of the
lesser of the purchase price or appraised value. Beginning in May 1994,
however, the Savings Bank initiated a "First Time Homebuyer's Program," which
has been popular with customers, pursuant to which it will lend up to the
lesser of 90% of the purchase price or the appraised value of the property
and offer an interest rate which is .25% below its quoted rate. A
prospective borrower must otherwise meet the Savings Bank's underwriting
standards. The Savings Bank requires either private mortgage insurance or
sufficient funds on deposit in a savings account with the Savings Bank on any
loans which are originated with a loan-to-value ratio of greater than 80%.
The Savings Bank's "First Time Homebuyer's Program" contributed 5.3%, 22.8%
and 22.0% of total residential originations during fiscal 1994 (in which the
program had just been operational for a few months), 1995 and 1996.
The Savings Bank began offering home equity loans secured by the
underlying equity in the borrower's home to those borrowers with whom it has
a first mortgage loan in April 1996. Such home equity loans are amortizing
loans with a maximum term of 20 years. The Savings Bank's home equity loans
require combined loan-to-value ratios of 80% or less.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LENDING. At
September 30, 1996, the Savings Bank's multi-family residential loan
portfolio was comprised of two apartment buildings which contain between 13
and 20 units. The Savings Bank will originate loans up to 70% of the value
of the security property for terms of up to 15 years. At September 30, 1996,
the Savings Bank had $.2 million, or .6% of the total loan portfolio,
invested in multi-family residential loans.
At September 30, 1996, the Savings Bank's commercial real estate
portfolio was comprised of 30 properties, with principal balances of up to
$169,000. The properties which secure such loans are local facilities and
include a warehouse, churches and a multi-purpose building. The Savings Bank
will originate loans for up to 60% of the appraised value for terms of up to
15 years. At September 30, 1996, the Savings Bank's commercial real estate
loan portfolio amounted to $1.7 million or 4.9% of the total loan portfolio.
8
<PAGE>
The Savings Bank evaluates various aspects of commercial and multi-family
residential real estate loan transactions in an effort to mitigate risk to
the extent possible. In underwriting these loans, consideration is given to
the stability of the property's cash flow history, future operating
projections, current and projected occupancy, position in the market,
location and physical condition. The underwriting analysis also includes
credit checks and a review of the financial condition of the borrower and
guarantor, if applicable. An appraisal report is prepared by an independent
appraiser to substantiate property values for every commercial real estate
and multi-family loan transaction.
Multi-family and commercial real estate lending entails different and
significant risks when compared to single-family residential lending because
such loans typically involve large loan balances to single borrowers and
because the payment experience on such loans is typically dependent on the
successful operation of the project or the borrower's business. These risks
can also be significantly affected by supply and demand conditions in the
local market for apartments, offices, or other commercial space. The Savings
Bank attempts to minimize its risk exposure by limiting such lending to
proven owners, only considering properties with existing operating
performance which can be analyzed, requiring conservative debt coverage
ratios, and periodically monitoring the operation and physical condition of
the collateral.
NON-REAL ESTATE LOANS. At September 30, 1996, the Savings Bank had
$703,000, or 1.9% of the total loan portfolio, invested in loans secured by
savings accounts. The Savings Bank will originate such loans in an amount up
to 95% of the account balance at 2% over the rate paid on the account. In
addition, as of such date, the Savings Bank had $463,000, or 1.3% of the
total loan portfolio, invested in new and used automobile loans, which are
fixed-rate loans with terms ranging up to five years in the case of loans on
new cars and shorter terms for loans on used cars; $86,000, or .2% of the
total loan portfolio, invested in home improvement loans and $397,000, or
1.1% of the total loan portfolio, invested in other miscellaneous loans,
primarily small, short-term unsecured loans to customers.
ASSET QUALITY
GENERAL. When a borrower fails to make a required payment on a loan, the
Savings Bank attempts to cure the deficiency by contacting the borrower and
seeking payment. A notice is sent 15 days after a payment is due and, if
payment has not been received within approximately 10 days, the borrower is
contacted by phone. In most cases, deficiencies are cured promptly. If a
delinquency continues, additional efforts are made to collect the loan.
While the Savings Bank generally prefers to work with borrowers to resolve
such problems, when a real estate loan becomes 90 days delinquent, the
Savings Bank institutes foreclosure proceedings or takes such other action as
may be necessary to minimize any potential loss. The Savings Bank believes
that the attention paid by its collection department to late payments is a
major reason for the low level of non-performing assets over the last several
years.
9
<PAGE>
Real estate loans are placed on non-accrual status when, in the judgment
of management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a real estate loan is placed
on non-accrual status, previously accrued but unpaid interest is deducted
from interest income. As a matter of policy, the Savings Bank does not
accrue interest on real estate loans past due 90 days or more.
The Savings Bank generally follows the same rigorous collection procedure
described above for its consumer loans. The Savings Bank charges off all
consumer loans after the fifth payment due is missed.
Real estate acquired as a result of foreclosure or by deed-in-lieu of
foreclosure are classified as real estate owned until sold. Pursuant to a
statement of position (SOP 92-3) issued by the AICPA in April 1992, which
provides guidance on determining the balance sheet treatment of foreclosed
assets in annual financial statements for periods ending on or after December
15, 1992, there is a rebuttable presumption that foreclosed assets are held
for sale and such assets are recommended to be carried at the lower of fair
value minus estimated costs to sell the property, or cost (generally the
balance of the loan on the property at the date of acquisition). After the
date of acquisition, all costs incurred in maintaining the property are
expenses and costs incurred for the improvement or development of such
property are capitalized up to the extent of their net realizable value.
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of the Savings Bank's non-performing assets at the dates
indicated. The Savings Bank had no troubled debt restructurings during the
periods presented.
September 30,
----------------------------------------
1996 1995 1994
------ ------ ------
(Dollars in Thousands)
Non-accruing loans:
Single-family residential $ 109 $ 46 $ --
---- --- ---
Total non-accruing loans 109 46 --
---- --- ---
Accruing loans greater than
90 days delinquent -- -- --
---- --- ---
Total non-performing loans(1) 109 46 --
---- --- ---
Real estate owned(1) 33 -- --
--- --- ---
Total non-performing assets $ 142 $ 46 $ --
----- ---- ----
----- ---- ----
Total non-performing
loans as a percentage of
total loans 0.31% 0.14% --%
----- ---- ----
----- ---- ----
Total non-performing
assets as a percentage of
total assets 0.25% 0.09% --%
----- ---- ----
----- ---- ----
(FOOTNOTES ON FOLLOWING PAGE)
10
<PAGE>
- -----------------------------
(1) The increase in total non-performing loans is attributable to five loans
on non-accrual status at September 30, 1996 (the largest of which was
$41,600) as compared to two loans at September 30, 1995, net of the
transfer of one single-family residential loan to real estate owned
during the 1996 fiscal year. Management does not expect any material
losses to be sustained as a result of these non-accrual loans.
For the years ended September 30, 1996 and 1995, gross interest income
which would have been recorded had the loans accounted for on a non-accrual
basis been current in accordance with their original terms amount to $3,584
and $1,885, respectively. For the years ended September 30, 1996 and 1995,
$3,895 and $2,614 were included in interest income for these same loans prior
to the time they were placed on non-accrual status.
ALLOWANCE FOR LOAN LOSSES. The Savings Bank's policy is to establish
reserves for estimated losses on loans when it determines that a significant
and probable decline in value occurs. The allowance for losses on loans is
maintained at a level believed adequate by management to absorb estimated
losses in the portfolio. Management's determination of the adequacy of the
allowance is based on an evaluation of the portfolio, past loss experience,
current economic conditions, volume, growth and composition of the portfolio,
and other relevant factors. The allowance is increased by provisions for
loan losses which are charged against income. The Savings Bank's allowance
for loan losses has historically been predicated on its low loss experience.
11
<PAGE>
The following table sets forth an analysis of the Savings Bank's
allowance for loan losses during the periods indicated.
Year Ended
September 30,
----------------------------------------
1996 1995 1994
------ ------ ------
(Dollars in Thousands)
Balance at beginning of period $278 $265 $262
---- ---- ----
Charge-offs:
Single-family residential (2) -- (46)
Consumer and other (8) (1) (11)
Recoveries:
Consumer and other 1 1 10
---- ---- ----
Net charge-offs (9) -- (47)
---- ---- ----
Provision for loan losses 14 13 50
---- ---- ----
Balance at end of period $283 $278 $265
---- ---- ----
---- ---- ----
Allowance for loan losses
as a percent of total
loans outstanding 0.81% 0.85% 0.91%
---- ---- ----
---- ---- ----
Ratio of net charge-offs
to average loans outstanding 0.03% 0.00% 0.17%
---- ---- ----
---- ---- ----
The following table sets forth information concerning the allocation of
the Savings Bank's allowance for loan losses by loan category at the dates
indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------
1996 1995 1994
---------------------- --------------------- ---------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Single-family residential $235 90.4% $225 87.4% $219 89.5%
Multi-family residential 7 .6 8 3.0 6 2.3
Commercial real estate 14 4.8 13 5.2 10 4.1
Other loans 27 4.2 32 4.4 30 4.1
---- ----- ---- ----- ---- -----
Total $283 100.0% $278 100.0% $265 100.0%
---- ----- ---- ----- ---- -----
---- ----- ---- ----- ---- -----
</TABLE>
12
<PAGE>
MORTGAGE-BACKED SECURITIES AND INVESTMENT SECURITIES
GENERAL. Federally-chartered savings institutions have authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies and of state and
municipal governments, certificates of deposit at federally-insured banks and
savings and loan associations, certain bankers' acceptances and Federal
funds. Subject to various restrictions, federally-chartered savings
institutions may also invest a portion of their assets in commercial paper,
corporate debt securities and mutual funds, the assets of which conform to
the investments that federally-chartered savings institutions are otherwise
authorized to make directly.
The Savings Bank's President has authority to implement the Savings
Bank's Board-approved investment policy. The President may make investments
of up to $500,000 without prior approval of the Board; however, the President
generally seeks Board approval on all investments over $250,000. All of such
investments are required to be reported to the Board for ratification at the
next scheduled meeting. Pursuant to the Savings Bank's investment policy,
all securities are to be purchased with the primary objective of safety of
principal and liquidity and, secondarily, with consideration given to the
yield to be earned. The Savings Bank is authorized to invest in U.S.
Government and agency issues, mortgage-backed securities issued by the
Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage
Association ("FNMA") and Government National Mortgage Association ("GNMA"),
municipal bonds issued by state or local authorities (which generally must be
rated in one of the top categories by one of the nationally recognized rating
services) and certificates of deposit in insured institutions up to a maximum
of $99,000 per institution.
MORTGAGE-BACKED SECURITIES. The Savings Bank maintains a significant
portfolio of mortgage-backed securities as a means of investing in
housing-related mortgage instruments without the costs associated with
originating mortgage loans for portfolio retention and with limited credit
risk of default which arises in holding a portfolio of loans to maturity.
Mortgage-backed securities (which also are known as mortgage participation
certificates or pass-through certificates) represent a participation interest
in a pool of single-family mortgages. The principal and interest payments on
mortgage-backed securities are passed from the mortgage originators, as
servicer, through intermediaries (generally U.S. Government agencies and
government-sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Savings Bank.
Such U.S. Government agencies and government sponsored enterprises, which
guarantee the payment of principal and interest to investors, primarily
include the FHLMC, the FNMA and the GNMA.
The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 Federal Home Loan Savings Banks and federally-insured savings
institutions. The FHLMC issues participation certificates backed principally
by conventional mortgage loans. The FHLMC guarantees the timely payment of
interest and the ultimate return of principal
13
<PAGE>
on participation certificates. The FNMA is a private corporation chartered by
the U.S. Congress with a mandate to establish a secondary market for mortgage
loans. The FNMA guarantees the timely payment of principal and interest on
FNMA securities. FHLMC and FNMA securities are not backed by the full faith
and credit of the United States, but because the FHLMC and the FNMA are U.S.
Government-sponsored enterprises, these securities are considered to be among
the highest quality investments with minimal credit risks. The GNMA is a
government agency within the Department of Housing and Urban Development
which is intended to help finance government-assisted housing programs. GNMA
securities are backed by FHA-insured and VA-guaranteed loans, and the timely
payment of principal and interest on GNMA securities are guaranteed by the
GNMA and backed by the full faith and credit of the U.S. Government. Because
the FHLMC, the FNMA and the GNMA were established to provide support for low-
and middle-income housing, there are limits to the maximum size of loans that
qualify for these programs. At September 30, 1996, the Savings Bank had an
aggregate of $7.6 million, or 98.4% of total mortgage-backed securities (held
to maturity and available for sale), invested in GNMA, FNMA and FHLMC
certificates and, as of such date, the Savings Bank had $124,000, or 1.6% of
total mortgage-backed securities, invested in two collateralized mortgage
obligations ("CMOs").
In contrast to pass-through mortgage-backed securities, in which cash
flow is receive pro rata by all security holders, the cash flow from the
mortgages underlying a CMO is segmented and paid in accordance with a
predetermined priority to investors holding various CMO classes. By
allocating the principal and interest cash flows from the underlying
collateral among the separate CMO classes, different classes of bonds are
created, each with its own stated maturity, estimated average life, coupon
rate and prepayment characteristics. The Savings Bank's CMO's were issued by
the GNMA and FNMA and are performing in accordance with their terms. The
Savings Bank last purchased a CMO in 1993 and has no plans to purchase
further CMOs. As of September 30, 1996, the Savings Bank did not own any
mortgage-related securities designated as "high-risk mortgage securities"
under OTS pronouncements.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate loans. As a result, the risk characteristics of the
underlying pool of mortgages, (i.e., fixed-rate or adjustable-rate) as well
as prepayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security thus approximates the life of the
underlying mortgages.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize certain obligations. At September 30, 1996, none of the
Savings Bank's mortgage-backed securities were pledged as security for an
14
<PAGE>
obligation. Mortgage-backed securities issued or guaranteed by the FNMA or
the FHLMC (except interest-only securities or the residual interests in CMOs)
are weighted at no more than 20.0% for risk-based capital purposes, compared
to a weight of 50.0% to 100.0% for residential loans. See "- Regulation -
The Savings Bank - Capital Requirements."
The Savings Bank's mortgage-backed securities are classified as either
held to maturity or available for sale based upon the Savings Bank's intent
and ability to hold such securities to maturity at the time of purchase, in
accordance with GAAP. The mortgage-backed securities of the Savings Bank
which are held to maturity are carried at cost, adjusted for the amortization
of premiums and the accretion of discounts using a method which approximates
a level yield, while mortgage-backed securities available for sale are
carried at the lower of cost or current market value. See Notes 1, 5 and 6
of the Notes to Consolidated Financial Statements.
The following table sets forth the composition of the Savings Bank's
mortgage-backed securities held to maturity at the dates indicated.
September 30,
----------------------------
1996 1995 1994
------ ------ ------
(Dollars in Thousands)
GNMA certificates $ 43 $ 656 $ 707
FNMA certificates 1,762 3,185 3,512
FHLMC certificates 3,142 4,401 5,060
Collateralized mortgage
obligations 124 163 201
------ ------ ------
Total mortgage-backed
securities held to maturity 5,071 8,405 9,480
Unamortized premiums 137 194 239
Unearned discounts (18) (31) (39)
------ ------ ------
Net mortgage-backed securities
held to maturity $5,190 $8,568 $9,680
------ ------ ------
------ ------ ------
Weighted average interest rate 6.47% 6.52% 5.48%
------ ------ ------
------ ------ ------
15
<PAGE>
The following table sets forth the composition of the Savings Bank's
mortgage-backed securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------
1996 1995 1994
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
GNMA certificates $ 955 $ 465 $ 482
FNMA certificates 945 397 418
FHLMC certificates 657 131 150
------ ------ ------
Total mortgage-backed
securities available for sale 2,557 993 1,050
Unamortized premiums 31 15 17
Unearned discounts (8) (4) (4)
Unrealized holding (loss) on
mortgage-backed securities
available for sale (4) (14) (31)
------ ------ ------
Net mortgage-backed securities
available for sale $2,576 $ 990 $1,032
------ ------ ------
------ ------ ------
Weighted average interest rate 6.60% 6.09% 5.31%
------ ------ ------
------ ------ ------
</TABLE>
The following table sets forth the activity in the Savings Bank's
aggregate mortgage-backed securities portfolio (held to maturity and
available for sale) during the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended
September 30,
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at
beginning of period $9,558 $10,712 $12,263
Purchases -- -- 1,838
Repayments (1,769) (1,133) (3,303)
Sales -- -- --
Accretion and amortization, net (33) (38) (55)
Net change in unrealized holding
gain (losses) on available for
sale securities 10 17 (31)
------- ------- -------
Mortgage-backed securities at
end of period $7,766 $ 9,558 $10,712
------- ------- -------
------- ------- -------
</TABLE>
At September 30, 1996, the weighted average contractual maturity of the
Savings Bank's aggregate mortgage-backed securities (held to maturity and
available for sale) was approximately 22.6 years. The actual maturity of a
mortgage-backed security is 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 adversely affect its yield to
16
<PAGE>
maturity. The yield is based upon the interest income and the amortization of
any premium or discount related to the mortgage-backed security. In
accordance with GAAP, premiums and discounts are amortized over the estimated
lives of the loans, which decrease and increase interest income,
respectively. The prepayment assumptions used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
mortgage-backed security, and these assumptions are reviewed periodically to
reflect actual prepayments. Although prepayments of underlying mortgages
depend on many factors, 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 falling 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, the
Savings Bank may be subject to reinvestment risk because to the extent that
the Savings Bank's mortgage-related securities amortize or prepay faster than
anticipated, the Savings Bank may not be able to reinvest the proceeds of
such repayments and prepayments at a comparable rate.
INVESTMENT SECURITIES. The following table sets forth certain
information relating to the Savings Bank's investment securities held to
maturity at the dates indicated.
<TABLE>
<CAPTION>
September 30,
1996 1995 1994
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
U.S. Treasury securities $ 250 $ 250 $ 251
U.S. Government agency
securities 5,078 1,843 1,470
Municipal bonds 1,447 1,008 1,011
Certificates of deposit 1,771 1,780 1,680
FHLB stock 438 409 383
------ ------ ------
Total $8,984 $ 5,290 $ 4,795
------ ------ ------
------ ------ ------
</TABLE>
17
<PAGE>
The following table sets forth certain information relating to the
Company's investment securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------
1996 1995 1994
------ ----- -----
(In Thousands)
<S> <C> <C> <C>
U.S. Government agency securities $2,391 $ -- $ --
Obligations of states and
political subdivisions 140 -- --
------ ----- -----
Total investment securities
available for sale 2,531 -- --
Unrealized holding gain on
investment securities available
for sale 1 -- --
------ ----- -----
Net investment securities
available for sale $2,532 $ -- $ --
------ ----- -----
------ ----- -----
</TABLE>
The following table sets forth certain information regarding the
maturities of the Savings Bank's investment securities at September 30, 1996.
<TABLE>
<CAPTION>
Contractually Maturing
--------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Under 1 Average Average Average Over 10 Average
Year Yield 1-5 Years Yield 6-10 Years Yield Years Yield
-------- -------- --------- -------- ---------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ -- --% $ 250 6.38% $ -- --% $ -- --%
U.S. Government
agency securities 250 4.15 5,021 6.51 1,496 7.38 703 7.10
Municipal bonds -- -- 537 5.80 1,050 5.22 -- --
Certificates of deposit 1,188 6.00 583 5.58 -- -- -- --
FHLB stock -- -- -- -- -- -- 438 7.00
-------- -------- --------- -------- ---------- -------- ------- --------
Total $1,438 5.70% $6,391 6.36% $2,546 6.49% $1,141 7.00%
-------- -------- --------- -------- ---------- -------- ------- --------
-------- -------- --------- -------- ---------- -------- ------- --------
</TABLE>
The Company's investment securities are classified as either held to
maturity or available for sale at the time of purchase, in accordance with
Generally Accepted Accounting Principles.
SOURCES OF FUNDS
GENERAL. The Savings Bank's principal source of funds for use in lending
and for other general business purposes has traditionally come from deposits
obtained through its branch offices. The Savings Bank also derives funds
from amortization and prepayments of outstanding loans and mortgage-backed
securities, from maturing investment securities and,
18
<PAGE>
occasionally, from advances from the FHLB of Cincinnati. Loan repayments are
a relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market
conditions. The Savings Bank may use borrowings to supplement its deposits as
a source of funds.
DEPOSITS. The Savings Bank's current deposit products primarily include
passbook accounts and certificates of deposit ranging in terms from six
months to 37 months, and to a lesser extent, demand accounts. The Savings
Bank's deposit products also include Individual Retirement Account ("IRA")
certificates.
The Savings Bank's deposits are obtained from residents in its primary
market area. The Savings Bank attracts local deposit accounts by offering
competitive interest rates. The Savings Bank utilizes traditional marketing
methods to attract new customers and savings deposits, including print media
and radio advertising.
The following table sets forth the dollar amount and average interest
rates of deposits in the various types of deposit programs offered by the
Savings Bank at the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- ----------------------
Amount Percentage Amount Percentage Amount Percentage
------- ---------- ------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
2.00 - 4.00% $ 1,662 3.7% $ 2,452 5.3% $ 7,928 18.9%
4.01 - 6.00% 21,321 47.6 8,698 18.8 13,459 32.1
6.01 - 8.00% 10,965 24.5 22,945 49.7 2,433 5.8
------- ---------- ------- ---------- -------- ----------
Total certificate accounts 33,948 75.8 34,095 73.8 23,820 56.8
------- ---------- ------- ---------- -------- ----------
Transaction accounts:
Passbook accounts 9,863 22.0 11,191 24.2 17,359 41.4
Christmas Club 96 .2 94 0.2 79 0.2
Demand accounts 902 2.0 818 1.8 704 1.6
------- ---------- ------- ---------- -------- ----------
Total transaction accounts 10,861 24.2 12,103 26.2 18,142 43.2
------- ---------- ------- ---------- -------- ----------
Total deposits $44,809 100.0% $46,198 100.0% $41,962 100.0%
------- ---------- ------- ---------- -------- ----------
------- ---------- ------- ---------- -------- ----------
</TABLE>
19
<PAGE>
The following table sets forth the savings activities of the Savings Bank
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended
September 30,
---------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Deposits $39,002 $35,225 $18,414
Withdrawals 42,057 32,457 20,831
------- ------- -------
Net increase (decrease)
before interest credited (3,055) 2,768 (2,417)
Interest credited 1,666 1,468 1,287
------- ------- -------
Net increase (decrease) in
deposits $(1,389) $4,236 $(1,130)
------- ------- -------
------- ------- -------
</TABLE>
The following table shows the contractual interest rate and maturity
information for the Savings Bank's certificates of deposit at September 30,
1996.
<TABLE>
<CAPTION>
Maturity Date
-------------------------------------------------------
One Year Over Over Over
or Less 1-2 Years 2-3 Years 3 Years Total
-------- --------- --------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
2.00 - 4.00% $ 1,627 $ 35 $ -- $ -- $ 1,662
4.01 - 6.00% 15,777 3,211 2,235 98 21,321
6.01 - 8.00% 4,279 5,880 806 -- 10,965
-------- --------- --------- ------- -------
Total $21,683 $9,126 $3,041 $ 98 $33,948
-------- --------- --------- ------- -------
-------- --------- --------- ------- -------
</TABLE>
The following table sets forth the maturities of the Savings Bank's
certificates of deposit having principal amounts of $100,000 or more at
September 30, 1996. The Savings Bank does not use brokered deposits and the
substantial majority of all funds are from within the local market area.
Certificates of deposit maturing
in quarter ending:
------------------------------------ --------------
(In Thousands)
December 31, 1996 $ 458
March 31, 1997 571
June 30, 1997 620
September 30, 1997 689
After September 30, 1997 1,246
------
Total certificates of deposit with
balances of $100,000 or more $3,584
------
------
20
<PAGE>
BORROWINGS. The Savings Bank may obtain advances from the FHLB of
Cincinnati upon the security of the common stock it owns in that bank and
certain of its residential mortgage loans and securities held to maturity,
provided certain standards related to creditworthiness have been met. Such
advances are made pursuant to several credit programs, each of which has its
own interest rate and range of maturities. At September 30, 1996, the
Savings Bank had $500,000 in outstanding advances from the FHLB of
Cincinnati.
The following table sets forth the maximum month-end balance and average
balance of the Savings Bank's FHLB advances during the periods indicated.
Year Ended
September 30,
-------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Maximum balance $500 $5,600 $ --
Average balance 27 1,105 --
Year end balance 500 -- --
Weighted average
interest rate:
At end of year 5.45% -- % --%
During the year 5.45 6.15 --
SUBSIDIARIES
The Savings Bank is permitted to invest up to 2% of its assets in the
capital stock of, or secured or unsecured loans to, subsidiary corporations,
with an additional investment of 1% of assets when such additional investment
is utilized primarily for community development purposes. The Savings Bank
has no subsidiaries.
COMPETITION
The Savings Bank faces strong competition both in attracting deposits and
making real estate loans. Its most direct competition for deposits has
historically come from other savings associations, credit unions and
commercial banks located within 15 miles of Ironton, which covers Lawrence
County, Ohio, Boyd and Greenup Counties, Kentucky and Cabell County, West
Virginia, including many large financial institutions which have greater
financial and marketing resources available to them.
The Savings Bank's primary market area is Lawrence County, Ohio.
Lawrence County has three banks with nine offices and four thrift
institutions with eight offices which all compete for deposits and loans.
Lawrence County has a very competitive financial institution market dominated
in total deposits by banks. The Savings Bank is much smaller in size than
many of its competitors in terms of assets and is less diversified.
21
<PAGE>
In addition, during times of high interest rates, the Savings Bank has
faced additional significant competition for investors' funds from short-term
money market securities, mutual funds and other corporate and government
securities. The ability of the Savings Bank to attract and retain savings
deposits depends on its ability to generally provide a rate of return,
liquidity and risk comparable to that offered by competing investment
opportunities.
The Savings Bank experiences strong competition for real estate loans
principally from other savings associations, commercial banks and mortgage
banking companies. The Savings Bank competes for loans principally through
the interest rates and, currently, by not charging loan fees, and the
efficiency and quality of services it provides borrowers. Competition may
increase as a result of the continuing reduction of restrictions on the
interstate operations of financial institutions.
REGULATION
SET FORTH BELOW IS A BRIEF DESCRIPTION OF THOSE LAWS AND REGULATIONS
WHICH, TOGETHER WITH THE DESCRIPTIONS OF LAWS AND REGULATIONS CONTAINED
ELSEWHERE HEREIN, ARE DEEMED MATERIAL TO AN INVESTOR'S UNDERSTANDING OF THE
EXTENT TO WHICH THE COMPANY AND THE SAVINGS BANK ARE REGULATED. THE
DESCRIPTION OF THE LAWS AND REGULATIONS HEREUNDER, AS WELL AS DESCRIPTIONS OF
LAWS AND REGULATIONS CONTAINED ELSEWHERE HEREIN, DOES NOT PURPORT TO BE
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO APPLICABLE LAWS AND
REGULATIONS.
THE COMPANY. The Company, as a savings and loan holding company within
the meaning of the Home Owners Loan Act ("HOLA"), has registered with the OTS
and is subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the
Savings Bank is subject to certain restrictions in its dealings with the
Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one
subsidiary savings institution. However, if the Director of the OTS
determines that there is reasonable cause to believe that the continuation by
a savings and loan holding company of an activity constitutes a serious risk
to the financial safety, soundness or stability of its subsidiary savings
institution, the Director may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the
above rules as to permissible business activities of unitary savings and loan
holding companies, if the savings institution subsidiary of such a holding
company fails to meet the QTL test, as discussed under "-- The Savings Bank
- -- Qualified Thrift Lender Test," then such unitary holding company also
shall become subject to the activities restrictions applicable to multiple
savings and loan holding companies and, unless the savings institution
requalifies as a QTL within
22
<PAGE>
one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "-- The Savings Bank
- -- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Savings
Bank, the Company would thereupon become a multiple savings and loan holding
company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
institution meets the QTL test, as set forth below, the activities of the
Company and any of its subsidiaries (other than the Savings Bank or other
subsidiary savings institutions) would thereafter be subject to further
restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution shall
commence or continue for a limited period of time after becoming a multiple
savings and loan holding company or subsidiary thereof any business activity,
upon prior notice to, and no objection by the OTS, other than: (i) furnishing
or performing management services for a subsidiary savings institution; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing,
or liquidating assets owned by or acquired from a subsidiary savings
institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust;
(vi) those activities authorized by regulation as of March 5, 1987 to be
engaged in by multiple savings and loan holding companies; or (vii) unless
the Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies, those activities authorized by the
Federal Reserve Board ("FRB") as permissible for bank holding companies.
Those activities described in (vii) above also must be approved by the
Director of the OTS prior to being engaged in by a multiple savings and loan
holding company.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between
savings institutions and any affiliate are governed by Sections 23A and 23B
of the Federal Reserve Act. An affiliate of a savings institution is any
company or entity which controls, is controlled by or is under common control
with the savings institution. In a holding company context, the parent
holding company of a savings institution (such as the Company) and any
companies which are controlled by such parent holding company are affiliates
of the savings institution. Generally, Sections 23A and 23B (i) limit the
extent to which the savings institution or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of
such institution's capital stock and surplus, and contain an aggregate limit
on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus and (ii) require that all such transactions be
on terms substantially the same, or at least as favorable, to the institution
or subsidiary as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and other similar transactions. In addition to the restrictions
imposed by Sections 23A and 23B, no savings institution may (i) loan or
otherwise extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding companies,
or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings institution.
23
<PAGE>
In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires
that loans to directors, executive officers and principal stockholders be
made on terms substantially the same as offered in comparable transactions to
other persons and also requires prior board approval for certain loans. In
addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired
capital and surplus. Furthermore, Section 22(g) places additional
restrictions on loans to executive officers. At September 30, 1996, the
Savings Bank was in compliance with the above restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without
prior approval of the Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or substantially all the
assets thereof or (ii) more than 5% of the voting shares of a savings
institution or holding company thereof which is not a subsidiary. Except
with the prior approval of the Director of the OTS, no director or officer of
a savings and loan holding company or person owning or controlling by proxy
or otherwise more than 25% of such company's stock, may acquire control of
any savings institution, other than a subsidiary savings institution, or of
any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls
savings institutions in more than one state if (i) the multiple savings and
loan holding company involved controls a savings institution which operated a
home or branch office located in the state of the institution to be acquired
as of March 5, 1987; (ii) the acquiror is authorized to acquire control of
the savings institution pursuant to the emergency acquisition provisions of
the Federal Deposit Insurance Act ("FDIA"); or (iii) the statutes of the
state in which the institution to be acquired is located specifically permit
institutions to be acquired by the state-chartered institutions or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions).
Under the Bank Holding Company Act of 1956, the FRB is authorized to
approve an application by a bank holding company to acquire control of a
savings institution. In addition, a bank holding company that controls a
savings institution may merge or consolidate the assets and liabilities of
the savings institution with, or transfer assets and liabilities to, any
subsidiary bank which is a member of the BIF with the approval of the
appropriate federal banking agency and the FRB. As a result of these
provisions, there have been a number of acquisitions of savings institutions
by bank holding companies in recent years.
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THE SAVINGS BANK. The OTS has extensive authority over the operations of
federally chartered savings institutions. As part of this authority, savings
institutions are required to file periodic reports with the OTS and are
subject to periodic examinations by the OTS and the FDIC. The last
regulatory examination of the Savings Bank by the OTS was as of February 26,
1996. The investment and lending authority of savings institutions are
prescribed by federal laws and regulations, and such institutions are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally chartered savings institutions and may also apply to
state-chartered savings institutions. Such regulation and supervision is
primarily intended for the protection of depositors.
The OTS' enforcement authority over all savings institutions and their
holding companies includes, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated
for violations of laws and regulations and unsafe or unsound practices.
Other actions or inactions may provide the basis for enforcement action,
including misleading or untimely reports filed with the OTS.
INSURANCE OF ACCOUNTS. The deposits of the Savings Bank are insured to
the maximum extent permitted by the SAIF, which is administered by the FDIC,
and are backed by the full faith and credit of the U.S. Government. As
insurer, the FDIC is authorized to conduct examinations of, and to require
reporting by, FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious threat to the FDIC. The FDIC also has
the authority to initiate enforcement actions against savings institutions,
after giving the OTS an opportunity to take such action.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Savings Bank, if it determines after a hearing
that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or
has violated any applicable law, regulation, order or any condition imposed
by an agreement with the FDIC. It also may suspend deposit insurance
temporarily during the hearing process for the permanent termination of
insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of the
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances which would result in termination of the
Savings Bank's deposit insurance.
The FDIC is authorized to establish separate assessment rates for deposit
insurance for members of the BIF and the SAIF. The FDIC may increase
assessment rates for either fund to restore the fund's ratio of reserves to
insured deposits to its statutorily set target level within a reasonable
time, and may decrease such assessment rates if such target level has been
met. Until the SAIF fund meets its target level, savings associations may
not
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transfer to the BIF fund. Furthermore, any such transfers, when permitted,
would be subject to exit and entrance fees. Under current FDIC regulations,
institutions are assigned to one of three capital groups which are based
solely on the level of an institution's capital -- "well capitalized,"
"adequately capitalized," and "undercapitalized" -- which are defined in the
same manner as the regulations establishing the prompt corrective action
system under Section 38 of the Federal Deposit Insurance Act ("FDIA") as
discussed below. These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates ranging from .23% for well capitalized, healthy
institutions to .31% for undercapitalized institutions with substantial
supervisory concerns. The insurance premiums for the Savings Bank for the
first semi-annual period in calendar 1996 was .23%.
The BIF fund met its target reserve level in September 1995, but the SAIF
was not expected to meet its target reserve level until at least 2002.
Consequently, in late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with respect to the semiannual premium
assessment beginning January 1, 1996, reduced deposit insurance premiums for
BIF member institutions to zero basis points (subject to an annual minimum of
$2,000) for institutions in the lowest risk category. Deposit insurance
premiums for SAIF members were maintained at their existing levels (23 basis
points for institutions in the lowest risk category).
On September 30, 1996, President Clinton signed into law legislation
which will eliminate the premium differential between SAIF-insured
institutions and BIF-insured institutions by recapitalizing the SAIF's
reserves to the required ratio. The legislation provides that all SAIF
member institutions pay a one-time special assessment to recapitalize the
SAIF, which in the aggregate will be sufficient to bring the reserve ratio in
the SAIF to 1.25% of insured deposits. The legislation also provides for the
merger of the BIF and the SAIF, with such merger being conditioned upon the
prior elimination of the thrift charter.
Effective October 8, 1996, FDIC regulations imposed a one-time special
assessment of 65.7 basis points on SAIF-assessable deposits as of March 31,
1995, which was collected on November 27, 1996. The Savings Bank's one-time
special assessment amounted to $177,780 net of related tax benefits. The
payment of such special assessment had the effect of immediately reducing the
Savings Bank's capital by such an amount. Nevertheless, management does not
believe that this one-time special assessment will have a material adverse
effect on the Company's consolidated financial condition or cause
non-compliance with the Savings Bank's regulatory capital requirements.
On October 16, 1996, the FDIC proposed to lower assessment rates for SAIF
members to reduce the disparity in the assessment rates paid by BIF and SAIF
members. Beginning October 1, 1996, effective SAIF rates would range from
zero basis points to 27 basis points. From 1997 through 1999, SAIF members
will pay 6.4 basis points to fund the Financing Corporation while BIF member
institutions will pay about 1.3 basis points. The
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Savings Bank's insurance premiums, which have amounted to 23 basis points
will be reduced to 6.4 basis points. Based upon the $44.8 million of
assessable deposits at September 30, 1996, the Savings Bank would expect to
pay $18,600 less in insurance premiums per quarter during 1997, or $.03 per
share.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings institutions
are required to maintain minimum levels of regulatory capital. The OTS has
established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital
requirements imposed on national banks. The OTS also is authorized to impose
capital requirements in excess of these standards on individual institutions
on a case-by-case basis.
Current OTS capital standards require savings institutions to satisfy
three different capital requirements. Under these standards, savings
institutions must maintain "tangible" capital equal to at least 1.5% of
adjusted total assets, "core" capital equal to at least 3.0% of adjusted
total assets and "total" capital (a combination of core and "supplementary"
capital) equal to at least 8.0% of "risk-weighted" assets. For purposes of
the regulation, core capital generally consists of common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and related surplus, minority interests in the equity accounts of fully
consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits and "qualifying supervisory goodwill." Tangible capital is given
the same definition as core capital but does not include qualifying
supervisory goodwill and is reduced by the amount of all the savings
institution's intangible assets, with only a limited exception for purchased
mortgage servicing rights. The Savings Bank had no goodwill or other
intangible assets at September 30, 1996. Both core and tangible capital are
further reduced by an amount equal to a savings institution's debt and equity
investments in subsidiaries engaged in activities not permissible to national
banks (other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies). These adjustments do not
materially affect the Savings Bank's regulatory capital.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided that the amount of supplementary
capital included does not exceed the savings institution's core capital.
Supplementary capital generally consists of hybrid capital instruments;
perpetual preferred stock which is not eligible to be included as core
capital; subordinated debt and intermediate-term preferred stock; and general
allowances for loan losses up to a maximum of 1.25% of risk-weighted assets.
In determining the required amount of risk-based capital, total assets,
including certain off-balance sheet items, are multiplied by a risk weight
based on the risks inherent in the type of assets. The risk weights assigned
by the OTS for principal categories of assets are (i) 0% for cash and
securities issued by the U.S. Government or unconditionally backed by the
full faith and credit of the U.S. Government; (ii) 20% for securities (other
than equity securities) issued by U.S. Government-sponsored agencies and
mortgage-backed securities issued by, or fully
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guaranteed as to principal and interest by, the FNMA or the FHLMC, except for
those classes with residual characteristics or stripped mortgage-related
securities; (iii) 50% for prudently underwritten permanent one- to
four-family first lien mortgage loans not more than 90 days delinquent and
having a loan-to-value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or the FHLMC,
qualifying residential bridge loans made directly for the construction of
one- to four-family residences and qualifying multi-family residential loans;
and (iv) 100% for all other loans and investments, including consumer loans,
commercial loans, and one- to four-family residential real estate loans more
than 90 days delinquent, and for repossessed assets.
In August 1995, the OTS and other federal banking agencies published a
final rule modifying their existing risk-based capital standards to provide
for consideration of interest rate risk when assessing capital adequacy of a
bank. Under the final rule, the OTS must explicitly include a bank's exposure
to declines in the economic value of its capital due to changes in interest
rates as a factor in evaluating a bank's capital adequacy. In addition, in
August 1995, the OTS and the other federal banking agencies published a joint
policy statement for public comment that describes the process the banking
agencies will use to measure and assess the exposure of a bank's net economic
value to changes in interest rates. Under the policy statement, the OTS will
consider results of supervisory and internal interest rate risk models as one
factor in evaluating capital adequacy. The OTS intends, at a future date, to
incorporate explicit minimum requirements for interest rate risk in its
risk-based capital standards through the use of a model developed from the
policy statement, a future proposed rule and the public comments received
therefrom.
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations,
termination of federal deposit insurance and the appointment of a conservator
or receiver. The OTS' capital regulation provides that such actions, through
enforcement proceedings or otherwise, could require one or more of a variety
of corrective actions.
LIQUIDITY REQUIREMENTS. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. The liquidity
requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings institutions. At the
present time, the required minimum liquid asset ratio is 5%. At September
30, 1996, the Savings Bank's liquidity ratio was 15.0%.
CAPITAL DISTRIBUTIONS. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out
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mergers, interest payments on certain convertible debt and other transactions
charged to the capital account of a savings institution to make capital
distributions. Generally, the regulation creates a safe harbor for specified
levels of capital distributions from institutions meeting at least their
minimum capital requirements, so long as such institutions notify the OTS and
receive no objection to the distribution from the OTS. Savings institutions
and distributions that do not qualify for the safe harbor are required to
obtain prior OTS approval before making any capital distributions.
Generally, a savings institution that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements (Tier
1 institutions) may make capital distributions during any calendar year equal
to the higher of (i) 100% of net income for the calendar year-to-date plus
50% of its "surplus capital ratio" at the beginning of the calendar year or
(ii) 75% of net income over the most recent four-quarter period. The
"surplus capital ratio" is defined to mean the percentage by which the
institution's ratio of total capital to assets exceeds the ratio of its fully
phased-in capital requirement to assets. "Fully phased-in capital
requirement" is defined to mean an institution's capital requirement under
the statutory and regulatory standards applicable on December 31, 1994, as
modified to reflect any applicable individual minimum capital requirement
imposed upon the institution. Failure to meet fully phased-in or minimum
capital requirements will result in further restrictions on capital
distributions, including possible prohibition without explicit OTS approval.
In order to make distributions under these safe harbors, Tier 1 and Tier
2 institutions must submit 30 days written notice to the OTS prior to making
the distribution. The OTS may object to the distribution during that 30-day
period based on safety and soundness concerns. At September 30, 1996, the
Savings Bank was a Tier 1 institution for purposes of this regulation.
In December 1994, the OTS published a notice of proposed rulemaking to
amend its capital distribution regulation. Under the proposal, institutions
would be permitted to only make capital distributions that would not result
in their capital being reduced below the level required to remain "adequately
capitalized." Because the Savings Bank is a subsidiary of a holding company,
the proposal would require the Savings Bank to provide notice to the OTS of
its intent to make a capital distribution. The Savings Bank does not believe
that the proposal will adversely affect its ability to make capital
distributions if it is adopted substantially as proposed.
LOANS TO ONE BORROWER. The permissible amount of loans-to-one borrower
now generally follows the national bank standard for all loans made by
savings institutions, as compared to the pre-FIRREA rule that applied that
standard only to commercial loans made by federally chartered savings
institutions. The national bank standard generally does not permit
loans-to-one borrower to exceed the greater of $500,000 or 15% of unimpaired
capital and surplus. Loans in an amount equal to an additional 10% of
unimpaired capital and surplus also may be made to a borrower if the loans
are fully secured by readily
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marketable securities. For information about the largest borrowers from the
Savings Bank, see "-- Lending Activities -- Loan Activity."
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act of 1977, as
amended ("CRA"), as implemented by OTS regulations, a savings institution has
a continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including
low and moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit
an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with its examination of a
savings institution, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation
of certain applications by such institution. FIRREA amended the CRA to
require public disclosure of an institution's CRA rating and require the OTS
to provide a written evaluation of an institution's CRA performance utilizing
a rating system which identifies four levels of performance that may describe
an institution's record of meeting community needs: outstanding,
satisfactory, needs to improve and substantial noncompliance. The CRA also
requires all institutions to make public disclosure of their CRA ratings.
The Savings Bank received a "satisfactory" rating as a result of its most
recent evaluation.
NATIONWIDE BANKING. The Savings Bank may face additional competition
from commercial banks headquartered outside of the State of Ohio as a result
of the enactment of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, which becomes fully effective on June 1, 1997, and
which will allow banks and bank holding companies headquartered outside of
Ohio to enter the Savings Bank's market through acquisition, merger or DE
NOVO branching. For further information about the Savings Bank's
competition, see "-- Competition."
BRANCHING BY FEDERAL SAVINGS INSTITUTIONS. OTS policy permits interstate
branching to the full extent permitted by statute (which is essentially
unlimited). Generally, federal law prohibits federal savings institutions
from establishing, retaining or operating a branch outside the state in which
the federal institution has its home office unless the institution meets the
IRS' domestic building and loan test (generally, 60% of a thrift's assets
must be housing-related) ("IRS Test"). The IRS Test requirement does not
apply if, among other things, the law of the state where the branch would be
located would permit the branch to be established if the federal savings
institution were chartered by the state in which its home office is located.
Furthermore, the OTS will evaluate a branching applicant's record of
compliance with the Community Reinvestment Act of 1977 ("CRA"). An
unsatisfactory CRA record may be the basis for denial of a branching
application.
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QUALIFIED THRIFT LENDER TEST. Under Section 2303 of the Economic Growth
and Regulatory Paperwork Reduction Act of 1996, a savings association can
comply with the QTL test by either meeting the QTL test set forth in the HOLA
and implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended ("Code"). A savings association that does not comply with
the QTL Test must either convert to a bank charter or comply with the
following restrictions on its operations: (i) the association may not engage
in any new activity or make any new investment, directly or indirectly,
unless such activity or investment is permissible for a national bank; (ii)
the branching powers of the association shall be restricted to those of a
national bank; (iii) the association shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the association
shall be subject to the rules regarding payment of dividends by a national
bank. Upon the expiration of three years from the date the association
ceases to be a QTL, it must cease any activity and not retain any investment
not permissible for a national bank and immediately repay any outstanding
FHLB advances (subject to safety and soundness considerations).
The QTL Test set forth in the HOLA requires that Qualified Thrift
Investments ("QTIs") represent 65% of portfolio assets. Portfolio assets are
defined as total assets less intangibles, property used by a savings
association in its business and liquidity investments in an amount not
exceeding 20% of assets. Generally, QTIs are residential housing related
assets. The 1996 amendments allow small business loans, credit card loans,
student loans, and loans for personal, family and household purposes to be
included without limitation as qualified investments. At September 30, 1996,
approximately 75.4% of the Savings Bank's assets were invested in QTIs, which
was in excess of the percentage required to qualify the Savings Bank under
the QTI Test in effect at that time.
ACCOUNTING REQUIREMENTS. Applicable OTS accounting regulations and
reporting requirements apply the following standards: (i) regulatory reports
will incorporate GAAP when GAAP is used by federal banking agencies; (ii)
savings institution transactions, financial condition and regulatory capital
must be reported and disclosed in accordance with OTS regulatory reporting
requirements that will be at least as stringent as for national banks; and
(iii) the Director of the OTS may prescribe regulatory reporting requirements
more stringent than GAAP whenever the Director determines that such
requirements are necessary to ensure the safe and sound reporting and
operation of savings institutions.
The accounting principles for depository institutions are currently
undergoing review to determine whether the historical cost model or
market-based measure of valuation is the appropriate measure for reporting
the assets of such institutions in their financial statements. Such proposal
is controversial because any change in applicable accounting principles which
requires depository institutions to carry mortgage-backed securities and
mortgage loans at fair market value could result in substantial losses to
such institutions and increased volatility in their liquidity and operations.
Currently, it cannot be predicted whether there may be any changes in the
accounting principles for depository institutions in this regard beyond those
imposed by SFAS No. 115 or when any such changes might become effective.
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FEDERAL HOME LOAN BANK SYSTEM. The Savings Bank is a member of the FHLB
of Cincinnati, which is one of 12 regional FHLBs that administers the home
financing credit function of savings institutions. Each FHLB serves as a
reserve or central bank for its members within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members (i.e., advances)
in accordance with policies and procedures established by the Board of
Directors of the FHLB. At September 30, 1996, the Savings Bank had $500,000
in FHLB advances.
As a member, the Savings Bank is required to purchase and maintain stock
in the FHLB of Cincinnati in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year or 5% of its advances from the FHLB
of Cincinnati, whichever is greater. At September 30, 1996, the Savings Bank
had $438,000 in FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid in the
past and could continue to do so in the future. These contributions also
could have an adverse effect on the value of FHLB stock in the future.
FEDERAL RESERVE SYSTEM. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and Super
NOW checking accounts) and non-personal time deposits. As of September 30,
1996, the Savings Bank was in compliance with applicable requirements.
However, because required reserves must be maintained in the form of vault
cash or a noninterest-bearing account at a Federal Reserve Bank, the effect
of this reserve requirement is to reduce an institution's earning assets.
FEDERAL TAXATION
GENERAL. The Company and Savings Bank are subject to the generally
applicable corporate tax provisions of the Code, and Savings Bank is subject
to certain additional provisions of the Code which apply to thrift and other
types of financial institutions. The following discussion of federal
taxation is intended only to summarize certain pertinent federal income tax
matters material to the taxation of the Company and the Savings Bank and is
not a comprehensive discussion of the tax rules applicable to the Company and
Savings Bank.
BAD DEBT RESERVES. Savings institutions, such as the Savings Bank, which
meet certain definitional tests primarily relating to their assets and the
nature of their businesses, are permitted to establish a reserve for bad
debts and to make annual additions to the reserve. These additions may,
within specified formula limits, be deducted in arriving at the institution's
taxable income. For purposes of computing the deductible addition to its bad
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debt reserve, the institution's loans are separated into "qualifying real
property loans" (i.e., generally those loans secured by certain interests in
real property) and all other loans ("non-qualifying loans"). The deduction
with respect to non-qualifying loans must be computed under the experience
method as described below. The following formulas may be used to compute the
bad debt deduction with respect to qualifying real property loans: (i)
actual loss experience, or (ii) a percentage of taxable income. Reasonable
additions to the reserve for losses on non-qualifying loans must be based
upon actual loss experience and would reduce the current year's addition to
the reserve for losses on qualifying real property loans, unless that
addition is also determined under the experience method. The sum of the
additions to each reserve for each year is the institution's annual bad debt
deduction.
Under the experience method, the deductible annual addition to the
institution's bad debt reserves is the amount necessary to increase the
balance of the reserve at the close of the taxable year to the greater of (a)
the amount which bears the same ratio to loans outstanding at the close of
the taxable year as the total net bad debts sustained during the current and
five preceding taxable years bear to the sum of the loans outstanding at the
close of the six years, or (b) the lower of (i) the balance of the reserve
account at the close of the Savings Bank's "base year," which was its tax
year ended December 31, 1987, or (ii) if the amount of loans outstanding at
the close of the taxable year is less than the amount of loans outstanding at
the close of the base year, the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the balance of the reserve at
the close of the base year bears to the amount of loans outstanding at the
close of the base year.
Under the percentage of taxable income method, the bad debt deduction
equals 8% of taxable income determined without regard to that deduction and
with certain adjustments. The availability of the percentage of taxable
income method permits a qualifying savings institution to be taxed at a lower
effective federal income tax rate than that applicable to corporations in
general. This resulted generally in an effective federal income tax rate
payable by a qualifying savings institution fully able to use the maximum
deduction permitted under the percentage of taxable income method, in the
absence of other factors affecting taxable income, of 31.3% exclusive of any
minimum tax or environmental tax (as compared to 34% for corporations
generally). For tax years beginning on or after January 1, 1993, the maximum
corporate tax rate was increased to 35%, which increased the maximum
effective federal income tax rate payable by a qualifying savings institution
fully able to use the maximum deduction to 32.2%. Any savings institution at
least 60% of whose assets are qualifying assets, as described in the Code,
will generally be eligible for the full deduction of 8% of taxable income.
As of September 30, 1996, 95.7% of the assets of the Savings Bank were
"qualifying assets" as defined in the Code, and the Savings Bank anticipates
that at least 60% of its assets will continue to be qualifying assets in the
immediate future. If this ceases to be the case, the institution may be
required to restore some portion of its bad debt reserve to taxable income in
the future.
Under the percentage of taxable income method, the bad debt deduction for
an addition to the reserve for qualifying real property loans cannot exceed
the amount
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necessary to increase the balance in this reserve to an amount equal to 6% of
such loans outstanding at the end of the taxable year. The bad debt
deduction is also limited to the amount which, when added to the addition to
the reserve for losses on non-qualifying loans, equals the amount by which
12% of deposits at the close of the year exceeds the sum of surplus,
undivided profits and reserves at the beginning of the year. Based on
experience, it is not expected that these restrictions will be a limiting
factor for the Savings Bank in the foreseeable future. In addition, the
deduction for qualifying real property loans is reduced by an amount equal to
all or part of the deduction for non-qualifying loans.
Pursuant to certain legislation which was recently enacted and which will
be effective for tax years beginning after 1995, a small thrift institution
(one with an adjusted basis of assets of less than $500 million), such as the
Savings Bank, would no longer be permitted to make additions to its tax bad
debt reserve under the percentage of taxable income method. Such
institutions would be permitted to use the experience method in lieu of
deducting bad debts only as they occur. Such legislation will require the
Savings Bank to realize increased tax liability over a period of at least six
years, beginning in 1996. Specifically, the legislation will require a small
thrift institution to recapture (i.e., take into income) over a multi-year
period the balance of its bad debt reserves in excess of the lesser of (i)
the balance of such reserves as of the end of its last taxable year ending
before 1988 or (ii) an amount that would have been the balance of such
reserves had the institution always computed its additions to its reserves
using the experience method. The recapture requirement would be suspended
for each of two successive taxable years beginning January 1, 1996 in which
the Savings Bank originates an amount of certain kinds of residential loans
which in the aggregate are equal to or greater than the average of the
principal amounts of such loans made by the Savings Bank during its six
taxable years preceding 1996. It is anticipated that any recapture of the
Savings Bank's bad debt reserves accumulated after 1987 would not have a
material adverse effect on the Savings Bank's financial condition and results
of operations.
At September 30, 1996, the federal income tax reserves of the Savings
Bank included $1.3 million for which no federal income tax has been provided.
Because of these federal income tax reserves and the liquidation account
established for the benefit of certain depositors of the Savings Bank in
connection with the conversion of the Savings Bank to stock form, the
retained earnings of the Savings Bank are substantially restricted.
DISTRIBUTIONS. If the Savings Bank were to distribute cash or property
to its sole stockholder, and the distribution was treated as being from its
accumulated bad debt reserves, the distribution would cause the Savings Bank
to have additional taxable income. A distribution is deemed to have been
made from accumulated bad debt reserves to the extent that (a) the reserves
exceed the amount that would have been accumulated on the basis of actual
loss experience, and (b) the distribution is a "non-qualified distribution."
A distribution with respect to stock is a non-qualified distribution to the
extent that, for federal income tax purposes, (i) it is in redemption of
shares, (ii) it is pursuant to a liquidation of the institution, or (iii) in
the case of a current distribution, together with all other such
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distributions during the taxable year, it exceeds the institution's current
and post-1951 accumulated earnings and profits. The amount of additional
taxable income created by a non-qualified distribution is an amount that when
reduced by the tax attributable to it is equal to the amount of the
distribution.
MINIMUM TAX. The Code imposes an alternative minimum tax at a rate of
20%. The alternative minimum tax generally applies to a base of regular
taxable income plus certain tax preferences ("alternative minimum taxable
income" or "AMTI") and is payable to the extent such AMTI is in excess of an
exemption amount. The Code provides that an item of tax preference is the
excess of the bad debt deduction allowable for a taxable year pursuant to the
percentage of taxable income method over the amount allowable under the
experience method. Other items of tax preference that constitute AMTI include
(a) tax-exempt interest on newly issued (generally, issued on or after August
8, 1986) private activity bonds other than certain qualified bonds and (b)
75% of the excess (if any) of (i) adjusted current earnings as defined in the
Code, over (ii) AMTI (determined without regard to this preference and prior
to reduction by net operating losses).
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back
net operating losses ("NOLs") to the preceding three taxable years and
forward to the succeeding 15 taxable years. This provision applies to losses
incurred in taxable years beginning after 1986. At September 30, 1996, the
Savings Bank had no NOL carryforwards for federal income tax purposes.
CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Corporate net
capital gains are taxed at a maximum rate of 35%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated
tax return, and corporations which own less than 20% of the stock of a
corporation distributing a dividend may deduct only 70% of dividends received
or accrued on their behalf. However, a corporation may deduct 100% of
dividends from a member of the same affiliated group of corporations.
OTHER MATTERS. Federal legislation is introduced from time to time that
would limit the ability of individuals to deduct interest paid on mortgage
loans. Individuals are currently not permitted to deduct interest on
consumer loans. Significant increases in tax rates or further restrictions
on the deductibility of mortgage interest could adversely affect the Savings
Bank.
The Savings Bank's federal income tax returns for the tax years ended
December 31, 1993 forward are open under the statute of limitations and are
subject to review by the IRS.
35
<PAGE>
STATE TAXATION
The Company is subject to a Delaware franchise tax based on the Company's
authorized capital stock or on its assumed par and no-par capital, whichever
yields a lower result. Under the authorized capital method, each share is
taxed at a graduated rate based on the number of authorized shares with a
maximum aggregate tax of $150,000 per year. Under the assumed par-value
capital method, Delaware taxes each $1,000,000 of assumed par-capital at the
rate of $200.
The Company will be subject to an Ohio franchise tax only to the extent
it is determined to be doing business in Ohio. The Company, a Delaware
corporation, does not expect to transact business in Ohio. To the extent
that the Ohio franchise tax is determined to apply to the Company, the tax is
computed based on the greater of a Company's tax liability as determined
under separate net worth and net income computations. The Company would
exclude its investment in the Savings Bank in determining its tax liability
under the net worth computation. The tax liability under the net worth
computation will be computed at 0.596% of the Company's net taxable value.
The tax liability under the net income method would be computed at a
graduated rate not exceeding 9.12% of the Company's Ohio taxable income.
The Savings Bank is subject to an Ohio franchise tax based on its net
worth plus certain reserve amounts. Total net worth for this purpose is
reduced by certain exempted assets. The resultant net worth is taxed at a
rate of 1.5% for the 1996 return, which is based on net worth as of December
31, 1996.
The Savings Bank's state franchise tax returns for the tax years ended
December 31, 1993 forward are open under the statute of limitations and are
subject to review by state taxing authorities.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal executive office is located at 415 Center Street,
Ironton, Ohio 45638. The following table sets forth certain information
with respect to the offices and other properties of the Savings Bank at
September 30, 1996.
Net Book Value
Description/Address Leased/Owned of Property Deposits
- ------------------- ------------ -------------- --------
(In Thousands)
Main Office Owned $693 $33,763
Branch Office Owned 107 11,046
Held for future use Owned 147 --
36
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Company is a party
or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference from pages
38 and 39 of the Company's 1996 Annual Report to Stockholders ("Annual
Report").
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required herein is incorporated by reference from pages
three to 13 of the Company's 1996 Annual Report.
ITEM 7. FINANCIAL STATEMENTS.
The information required herein is incorporated by reference from pages
two, and 14 to 36 of the Company's 1996 Annual Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required herein is incorporated by reference from pages two
to six, and nine of the Company's Proxy Statement dated December 17, 1996
("Proxy Statement").
37
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages
nine to 14 of the Company's Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from pages
seven and eight of the Company's Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page 14
of the Company's Proxy Statement.
PART IV
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Document filed as part of this Report.
(1) The following documents are filed as part of this report and are
incorporated herein by reference from the Registrant's 1996 Annual Report.
Independent Auditor's Report.
Consolidated Balance Sheets as of September 30, 1996 and 1995.
Consolidated Statements of Income for the Years Ended September 30, 1996,
1995 and 1994.
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended September 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are omitted
because they are not applicable or the required information is included in the
Consolidated Financial Statements or notes thereto.
(3)(a) The following exhibits are filed as part of this Form 10-KSB,
and this list includes the Exhibit Index.
38
<PAGE>
No. Description
- --- -----------------------------------------------------------------------
3.1 Certificate of Incorporation of First Federal Financial Bancorp, Inc.(1)
3.2 Bylaws of First Federal Financial Bancorp, Inc.(1)
4 Stock Certificate of First Federal Financial Bancorp, Inc.(1)
10.1 Employment Agreement among First Federal Financial Bancorp, Inc.,
First Federal Savings Bank of Ironton and I. Vincent Rice
(representative of a similar agreement entered into with
Jeffery W. Clark)*
10.2 Stock Option Plan*
10.3 Recognition and Retention Plan and Trust*
13 1996 Annual Report to Stockholders specified portion (p. two to 36)
of the Registrant's Annual Report to Stockholders for the year
ended September 30, 1996.
21 Subsidiaries of the Registrant -- Reference is made to Item 1.
"Business" for the Required information
27 Financial Data Schedule
- --------------------
(1) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-1672) filed by the Registrant with the Securities and
Exchange Commission ("SEC") on February 26, 1996, as amended.
* Management contract or compensatory plan or arrangement.
(3)(b) Reports filed on Form 8-K.
None.
39
<PAGE>
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 FEDERAL FINANCIAL BANCORP, INC.
By: /s/I. Vincent Rice
-----------------------------
I. Vincent Rice
President
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/I. Vincent Rice
- --------------------------------------- December 26, 1996
I. Vincent Rice
President (Principal Executive Officer)
/s/Jeffery W. Clark
- --------------------------------------- December 26, 1996
Jeffery W. Clark
Comptroller (Principal Financial and
Accounting Officer)
/s/Thomas D. Phillips
- --------------------------------------- December 26, 1996
Thomas D. Phillips
Chairman
/s/James E. Waldo
- --------------------------------------- December 26, 1996
James E. Waldo
Vice Chairman
<PAGE>
/s/Edith M. Daniels
- --------------------------------------- December 26, 1996
Edith M. Daniels
Corporate Secretary and Director
/s/Edward R. Rambacher
- --------------------------------------- December 26, 1996
Edward R. Rambacher
Director
/s/Steven C. Milleson
- --------------------------------------- December 26, 1996
Steven C. Milleson
Director
/s/William P. Payne
- --------------------------------------- December 26, 1996
William P. Payne
Director
<PAGE>
EXHIBIT 10.1
AGREEMENT
AGREEMENT, dated this 3rd day of June 1996, between First Federal
Financial Bancorp, Inc. (the "Corporation"), a Delaware corporation, First
Federal Savings Bank of Ironton (the "Savings Bank"), a federally-chartered
stock savings bank and I. VINCENT RICE (the "Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of the Corporation and the
Savings Bank (together, the "Employers"); and
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive in the event that his employment with the
Employers is terminated under specified circumstances;
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) BASE SALARY. "Base Salary" shall have the meaning set forth in
Section 3(a) hereof.
(b) CAUSE. Termination of the Executive's employment for "Cause" shall
mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement.
All such determinations pursuant to this Section 1(b) shall be made in the
sole and complete discretion of the Board of Directors, which determinations
shall be final and conclusive.
(c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean a change in control of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of 1934, as
amended ("Exchange Act"), or any successor thereto,
<PAGE>
2
whether or not the Corporation is registered under Exchange Act; provided
that, without limitation, such a change in control shall be deemed to have
occurred if (i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities
of the Corporation representing 25% or more of the combined voting power of
the Corporation's then outstanding securities; or (ii) during any period of
two consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the Corporation cease for any reason to
constitute at least a majority thereof unless the election, or the nomination
for election by stockholders, of each new director was approved by a vote of
at least two-thirds of the directors then still in office who were directors
at the beginning of the period.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's
employment is terminated for any other reason, the date on which a Notice of
Termination is given or as specified in such Notice.
(f) DISABILITY. Termination by the Employers of the Executive's
employment based on "Disability" shall mean termination because of any
physical or mental impairment which qualifies the Executive for disability
benefits under the applicable long-term disability plan maintained by the
Employers or any subsidiary or, if no such plan applies, which would qualify
the Executive for disability benefits under the Federal Social Security
System.
(g) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive
following a Change in Control of the Corporation based on:
(i) Without the Executive's express written consent, a material
reduction by the Employers in the Executive's Base Salary as the
same may be increased from time to time or, except to the extent
permitted by Section 3(b) hereof, a material reduction in the
package of fringe benefits provided to the Executive, taken as a
whole;
(ii) The principal executive office of the Employers is relocated more
than 30 miles from the location of the Employers' current
principal executive office, or, without the Executive's express
written consent, the Employers require the Executive to be based
more than 30 miles from the location of the Employers' current
principal executive office, except for required travel on
business of the Employers to an extent
<PAGE>
3
substantially consistent with the Executive's present business
travel obligations;
(iii) Any purported termination of the Executive's employment for
Cause, Disability or Retirement which is not effected
pursuant to a Notice of Termination satisfying the
requirements of paragraph (i) below;
(iv) The failure by the Employers to elect or to re-elect or to
appoint or to re-appoint the Executive to the office of President
of the Employers or a material adverse change made by the
Employers in the Executive's functions, duties or
responsibilities as President of the Employers without the
Executive's express written consent; or
(v) The failure by the Employers to obtain the assumption of and
agreement to perform this Agreement by any successor as
contemplated in Section 9 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by the Employers for any reason, including without
limitation for Cause, Disability or Retirement, or by the Executive for any
reason, including without limitation for Good Reason, shall be communicated
by written "Notice of Termination" to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a dated notice which
(i) indicates the specific termination provision in this Agreement relied
upon, (ii) sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under
the provision so indicated, (iii) specifies a Date of Termination, which
shall be not less than thirty (30) nor more than ninety (90) days after such
Notice of Termination is given, except in the case of the Employers
termination of Executive's employment for Cause, which shall be effective
immediately; and (iv) is given in the manner specified in Section 10 hereof.
(j) RETIREMENT. Termination by the Employers of the Executive's
employment based on "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' retirement policies, including
early retirement, generally applicable to their salaried employees.
2. TERM OF EMPLOYMENT.
(a) The Employers hereby employ the Executive as President and
Executive hereby accepts said employment and agrees to render such services
to the Employers on the terms and conditions set forth in this Agreement.
The term of employment under this
<PAGE>
4
Agreement shall be for three years, commencing on the date of this Agreement
and, upon approval of the Board of Directors of the Employers, shall extend
for an additional year on each annual anniversary of the date of this
Agreement such that at any time the remaining term of this Agreement shall be
from two to three years. Prior to the first annual anniversary of the date
of this Agreement and each annual anniversary thereafter, the Board of
Directors of the Employers shall consider and review (with appropriate
corporate documentation thereof, and after taking into account all relevant
factors, including the Executive's performance hereunder) extension of the
term under this Agreement, and the term shall continue to extend each year if
the Board of Directors approves such extension unless the Executive gives
written notice to the Employers of the Executive's election not to extend the
term, with such written notice to be given not less than thirty (30) days
prior to any such anniversary date. References herein to the term of this
Agreement shall refer both to the initial term and successive terms.
(b) During the term of this Agreement, the Executive shall perform such
executive services for the Employers as may be consistent with his titles and
from time to time assigned to him by the Employers' Board of Directors.
3. COMPENSATION AND BENEFITS.
(a) The Employers shall compensate and pay Executive for his services
during the term of this Agreement at a minimum salary of $47,500 per year,
which may be increased from time to time in such amounts as may be determined
by the Board of Directors of the Employers and, except in connection with a
company-wide general reduction in salaries as a result of general economic
conditions, may not be decreased without the Executive's express written
consent (hereinafter, referred to as Executive's "Base Salary"). In
addition, the Executive may also receive bonus payments when, as, and if
determined in the sole discretion of the Board of Directors of the Employers.
(b) During the term of the Agreement, Executive shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or
other plans, benefits and privileges given to employees and executives of the
Employers, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Employers. The
Employers shall not make any changes in such plans, benefits or privileges
which would adversely affect Executive's rights or benefits thereunder,
unless such change occurs pursuant to a program applicable to all executive
officers of the Employers and does not result in a proportionately greater
adverse change in the rights of or benefits to Executive as compared with any
other executive officer of the Employers. Nothing paid to Executive under
any plan or arrangement presently in effect or made available in the future
shall be deemed to be in lieu of the salary payable to Executive pursuant to
Section 3(a) hereof.
<PAGE>
5
(c) During the term of this Agreement, Executive shall be entitled to
paid annual vacation in accordance with the policies as established from time
to time by the Board of Directors of the Employers, which shall in no event
be less than four weeks per annum. Executive shall not be entitled to
receive any additional compensation from the Employers for failure to take a
vacation, nor shall Executive be able to accumulate unused vacation time from
one year to the next, except to the extent authorized by the Board of
Directors of the Employers.
(d) In the event of termination by the Employers of the Executive's
employment because of Disability, the Employers shall provide continued
medical insurance in the Employers' health plan for the benefit of the
Executive and his spouse until the Executive shall have attained the age of
65, and such insurance shall be comparable to that which is provided to the
Executive as of the date of this Agreement notwithstanding anything to the
contrary in this Agreement. In the event of the Executive's death before he
attains the age of 65, the Employers shall provide the Executive's spouse
said medical insurance for two years from the date of the Executive's death.
(e) In the event of the Executive's death during the term of this
Agreement, the Executive's spouse, estate, legal representative or named
beneficiaries (as directed by the Executive in writing) shall be paid on a
monthly basis the greater of (i) the death benefits which may be available
under one or more policies of the Employers or (ii) the Executive's annual
compensation from the Employers at the rate in effect at the time of the
Executive's death for a period of twelve (12) months from the date of the
Executive's death.
(f) The Executive's compensation, benefits and expenses which are
required to be provided under this Agreement shall be paid by the Corporation
and the Savings Bank in the same proportion as the time and services actually
expended by the Executive on behalf of each respective Employer.
4. EXPENSES. The Employers shall reimburse Executive or otherwise
provide for or pay for all reasonable expenses incurred by Executive in
furtherance of, or in connection with the business of the Employers,
including, but not by way of limitation, traveling expenses, subject to such
reasonable documentation and other limitations as may be established by the
Board of Directors of the Employers. If such expenses are paid in the first
instance by Executive, the Employers shall reimburse the Executive therefor.
5. TERMINATION.
(a) The Employers shall have the right, at any time upon prior Notice
of Termination, to terminate the Executive's employment hereunder for any
reason, including without limitation termination for Cause, Disability or
Retirement, and Executive shall have
<PAGE>
6
the right, upon prior Notice of Termination, to terminate his employment
hereunder for any reason.
(b) In the event that (i) Executive's employment is terminated by the
Employers for Cause, Disability or Retirement or in the event of the Executive's
death, or (ii) Executive terminates his employment hereunder other than for Good
Reason, Executive shall have no right pursuant to this Agreement to compensation
or other benefits for any period after the applicable Date of Termination, other
than as set forth in subsections 3(d) and 3(e) hereinabove.
(c) In the event that (i) Executive's employment is terminated by the
Employers for other than Cause, Disability, Retirement or the Executive's death,
or (ii) such employment is terminated by the Executive (a) due to a material
breach of this Agreement by the Employers, which breach has not been cured
within fifteen (15) days after a written notice of non-compliance has been given
by the Executive to the Employers, or (b) for Good Reason, then the Employers
shall:
(A) pay to the Executive, in thirty-six (36) equal monthly
installments beginning with the first business day of the month following
the Date of Termination, a cash severance amount equal to three (3) times
the Executive's Base Salary, and
(B) maintain and provide for a period ending at the earlier of (i)
the expiration of the remaining term of employment pursuant hereto prior to
the Notice of Termination or (ii) the date of the Executive's full-time
employment by another employer (provided that the Executive is entitled
under the terms of such employment to benefits substantially similar to
those described in this subparagraph (B)), at no additional cost to the
Executive beyond that which the Executive is responsible for prior to the
Date of Termination, the Executive's continued participation in all group
insurance, life insurance, health and accident, disability and other
employee benefit plans, programs and arrangements in which the Executive
was entitled to participate immediately prior to the Date of Termination
(other than stock option and restricted stock plans of the Employers),
provided that in the event that the Executive's participation in any plan,
program or arrangement as provided in this subparagraph (B) is barred, or
during such period any such plan, program or arrangement is discontinued or
the benefits thereunder are materially reduced, the Employers shall arrange
to provide the Executive with benefits substantially similar to those which
the Executive was entitled to receive under such plans, programs and
arrangements immediately prior to the Date of Termination.
6. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments
and benefits pursuant to Section 5 hereof, either alone or together with other
payments and benefits which Executive has the right to receive from the
Employers, would constitute a
<PAGE>
7
"parachute payment" under Section 280G of the Code, the payments and benefits
pursuant to Section 5 hereof shall be reduced, in the manner determined by
the Executive, by the amount, if any, which is the minimum necessary to
result in no portion of the payments and benefits under Section 5 being
non-deductible to the Employers pursuant to Section 280G of the Code and
subject to the excise tax imposed under Section 4999 of the Code. The
determination of any reduction in the payments and benefits to be made
pursuant to Section 5 shall be based upon the opinion of independent tax
counsel selected by the Employers' independent public accountants and paid by
the Employers. Such counsel shall be reasonably acceptable to the Employers
and the Executive; shall promptly prepare the foregoing opinion, but in no
event later than thirty (30) days from the Date of Termination; and may use
such actuaries as such counsel deems necessary or advisable for the purpose.
In the event that the Employers and/or the Executive do not agree with the
opinion of such counsel, (i) the Employers shall pay to the Executive the
maximum amount of payments and benefits pursuant to Section 5, as selected by
the Executive, which such opinion indicates that there is a high probability
do not result in any of such payments and benefits being non-deductible to
the Employers and subject to the imposition of the excise tax imposed under
Section 4999 of the Code and (ii) the Employers may request, and Executive
shall have the right to demand that the Employers request, a ruling from the
IRS as to whether the disputed payments and benefits pursuant to Section 5
hereof have such consequences. Any such request for a ruling from the IRS
shall be promptly prepared and filed by the Employers, but in no event later
than thirty (30) days from the date of the opinion of counsel referred to
above, and shall be subject to Executive's approval prior to filing, which
shall not be unreasonably withheld. The Employers and Executive agree to be
bound by any ruling received from the IRS and to make appropriate payments to
each other to reflect any such rulings, together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the Code.
Nothing contained herein shall result in a reduction of any payments or
benefits to which the Executive may be entitled upon termination of
employment under any circumstances other than as specified in this Section 6,
or a reduction in the payments and benefits specified in Section 5 below zero.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) In the event that the Employers are required to make payments to
the Executive pursuant to Section 5 hereof in connection with a termination
of Executive's employment for other than Good Reason, the cash severance
amount required to be paid by the Employers shall be reduced during each year
that such payments are required to be made by 50% of any payments made to the
Executive by any other employer. In all other circumstances, the Executive
shall not be required to mitigate the amount of any benefits hereunder by
seeking other employment or otherwise, nor shall the amount of any such
benefits be reduced by any compensation earned by the Executive as a result
of employment by another employer after the Date of Termination or otherwise.
<PAGE>
8
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
8. WITHHOLDING. All payments required to be made by the Employers
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Employers may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
9. ASSIGNABILITY. The Employers may assign this Agreement and their
rights and obligations hereunder in whole, but not in part, to any corporation,
bank or other entity with or into which the Employers may hereafter merge or
consolidate or to which the Employers may transfer all or substantially all of
their assets, if in any such case said corporation, bank or other entity shall
by operation of law or expressly in writing assume all obligations of the
Employers hereunder as fully as if it had been originally made a party hereto,
but may not otherwise assign this Agreement or their rights and obligations
hereunder. The Executive may not assign or transfer this Agreement or any
rights or obligations hereunder.
10. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Employers: Secretary
First Federal Financial Bancorp, Inc.
First Federal Savings Bank of Ironton
415 Center Street
Ironton, Ohio 45638
To the Executive: I. Vincent Rice
337 Township Road 111
Ironton, Ohio 45638
11. AMENDMENT; WAIVER. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Employers to sign on
their behalf. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
<PAGE>
9
12. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United
States where applicable and otherwise by the substantive laws of the State of
Ohio.
13. NATURE OF OBLIGATIONS. Nothing contained herein shall create or
xrequire the Employers to create a trust of any kind to fund any benefits
which may be payable hereunder, and to the extent that the Executive acquires
a right to receive benefits from the Employers hereunder, such right shall be
no greater than the right of any unsecured general creditor of the Employers.
14. HEADINGS. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
17. REGULATORY PROHIBITION. Notwithstanding any other provision of
this Agreement to the contrary, any payments made to the Executive pursuant
to this Agreement, or otherwise, are subject to and conditioned upon their
compliance with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and any
regulations promulgated thereunder.
The following provisions shall be applicable to the parties to the
extent that they are required to be included in employment agreements between
a savings association and its employees pursuant to Section 563.39(b) of the
Regulations Applicable to all Savings Associations, 12 C.F.R. Section
563.39(b), or any successor thereto, and shall be controlling in the event of
a conflict with any other provision of this Agreement, including without
limitation Section 5 hereof.
(a) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Employers' affairs pursuant to
notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA")(12 U.S.C. Sections 1818(e)(3) and 1818(g)(1)), the
Employers' obligations under this Agreement shall be suspended as of the date
of service, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Employers may, in their discretion: (i) pay
Executive all or part of the compensation withheld while its obligations
under this Agreement were
<PAGE>
10
suspended, and (ii) reinstate (in whole or in part) any of its obligations
which were suspended.
(b) If Executive is removed from office and/or permanently prohibited
from participating in the conduct of the Employers' affairs by an order
issued under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C.
Sections 1818(e)(4) and (g)(1)), all obligations of the Employers under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the Executive and the Employers as of the date of termination shall
not be affected.
(c) If the Savings Bank is in default, as defined in Section 3(x)(1) of
the FDIA (12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement
shall terminate as of the date of default, but vested rights of the Executive
and the Employers as of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be terminated pursuant
to 12 C.F.R. Section 563.39(b)(5) (except to the extent that it is determined
that continuation of the Agreement for the continued operation of the
Employers is necessary): (i) by the Director of the Office of Thrift
Supervision ("OTS"), or his/her designee, at the time the Federal Deposit
Insurance Corporation ("FDIC") or Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Savings Bank under the
authority contained in Section 13(c) of the FDIA (12 U.S.C. Section 1823(c));
or (ii) by the Director of the OTS, or his/her designee, at the time the
Director or his/her designee approves a supervisory merger to resolve
problems related to operation of the Savings Bank or when the Savings Bank is
determined by the Director of the OTS to be in an unsafe or unsound
condition, but vested rights of the Executive and the Employers as of the
date of termination shall not be affected.
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11
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: FIRST FEDERAL FINANCIAL BANCORP, INC.
/s/ Edith M. Daniels By: /s/ Thomas D. Phillips
- ---------------------------- ---------------------------------
Edith M. Daniels, Secretary Thomas D. Phillips
Chairman
Attest: FIRST FEDERAL SAVINGS BANK
OF IRONTON
/s/ Edith M. Daniels By: /s/ Thomas D. Phillips
- ---------------------------- ---------------------------------
Edith M. Daniels, Secretary Thomas D. Phillips
Chairman
EXECUTIVE
By: /s/ I. Vincent Rice
---------------------------------
I. Vincent Rice
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EXHIBIT 10.2
FIRST FEDERAL FINANCIAL BANCORP, INC.
STOCK OPTION PLAN
ARTICLE I
ESTABLISHMENT OF THE PLAN
First Federal Financial Bancorp, Inc. (the "Corporation") hereby
establishes this Stock Option Plan (the "Plan") upon the terms and conditions
hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
The purpose of this Plan is to improve the growth and profitability
of the Corporation and its Subsidiary Companies by providing Employees and
Non-Employee Directors with a proprietary interest in the Corporation as an
incentive to contribute to the success of the Corporation and its Subsidiary
Companies, and rewarding those Employees for outstanding performance and the
attainment of targeted goals. All Incentive Stock Options issued under this
Plan are intended to comply with the requirements of Section 422 of the Code,
and the regulations thereunder, and all provisions hereunder shall be read,
interpreted and applied with that purpose in mind.
ARTICLE III
DEFINITIONS
3.01 "Award" means an Option or Stock Appreciation Right granted
pursuant to the terms of this Plan.
3.02 "Board" means the Board of Directors of the Corporation.
3.03 "Change in Control of the Corporation" shall be deemed to have
occurred if: (i) any "person" as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Corporation and any trustee or
other fiduciary holding securities under any employee benefit plan of the
Corporation), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Corporation representing 25% or more of the combined voting power of the
Corporation's then outstanding securities; (ii) during any period of two
consecutive years (not including any period prior to the adoption of the
Plan), individuals who at the beginning of such period constitute the Board
of Directors, and any new director whose election by the Board of Directors
or nomination for election by the Corporation's stockholders was approved by
a vote of at least two-thirds of the directors then still in office who
either were directors at the beginning of the two-year period or whose
election or nomination for election was
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previously so approved, cease for any reason to constitute at least a
majority of the Board of Directors; (iii) the stockholders of the Corporation
approve a merger or consolidation of the Corporation with any other
corporation, other than a merger or consolidation that would result in the
voting securities of the Corporation outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 50% of
the combined voting power of the voting securities of the Corporation
outstanding immediately after such merger or consolidation; or (iv) the
stockholders of the Corporation approve a plan of complete liquidation of the
Corporation or an agreement for the sale or disposition by the Corporation of
all or substantially all of the Corporation's assets. If any of the events
enumerated in clauses (i) through (iv) occur, the Board shall determine the
effective date of the Change in Control resulting therefrom for purposes of
the Plan.
3.04 "Code" means the Internal Revenue Code of 1986, as amended.
3.05 "Committee" means a committee of two or more directors
appointed by the Board pursuant to Article IV hereof, each of whom shall be a
Non-Employee Director.
3.06 "Common Stock" means shares of the common stock, $.01 par
value per share, of the Corporation.
3.07 "Disability" means any physical or mental impairment which
qualifies an Employee for disability benefits under the applicable long-term
disability plan maintained by the Corporation or a Subsidiary Company, or, if no
such plan applies, which would qualify such Employee for disability benefits
under the Federal Social Security System.
3.08 "Effective Date" means the day upon which the Board approves
this Plan.
3.09 "Employee" means any person who is employed by the
Corporation or a Subsidiary Company, or is an Officer of the Corporation or a
Subsidiary Company, but not including directors who are not also Officers of or
otherwise employed by the Corporation or a Subsidiary Company.
3.10 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
3.11 "Fair Market Value" shall be equal to the fair market value
per share of the Corporation's Common Stock on the date an Award is granted.
For purposes hereof, the Fair Market Value of a share of Common Stock shall be
the closing sale price of a share of Common Stock on the date in question (or,
if such day is not a trading day in the U.S. markets, on the nearest preceding
trading day), as reported with respect to the principal market (or the composite
of the markets, if more than one) or national quotation system in which such
shares are then traded, or if no such closing prices are reported, the mean
between the high bid and low asked prices that day on the principal market or
national quotation system then in use, or if no such quotations are available,
the price furnished by
2
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a professional securities dealer making a market in such shares selected by
the Committee.
3.12 "Incentive Stock Option" means any Option granted under this
Plan which the Board intends (at the time it is granted) to be an incentive
stock option within the meaning of Section 422 of the Code or any successor
thereto.
3.13 "Non-Employee Director" means a member of the Board who is
not an Officer or Employee of the Corporation or any Subsidiary Company and
shall include any individual who, at any time after the date of adoption of the
Plan, services the Board in an advisory or emeritus capacity.
3.14 "Non-Qualified Option" means any Option granted under this
Plan which is not an Incentive Stock Option.
3.15 "Offering" means the offering of Common Stock to the public
pursuant to a Plan of Conversion adopted by the Savings Bank.
3.16 "Officer" means an Employee whose position in the
Corporation or Subsidiary Company is that of a corporate officer, as determined
by the Board.
3.17 "OTS" means the Office of Thrift Supervision.
3.18 "Option" means a right granted under this Plan to purchase
Common Stock.
3.19 "Optionee" means an Employee or Non-Employee Director or
former Employee or Non-Employee Director to whom an Option is granted under the
Plan.
3.20 "Retirement" means a termination of employment upon or after
attainment of age sixty-five (65) or such earlier age as may be specified in any
applicable plans or policies maintained by the Corporation or a Subsidiary
Company.
3.21 "Savings Bank" means First Federal Savings Bank of Ironton,
the wholly-owned subsidiary of the Corporation.
3.22 "Stock Appreciation Right" means a right to surrender an
Option in consideration for a payment by the Corporation in cash and/or Common
Stock, as provided in the discretion of the Committee in accordance with Section
8.11.
3.23 "Subsidiary Companies" means those subsidiaries of the
Corporation, including the Savings Bank, which meet the definition of
"subsidiary corporations" set forth in Section 425(f) of the Code, at the time
of granting of the Option in question.
3
<PAGE>
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 DUTIES OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, as appointed from time to time by the Board
pursuant to Section 4.02. The Committee shall have the authority (subject to
compliance with applicable OTS regulations) to adopt, amend and rescind such
rules, regulations and procedures as, in its opinion, may be advisable in the
administration of the Plan, including, without limitation, rules, regulations
and procedures which (i) deal with satisfaction of an Optionee's tax
withholding obligation pursuant to Section 12.02 hereof, (ii) include
arrangements to facilitate the Optionee's ability to borrow funds for payment
of the exercise or purchase price of an Award, if applicable, from securities
brokers and dealers, and (iii) include arrangements which provide for the
payment of some or all of such exercise or purchase price by delivery of
previously-owned shares of Common Stock or other property and/or by
withholding some of the shares of Common Stock which are being acquired. The
interpretation and construction by the Committee of any provisions of the
Plan, any rule, regulation or procedure adopted by it pursuant thereto or of
any Award shall be final and binding in the absence of action by the Board of
Directors.
4.02 APPOINTMENT AND OPERATION OF THE COMMITTEE. The members of the
Committee shall be appointed by, and will serve at the pleasure of, the
Board. The Board from time to time may remove members from, or add members
to, the Committee, provided the Committee shall continue to consist of two or
more members of the Board, each of whom shall be a Non-Employee Director.
The Committee shall act by vote or written consent of a majority of its
members. Subject to the express provisions and limitations of the Plan, the
Committee may adopt such rules, regulations and procedures as it deems
appropriate for the conduct of its affairs. It may appoint one of its
members to be chairman and any person, whether or not a member, to be its
secretary or agent. The Committee shall report its actions and decisions to
the Board at appropriate times but in no event less than one time per
calendar year.
4.03 REVOCATION FOR MISCONDUCT. The Board of Directors or the
Committee may by resolution immediately revoke, rescind and terminate any
Option, or portion thereof, to the extent not yet vested, or any Stock
Appreciation Right, to the extent not yet exercised, previously granted or
awarded under this Plan to an Employee who is discharged from the employ of
the Corporation or a Subsidiary Company for cause, which, for purposes
hereof, shall mean termination because of the Employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of
any law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order. Options granted to a Non-Employee
Director who is removed for cause pursuant to the Corporation's Certificate
of Incorporation shall, to the extent not yet vested, terminate as of the
effective date of such removal.
4
<PAGE>
4.04 LIMITATION ON LIABILITY. Neither the members of the Board of
Directors nor any member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan, any rule,
regulation or procedure adopted pursuant thereto or for any Awards granted
hereunder. If any members of the Board of Directors or a member of the
Committee is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of anything done or not done by
him in such capacity under or with respect to the Plan, the Corporation
shall, subject to the requirements of applicable laws and regulations,
indemnify such member against all liabilities and expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed
to be in the best interests of the Corporation and its Subsidiary Companies
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful.
4.05 COMPLIANCE WITH LAW AND REGULATIONS. All Awards granted
hereunder shall be subject to all applicable federal and state laws, rules
and regulations and to such approvals by any government or regulatory agency
as may be required. The Corporation shall not be required to issue or
deliver any certificates for shares of Common Stock prior to the completion
of any registration or qualification of or obtaining of consents or approvals
with respect to such shares under any federal or state law or any rule or
regulation of any government body, which the Corporation shall, in its sole
discretion, determine to be necessary or advisable. Moreover, no Option or
Stock Appreciation Right may be exercised if such exercise would be contrary
to applicable laws and regulations.
4.06 RESTRICTIONS ON TRANSFER. The Corporation may place a legend
upon any certificate representing shares acquired pursuant to an Award
granted hereunder noting that the transfer of such shares may be restricted
by applicable laws and regulations.
ARTICLE V
ELIGIBILITY
Awards may be granted to such Employees or Non-Employee Directors of
the Corporation and its Subsidiary Companies as may be designated from time
to time by the Board of Directors or the Committee. Awards may not be
granted to individuals who are not Employees or Non-Employee Directors of
either the Corporation or its Subsidiary Companies. Non-Employee Directors
shall be eligible to receive only Non-Qualified Options.
5
<PAGE>
ARTICLE VI
COMMON STOCK COVERED BY THE PLAN
6.01 OPTION SHARES. The aggregate number of shares of Common Stock
which may be issued pursuant to this Plan, subject to adjustment as provided
in Article IX, shall be 67,178 shares, which is equal to 10.0% of the shares
of Common Stock issued in the Offering. None of such shares shall be the
subject of more than one Award at any time, but if an Option as to any shares
is surrendered before exercise, or expires or terminates for any reason
without having been exercised in full, or for any other reason ceases to be
exercisable, the number of shares covered thereby shall again become
available for grant under the Plan as if no Awards had been previously
granted with respect to such shares. Notwithstanding the foregoing, if an
Option is surrendered in connection with the exercise of a Stock Appreciation
Right, the number of shares covered thereby shall not be available for grant
under the Plan. During the time this Plan remains in effect, grants to each
Employee and each Non-Employee Director shall not exceed 25% and 5% of the
shares of Common Stock available under the Plan, respectively, provided,
however, that grants in the aggregate to Non-Employee Directors shall not
exceed 30% of the shares of Common Stock available under the Plan.
6.02 SOURCE OF SHARES. The shares of Common Stock issued under the
Plan may be authorized but unissued shares, treasury shares, shares purchased
by the Corporation on the open market or from private sources for use under
the Plan or, if applicable, shares held in a grantor trust created by the
Corporation.
ARTICLE VII
DETERMINATION OF
AWARDS, NUMBER OF SHARES, ETC.
The Board of Directors or the Committee shall, in its discretion,
determine from time to time which Employees and Non-Employee Directors will
be granted Awards under the Plan, the number of shares of Common Stock
subject to each Award, whether each Option will be an Incentive Stock Option
or a Non-Qualified Stock Option and the exercise price of an Option. In
making determinations with respect to Employees there shall be taken into
account the duties, responsibilities and performance of each respective
Employee, his present and potential contributions to the growth and success
of the Corporation, his salary and such other factors as the Board of
Directors or the Committee shall deem relevant to accomplishing the purposes
of the Plan.
ARTICLE VIII
OPTIONS AND STOCK APPRECIATION RIGHTS
Each Option granted hereunder shall be on the following terms and
conditions:
6
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8.01 STOCK OPTION AGREEMENT. The proper Officers on behalf of the
Corporation and each Optionee shall execute a Stock Option Agreement which
shall set forth the total number of shares of Common Stock to which it
pertains, the exercise price, whether it is a Non-Qualified Option or an
Incentive Stock Option, and such other terms, conditions, restrictions and
privileges as the Board of Directors or the Committee in each instance shall
deem appropriate, provided they are not inconsistent with the terms,
conditions and provisions of this Plan. Each Optionee shall receive a copy
of his executed Stock Option Agreement.
8.02 AWARDS TO EMPLOYEES AND NON-EMPLOYEE DIRECTORS. Specific
Awards to Employees and Non-Employee Directors shall be made to such persons
and in such amounts as are determined by the Board of Directors or the
Committee. However, Awards equal to 20,153 shares (or 30% of the number of
shares available under this Plan) shall be made to Non-Employee Directors in
the aggregate and no individual Non-Employee Director may receive Awards in
excess of 3,358 shares (or 5% of the number of shares available under this
Plan).
8.03 OPTION EXERCISE PRICE.
(A) INCENTIVE STOCK OPTIONS. The per share price at which the
subject Common Stock may be purchased upon exercise of an Incentive Stock
Option shall be no less than one hundred percent (100%) of the Fair Market
Value of a share of Common Stock at the time such Incentive Stock Option is
granted, except as provided in Section 8.10(b), and subject to any applicable
adjustment pursuant to Article IX hereof.
(B) NON-QUALIFIED OPTIONS. The per share price at which the
subject Common Stock may be purchased upon exercise of a Non-Qualified Option
shall be no less than one hundred percent (100%) of the Fair Market Value of
a share of Common Stock at the time such Non-Qualified Option is granted, and
subject to any applicable adjustment pursuant to Article IX hereof.
8.04 VESTING AND EXERCISE OF OPTIONS.
(A) GENERAL RULES. Incentive Stock Options and Non-Qualified
Options granted hereunder shall become vested and exercisable at the rate of
20% per year on each annual anniversary of the date the Option was granted,
and the right to exercise shall be cumulative. Notwithstanding the
foregoing, no vesting shall occur on or after an Employee's employment with
the Corporation and all Subsidiary Companies is terminated for any reason
other than his death or Disability. In determining the number of shares of
Common Stock with respect to which Options are vested and/or exercisable,
fractional shares will be rounded up to the nearest whole number if the
fraction is 0.5 or higher, and down if it is less.
(B) ACCELERATED VESTING. Unless the Committee shall
specifically state
7
<PAGE>
otherwise at the time an Option is granted, all Options granted hereunder
shall become vested and exercisable in full on the date an Optionee
terminates his employment with or service to the Corporation or a Subsidiary
Company because of his death or Disability. All options hereunder shall
become immediately vested and exercisable in full on the date an Optionee
terminates his employment or service to the Corporation or a Subsidiary
Company as the result of a Change in Control of the Corporation if, as of the
date of such Change in Control of the Corporation, such treatment is either
authorized or is not prohibited by applicable laws and regulations.
8.05 DURATION OF OPTIONS.
(A) GENERAL RULE. Except as provided in Sections 8.05(b) and
8.10, each Option or portion thereof granted to Employees and Non-Employee
Directors shall be exercisable at any time on or after it vests and becomes
exercisable until the earlier of (i) ten (10) years after its date of grant
or (ii) three (3) months after the date on which the Optionee ceases to be
employed (or in the service of the Board of Directors in the case of
Non-Employee Directors) by the Corporation and all Subsidiary Companies,
unless the Board of Directors or the Committee in its discretion decides at
the time of grant or thereafter to extend such period of exercise upon
termination of employment or service from three (3) months to a period not
exceeding one (1) year.
(B) EXCEPTIONS. If an Employee dies while in the employ of
the Corporation or a Subsidiary Company or terminates employment with the
Corporation or a Subsidiary Company as a result of Disability without having
fully exercised his Options, the Optionee or the executors, administrators,
legatees or distributees of his estate shall have the right, during the
twelve-month period following the earlier of his death or termination due to
Disability, to exercise such Options. If a Non-Employee Director dies while
serving as a Non-Employee Director or terminates his service to the
Corporation or a Subsidiary Company as a result of Disability without having
fully exercised his Options, the Non-Employee Director or the executors,
administrators, legatees or distributees of his estate shall have the right,
during the twelve-month period following the earlier of his death or
termination due to Disability, to exercise such Options. In no event,
however, shall any Option be exercisable more than ten (10) years from the
date it was granted. In the event of Retirement, an Employee or Non-Employee
Director shall be entitled to the same time period set forth above in this
Section 8.05(b) to exercise an Option if, as of the date of such Retirement,
such treatment is either authorized or is not prohibited by applicable laws
and regulations.
8.06 NONASSIGNABILITY. Options shall not be transferable by an
Optionee except by will or the laws of descent or distribution, and during an
Optionee's lifetime shall be exercisable only by such Optionee or the
Optionee's guardian or legal representative. Notwithstanding the foregoing,
or any other provision of this Plan, an Optionee who holds Non-Qualified
Options may transfer such Options to his or her spouse, lineal ascendants,
lineal descendants, or to a duly established trust for the benefit of one or
more of these individuals. Options so transferred may thereafter be
transferred only to the Optionee who originally received the grant or to an
individual or trust to whom the Optionee could have
8
<PAGE>
initially transferred the Option pursuant to this Section 8.06. Options which
are transferred pursuant to this Section 8.06 shall be exercisable by the
transferee according to the same terms and conditions as applied to the
Optionee.
8.07 MANNER OF EXERCISE. Options may be exercised in part or in
whole and at one time or from time to time. The procedures for exercise
shall be set forth in the written Stock Option Agreement provided pursuant to
Section 8.01.
8.08 PAYMENT FOR SHARES. Payment in full of the purchase price for
shares of Common Stock purchased pursuant to the exercise of any Option shall
be made to the Corporation upon exercise of such Option. All shares sold
under the Plan shall be fully paid and nonassessable. Payment for shares may
be made by the Optionee in cash or, at the discretion of the Board of
Directors or the Committee, by delivering shares of Common Stock (including
shares acquired pursuant to the exercise of an Option) or other property
equal in Fair Market Value to the purchase price of the shares to be acquired
pursuant to the Option, by withholding some of the shares of Common Stock
which are being purchased upon exercise of an Option, or any combination of
the foregoing.
8.09 VOTING AND DIVIDEND RIGHTS. No Optionee shall have any voting
or dividend rights or other rights of a stockholder in respect of any shares
of Common Stock covered by an Option prior to the time that his name is
recorded on the Corporation's stockholder ledger as the holder of record of
such shares acquired pursuant to an exercise of such Option.
8.10 ADDITIONAL TERMS APPLICABLE TO INCENTIVE STOCK OPTIONS. All
Options issued under the Plan as Incentive Stock Options will be subject, in
addition to the terms detailed in Sections 8.01 to 8.09 above, to those
contained in this Section 8.10.
(A) Notwithstanding any contrary provisions contained
elsewhere in this Plan and as long as required by Section 422 of the Code,
the aggregate Fair Market Value, determined as of the time an Incentive Stock
Option is granted, of the Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by the Optionee during any
calendar year, under this Plan and stock options that satisfy the
requirements of Section 422 of the Code under any other stock option plan or
plans maintained by the Corporation (or any parent or Subsidiary Company),
shall not exceed $100,000.
(B) LIMITATION ON TEN PERCENT STOCKHOLDERS. The price at
which shares of Common Stock may be purchased upon exercise of an Incentive
Stock Option granted to an individual who, at the time such Incentive Stock
Option is granted, owns, directly or indirectly, more than ten percent (10%)
of the total combined voting power of all classes of stock issued to
stockholders of the Corporation or any Subsidiary Company, shall be no less
than one hundred and ten percent (110%) of the Fair Market Value of a share
of the Common Stock of the Corporation at the time of grant, and such
Incentive Stock Option shall by its terms not be exercisable after the
earlier of the date determined under Section
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8.04 or the expiration of five (5) years from the date such Incentive Stock
Option is granted.
(C) NOTICE OF DISPOSITION; WITHHOLDING; ESCROW. An Optionee
shall immediately notify the Corporation in writing of any sale, transfer,
assignment or other disposition (or action constituting a disqualifying
disposition within the meaning of Section 421 of the Code) of any shares of
Common Stock acquired through exercise of an Incentive Stock Option within
two (2) years after the grant of such Incentive Stock Option or within one
(1) year after the acquisition of such shares, setting forth the date and
manner of disposition, the number of shares disposed of and the price at
which such shares were disposed of. The Corporation shall be entitled to
withhold from any compensation or other payments then or thereafter due to
the Optionee such amounts as may be necessary to satisfy any withholding
requirements of federal or state law or regulation and, further, to collect
from the Optionee any additional amounts which may be required for such
purpose. The Committee may, in its discretion, require shares of Common
Stock acquired by an Optionee upon exercise of an Incentive Stock Option to
be held in an escrow arrangement for the purpose of enabling compliance with
the provisions of this Section 8.10(c).
8.11 STOCK APPRECIATION RIGHTS.
(A) GENERAL TERMS AND CONDITIONS. The Board of Directors or
the Committee may, but shall not be obligated to, authorize the Corporation,
on such terms and conditions as it deems appropriate in each case, to grant
rights to Optionees to surrender an exercisable Option, or any portion
thereof, in consideration for the payment by the Corporation of an amount
equal to the excess of the Fair Market Value of the shares of Common Stock
subject to the Option, or portion thereof, surrendered over the exercise
price of the Option with respect to such shares (any such authorized
surrender and payment being hereinafter referred to as a "Stock Appreciation
Right"). Such payment, at the discretion of the Board of Directors or the
Committee, may be made in shares of Common Stock valued at the then Fair
Market Value thereof, or in cash, or partly in cash and partly in shares of
Common Stock.
The terms and conditions set with respect to a Stock Appreciation
Right may include (without limitation), subject to other provisions of this
Section 8.11 and the Plan, the period during which, date by which or event upon
which the Stock Appreciation Right may be exercised (which shall be on the same
terms as the Option to which it relates pursuant to Section 8.04 hereunder); the
method for valuing shares of Common Stock for purposes of this Section 8.11; a
ceiling on the amount of consideration which the Corporation may pay in
connection with exercise and cancellation of the Stock Appreciation Right; and
arrangements for income tax withholding. The Board of Directors or the
Committee shall have complete discretion to determine whether, when and to whom
Stock Appreciation Rights may be granted. Notwithstanding the foregoing, the
Corporation may not permit the exercise of a Stock Appreciation Right issued
pursuant to this Plan until the Corporation has been subject to the reporting
requirements of Section 13 of the Exchange Act for a period of at least one year
prior to the exercise of any such Stock Appreciation Right and
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until a Stock Appreciation Right issued pursuant to this Plan has been
outstanding for at least six months from the date of grant.
(B) TIME LIMITATIONS. If a holder of a Stock Appreciation Right
terminates service with the Corporation, the Stock Appreciation Right may be
exercised only within the period, if any, within which the Option to which it
relates may be exercised. Notwithstanding the foregoing, any election by an
Optionee to exercise the Stock Appreciation Rights provided in this Plan shall
be made during the period beginning on the third business day following the
release for publication of quarterly or annual financial information required to
be prepared and disseminated by the Corporation pursuant to the requirements of
the Exchange Act and ending on the twelfth business day following such date.
The required release of information shall be deemed to have been satisfied when
the specified financial data appears on or in a wire service, financial news
service or newspaper of general circulation or is otherwise first made publicly
available.
(C) EFFECTS OF EXERCISE OF STOCK APPRECIATION RIGHTS OR OPTIONS.
Upon the exercise of a Stock Appreciation Right, the number of shares of Common
Stock available under the Option to which it relates shall decrease by a number
equal to the number of shares for which the Stock Appreciation Right was
exercised. Upon the exercise of an Option, any related Stock Appreciation Right
shall terminate as to any number of shares of Common Stock subject to the Stock
Appreciation Right that exceeds the total number of shares for which the Option
remains unexercised.
(D) TIME OF GRANT. A Stock Appreciation Right may be granted
concurrently with the Option to which it relates or at any time thereafter prior
to the exercise or expiration of such Option.
(E) NON-TRANSFERABLE. The holder of a Stock Appreciation Right
may not transfer or assign the Stock Appreciation Right otherwise than by will
or in accordance with the laws of descent and distribution, and during a
holder's lifetime a Stock Appreciation Right may be exercisable only by the
holder.
ARTICLE IX
ADJUSTMENTS FOR CAPITAL CHANGES
The aggregate number of shares of Common Stock available for
issuance under this Plan, the number of shares to which any Award relates and
the exercise price per share of Common Stock under any Option shall be
proportionately adjusted for any increase or decrease in the total number of
outstanding shares of Common Stock issued subsequent to the effective date of
this Plan resulting from a split, subdivision or consolidation of shares or
any other capital adjustment, the payment of a stock dividend, or other
increase or decrease in such shares effected without receipt or payment of
consideration by the Corporation. If, upon a merger, consolidation,
reorganization, liquidation, recapitalization
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or the like of the Corporation, the shares of the Corporation's Common Stock
shall be exchanged for other securities of the Corporation or of another
corporation, each recipient of an Award shall be entitled, subject to the
conditions herein stated, to purchase or acquire such number of shares of
Common Stock or amount of other securities of the Corporation or such other
corporation as were exchangeable for the number of shares of Common Stock of
the Corporation which such optionees would have been entitled to purchase or
acquire except for such action, and appropriate adjustments shall be made to
the per share exercise price of outstanding Options. Notwithstanding any
provision to the contrary, the exercise price of shares subject to
outstanding Awards may be proportionately adjusted upon the payment of a
special large and nonrecurring dividend that has the effect of a return of
capital to the stockholders.
ARTICLE X
AMENDMENT AND TERMINATION OF THE PLAN
The Board may, by resolution, at any time terminate or amend the
Plan with respect to any shares of Common Stock as to which Awards have not
been granted, subject to regulations of the OTS and any required stockholder
approval or any stockholder approval which the Board may deem to be advisable
for any reason, such as for the purpose of obtaining or retaining any
statutory or regulatory benefits under tax, securities or other laws or
satisfying any applicable stock exchange listing requirements. The Board may
not, without the consent of the holder of an Award, alter or impair any Award
previously granted or awarded under this Plan as specifically authorized
herein.
ARTICLE XI
EMPLOYMENT RIGHTS
Neither the Plan nor the grant of any Awards hereunder nor any action
taken by the Committee or the Board in connection with the Plan shall create any
right on the part of any Employee or Non-Employee Director of the Corporation or
a Subsidiary Company to continue in such capacity.
ARTICLE XII
WITHHOLDING
12.01 TAX WITHHOLDING. The Corporation may withhold from any cash
payment made under this Plan sufficient amounts to cover any applicable
withholding and employment taxes, and if the amount of such cash payment is
insufficient, the Corporation may require the Optionee to pay to the Corporation
the amount required to be withheld as a condition to delivering the shares
acquired pursuant to an Award. The Corporation also may withhold or collect
amounts with respect to a disqualifying disposition of shares of Common Stock
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acquired pursuant to the exercise of an Incentive Stock Option, as provided in
Section 8.10(c).
12.02 METHODS OF TAX WITHHOLDING. The Board of Directors or the
Committee is authorized to adopt rules, regulations or procedures which provide
for the satisfaction of an Optionee's tax withholding obligation by the
retention of shares of Common Stock to which the Employee would otherwise be
entitled pursuant to an Award and/or by the Optionee's delivery of
previously-owned shares of Common Stock or other property.
ARTICLE XIII
EFFECTIVE DATE OF THE PLAN; TERM
13.01 EFFECTIVE DATE OF THE PLAN. This Plan shall become
effective on the Effective Date, and Awards may be granted hereunder as of or
after the Effective Date and prior to the termination of the Plan, provided that
no Incentive Stock Option issued pursuant to this Plan shall qualify as such
unless this Plan is approved by the requisite vote of the holders of the
outstanding voting shares of the Corporation at a meeting of stockholders of the
Corporation held within twelve (12) months of the Effective Date.
Notwithstanding the foregoing or anything to the contrary in this Plan, the
implementation of this Plan and any Awards granted pursuant hereto shall be
subject to the non-objection of the OTS in the first year after the completion
of the Offering and to the approval of the Corporation's stockholders.
13.02 TERM OF PLAN. Unless sooner terminated, this Plan shall
remain in effect for a period of ten (10) years ending on the tenth
anniversary of the Effective Date. Termination of the Plan shall not affect
any Awards previously granted and such Awards shall remain valid and in
effect until they have been fully exercised or earned, are surrendered or by
their terms expire or are forfeited.
ARTICLE XIV
MISCELLANEOUS
14.01 GOVERNING LAW. To the extent not governed by federal law,
this Plan shall be construed under the laws of the State of Ohio.
14.02 PRONOUNS. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun, and the singular shall include the plural.
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EXHIBIT 10.3
FIRST FEDERAL FINANCIAL BANCORP, INC.
RECOGNITION AND RETENTION PLAN AND TRUST AGREEMENT
ARTICLE I
ESTABLISHMENT OF THE PLAN AND TRUST
1.01 First Federal Financial Bancorp, Inc. (the "Corporation") hereby
establishes a Recognition and Retention Plan (the "Plan") and Trust (the
"Trust") upon the terms and conditions hereinafter stated in this Management
Recognition Plan and Trust Agreement (the "Agreement").
1.02 The Trustee hereby accepts this Trust and agrees to hold the Trust
assets existing on the date of this Agreement and all additions and
accretions thereto upon the terms and conditions hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to retain personnel of experience and
ability in key positions by providing Employees and Non-Employee Directors of
the Corporation and of First Federal Savings Bank of Ironton (the "Savings
Bank") with a proprietary interest in the Corporation as compensation for their
contributions to the Corporation, the Savings Bank, and any other Subsidiaries
and as an incentive to make such contributions in the future.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Agreement with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meanings set forth below. Wherever appropriate, the masculine pronouns shall
include the feminine pronouns and the singular shall include the plural.
3.01 "Beneficiary" means the person or persons designated by a Recipient to
receive any benefits payable under the Plan in the event of such Recipient's
death. Such person or persons shall be designated in writing on forms provided
for this purpose by the Committee and may be changed from time to time by
similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, his estate.
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3.02 "Board" means the Board of Directors of the Corporation.
3.03 "Change in Control of the Corporation" shall be deemed to have
occurred if: (i) any "person" as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Corporation and any trustee or
other fiduciary holding securities under any employee benefit plan of the
Corporation), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Corporation representing 25% or more of the combined voting power of the
Corporation's then outstanding securities; (ii) during any period of two
consecutive years (not including any period prior to the adoption of the
Plan), individuals who at the beginning of such period constitute the Board
of Directors, and any new director whose election by the Board of Directors
or nomination for election by the Corporation's stockholders was approved by
a vote of at least two-thirds of the directors then still in office who
either were directors at the beginning of the two-year period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute at least a majority of the Board of Directors; (iii) the
stockholders of the Corporation approve a merger or consolidation of the
Corporation with any other corporation, other than a merger or consolidation
that would result in the voting securities of the Corporation outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting securities
of the Corporation outstanding immediately after such merger or
consolidation; or (iv) the stockholders of the Corporation approve a plan of
complete liquidation of the Corporation or an agreement for the sale or
disposition by the Corporation of all or substantially all of the
Corporation's assets. If any of the events enumerated in clauses (i) through
(iv) occur, the Board shall determine the effective date of the Change in
Control resulting therefrom for purposes of the Plan.
3.04 "Code" means the Internal Revenue Code of 1986, as amended.
3.05 "Committee" means the committee appointed by the Board pursuant to
Article IV hereof.
3.06 "Common Stock" means shares of the common stock, $.01 par value per
share, of the Corporation.
3.07 "Disability" means any physical or mental impairment which qualifies
an Employee for disability benefits under the applicable long-term disability
plan maintained by the Corporation or any Subsidiary or, if no such plan
applies, which would qualify such Employee for disability benefits under the
Federal Social Security System.
3.08 "Effective Date" means the day upon which the Board approves this
Plan.
3.09 "Employee" means any person who is employed by the Corporation, the
Savings Bank, or any Subsidiary, or is an officer of the Corporation, the
Savings Bank, or
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any Subsidiary, including officers or other employees who may be directors of
the Corporation.
3.10 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
3.11 "Non-Employee Director" means a member of the Board who is not an
Employee, and shall include any individual who, at any time after the date of
adoption of the Plan, serves the Board in an advisory or emeritus capacity.
3.12 "OTS" means the Office of Thrift Supervision.
3.13 "Plan Shares" or "Shares" means shares of Common Stock held in the
Trust which may be distributed to a Recipient pursuant to the Plan.
3.14 "Plan Share Award" or "Award" means a right granted under this Plan to
receive a distribution of Plan Shares upon completion of the service
requirements described in Article VII.
3.15 "Recipient" means an Employee or Non-Employee Director who receives a
Plan Share Award under the Plan.
3.16 "Savings Bank" means First Federal Savings Bank of Ironton, the
wholly-owned subsidiary of the Corporation.
3.17. "Subsidiary" means First Federal Bank of Ironton and any other
subsidiaries of the Corporation or the Savings Bank which, with the consent of
the Board, agree to participate in this Plan.
3.18. "Trustee" means such firm, entity or persons approved by the
Board of Directors to hold legal title to the Plan for the purposes set forth
herein.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 ROLE OF THE COMMITTEE. The Plan shall be administered and interpreted
by the Committee, which shall consist of two or more members of the Board, each
of whom shall be a Non-Employee Director. The Committee shall have all of the
powers allocated to it in this and other Sections of the Plan. The
interpretation and construction by the Committee of any provisions of the Plan
or of any Plan Share Award granted hereunder shall be final and binding in the
absence of action by the Board of Directors. The Committee shall act by vote or
written consent of a majority of its members. Subject to the express provisions
and limitations of the Plan (subject to compliance with applicable OTS
regulations), the Committee may adopt such rules, regulations and procedures as
it deems appropriate for the conduct of its affairs. The Committee shall report
its actions and
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decisions with respect to the Plan to the Board at appropriate
times, but in no event less than one time per calendar year.
4.02 ROLE OF THE BOARD. The members of the Committee and the Trustee shall
be appointed or approved by, and will serve at the pleasure of, the Board. The
Board may in its discretion from time to time remove members from, or add
members to, the Committee, and may remove or replace the Trustee, provided that
any directors who are selected as members of the Committee shall be Non-Employee
Directors.
4.03 LIMITATION ON LIABILITY. No member of the Board or the Committee
shall be liable for any determination made in good faith with respect to the
Plan or any Plan Shares or Plan Share Awards granted under it. If a member
of the Board or the Committee is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of anything done
or not done by him in such capacity under or with respect to the Plan, the
Corporation shall, subject to the requirements of applicable laws and
regulations, indemnify such member against all liabilities and expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he reasonably
believed to be in the best interests of the Corporation and any Subsidiaries
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful.
4.04 COMPLIANCE WITH LAWS AND REGULATIONS. All Awards granted hereunder
shall be subject to all applicable federal and state laws, rules and OTS
regulations and to such approvals by any government or regulatory agency as
may be required.
ARTICLE V
CONTRIBUTIONS
5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall determine the
amount (or the method of computing the amount) and timing of any
contributions by the Corporation and any Subsidiaries to the Trust
established under this Plan. Such amounts may be paid in cash or in shares
of Common Stock and shall be paid to the Trust at the designated time of
contribution. No contributions by Employees or Directors shall be permitted.
5.02 INVESTMENT OF TRUST ASSETS; NUMBER OF PLAN SHARES. Subject to
Section 8.02 hereof, the Trustee shall invest all of the Trust's assets
primarily in Common Stock. The aggregate number of Plan Shares available for
distribution pursuant to this Plan shall be 26,871 shares of Common Stock,
which shares shall be purchased from the Corporation and/or from stockholders
thereof by the Trust with funds contributed by the Corporation. During the
time this Plan remains in effect, Awards to each Employee and each Non-
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Employee Director shall not exceed 25% and 5% of the shares of Common
Stock available under the Plan, respectively, provided, however, that Awards
in the aggregate to all Non-Employee Directors shall not exceed 30% of the
shares of Common Stock available under the Plan.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 AWARDS TO NON-EMPLOYEE DIRECTORS. Plan Share Awards to Non-Employee
Directors shall be made to such persons and in such amounts as determined by the
Board of Directors or the Committee. However, Plan Share Awards equal to 8,061
shares (or 30% of the number of shares available under this Plan) shall be made
to Non-Employee Directors in the aggregate and no individual Non-Employee
Director may receive Plan Share Awards in excess of 1,343 shares (or 5% of the
number of shares available under this Plan). In the event of a forfeiture of
the right to any Shares subject to an Award, such forfeited Shares shall be
reallocated on the first day of the month following such forfeiture to the
remaining Non-Employee Directors who are eligible to receive such re-allocation
by dividing the number of forfeited shares of Common Stock by such remaining
number of Non-Employee Directors at such time.
6.02 AWARDS TO EMPLOYEES. Plan Share Awards may be made to such Employees
as may be selected by the Board of Directors or the Committee, subject to the
maximum number of shares as determined under Section 5.02 hereof. In selecting
those Employees to whom Plan Share Awards may be granted and the number of
Shares covered by such Awards, the Board of Directors or the Committee shall
consider the duties, responsibilities and performance of each respective
Employee, his present and potential contributions to the growth and success of
the Corporation, his salary and such other factors as shall be deemed relevant
to accomplishing the purposes of the Plan. The Board of Directors or the
Committee may but shall not be required to request the written recommendation of
the Chief Executive Officer of the Corporation other than with respect to Plan
Share Awards to be granted to him.
6.03 FORM OF ALLOCATION. As promptly as practicable after a determination
is made pursuant to Sections 6.01 or 6.02 that a Plan Share Award is to be
issued (subject to the maximum number of shares as determined under Section 5.02
hereof) the Board of Directors or the Committee shall notify the Recipient in
writing of the grant of the Award, the number of Plan Shares covered by the
Award, and the terms upon which the Plan Shares subject to the Award shall be
distributed to the Recipient. The date on which the Board of Directors or the
Committee makes the determination with respect to Plan Share Awards shall be
considered the date of grant of the Plan Share Award. The Board of Directors or
the Committee shall maintain records as to all grants of Plan Share Awards under
the Plan.
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6.04 ALLOCATIONS NOT REQUIRED TO ANY SPECIFIC EMPLOYEE. Notwithstanding
anything to the contrary in Section 6.02 hereof, no Employee shall have any
right or entitlement to receive a Plan Share Award hereunder, such Awards being
at the total discretion of the Board of Directors or the Committee.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 EARNING PLAN SHARES; FORFEITURES.
(a) GENERAL RULES. Subject to the terms hereof, Plan Share Awards
shall be earned by a Recipient at the rate of twenty percent (20%) of the
aggregate number of Shares covered by the Award as of each annual anniversary of
the date of grant of the Award. If the employment of an Employee or service as
a Non-Employee Director is terminated prior to the fifth (5th) annual
anniversary of the date of grant of a Plan Share Award for any reason (except as
specifically provided in subsections (b) and (c) below), the Recipient shall
forfeit the right to any Shares subject to the Award which have not theretofore
been earned. In the event of a forfeiture of the right to any Shares subject to
an Award by an Employee, such forfeited Shares shall become available for
allocation pursuant to Section 6.02 hereof as if no Award had been previously
granted with respect to such Shares. No fractional shares shall be distributed
pursuant to this Plan.
(b) EXCEPTION FOR TERMINATIONS DUE TO DEATH OR DISABILITY.
Notwithstanding the general rule contained in Section 7.01(a), all Plan Shares
subject to a Plan Share Award held by a Recipient whose employment with or
service to the Corporation or any Subsidiary terminates due to death or
Disability shall be deemed earned as of the Recipient's last day of employment
with or service to the Corporation or any Subsidiary and shall be distributed as
soon as practicable thereafter; provided, however, that Awards shall be
distributed in accordance with Section 7.03(a).
(c) EXCEPTION FOR TERMINATIONS AFTER A CHANGE IN CONTROL OF THE
CORPORATION. Notwithstanding the general rule contained in Section 7.01(a), all
Plan Shares subject to a Plan Share Award held by a Recipient shall be deemed to
be earned in the event of a Change in Control of the Corporation if, as of the
date of such Change in Control of the Corporation, such treatment is either
authorized or is not prohibited by applicable laws and regulations.
(d) REVOCATION FOR MISCONDUCT. Notwithstanding anything hereinafter
to the contrary, the Board may by resolution immediately revoke, rescind and
terminate any Plan Share Award, or portion thereof, previously awarded under
this Plan, to the extent Plan Shares have not been distributed hereunder,
whether or not yet earned, in the case of an Employee who is discharged from the
employ of the Corporation or any Subsidiary for cause (as hereinafter defined).
Termination for cause shall mean termination because of the
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Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform
stated duties, willful violation of any law, rule, or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order.
Plan Share Awards granted to a Non-Employee Director who is removed for cause
pursuant to the Corporation's Certificate of Incorporation shall terminate as
of the effective date of such removal.
7.02 DISTRIBUTION OF DIVIDENDS. Any cash dividends (including special
large and non-recurring dividends including one that has the effect of a return
of capital to the Corporation's stockholders) or stock dividends declared in
respect of each unvested Plan Share Award will be held by the Trust for the
benefit of the Recipient on whose behalf such Plan Share Award is then held by
the Trust and such dividends, including any interest thereon, will be paid out
proportionately by the Trust to the Recipient thereof as soon as practicable
after the Plan Share Awards become earned. Any cash dividends or stock
dividends declared in respect of each vested Plan Share held by the Trust will
be paid by the Trust, as soon as practicable after the Trust's receipt thereof,
to the Recipient on whose behalf such Plan Share is then held by the Trust.
7.03 DISTRIBUTION OF PLAN SHARES.
(a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Plan Shares shall be
distributed to the Recipient or his Beneficiary, as the case may be, as soon as
practicable after they have been earned.
(b) FORM OF DISTRIBUTIONS. All Plan Shares, together with any Shares
representing stock dividends, shall be distributed in the form of Common Stock.
One share of Common Stock shall be given for each Plan Share earned and
distributable. Payments representing cash dividends shall be made in cash.
(c) WITHHOLDING. The Trustee may withhold from any cash payment or
Common Stock distribution made under this Plan sufficient amounts to cover any
applicable withholding and employment taxes, and if the amount of a cash payment
is insufficient, the Trustee may require the Recipient or Beneficiary to pay to
the Trustee the amount required to be withheld as a condition of delivering the
Plan Shares. The Trustee shall pay over to the Corporation or any Subsidiary
which employs or employed such Recipient any such amount withheld from or paid
by the Recipient or Beneficiary.
(d) RESTRICTIONS ON SELLING OF PLAN SHARES. Plan Share Awards may
not be sold, assigned, pledged or otherwise disposed of prior to the time
that they are earned and distributed pursuant to the terms of this Plan.
Following distribution, the Board of Directors or the Committee may require
the Recipient or his Beneficiary, as the case may be, to agree not to sell or
otherwise dispose of his distributed Plan Shares except in accordance with
all then applicable federal and state securities laws, and the Board of
Directors or the Committee may cause a legend to be placed on the stock
certificate(s) representing the
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distributed Plan Shares in order to restrict the transfer of the distributed
Plan Shares for such period of time or under such circumstances as the Board
of Directors or the Committee, upon the advice of counsel, may deem
appropriate.
7.04 VOTING OF PLAN SHARES. All Plan Shares which have not yet been earned
and allocated shall be voted by the Trustee in its sole discretion.
ARTICLE VIII
TRUST
8.01 TRUST. The Trustee shall receive, hold, administer, invest and make
distributions and disbursements from the Trust in accordance with the provisions
of the Plan and Trust and the applicable directions, rules, regulations,
procedures and policies established by the Board of Directors or the Committee
pursuant to the Plan.
8.02 MANAGEMENT OF TRUST. It is the intent of this Plan and Trust that the
Trustee shall have complete authority and discretion with respect to the
arrangement, control and investment of the Trust, and that the Trustee shall
invest all assets of the Trust in Common Stock to the fullest extent
practicable, except to the extent that the Trustee determine that the holding of
monies in cash or cash equivalents is necessary to meet the obligations of the
Trust. In performing their duties, the Trustee shall have the power to do all
things and execute such instruments as may be deemed necessary or proper,
including the following powers:
(a) To invest up to one hundred percent (100%) of all Trust assets in
Common Stock without regard to any law now or hereafter in force limiting
investments for trustees or other fiduciaries. The investment authorized herein
may constitute the only investment of the Trust, and in making such investment,
the Trustee is authorized to purchase Common Stock from the Corporation or from
any other source, and such Common Stock so purchased may be outstanding, newly
issued, or treasury shares.
(b) To invest any Trust assets not otherwise invested in accordance
with (a) above, in such deposit accounts, and certificates of deposit,
obligations of the United States Government or its agencies or such other
investments as shall be considered the equivalent of cash.
(c) To sell, exchange or otherwise dispose of any property at any
time held or acquired by the Trust.
(d) To cause stocks, bonds or other securities to be registered in
the name of a nominee, without the addition of words indicating that such
security is an asset of the Trust (but accurate records shall be maintained
showing that such security is an asset of the Trust).
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(e) To hold cash without interest in such amounts as may in the
opinion of the Trustee be reasonable for the proper operation of the Plan and
Trust.
(f) To employ brokers, agents, custodians, consultants and
accountants.
(g) To hire counsel to render advice with respect to their rights,
duties and obligations hereunder, and such other legal services or
representation as the Trustee deems desirable.
(h) To hold funds and securities representing the amounts to be
distributed to a Recipient or his Beneficiary as a consequence of a dispute as
to the disposition thereof, whether in a segregated account or held in common
with other assets of the Trust.
Notwithstanding anything herein contained to the contrary, the Trustee
shall not be required to make any inventory, appraisal or settlement or report
to any court, or to secure any order of court for the exercise of any power
herein contained, or give bond.
8.03 RECORDS AND ACCOUNTS. The Trustee shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Board of Directors or the Committee.
8.04 EXPENSES. All costs and expenses incurred in the operation and
administration of this Plan shall be borne by the Corporation.
8.05 INDEMNIFICATION. Subject to the requirements of applicable laws and
regulations, the Corporation shall indemnify, defend and hold the Trustee
harmless against all claims, expenses and liabilities arising out of or related
to the exercise of the Trustee's powers and the discharge of its duties
hereunder, unless the same shall be due to the Trustee's gross negligence or
willful misconduct.
ARTICLE IX
MISCELLANEOUS
9.01 ADJUSTMENTS FOR CAPITAL CHANGES. The aggregate number of Plan Shares
available for distribution pursuant to the Plan Share Awards and the number of
Shares to which any Plan Share Award relates shall be proportionately adjusted
for any increase or decrease in the total number of outstanding shares of Common
Stock issued subsequent to the effective date of the Plan resulting from any
split, subdivision or consolidation of shares or other capital adjustment, or
other increase or decrease in such shares effected without receipt or payment of
consideration by the Corporation.
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9.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution, at
any time amend or terminate the Plan and the Trust (including amendments which
may result in the merger of the Plan or the Trust with and into other plans or
trusts of the Corporation or successor thereto), subject to regulations of the
OTS and any required stockholder approval or any stockholder approval which the
Board may deem to be advisable for any reason, such as for the purpose of
obtaining or retaining any statutory or regulatory benefits under tax,
securities or other laws or satisfying any applicable stock exchange listing
requirements. The Board may not, without the consent of the Recipient, alter or
impair his Plan Share Award except as specifically authorized herein. Upon
termination of the Plan, the Recipient's Plan Share Awards shall be distributed
to the Recipient in accordance with the terms of Article VII hereof.
9.03 NONTRANSFERABLE. During the lifetime of the Recipient, Plan Shares
may only be earned by and paid to the Recipient who was notified in writing of
the Award pursuant to Section 6.03, provided that Plan Share Awards and rights
to Plan Shares shall be transferable by a Recipient to his or her spouse, lineal
ascendants, lineal descendants, or to a duly established trust. Plan Share
Awards so transferred may not again be transferred other than to the Recipient
who originally received the grant of Plan Share Awards or to an individual or
trust to whom such Recipient could have transferred Plan Share Awards pursuant
to this Section 9.03. Plan Share Awards which are transferred pursuant to this
Section 9.03 shall be subject to the same terms and conditions as would have
applied to such Plan Share Awards in the hands of the Recipient who originally
received the grant of such Plan Share Award. No Recipient or Beneficiary shall
have any right in or claim to any assets of the Plan or Trust, nor shall the
Corporation or any Subsidiary be subject to any claim for benefits hereunder.
9.04 EMPLOYMENT OR SERVICE RIGHTS. Neither the Plan nor any grant of a
Plan Share Award or Plan Shares hereunder nor any action taken by the Trustee,
the Committee or the Board in connection with the Plan shall create any right on
the part of any Employee or Non-Employee Director to continue in such capacity.
9.05 VOTING AND DIVIDEND RIGHTS. No Recipient shall have any voting or
dividend rights or other rights of a stockholder in respect of any Plan Shares
covered by a Plan Share Award, except as expressly provided in Sections 7.02 and
7.04 above, prior to the time said Plan Shares are actually earned and
distributed to him.
9.06 GOVERNING LAW. To the extent not governed by federal law, the Plan
and Trust shall be governed by the laws of the State of Ohio.
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9.07 EFFECTIVE DATE. This Plan shall be effective as of the Effective
Date, and Awards may be granted hereunder as of or after the Effective Date and
as long as the Plan remains in effect. Notwithstanding the foregoing or
anything to the contrary in this Plan, the implementation of this Plan and any
Awards granted pursuant hereto are subject to the non-objection of the OTS and
approval of the Corporation's stockholders.
9.08 TERM OF PLAN. This Plan shall remain in effect until the earlier of
(1) ten (10) years from the Effective Date, (2) termination by the Board, or (3)
the distribution to Recipients and Beneficiaries of all assets of the Trust.
9.09 TAX STATUS OF TRUST. It is intended that the trust established hereby
be treated as a Grantor Trust of the Corporation under the provisions of Section
671 et seq. of the Code, as the same may be amended from time to time.
11
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its duly authorized officers and the corporate seal to be affixed
and duly attested, and the initial Trustee established pursuant hereto have duly
and validly executed this Agreement, all on this 21st day of October 1996.
FIRST FEDERAL FINANCIAL
BANCORP, INC.
By: /s/ I. Vincent Rice
---------------------------------
I. Vincent Rice
President
ATTEST:
By: /s/ Edith M. Daniels
----------------------------
Edith M. Daniels
Corporate Secretary
TRUSTEE
By: /s/ Thomas D. Phillips
---------------------------------
Thomas D. Phillips
Trustee
By: /s/ James E. Waldo
---------------------------------
James E. Waldo
Trustee
By: /s/ Edward R. Rambacher
---------------------------------
Edward R. Rambacher
Trustee
By: /s/ Steven C. Milleson
---------------------------------
Steven C. Milleson
Trustee
By: /s/ William P. Payne
---------------------------------
William P. Payne
Trustee
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
September 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION AND OTHER DATA:
Total assets $56,637 $51,296 $46,679 $47,461 $46,167
Cash and cash equivalents 801 2,528 983 2,440 3,499
Investment securities (1) 11,516 5,290 4,975 4,657 3,771
Mortgage-backed securities (2) 7,766 9,558 10,712 12,263 11,152
Loans receivable, net 34,955 32,609 28,747 26,627 26,619
Real estate owned 33 -- -- 234 --
Deposits 44,809 46,198 41,962 43,092 42,217
FHLB advances 500 -- -- -- --
Stockholders' equity, net 10,884 4,929 4,565 4,212 3,806
Full service offices 2 2 2 2 2
</TABLE>
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
1996 1995 1994 1993 1992
------ ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income $ 3,871 $ 3,437 $ 3,208 $ 3,507 $ 3,733
Total interest expense 2,331 2,004 1,765 2,037 2,397
------- ------- ------- ------- --------
Net interest income 1,540 1,433 1,443 1,470 1,336
Provision for loan losses 14 13 50 52 48
------- ------- ------- ------- --------
Net interest income after
provision for loan losses 1,526 1,420 1,393 1,418 1,288
Non-interest income 41 32 80 23 19
Non-interest expense (3) 1,298 944 934 833 779
------- ------- ------- ------- --------
Income before provision
for income taxes 269 508 539 608 528
Provision for income taxes 52 155 165 203 196
------- ------- ------- ------- --------
Net income $ 217 $ 353 $ 374 $ 405 $ 332
------- ------- ------- ------- --------
------- ------- ------- ------- --------
SELECTED OPERATING RATIOS (4):
Return on average assets 0.41% 0.73% 0.79% 0.86% 0.76%
Return on average equity 3.43 7.35 8.45 10.15 9.12
Average equity to average assets 12.00 9.90 9.34 8.43 8.32
Equity to assets at
end of year 19.22 9.61 9.78 8.87 8.24
Interest rate spread (5) 2.36 2.62 2.79 2.85 2.73
Net interest margin (5) 2.95 3.02 3.11 3.17 3.13
Average interest-earning assets
to average interest-bearing
liabilities 113.16 109.30 108.53 107.27 107.12
Net interest income after
provision for loan losses to
total expense 117.57 150.42 149.14 170.23 165.34
Non-interest expense to average
total assets 2.46 1.95 1.97 1.76 1.78
ASSET QUALITY RATIOS: (6)
Non-performing loans to total
loans at end of period 0.31 0.14 -- 0.64 1.56
Non-performing assets to total
assets at end of period 0.25 0.09 -- 0.86 0.90
Allowance for loan losses to
total loans outstanding
at end of period 0.81 0.85 0.91 0.97 0.88
</TABLE>
- ---------------------------
(1) Includes investment securities held to maturity as well as those
available for sale.
(2) Includes mortgage-backed securities held to maturity
as well as those available for sale.
(3) Includes $269,000 SAIF special assessment in 1996.
(4) With the exception of end of year ratios, all ratios
are based on average monthly balances during the year.
(5) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average rate
on interest-bearing liabilities. Net interest margin represents net
interest income as a percentage of average interest-earning assets.
(6) Non-performing loans consist of non-accrual loans and loans that are
contractually past due 90 days or more but still accruing interest, and
non-performing assets consist of non-performing loans and real estate
acquired by foreclosure or deed-in-lieu thereof.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
First Federal Financial Bancorp, Inc. (the "Company") is a Delaware
corporation organized in 1996 by First Federal Savings and Loan Association
of Ironton (the "Association") for the purpose of acquiring all of the
capital stock of First Federal Savings Bank of Ironton (the "Bank") issued in
the conversion of the Association from a federally-chartered mutual savings
and loan association to a federally-chartered stock savings bank (the
"Conversion"). The Conversion was completed on June 3, 1996. The only
significant assets of the Company are the capital stock of the Bank and the
net conversion proceeds retained by the Company. To date, the business of
the Company has consisted of the business of the Bank.
The Bank conducts business from its main office located in Ironton,
Ohio and one full-service branch office located in Chesapeake, Ohio. The
Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") to the maximum
extent permitted by law. At September 30, 1996, the Company had total
consolidated assets of $56.6 million, total consolidated liabilities of $45.7
million, and total stockholders' equity of $10.9 million.
The Bank is primarily engaged in attracting deposits from the
general public and using those funds to originate loans secured by
single-family residences located in Lawrence County and surrounding counties
in Southern Ohio and to invest in mortgage-backed securities and Untied
States Government and federal agency securities. To a lesser extent, the
Bank also makes consumer loans and loans secured by savings accounts.
The operating results of the Company depend primarily upon its net
interest income, which is determined by the difference between interest
income on interest-earnings assets, principally loans, mortgage-backed
securities and investment securities, and interest expense on
interest-bearing liabilities, which consist of interest-bearing checking
accounts, passbook savings accounts and certificates of deposit. The
Company's net income is also affected by its provision for loan losses, as
well as its non-interest income, including fees and gains or losses on sales
of assets, its operating expenses, including compensation and benefits
expenses, occupancy and equipment expenses, federal deposit insurance
premiums, miscellaneous other expenses and federal income taxes.
The financial information presented herein, with the exception of
September 30, 1996 and the year then ended, is for the Bank only, since prior
to 1996, the Company had not yet completed the Conversion or issued any stock.
FINANCIAL CONDITION
ASSETS. Total assets increased by $5.3 million, or 10.3%, from
$51.3 million at September 30, 1995 to $56.6 million at September 30, 1996.
The increase consisted primarily of increases in loans receivable of $2.3
million and investment securities (both held to maturity and available for
sale) of $6.2 million, offset by decreases in mortgage-backed securities
(both held to maturity and available for sale) of $1.8 million and cash and
cash equivalents of $1.7 million.
CASH AND CASH EQUIVALENTS. These balances consist of cash on hand
and interest-bearing checking accounts and overnight deposit accounts in
other financial institutions. During the year ended September 30, 1996, cash
and cash equivalents decreased $1.7 million, or 68.0%, due primarily to
increased purchases of investment securities and the funding of increased
loan demand.
3
<PAGE>
INVESTMENT SECURITIES. Investment securities consist primarily of
U.S. Treasury and U.S. government agency securities. The Company has also
invested in recent years in certificates of deposit in other insured
financial institutions (in amounts up to $99,000 at any one institution) and,
to a lesser extent, in municipal securities. During the year ended September
30, 1996, investment securities, both held to maturity and available for
sale, increased $6.2 million, or 116.9%, to $11.5 million. The increase
consisted of purchases of $8.0 million, offset by maturities of $1.8 million.
Cash utilized to increase the investment portfolio was generated from the
Conversion proceeds.
LOANS RECEIVABLE. The Company's loans receivable, net, increased by
$2.3 million, or 7.4%, from $32.6 million at September 30, 1995 to $35.0
million at September 30, 1996. Total loan originations during the year
amounted to $9.9 million, of which $8.5 million were for single-family
residential loans within the Company's local trade area.
MORTGAGE-BACKED SECURITIES. The Company invests primarily in
adjustable-rate mortgage-backed securities, which are classified either as
held to maturity or as available for sale. For the year ended September 30,
1996, aggregate mortgage-backed securities decreased by $1.8 million, or
18.7%, from $9.6 million at September 30, 1995 to $7.8 million at September
30, 1996. Reductions in principal balances during the year were used to fund
increased loan demand and to purchase investment securities. There were no
purchases of mortgage-backed securities during fiscal 1996.
OFFICE PROPERTIES AND EQUIPMENT. The Company purchased property during
the year ended September 30, 1996 in order to expand the drive-through
facilities at its main office facility at a cost of $152,500.
DEPOSITS. The Company's deposit accounts consist of passbook
savings accounts, certificates of deposit and checking accounts. Deposits
decreased by $1.4 million, or 3.0%, from $46.2 million at September 30, 1995,
to $44.8 million at September 30, 1996. The decrease resulted primarily from
withdrawals by customers to purchase stock in connection with the Conversion.
The Bank continues to offer competitive interest rates on deposits.
ADVANCE FROM FEDERAL HOME LOAN BANK. The Company obtained a
short-term, $500,000 advance during September 1996 to facilitate the
origination of loans. The loan bears interest at 5.45% and matures December
10, 1996. The Company has the ability to renew this advance for additional
periods, if necessary.
STOCKHOLDERS' EQUITY. The Company's stockholders' equity totaled
$10.9 million at September 30, 1996, as compared to $4.9 million in retained
earnings for the Association (in its mutual form) at September 30, 1995. The
increase of $6.0 million, or 122.4%, resulted primarily from net Conversion
proceeds of $5.7 million, and the addition of net income for the year.
4
<PAGE>
Results of Operations
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES
PAID. The following table presents for the years indicated the total dollar
amount of interest from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates, and the net interest
margin. The table does not reflect any effect of income taxes. All average
balances are based on month-end balances.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ---------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------ ------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $ 33,543 $ 2,733 8.15% $ 30,973 $ 2,522 8.14% $ 27,745 $ 2,326 8.38%
Mortgage-backed
securities(2) 8,717 519 5.95 10,113 559 5.53 11,423 544 4.76
Investment securities(3) 7,456 490 6.57 4,965 275 5.54 4,924 262 5.32
Other interest-
earning assets 2,457 129 5.25 1,429 81 5.67 2,249 76 3.38
--------- -------- --------- -------- --------- --------
Total interest-
earning assets 52,173 $ 3,871 7.42% 47,480 $ 3,437 7.24% 46,341 $ 3,208 6.92%
-------- ---- -------- ----- -------- -----
-------- ---- -------- ----- -------- -----
Non-interest earning
assets 537 1,034 1,048
--------- --------- ---------
Total assets $ 52,710 $ 48,514 $ 47,389
---------- --------- ---------
---------- --------- ---------
Interest-bearing liabilities:
Deposits $ 46,079 $ 2,330 5.06% $ 42,327 $ 1,936 4.57% $ 42,700 $ 1,765 4.13%
FHLB advances 27 1 3.70 1,105 68 6.15 - - -
---------- -------- --------- -------- --------- --------
Total interest-
bearing liabilities 46,106 $ 2,331 5.06% 43,432 $ 2,004 4.62% 42,700 $ 1,765 4.13%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
Non-interest bearing
liabilities 278 277 264
---------- --------- ---------
Total liabilities 46,384 43,709 42,964
Stockholders' equity 6,326 4,805 4,425
---------- --------- ---------
Total liabilities and
stockholders' equity $ 52,710 $ 48,514 $ 47,389
----------- --------- ---------
----------- --------- ---------
Net interest income;
interest rate spread $ 1,540 2.36% $ 1,433 2.62% $ 1,443 2.79%
-------- ----- --------- ----- -------- -----
-------- ----- --------- ----- -------- -----
Net interest margin(4) 2.95% 3.02% 3.11%
----- ----- -----
----- ----- -----
Average interest-earning
assets to average interest-
bearing liabilities 113.16% 109.30% 108.53%
------- ------- -------
------- ------- -------
</TABLE>
- ----------
(1) Includes non-accrual loans.
(2) Includes mortgage-backed securities held to maturity as well as those
available for sale.
(3) Includes investment securities held to maturity as well as those
available for sale.
(4) Net interest margin is net interest income divided by average interest-
earning assets.
5
<PAGE>
RATE/VOLUME ANALYSIS. The following table describes the extent to which
changes in interest rates and changes in volume of interest-related assets
and liabilities have affected the Company's interest income and expense
during the periods indicated. For each category of interest-earning assets
and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (change in volume multiplied by prior
year rate), (ii) changes in rate (change in rate multiplied by prior year
volume), and (iii) total change in rate and volume. The combined effect of
changes in both rate and volume has been allocated proportionately to the
change due to rate and the change due to volume.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
---------------------------- ----------------------------- -----------------------------
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Total Due to Total Due To Total
--------------- Increase -------------- Increase --------------- Increase
Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume (Decrease)
------ -------- ---------- ------ -------- ---------- ------ -------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 27 $ 185 $ 212 $ (64) $ 260 $196 $(293) $124 $(169)
Mortgage-backed securities(1) 51 (91) (40) 52 (37) 15 (81) (52) (133)
Investment securities(2) 58 157 215 11 2 13 (11) 27 16
Other interest earning assets 3 44 47 11 (6) 5 14 (27) (13)
------ ---- ---- ------ ------ ---- ----- ---- -----
Total interest-earning
assets 139 295 434 10 219 229 (371) 72 (299)
------ ---- ---- ------ ------ ---- ----- ---- -----
Interest-bearing liabilities:
Deposits 215 179 394 186 (15) 171 (250) (22) (272)
FHLB advances 46 (113) (67) - 68 68 - - -
------ ---- ---- ------ ------ ---- ----- ---- -----
Total interest-bearing
liabilities 261 66 327 186 53 239 (250) (22) (272)
------ ---- ---- ------ ------ ---- ----- ---- -----
Increase (decrease) in net
interest income $(122) $ 229 $ 107 $(176) $166 $(10) $ (121) $94 $(27)
------ ---- ---- ------ ------ ---- ----- ---- ------
------ ---- ---- ------ ------ ---- ----- ---- ------
</TABLE>
_______________________
(1) Includes mortgage-backed securities held to maturity as well as those
available for sale.
(2) Includes investment securities held to maturity as well as those available
for sale.
6
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
NET INCOME. The Company's net income decreased $136,000, or 38.5%,
from $353,000 for the year ended September 30, 1995 to $217,000 for the year
ended September 30, 1996. Net income per share for 1996 was $.35. The
decrease was primarily attributable to a $269,000, one-time statutorily
mandated assessment and related charge to recapitalize the SAIF of the FDIC.
The charge, which was assessed against all SAIF insured institutions, will
recapitalize the SAIF to a reserve ratio of 1.25% of insured deposits. Future
earnings will be enhanced due to lower insurance premiums which, effective
January 1, 1997, will approximate $.064 per $100 of insured deposits, down from
the $.23 per $100 currently being paid by the Bank. Had it not been for this
one-time SAIF special assessment, 1996 net income would have been $394,000, or
$.64 per share, an 11.6% increase over 1995.
For 1996 as compared to 1995, net interest income increased $107,000,
or 7.5%, non-interest income increased $9,000, and the provision for income
taxes decreased $103,000, offset by increases in the provision for loan losses
and other non-interest expenses (other than the SAIF special assessment) of
$1,000 and $85,000, respectively.
INTEREST INCOME. Interest income increased $434,000, or 12.6%, to
$3.9 million for the year ended September 30, 1996. The increase consisted of
increases of $212,000, $215,000 and $48,000 in interest earned on loans
receivable, investment securities, and other interest-earning assets,
respectively, which increases were offset by a decline in interest earned on
mortgage-backed securities of $41,000. The increases were primarily due to
increases in 1996 as compared to 1995 in the average volume of the respective
portfolios, and to a lesser extent, from increased interest rates. Conversely,
the decrease in interest earned on mortgage-backed securities resulted from a
decline in the average volume of the portfolio due to principal repayments,
offset by a slight increase in rates. Overall, the interest-earning assets
yield increased 18 basis points, to 7.42%.
INTEREST EXPENSE. Interest expense increased $328,000, or 16.4%, from
approximately $2.0 million for the year ended September 30, 1995 to $2.3
million for fiscal 1996. The increase was primarily due to an increase in the
average rates paid on deposits for 1996 as compared to 1995, from 4.57% to
5.06%, and to a lesser extent, a $3.8 million increase in the average volume of
interest-bearing deposits.
PROVISION FOR LOAN LOSSES. The $1,000 increase in the provision for
loan losses, from $13,000 for 1995 to $14,000 for 1996, is not deemed
significant. Management has determined that the allowance for loan losses is
adequate at September 30, 1996.
NON-INTEREST INCOME. The $9,000, or 28.1%, increase in non-interest
income for 1996 as compared to 1995 was due to increased fees received from
service charges on deposit accounts.
NON-INTEREST EXPENSE. Non-interest expense increased $354,000, or
37.5%, from $944,000 for the year ended September 30, 1995 to $1,298,000 for
fiscal 1996. Other than the one-time SAIF special assessment of $269,000
discussed above, the $85,000 remaining increase consisted primarily of
increases in ESOP compensation expense of $25,000, the regular SAIF deposit
insurance premiums of $10,000, Ohio franchise taxes of $6,000, and other
miscellaneous non-interest expenses of $37,000.
7
<PAGE>
In connection with the Conversion, the Company established an ESOP for
the benefit of its officers and employees, resulting in an expense for the
1996 fiscal year with no corresponding 1995 expense. The regular SAIF deposit
insurance premiums increased due to a higher balance of average insured
deposits during 1996 as compared to 1995. The Ohio franchise tax increased due
to higher levels of Bank capital during 1996 as compared to 1995. The $37,000
increase in other miscellaneous non-interest expenses resulted primarily from
increased costs during 1996 of operating as a public company.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
decreased $102,000, or 66.2%, from $154,000 for the year ended September 30,
1995 to $52,000 for the 1996 fiscal year. The Company's effective tax rate was
approximately 19.4% for the year ended September 30, 1996 as compared to the
Bank's effective tax rate of 30.5% for fiscal 1995. The decrease in the
effective rate between years is due to lower pretax income in 1996 which is
taxed at lower tax rates.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
NET INCOME. For the year ended September 30, 1995, the Bank had net
income of $353,000 as compared to $374,000 for fiscal 1994. The $21,000, or
5.6%, decrease in net income was primarily due to decreases in net interest
income of $10,000, in non-interest income of $48,000 and an increase in
non-interest expense of $10,000, which were partially offset by reductions
in the provisions for loan losses and income taxes of $37,000 and $10,000,
respectively.
INTEREST INCOME. For the year ended September 30, 1995, interest
income increased by $229,000, or 7.1%, to $3.4 million, due to a 32 basis
point increase in the average yield on interest-earning assets, primarily due
to increases in the Bank's aggregate mortgage-backed securities and other
interest-earning assets (which assets adjust to the increase in market rates of
interest to a quicker extent than the Bank's loans receivable), and a $1.1
million, or 2.5%, increase in the average balances of interest-earning assets.
Average loan balances increased $3.2 million, or 11.6%, due to increased loan
demand. Average balances of mortgage-backed securities (held to maturity
and available for sale) and average other interest-earning assets decreased by
$1.3 million and $820,000, or 11.5% and 36.5%, respectively, as such reductions
were used to fund the new loan originations. Average investment securities
remained relatively unchanged between years.
INTEREST EXPENSE. Interest expense increased by $239,000, or 13.5%,
to $2.0 million, due primarily to a 44 basis point increase in the average
rate paid on deposits, to 4.57% and, to a lesser extent, an increase in the
average balances of interest-bearing liabilities of $732,000, or 1.7%. During
the year ended September 30, 1995, the Bank obtained average short term
advances from the FHLB of Cincinnati of $1.1 million as a less expensive source
of funding loan growth than the rates being paid in the local market for
deposits. The Bank incurred interest expense on such advances of $68,000.
PROVISION FOR LOAN LOSSES. The provision for loan losses amounted to
$13,000 and $50,000 for the fiscal years ended September 30, 1995 and 1994,
respectively. The $37,000, or 74.0%, decrease in the provision for loan losses
during fiscal 1995 reflected an improvement in the Bank's non-performing
assets. During fiscal 1994, the Bank sold eight single-family residences that
it had foreclosed on in fiscal 1993 for net gains of $53,000. As a result, the
Bank had no real estate owned at September 30, 1995 or 1994.
8
<PAGE>
NON-INTEREST INCOME. For the year ended September 30, 1995, the
Bank's non-interest income decreased by $48,000, or 60.5%, due primarily to
the absence in 1995 of gains on foreclosed real estate. Such gains totalled
$53,000 during fiscal 1994.
NON-INTEREST EXPENSE. Non-interest expense increased by $10,000, or
1.1%, to $944,000. Compensation and benefits expenses increased $7,000, or
1.9%, to $386,000, due to annual salary increases given to management and
employees. The SAIF deposit insurance premiums decrease $4,000, or 3.8%, due
to a modest decrease in average balances of insured deposits during the year,
while advertising expense increased $6,000, or 13.9%.
PROVISION FOR INCOME TAXES. During the fiscal year ended September
30, 1995, the provision for income taxes decreased by $11,000 due to lower
pre-tax income than in fiscal 1994. The Bank's effective tax rate was
approximately 30.5% for the years ended September 30, 1995 and 1994.
ASSET AND LIABILITY MANAGEMENT
The Company's profitability, like that of many financial institutions,
is dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as
loans and investments, and its interest expense on interest-bearing
liabilities, such as deposits. When interest-earning liabilities mature or
reprice more quickly than interest-earning assets in a given period, a
significant increase in market rates of interest could adversely affect net
interest income. Similarly, when interest-earning assets mature or reprice
more quickly than interest-bearing liabilities, falling interest rates could
result in a decrease in net interest income. Finally, a flattening of the
"yield curve" (i.e., a decline in the difference between long- and short-term
interest rates), such as has occurred during the past year, could adversely
impact net interest income to the extent that the Company's assets have a
longer average term than its liabilities. At September 30, 1996, the ratio
of the Company's average interest-earning assets to average interest-bearing
liabilities amounted to 113.16%.
The Company's actions with respect to interest rate risk and its
asset/liability gap management are taken under the guidance of the Bank's
Board of Directors, through its Executive/Loan Committee, which generally
meets every two to three weeks.
The Company's attempts to mitigate the interest-rate risk of holding
long-term assets in its portfolio through the origination of adjustable-rate,
single-family residential mortgage loans, which have interest rates which
adjust annually, and the purchase of mortgage-backed securities, primarily
secured by single-family residential dwellings financed with adjustable-rate
mortgages. At September 30, 1996, $26.4 million, or 80.7% of total
single-family loans, and $28.2 million, or 80.7% of the total loan portfolio,
had adjustable rates of interest. In addition, $7.3 million, or 93.8% of the
Company's mortgage-backed securities ("held to maturity" as well as "available
for sale"), had underlying loans with adjustable rates of interest. In
accordance with recent guidance by the Financial Accounting Standards Board,
the Company during the year ended September 30, 1996, reclassified
mortgage-backed securities with a carrying value of $2.2 million from its "held
to maturity" to its "available for sale" portfolio. This action permits the
Company to sell such securities if deemed appropriate in response to, among
other things, changes in market rates of interest. In addition, at September
30, 1996, $11.5 million, or 20.3%, of the Company's total assets, consisted of
investment securities, 68.0% of which have terms to maturity of less than
five years. The relatively short-term nature of such portfolio permits
reinvestment of such funds into securities or other assets at then market
rates.
9
<PAGE>
As part of its efforts to maximize net interest income and manage the
risks associated with changing interest rates, management of the Bank uses
the "market value of portfolio equity" ("NPV") methodology which the Office
of Thrift Supervision ("OTS") has adopted as part of its capital regulations.
Although the Bank would not be subject to the NPV regulation because such
regulation does not apply to institutions with less than $300 million in assets
and risk based capital in excess of 12%, the application of the NPV methodology
may illustrate the Bank's interest rate risk.
Under this methodology, interest rate risk exposure is assessed by
reviewing the estimated changes in the Bank's NPV which would hypothetically
occur if interest rates rapidly rise or fall all along the yield curve.
Projected values of NPV at both higher and lower regulatory defined rate
scenarios are compared to base case values (no changes in rates) to determine
the sensitivity to changing interest rates.
Presented below, as of September 30, 1996, is an analysis of the
Bank's interest rate risk ("IRR") as measured by changes in NPV for
instantaneous and sustained parallel shifts of 100 basis points in market
interest rates. The table also contains the policy that the Board of Directors
deems advisable in the event of various changes in interest rates. Such
limits have been established with consideration of the impact of various rate
changes and the Bank's currently strong capital position.
<TABLE>
<CAPTION>
As of September 30, 1996
Changes in Market Value of Portfolio Equity
Interest Rates Board Limit
(Basis Points) % Change $ Change in NPV % Change in NPV
(In Thousands)
<S> <C> <C> <C>
+400 (40)% $(2,620) (23)%
+300 (30) (1,788) (15)
+200 (20) (1,016) (9)
+100 (10) (394) (3)
-- -- -- --
-100 (10) 130 1
-200 (20) 149 1
-300 (30) 397 3
-400 (40) 741 6
</TABLE>
The OTS uses the above NPV calculation to monitor an institution's IRR.
The OTS has promulgated regulations regarding a required adjustment to the
institution's risk-based capital based on IRR. The application of the OTS'
methodology quantifies IRR as the change in the NPV which results from a
theoretical 200 basis point increase or decrease in market interest rates. If
the NPV from either calculation would decrease by more than 2% of the present
value of the institution's assets, the institution must deduct 50% of the
amount of the decrease in excess of such 2% in the calculation of risk-based
capital. At September 30, 1996, 2% of the present value of the Bank's assets
was approximately $1.0 million, and, as shown in the table, a 200 basis point
increase or decrease in market interest rates would not significantly impact
the Bank's portfolio value. Thus, at September 30, 1996, the Bank would not
have an interest rate risk component deducted from its regulatory capital.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government
and government agency obligations and other similar investments having
maturities of five years or less. Such investments are intended to provide a
source of relatively liquid funds upon which the Bank may rely if necessary
to fund deposit withdrawals and for other short-term funding needs. The
required level of such liquid investments is currently 5% of certain
liabilities as defined by the OTS and may be changed to reflect economic
conditions.
The liquidity of the Bank, as measured by the ratio of cash, cash
equivalents, qualifying investments and mortgage-backed securities and
interest receivable on investments and mortgage-backed securities that would
qualify except for the maturity dates, to the sum of total deposits less any
share loans on deposits, was 15.0% at September 30, 1996, as compared to 10.6%
at September 30, 1995. At September 30, 1996, the Bank's "liquid" assets
totalled approximately $6.6 million, which was $4.4 million in excess of the
current OTS minimum requirement.
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's
primary sources of funds are deposits, prepayments and maturities of
outstanding loans and mortgage-backed securities, maturities of short-term
investments, and funds provided from operations. While scheduled loan and
mortgage-backed securities amortization and maturing short-term investments
are relatively predictable sources of funds, deposit flows and loan prepayments
are greatly influenced by general interest rates, economic conditions and
competition. The Bank generates cash through its retail deposits and,
occasionally to the extent deemed necessary, has utilized borrowings from the
FHLB of Cincinnati.
Liquidity management is both a daily and long-term function of
business management. The Bank uses its sources of funds primarily to meet its
ongoing commitments, to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain a portfolio of mortgage-backed
and investment securities. At September 30, 1996, the total approved loan
commitments outstanding amounted to $913,000. Certificates of deposit
scheduled to mature in one year or less at September 30, 1996 totalled $21.7
million. The Company believes that it has adequate resources to fund all of
its commitments and that it could either adjust the rate of certificates of
deposit in order to retain deposits in changing interest rate environments or
replace such deposits with borrowings if it proved to be cost-effective to
do so.
At September 30, 1996, the Bank had regulatory capital which was well
in excess of applicable limits. At September 30, 1996, the Bank was required
to maintain tangible capital of 1.5% of adjusted total assets, core capital of
3.0% of adjusted total assets and risk-based capital of 8.0% of adjusted
risk-weighted assets. At September 30, 1996, the Bank's tangible capital was
$8.3 million or 15.3% of adjusted total assets, core capital was $8.3 million
or 15.3% of adjusted total assets and risk-based capital was $8.6 million or
35.5% of adjusted risk-weighted assets, exceeding the requirements by $7.5
million, $6.7 million and $6.6 million, respectively.
The Company, as a separately incorporated holding company, has no
significant operations other than serving as sole stockholder of the Bank. On
an unconsolidated basis, the Company has no paid employees. The Company's
assets consists of its investment in the Bank, the Company's loan to the ESOP
and the net proceeds retained from the Conversion, and its sources of income
consists primarily of earnings from the investment of such funds as well as any
dividends from
11
<PAGE>
the Bank. The only significant expenses expected to be incurred by the Company
will relate to its reporting obligations under federal securities laws and
related expenses as a publicly traded company. The Company retained 50% of
the net Conversion proceeds, and management believes that the Company will have
adequate liquidity available to respond to liquidity demands.
Any future cash dividends will be based on a percentage of the
Company's consolidated earnings and should not have a significant impact on its
liquidity. In addition, the Company also will have the ability to obtain
dividends from the Bank.
RECAPITALIZATION OF SAIF
The deposits of the Bank are currently insured by the SAIF. Both the
SAIF and the Bank Insurance Fund ("BIF"), the federal deposit insurance fund
that covers commercial bank deposits, are required by law to attain and
thereafter maintain a reserve ratio of 1.25% of insured deposits.
The BIF fund met its target reserve level in September 1995, but the
SAIF was not expected to meet its target reserve level until at least 2002.
Consequently, in late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with respect to the semiannual premium
assessment beginning January 1, 1996, reduced deposit insurance premiums for
BIF member institutions to zero basis points (subject to an annual minimum of
$2,000) for institutions in the lowest risk category. Deposit insurance
premiums for SAIF members were maintained at their existing levels (23 basis
points for institutions in the lowest risk category).
On September 30, 1996, President Clinton signed into law legislation
which will eliminate the premium differential between SAIF-insured institutions
and BIF-insured institutions by recapitalizing the SAIF's reserves to the
required ratio. The legislation provides that all SAIF member institutions pay
a one-time special assessment to recapitalize the SAIF, which in the aggregate
will be sufficient to bring the reserve ratio of the SAIF to 1.25% of insured
deposits. The legislation also provides for the merger of the BIF and the
SAIF, with such merger being conditioned upon the prior elimination of the
thrift charter.
Effective October 8, 1996, FDIC regulations imposed a one-time special
assessment of 65.7 basis points on SAIF-assessable deposits as of March 31,
1995, which was collected on November 27, 1996. The Bank's one-time special
assessment amounted to $269,363 ($177,780 net of related tax benefits). The
payment of such special assessment had the effect of immediately reducing the
Bank's capital by such an amount. Nevertheless, management does not believe
that this one-time special assessment will have a material adverse effect on
the Company's consolidated financial condition or cause non-compliance with the
Bank's regulatory capital requirements.
On October 16, 1996, the FDIC proposed to lower assessment rates for
SAIF members to reduce the disparity in the assessment rates paid by BIF and
SAIF members. Beginning October 1, 1996, effective SAIF rates would range from
zero basis points to 27 basis points. From 1997 through 1999, SAIF members
will pay 6.4 basis points to fund the Financing Corporation while BIF member
institutions will pay about 1.3 basis points. The Bank's insurance premiums,
which have amounted to 23 basis points will be reduced to 6.4 basis points.
Based upon the $44.8 million of assessable deposits at September 30, 1996, the
Bank would expect to pay $18,600 less in insurance premiums per quarter during
1997, or $.03 per share.
12
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In management's opinion, there are no recent accounting pronouncements
which have been adopted, or pending pronouncements that, if adopted, which have
had or would have a significant effect on the Company's financial position or
results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements of the Company and related notes presented
herein 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 changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets
and liabilities of a financial institution are monetary in nature. As a
result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the price of goods and services, since such prices are affected by
inflation to a larger extent than interest rates. In the current interest
rate environment, liquidity and the maturity structure of First Federal's
assets and liabilities are critical to the maintenance of acceptable
performance levels.
13
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors
First Federal Financial Bancorp, Inc.
Ironton, Ohio 45638
We have audited the accompanying consolidated balance sheets of First Federal
Financial Bancorp, Inc. and subsidiary as of September 30, 1996 and 1995, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years ended September 30, 1996, 1995 and 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated 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 consolidated financial position of First
Federal Financial Bancorp, Inc. and subsidiary as of September 30, 1996 and
1995, and the results of their operations and their cash flows for the years
ended September 30, 1996, 1995 and 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for investment securities in 1994.
Ashland, Kentucky
November 1, 1996
14
<PAGE>
FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS, including interest-bearing
deposits of $754,676 and $2,496,216, respectively $ 801,243 $ 2,528,416
INVESTMENT SECURITIES HELD TO MATURITY, approximate
market value of $8,934,776 and $5,292,000, respectively 8,983,577 5,290,336
INVESTMENT SECURITIES AVAILABLE FOR SALE,
at approximate market value 2,531,995 -
LOANS RECEIVABLE, less allowance for loan losses of $283,112
and $277,937, respectively 34,955,329 32,609,321
MORTGAGE-BACKED SECURITIES HELD TO MATURITY, approximate
market value of $5,067,431 and $8,453,400, respectively 5,190,066 8,567,701
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE, at
approximate market value 2,575,973 989,994
ACCRUED INTEREST RECEIVABLE 382,997 304,753
FORECLOSED REAL ESTATE 33,367 -
OFFICE PROPERTIES AND EQUIPMENT 1,037,768 904,014
OTHER ASSETS 144,237 101,801
------------ ------------
$ 56,636,552 $ 51,296,336
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $ 44,809,072 $ 46,197,820
ADVANCE FROM FEDERAL HOME LOAN BANK 500,000 -
DEFERRED FEDERAL INCOME TAXES PAYABLE 84,015 69,578
ACCRUED INTEREST PAYABLE 5,224 6,519
ACCRUED SAIF SPECIAL ASSESSMENT 269,363 -
OTHER LIABILITIES 85,360 93,555
------------ ------------
Total liabilities 45,753,034 46,367,472
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 3,000,000 shares
authorized; 671,783 shares issued and outstanding 6,718 -
Employee benefit plans (513,080) -
Additional paid-in capital 6,280,193 -
Retained earnings-substantially restricted 5,111,660 4,938,274
Unrealized holding loss on securities
available for sale, net of taxes (1,973) (9,410)
------------ ------------
Total stockholders' equity 10,883,518 4,928,864
------------ ------------
$ 56,636,552 $ 51,296,336
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
15
<PAGE>
FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable -
First mortgage loans $ 2,620,582 $ 2,414,203 $ 2,236,198
Consumer and other loans 112,697 107,312 89,578
Mortgage-backed and related
securities 518,936 559,362 544,111
Investment securities 489,666 274,552 261,708
Other interest-earning assets 129,229 81,282 75,909
----------- ----------- -----------
Total interest income 3,871,110 3,436,711 3,207,504
----------- ----------- -----------
INTEREST EXPENSE:
Interest-bearing checking 15,312 15,454 10,080
Passbook savings 326,942 417,433 623,968
Certificates of deposit 1,987,887 1,503,530 1,130,888
Advances from Federal Home
Loan Bank 1,443 67,513 -
----------- ----------- -----------
Total interest expense 2,331,584 2,003,930 1,764,936
----------- ----------- -----------
Net interest income 1,539,526 1,432,781 1,442,568
PROVISION FOR LOAN LOSSES 14,000 13,000 50,000
----------- ----------- -----------
Net interest income after
provision for loan losses 1,525,526 1,419,781 1,392,568
----------- ----------- -----------
NON-INTEREST INCOME:
Gains on foreclosed
real estate - - 52,954
Other 41,027 31,930 27,974
----------- ----------- -----------
Total non-interest income 41,027 31,930 80,928
----------- ----------- -----------
NON-INTEREST EXPENSE:
Compensation and benefits 384,249 385,785 378,545
Occupancy and equipment 88,003 83,674 84,439
SAIF deposit insurance premium 105,219 94,784 98,560
SAIF special assessment 269,363 - -
Directors' fees and expenses 65,121 64,891 65,258
Ohio franchise tax 74,687 68,821 63,541
Data processing 58,702 53,381 57,303
Advertising 49,186 52,670 46,243
Employee Stock Ownership Plan 25,420 - -
Other 177,744 140,342 140,192
----------- ----------- -----------
Total non-interest expense 1,297,694 944,348 934,081
----------- ----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 268,859 507,363 539,415
----------- ----------- -----------
PROVISION FOR INCOME TAXES:
Current 41,603 141,068 150,452
Deferred 10,608 13,491 14,993
----------- ----------- -----------
Total provision for
income taxes 52,211 154,559 165,445
----------- ----------- -----------
NET INCOME $ 216,648 $ 352,804 $ 373,970
----------- ----------- -----------
----------- ----------- -----------
NET INCOME PER SHARE $ .35 N/A N/A
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
16
<PAGE>
FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Unrealized
Holding
Retained Loss on
Employee Additional Earnings- Securities Total
Common Benefit Paid-in Substantially Available Stockholders'
Stock Plans Capital Restricted For Sale Equity
------ -------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, September 30, 1993 $ -- $ -- $ -- $4,211,500 $ -- $4,211,500
NET INCOME, 1994 -- -- -- 373,970 -- 373,970
UNREALIZED HOLDING LOSS, net of
deferred taxes of $10,687 -- -- -- -- (20,745) (20,745)
------ -------- ---------- ------------ ---------- -------------
BALANCES, September 30, 1994 -- -- -- 4,585,470 (20,745) 4,564,725
NET INCOME, 1995 -- -- -- 352,804 -- 352,804
CHANGE IN UNREALIZED HOLDING LOSS,
net of deferred taxes of $5,839 -- -- -- -- 11,335 11,335
------ -------- ---------- ------------ ---------- -------------
BALANCES, September 30, 1995 -- -- -- 4,938,274 (9,410) 4,928,864
CHANGE IN UNREALIZED HOLDING LOSS,
net of deferred taxes of $3,831 -- -- -- -- 7,437 7,437
NET INCOME, 1996 -- -- -- 216,648 -- 216,648
COMMON STOCK ISSUED, $.01 par
value 6,718 (537,600) 6,279,293 -- -- 5,748,411
ESOP SHARES RELEASED, 2,452
shares; $10.37 average fair
market value -- 24,520 900 -- -- 25,420
DIVIDENDS PAID ($.07 per share) -- -- -- (43,262) -- (43,262)
------ -------- ---------- ------------ ---------- -------------
BALANCES, September 30, 1996 $6,718 $(513,080) $6,280,193 $5,111,660 $ (1,973) $10,883,518
------ -------- ---------- ------------ ---------- -------------
------ -------- ---------- ------------ ---------- -------------
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these consolidated statements.
17
<PAGE>
FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 216,648 $ 352,804 $ 373,970
Adjustments to reconcile net income
to net cash provided by operating
activities -
(Gains) losses on foreclosed real estate 1,000 - (52,954)
Provision for loan losses 14,000 13,000 50,000
Depreciation 50,892 49,605 50,895
FHLB stock dividends (29,200) (25,900) (19,400)
Amortization and accretion, net 32,730 41,933 59,788
ESOP compensation 25,420 - -
Change in -
Accrued interest receivable (78,244) (20,530) 31,975
Other assets (42,437) 2,874 9,516
Deferred Federal income taxes 10,608 13,491 14,993
Accrued interest payable (1,295) (4,944) 2,371
Accrued SAIF special assessment 269,363 - -
Other liabilities (8,195) 2,511 (11,096)
----------- ----------- -----------
Net cash provided by operating
activities 461,290 424,844 510,058
----------- ----------- -----------
INVESTING ACTIVITIES:
Net increase in loans (2,394,375) (3,875,812) (1,936,100)
Proceeds from maturities of investment
securities held to maturity 1,843,000 790,000 1,689,000
Purchases of investment securities
held to maturity (5,506,999) (1,081,822) (1,992,803)
Purchases of investment securities
available for sale (2,530,662) - -
Principal collected on mortgage-backed
securities held to maturity 1,140,551 1,075,646 3,190,608
Purchases of mortgage-backed
securities held to maturity - - (659,765)
Principal collected on mortgage-backed
securities available for sale 628,267 56,856 112,067
Purchases of mortgage-backed
securities available for sale - - (1,178,577)
Purchases of office properties
and equipment (184,646) (80,567) (114,073)
Proceeds from sales of foreclosed
real estate - - 53,300
----------- ----------- -----------
Net cash used for investing
activities (7,004,864) (3,115,699) (836,343)
FINANCING ACTIVITIES:
Proceeds from sale of stock 5,748,411 - -
Dividends paid (43,262) - -
Proceeds from FHLB advances 500,000 5,600,000 -
Principal paid on FHLB advances - (5,600,000) -
Net increase (decrease) in deposits (1,388,748) 4,236,254 (1,130,607)
----------- ----------- -----------
Net cash provided by (used for)
financing activities 4,816,401 4,236,254 (1,130,607)
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,727,173) 1,545,399 (1,456,892)
</TABLE>
18
<PAGE>
FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS, beginning of year 2,528,416 983,017 2,439,909
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 801,243 $ 2,528,416 $ 983,017
----------- ----------- -----------
----------- ----------- -----------
NONCASH INVESTING ACTIVITIES:
Loans taken into foreclosed real estate $ 34,367 $ - $ 106,611
Loans made to facilitate sales of foreclosed
real estate - - 317,200
Unrealized holding loss on securities
available for sale 2,991 14,258 31,432
Transfer of securities classified as
held to maturity to available for sale 2,216,252 - -
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Federal income taxes paid 103,635 141,113 176,186
Interest paid 2,332,879 2,008,874 1,762,564
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
19
<PAGE>
FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
First Federal Financial Bancorp, Inc. (the "Company") was incorporated
under Delaware law in February 1996 by First Federal Savings and Loan
Association of Ironton (the "Association") in connection with the conversion
of the Association from a federally-chartered mutual savings and loan
association to a federally-chartered stock savings bank to be known as "First
Federal Savings Bank of Ironton" (the "Bank") and the issuance of the Bank's
common stock to the Company and the offer and sale of the Company's common
stock by the Company to the members of the public, the Association's Board of
Directors, its management, and the First Federal Financial Bancorp, Inc.
Employee Stock Ownership Plan (the "ESOP") (the "Conversion").
As part of the Conversion, the Company issued 671,783 shares of its
common stock. Total proceeds of $6,717,830 were reduced by $537,600 for
shares to be purchased by the ESOP and by approximately $432,000 for
conversion expenses. As a result of the Conversion, the Company contributed
approximately $3,145,000 of additional capital to the Bank and retained the
balance of the proceeds.
The Company's principal business is conducted through the Bank which
conducts business from its main office located in Ironton, Ohio, and one
full-service branch located in Chesapeake, Ohio. The Bank's deposits are
insured by the Savings Association Insurance Fund ("SAIF") to the maximum
extent permitted by law. The Bank is subject to examination and
comprehensive regulation by the Office of Thrift Supervision ("OTS"), which
is the Bank's chartering authority and primary regulator. The Bank is also
subject to regulation by the Federal Deposit Insurance Corporation ("FDIC"),
as the administrator of the SAIF, and to certain reserve requirements
established by the Federal Reserve Board ("FRB"). The Bank is a member of
the Federal Home Loan Bank of Cincinnati ("FHLB").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements at September 30, 1996, and for
the year then ended, include the accounts of the Company and the Bank. All
significant intercompany transactions and balances have been eliminated in
consolidation. The financial statements at September 30, 1995, and for the
years ended September 30, 1995 and 1994, include only the accounts of the
Bank (formerly the Association). Additionally, certain reclassifications may
have been made in order to conform with the current year's presentation. The
accompanying financial statements have been prepared on the accrual basis.
20
<PAGE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for loan
losses, and the effect of prepayments on premiums and discounts associated
with investments and mortgage-backed securities. Management believes that
the allowance for loan losses and the effect of prepayments on premiums and
discounts associated with investments and mortgage-backed securities have
been adequately evaluated. Various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for
loan losses and valuations of foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowance or adjustments to
the valuations based on their judgments about information available to them
at the time of their examination.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
include cash and interest bearing deposits in other financial institutions.
The Company and Bank maintain cash deposits in other depository institutions
which occasionally exceed the amount of deposit insurance available.
Management periodically assesses the financial condition of these
institutions.
Federal regulations require the maintenance of certain daily reserve
balances. Based upon the regulatory calculation, the Bank's reserve
requirements at September 30, 1996 and 1995 were $-0-. However, aggregate
reserves (in the form of vault cash) are maintained to satisfy federal
regulatory requirements should they be needed.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investment securities and mortgage-backed securities held to maturity
are carried at amortized cost, based upon management's intent and their
ability to hold such securities to maturity. Adjustments for premiums and
discounts are recognized in interest income using the interest method over
the period to maturity.
Equity securities that are nonmarketable and restricted are carried
at cost. The Bank is required to maintain stock in the Federal Home Loan
Bank of Cincinnati in an amount equal to 1% of mortgage related assets
(residential mortgages and mortgage-backed securities) or 0.3% of the Bank's
total assets at December 31 of each year. Such stock is carried at cost.
Investment securities and mortgage-backed securities available for sale
are stated at approximate market value, adjusted for amortization of premiums
and accretion of discounts using the interest method. Unrealized gains and
losses on such securities are reported as a separate component of
stockholders' equity.
21
<PAGE>
During 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS No. 115), which requires,
among other things, that debt and equity securities (including
mortgage-backed securities) classified as available for sale be reported at
fair value, with unrealized gains and losses excluded from net income and
reported as a separate component of stockholders' equity, net of income
taxes. The Bank adopted the provisions of SFAS No. 115 effective October 1,
1993. Accordingly, securities classified as available for sale are carried
at their market value for 1996 and 1995. This change was not material to the
Bank's assets or stockholders' equity for the year ended September 30, 1994.
Realized gains and losses on sales of investment securities and
mortgage-backed securities are recognized in the statements of income using
the specific identification method.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses, and net deferred loan origination fees and costs.
It is the policy of the Bank to provide a valuation allowance for
estimated losses on loans when a significant and probable decline in value
occurs. The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of any underlying collateral, and current economic conditions.
Loans are placed on non-accrual when a loan is specifically determined
to be impaired or when principal and interest is delinquent for 90 days or
more. Any unpaid interest previously accrued on those loans is reversed from
income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal
balance. Interest income on other nonaccrual loans is recognized only to the
extent of the interest payments received.
Unearned income on installment loans, home improvement loans and
automobile loans is amortized over the term of the loans using the Rule of
78's method.
FORECLOSED REAL ESTATE
At the time of foreclosure, foreclosed real estate is recorded at the
lower of the Bank's cost or the asset's fair value, less estimated costs to
sell, which becomes the property's new basis. Any write-downs based on the
asset's fair value at date of acquisition are charged to the allowance for
loan losses. Costs incurred in maintaining foreclosed real estate and
subsequent write-downs to reflect declines in the fair value of the property
are included in expenses.
INCOME TAXES
Deferred income taxes are recognized for temporary differences between
transactions recognized for financial reporting purposes and income tax
purposes. Income taxes are accounted for in accordance with the provisions
of Statement of Financial Accounting Standards No. 109.
22
<PAGE>
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment accounts are stated at cost.
Expenditures which increase values or extend useful lives of the respective
assets are capitalized, whereas expenditures for maintenance and repairs are
charged to expense as incurred.
DEPRECIATION
The Bank computes depreciation generally on the straight-line method.
The estimated useful lives used to compute depreciation are:
Years
-----
Buildings and improvements 20-50
Furniture, fixtures and equipment 5-10
Automobile 5
NET INCOME PER SHARE
Net income per share for the year ended September 30, 1996 was
computed using the weighted average number (618,759) of outstanding common
shares. There were no shares of stock outstanding except for the year ended
September 30, 1996. Shares which have not been committed to be released to
the ESOP are not considered to be outstanding for purposes of calculating net
income per share.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In
that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used in estimating fair
value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the
consolidated balance sheet for cash and cash equivalents approximates fair
value.
Investment securities and mortgage-backed securities: Fair values
for investment securities and mortgage-backed securities are based on quoted
market prices, where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on
carrying amounts. The fair values for other loans
23
<PAGE>
(for example, fixed rate mortgage loans) are estimated using discounted cash
flow analysis, based on interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Loan fair value
estimates include judgments regarding future expected loss experience and
risk characteristics. The carrying amount of accrued interest receivable
approximates fair value.
Deposits: The fair values disclosed for demand and passbook accounts
are, by definition, equal to the amount payable on demand at the reporting
date (that is their carrying amounts). The fair values for certificates of
deposit are considered to approximate carrying value if they have original
maturities of two years or less. For other certificates of deposit, fair
values are estimated using a discounted cash flow calculation that applies
interest rates currently being offered to a schedule of aggregated
contractual maturities on such deposits. The carrying amount of accrued
interest payable approximates fair value.
Advance from Federal Home Loan Bank: Due to the short-term maturity,
the advance from the Federal Home Loan Bank's carrying value approximates its
fair value.
(2) INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity consist of the following:
<TABLE>
<CAPTION>
September 30, 1996
----------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 250,199 $ 1,128 $ - $ 251,327
U.S. Government agency
securities 5,076,984 6,743 80,463 5,003,264
Obligations of states and
political subdivisions 1,447,170 25,445 1,654 1,470,961
Certificates of deposit 1,770,924 - - 1,770,924
---------- -------- -------- ----------
8,545,277 33,316 82,117 8,496,476
Restricted Equity Securities:
Stock in FHLB, at cost 438,300 - - 438,300
---------- -------- -------- ----------
$8,983,577 $ 33,316 $ 82,117 $8,934,776
---------- -------- -------- ----------
---------- -------- -------- ----------
September 30, 1995
---------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
---------- ---------- ---------- ----------
U.S. Treasury securities $ 250,465 $ 1,997 $ - $ 252,462
U.S. Government agency
securities 1,843,020 6,872 27,335 1,822,557
Obligations of states and
political subdivisions 1,007,406 20,130 - 1,027,536
Certificates of deposit 1,780,345 - - 1,780,345
---------- -------- -------- ----------
4,881,236 28,999 27,335 4,882,900
Restricted Equity Securities:
Stock in FHLB, at cost 409,100 - - 409,100
---------- -------- -------- ----------
$5,290,336 $ 28,999 $ 27,335 $5,292,000
---------- -------- -------- ----------
---------- -------- -------- ----------
</TABLE>
24
<PAGE>
The amortized cost and estimated market value of investment
securities held to maturity at September 30, 1996, by contractual maturity
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations without
call or prepayment penalties.
Estimated
Amortized Market
Cost Value
---------- ----------
Due in one year or less $1,438,000 $1,437,625
Due after one year through five years 4,997,708 4,971,247
Due after five years through ten years 1,406,093 1,412,548
Due after ten years 1,141,776 1,113,356
---------- ----------
$8,983,577 $8,934,776
---------- ----------
---------- ----------
At September 30, 1996 and 1995, investment securities with a carrying
value of $535,000 were pledged to secure public deposits.
There were no sales of investment securities held to maturity during
the years ended September 30, 1996, 1995 and 1994.
(3) INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale consist of the following:
<TABLE>
<CAPTION>
September 30, 1996
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government
agency securities $ 2,391,012 $ 6,475 $ 6,297 $ 2,391,190
Obligations of states
and political subdivisions 140,000 805 - 140,805
----------- ------- ------- -----------
$ 2,531,012 $ 7,280 $ 6,297 $ 2,531,995
----------- ------- ------- -----------
----------- ------- ------- -----------
</TABLE>
The amortized cost and estimated market value of investment
securities available for sale at September 30, 1996, by contractual maturity
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations without
call or prepayment penalties.
Estimated
Amortized Market
Cost Value
----------- -----------
Due after one year through five years $ 1,392,655 $ 1,393,220
Due after five years through ten years 1,138,357 1,138,775
----------- -----------
$ 2,531,012 $ 2,531,995
----------- -----------
----------- -----------
There were no sales of investment securities available for sale
during the year ended September 30, 1996.
25
<PAGE>
(4) LOANS RECEIVABLE
Loans receivable at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Real estate loans:
Single family residential $ 32,672,805 $ 30,535,900
Multi-family residential 229,561 250,830
Commercial real estate 1,734,269 1,748,679
------------ ------------
Total real estate loans 34,636,635 32,535,409
------------ ------------
Consumer and other loans:
Loans secured by deposit accounts 703,351 567,318
Home improvement 85,680 73,992
Automobile 463,419 386,892
Home equity 17,899 -
Other 379,446 485,776
------------ ------------
Total consumer and other loans 1,649,795 1,513,978
------------ ------------
Total loans 36,286,430 34,049,387
Less:
Unearned interest (118,125) (116,432)
Loans in process (909,079) (1,016,325)
Deferred loan fees (20,785) (29,372)
Allowance for loan losses (283,112) (277,937)
------------ ------------
Loans receivable, net $ 34,955,329 $ 32,609,321
============ ============
Weighted average interest rate 7.53% 7.89%
============ ============
</TABLE>
Activity in the allowance for loan losses is summarized as follows for
the years ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- -----------
<S> <C> <C> <C>
Balance, beginning of year $ 277,937 $ 265,703 $ 262,548
Provision charged to expense 14,000 13,000 50,000
Loans charged off (9,262) (1,379) (57,958)
Loans recovered 437 613 (11,113)
--------- --------- ------------
Balance, end of year $ 283,112 $ 277,937 $ 265,703
========= ========= ===========
</TABLE>
Loans on which the accrual of interest had been discontinued or
reduced and for which impairment had not been recognized totaled approximately
$109,000, $46,000, and $-0- at September 30, 1996, 1995 and 1994, respectively.
Interest income which would have been recognized under the original terms of
these contracts was $3,584, $1,885, and $-0-, respectively.
26
<PAGE>
The Bank is not committed to lend additional funds to debtors whose
loans are in nonaccrual status.
The Bank is principally a local lender and, therefore, has a
significant concentration of loans to borrowers who reside in and/or which
are collateralized by real estate located in Lawrence and Scioto County, Ohio,
and Boyd and Greenup County, Kentucky. Employment in these areas is highly
concentrated in the petroleum, iron and steel industries. Therefore, many
debtors' ability to honor their contracts is dependent upon these economic
sectors.
The aggregate amount of loans by the Bank to its directors and
executive officers, including loans to related persons and entities, was
$193,558 and $116,815 at September 30, 1996 and 1995, respectively.
Management's opinion is that these loans compare favorably to other loans
made in the ordinary course of business. An analysis of the activity of loans
to directors and executive officers is as follows:
<TABLE>
<CAPTION>
Year Ended
September 30,
---------------------
1996 1995
--------- ----------
<S> <C> <C>
Balance, beginning of year $ 116,875 $ 85,029
New loans advanced 193,436 46,058
Repayments (116,753) (14,272)
--------- ----------
Balance, end of year $ 193,558 $ 116,815
========= ==========
</TABLE>
(5) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity at September 30 consist
of the following:
<TABLE>
<CAPTION>
1996
---------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
FHLMC Certificates $3,204,882 $16,312 $ 91,934 $3,129,260
FNMA Certificates 1,817,139 10,177 57,561 1,769,755
GNMA Certificates 43,592 2,772 - 46,364
FNMA and GNMA CMO's 124,453 347 2,748 122,052
---------- ------- -------- ----------
$5,190,066 $29,608 $152,243 $5,067,431
========== ======= ======== ==========
Weighted average rate 6.47%
========
1995
----------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
FHLMC Certificates $ 4,487,261 $25,259 $ 78,671 $4,433,849
FNMA Certificates 3,267,328 20,916 78,446 3,209,798
GNMA Certificates 649,249 8,411 6,836 650,824
FNMA and GNMA CMO's 163,863 424 5,358 158,929
------------ ------- -------- ----------
$ 8,567,701 $55,010 $169,311 $8,453,400
============ ======= ======== ==========
Weighted average rate 6.52%
========
</TABLE>
27
<PAGE>
During December 1995, the Bank transferred investments with an amortized
cost of $2,216,252 and an estimated market value of $2,232,378, and unrealized
gains of $16,126, from the held to maturity category to the available for sale
category. The transfers were made to increase liquidity. The unrealized
holding gain or loss on the investments transferred was recognized as a
component of stockholders' equity, net of applicable income taxes, on the
date of transfer.
The transfers did not impair the held to maturity portfolio, which is
stated at amortized cost, as they were made in accordance with guidance
issued by the Financial Accounting Standards Board.
There were no sales of mortgage-backed securities held to maturity during
the years ended September 30, 1996, 1995 and 1994.
(6) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale at September 30 consist
of the following:
<TABLE>
<CAPTION>
1996
--------------------------------------------------
Gross Gross Carrying
Amortized Unrealized Unrealized (Market)
Cost Gains Losses Value
---------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
FHLMC Certificates $ 669,845 $ 5,763 $ 3,727 $ 671,881
FNMA Certificates 963,656 1,215 11,220 953,651
GNMA Certificates 946,447 3,994 - 950,441
---------- ------- -------- ----------
$2,579,948 $10,972 $ 14,947 $2,575,973
========== ======= ======== ==========
Weighted average rate 6.60%
========
1995
----------------------------------------------------
Gross Gross Carrying
Amortized Unrealized Unrealized (Market)
Cost Gains Losses Value
------------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
FHLMC Certificates $ 134,231 $ - $ 1,220 $ 133,011
FNMA Certificates 408,552 - 5,530 403,022
GNMA Certificates 461,469 - 7,508 453,961
------------ ------- ---------- ----------
$ 1,004,252 $ - $ 14,258 $ 989,994
============ ======= ========== ==========
Weighted average rate 6.09%
==========
</TABLE>
There were no sales of mortgage-backed securities available for sale
during the years ended September 30, 1996, 1995 or 1994.
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30 is summarized as follows:
28
<PAGE>
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Loans $181,134 $172,882
Investment securities 140,014 55,794
Mortgage-backed and related
securities 61,849 76,077
-------- ----------
$382,997 $304,753
-------- ----------
-------- ----------
</TABLE>
(8) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Land $ 461,096 $ 308,592
Buildings and improvements 690,776 689,411
Furniture, fixtures and equipment 221,831 191,054
Automobile 13,667 13,667
---------- -----------
1,387,370 1,202,724
Less - accumulated depreciation (349,602) (298,710)
---------- ------------
$1,037,768 $ 904,014
---------- ------------
---------- ------------
</TABLE>
(9) OTHER ASSETS
Other assets at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Federal income taxes receivable $ 62,090 $ 12,640
Prepaid pension -- 19,340
Prepaid Federal insurance 27,397 25,327
Prepaid Ohio franchise tax 19,110 17,357
Other prepaid expenses 35,640 27,137
---------- -----------
$ 144,237 $ 101,801
---------- ------------
---------- ------------
</TABLE>
(10) DEPOSITS
Deposits at September 30 are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average Rate 1996 1995
at September 30, ------------------------ -------------------------
1996 Amount Percent Amount Percent
---------------- ------ ------- ------ --------
<S> <C> <C> <C> <C> <C>
Passbook 3.0% $ 9,862,917 22.0% $11,190,868 24.2%
----- ----------- ------ ----------- ------
Christmas club 3.0 95,588 .2 94,406 .2
----- ----------- ------ ----------- ------
Demand accounts - 354,074 .8 294,005 .7
----- ----------- ------ ----------- ------
NOW accounts 3.0 548,684 1.2 523,954 1.1
----- ----------- ------ ----------- ------
Certificates:
3.0-3.99% 3.83 1,662,214 3.7 2,451,654 5.3
4.0-4.99% 4.50 4,573,292 10.2 4,436,111 9.6
5.0-5.99% 5.46 16,747,593 37.4 4,262,267 9.2
6.0-6.99% 6.42 10,964,710 24.5 16,854,424 36.5
7.0-7.99% - - - 6,090,131 13.2
----- ----------- ------ ----------- ------
5.86 33,947,809 75.8 34,094,587 73.8
----- ----------- ------ ----------- ------
5.06% $44,809,072 100.0% $46,197,820 100.0%
----- ----------- ------ ----------- ------
</TABLE>
29
<PAGE>
The aggregate amount of short-term jumbo certificates of
deposit with a minimum denomination of $100,000 was approximately $3,584,000
and $3,955,000 at September 30, 1996 and 1995, respectively.
At September 30, 1996, scheduled maturities of certificates of
deposit are as follows:
Year
Ending
September 30, Amount Percent
------------ ------ --------
1997 $21,682,656 63.9%
1998 9,126,047 26.9
1999 3,041,182 9.0
2000 97,924 .2
----------- -----
$33,947,809 100.0%
----------- -----
----------- -----
(11) OTHER LIABILITIES
Other liabilities at September 30 are summarized as follows:
1996 1995
--------- --------
Escrow accounts $ 59,979 $72,052
Accrued expenses 12,306 15,956
Other liabilities 13,075 5,547
-------- -------
$ 85,360 $93,555
-------- -------
-------- -------
(12) ADVANCE FROM FEDERAL HOME LOAN BANK
The advance from the Federal Home Loan Bank at September 30 is as
follows:
Interest
Date Due Rate 1996
-------- --------- ---------
12/10/96 5.45 % $500,000
--------
---------
The advance is collateralized by first mortgage loans totalling
750,000 at September 30, 1996.
(13) SAIF SPECIAL ASSESSMENT
On September 30, 1996, Bank Insurance Fund ("BIF")-SAIF reform was
enacted as part of the 1997 omnibus appropriations bill. As part of this
legislation, thrifts, including the Bank, will pay a special one-time
assessment to restore the SAIF insurance fund to the statutorily prescribed
level of 1.25% of insured deposits. The assessment rate will be 65.7 basis
points on SAIF-insured deposits as of March 31, 1995. Payments for the
one-time charge are due November 27, 1996. In accordance with generally
accepted accounting principles, the Bank has accrued $269,363 at September
30, 1996, to record this assessment.
Future quarterly SAIF assessments will be reduced beginning January
1, 1997, to $.064 for every $100 of insured deposits, from the present level
of $.23 per $100 of insured deposits. Based upon the $44.8 million of
assessable deposits at September 30, 1996, the Bank would expect to pay
$18,592 less in insurance premiums per quarter during 1997.
30
<PAGE>
(14) PENSION PLAN
The Bank has a non-contributory pension plan covering all employees
who meet minimum age and length of service requirements. Pension assets
consist of the cash value of individual insurance policies. The Bank makes
annual payments in amounts equal to the cost of the insurance premiums.
Contributions charged to expense for the years ended September 30, 1996, 1995
and 1994 were $22,871, $35,071 and $41,694, respectively. During the year
ended September 30, 1996, the Bank's Board of Directors elected to
discontinue the Plan upon the establishment of the ESOP as discussed at Note
18. Plan assets will be distributed to the participants.
(15) INCOME TAXES
The Bank files its Federal income tax return on a calendar-year
basis. If certain conditions are met in determining taxable income, the Bank
was allowed a special bad debt deduction based on a percentage of taxable
income (currently 8 percent) or on specified experience formulas for the
calendar years ended December 31, 1995 and 1994, respectively.
The provision for income taxes differs from the amount computed by
applying the U.S. Federal income tax rate of 34 percent for 1996, 1995 and
1994 to income before the provision for income taxes as a result of the
following:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Expected provision for
income taxes at Federal
tax rate $91,412 $172,504 $183,401
Tax-exempt interest (15,560) (17,712) (17,126)
Surtax exemptions (10,340) - -
Others, net (12,301) (233) (830)
------- ---------- ---------
$52,211 $154,559 $165,445
------- -------- ---------
------- -------- ---------
</TABLE>
The deferred income tax liability consists of income taxes applicable
to temporary differences between transactions recognized for financial
reporting and income tax reporting purposes. A deferred tax asset valuation
allowance is established for deferred tax assets not expected to be realized.
The deferred tax liability at September 30 consists of the following:
<TABLE>
1996 1995
--------- ----------
<S> <C> <C>
FHLB stock dividends not currently
taxable $(75,859) $(65,930)
Depreciation (16,962) (18,255)
Loan fees 7,067 9,986
Unrealized holding loss on
investments available for sale 1,352 4,848
Bad debts 85,380 85,786
Others, net 387 (227)
------- ---------
1,365 16,208
Less - valuation allowance for bad
debt deferred tax asset (85,380) (85,786)
------- ---------
Net deferred tax liability $(84,015) $(69,578)
------- ---------
------- ---------
</TABLE>
Retained earnings at September 30, 1996 and 1995, include approximately
$1,309,000 and $1,282,000, respectively, for which no deferred Federal income
tax liability has been
31
<PAGE>
recognized. These amounts represent an allocation of income to bad debt
deductions for tax purposes only. Reduction of amounts so allocated for
purposes other than bad debt losses or adjustments arising from carryback
of net operating losses would create income for tax purposes only, which would
be subject to the then current corporate income tax rate. The unrecorded
deferred income tax liability on the above amounts was approximately $445,000
and $436,000 at September 30, 1996 and 1995, respectively.
(16) FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT
(FIRREA) OF 1989
FIRREA was signed into law on August 9, 1989; regulations for savings
institutions' minimum-capital requirements went into effect on December 7,
1989. In addition to the capital requirements, FIRREA includes provisions
for changes in the Federal regulatory structure for institutions, including a
new deposit insurance system, increased deposit insurance premiums, and
restricted investment activities with respect to non-investment-grade
corporate debt and certain other investments. FIRREA also increases the
required ratio of housing-related assets needed to qualify as a savings
institution. The regulations require institutions to have minimum regulatory
tangible capital equal to 1.5 percent of total assets, 3 to 4 percent
leverage capital ratio, and a 8.0 percent risk-based capital ratio.
For purpose of the regulation, the core and tangible capital of the
Bank is defined as retained earnings. Adjusted total assets are the Bank's
total assets as determined under generally accepted accounting principles.
In determining compliance with the risk-based capital requirement, the
Bank is allowed to use both core capital and supplementary capital provided
the amount of supplementary capital used does not exceed the Bank's core
capital. Supplementary capital of the Bank is defined to include all of the
Bank's general loan loss allowances. The risk-based capital requirement is
measured against risk-weighted assets which equals the sum of each asset and
the credit-equivalent amount of each off-balance sheet item after being
multiplied by an assigned risk weight.
The Bank, at September 30, 1996, meets all the required capital
requirements. Failure to meet all the regulatory capital requirements could
subject the Bank to certain regulatory sanctions and requirements.
The following is a reconciliation of the Bank's GAAP capital to
regulatory capital:
<TABLE>
Regulatory (000's Omitted)
-------------------------------------------------------------------------------
Risk-
Tangible Core based
Capital Ratio Capital Ratio Capital Ratio
-------- ----- ------- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C>
GAAP capital, as adjusted $8,295 $8,295 $8,295
Adjustments -
General valuation
allowances - limited - - 283
------ ------ -------
Regulatory capital -
computed 8,295 15.3% 8,295 15.3% 8,578 35.5%
Minimum capital requirement 811 1.5% 1,622 3.0% 1,931 8.0%
------ ---- ------ ----- ------- -------
Regulatory capital - excess $7,484 13.8% $6,673 12.3% $6,647 27.5%
------ ---- ------ ----- ------- -------
------ ---- ------ ----- ------- -------
</TABLE>
32
<PAGE>
(17) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements. The principal commitments of the Bank are
loan commitments which approximated $913,000 and $576,000 at September 30, 1996
and 1995, respectively. The Bank uses the same credit policies for making loan
commitments as it does for other loans.
The Bank was not committed to sell or purchase loans or securities at
September 30, 1996 or 1995.
(18) EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established an ESOP for employees of the Company and the
Bank which became effective upon the Conversion. Full-time employees of the
Company and the Bank who have been credited with at least 1,000 hours of service
during a twelve month period and who have attained age 21 are eligible to
participate in the ESOP. The Company loaned the ESOP $537,600 for the initial
purchase of the ESOP shares. The loan is due and payable in forty-eight (48)
equal quarterly installments of $11,200 beginning June 29, 1996, plus interest
at the rate of 8.75% per annum. The Company will make scheduled discretionary
cash contributions to the ESOP sufficient to amortize the principal and interest
on the loan over a period of 12 years. The Company accounts for its ESOP in
accordance with Statement of Position 93-6, "Employer's Accounting For Employee
Stock Ownership Plans." As shares are committed to be released to participants,
the Company reports compensation expense equal to the average market price of
the shares during the period. ESOP compensation expense recorded during the
year ended September 30, 1996 was $25,420.
The fair value of the unreleased ESOP shares was approximately $564,000 at
September 30, 1996.
(19) DIVIDEND RESTRICTION
At the time of the Conversion, the Bank established a liquidation account
of approximately $5,005,000 (the amount equal to its total retained earnings as
of the date of the latest statement of financial condition appearing in the
final prospectus). The liquidation account will be maintained for the benefit
of eligible deposit account holders who continue to maintain their accounts at
the Bank after the Conversion. The liquidation account will be reduced
annually to the extent that eligible deposit account holders have reduced
their qualifying deposits. Subsequent increases will not restore an eligible
account holder's interest in the liquidation account. In the event of a
complete liquidation, each eligible account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held.
Subsequent to the Conversion, the Bank may not declare or pay cash
dividends on its shares of common stock if the effect thereon would cause
stockholders' equity to be reduced below the amount of the liquidation account
or applicable regulatory capital maintenance requirements, or if such
declaration and payment would otherwise violate regulatory requirements.
33
<PAGE>
(20) FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and the estimated fair values of the Company's
financial instruments at September 30, 1996 are as follows:
Carrying
Amount Fair Value
-------- ----------
Financial assets:
Cash and cash equivalents $ 801,243 $ 801,243
Loans receivable, less allowance 34,955,329 35,323,550
Investment securities held to
maturity 8,983,577 8,934,776
Investment securities available
for sale 2,531,995 2,531,995
Mortgage-backed securities held
to maturity 5,190,066 5,067,431
Mortgage-backed securities
available for sale 2,575,973 2,575,973
Accrued interest receivable 382,997 382,997
Financial liabilities:
Deposits 44,809,072 44,839,690
Advance from Federal Home
Loan Bank 500,000 500,000
Accrued interest payable 5,224 5,224
The carrying amounts in the preceding tables are included in the
consolidated balance sheets under the applicable captions.
While these estimates of fair value are based on management's
judgment of the most appropriate factors, there is no assurance that if the
Company were to have disposed of such items at September 30, 1996, the
estimated fair values would necessarily have been achieved at that date,
since market values may differ depending on various circumstances. The
estimated fair values at September 30, 1996 should not necessarily be
considered to apply at subsequent dates.
In addition, other assets and liabilities of the Company that are not
defined as financial instruments are not included in the above disclosures, such
as property and equipment. Also, non-financial instruments typically not
recognized in the financial statements nevertheless may have value but not
included in the above disclosures. These include, among other items, the
trained work force, customer goodwill, and similar items.
34
<PAGE>
(21) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the year ended September 30, 1996
is as follows:
Quarter Ended
-----------------------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
(Dollars in thousands except per share data)
Total interest income $936 $944 $978 $1,013
Total interest expense 595 590 588 559
---- ---- ---- ------
Net interest income 341 354 390 454
Provision for loan losses 6 6 2 -
---- ---- ---- ------
Net interest income after
provision for loan losses 335 348 388 454
Non-interest income 9 10 10 12
Non-interest expense 261 244 248 544
---- ---- ---- ------
Income (loss) before
provision for income taxes 83 114 150 (78)
Provision credit for
income taxes 16 35 44 (43)
---- ---- ---- -------
Net income (loss) $ 67 $ 79 $ 106 $ (35)
---- ---- ----- -------
---- ---- ----- -------
Net income (loss) per share $.11 $.13 $ .17 $ (.06)
---- ---- ----- --------
---- ---- ----- --------
Dividends declared per share $ - $ - $ - $ .07
---- ---- ---- --------
---- ---- ---- --------
(22) CONDENSED PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for the parent company only (First Federal
Financial Bancorp, Inc.) as of and for the year ended September 30, 1996 is as
follows:
35
<PAGE>
BALANCE SHEET
<TABLE>
ASSETS
<S> <C>
Cash and cash equivalents $ 14,183
Investment in subsidiary 8,295,303
Investment securities available for sale 2,531,995
Accrued interest receivable 43,539
Other assets 3,763
Deferred income taxes 387
------------
$ 10,889,170
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Income taxes payable $ 1,836
Other liabilities 3,816
------------
Total liabilities 5,652
------------
Common stock 6,718
Employee benefit plans (513,080)
Additional paid-in capital 6,280,193
Retained earnings 5,111,660
Unrealized holding loss on securities available
for sale, net of taxes (1,973)
------------
Total stockholders' equity 10,883,518
------------
$ 10,889,170
------------
------------
STATEMENT OF INCOME
Interest on investment securities $ 39,750
Compensation and benefits (25,420)
Other non-interest expense (10,761)
------------
Income before income taxes and equity in
undistributed income of subsidiary 3,569
Provision for income taxes 1,115
------------
Income before equity in undistributed
income of subsidiary 2,454
Equity in undistributed income of subsidiary 214,194
------------
Net income $ 216,648
------------
------------
STATEMENT OF CASH FLOWS
Operating activities:
Net income $ 216,648
Adjustments to reconcile net income to net
cash flows provided by operating activities -
Equity in undistributed income of subsidiary (214,194)
Accretion (350)
Deferred income taxes (721)
Increase in other assets (3,763)
Increase in accrued interest receivable (43,539)
Increase in income taxes payable 1,836
Increase in other liabilities 3,816
ESOP compensation 25,420
------------
Net cash used for operating activities (14,847)
------------
Investing activities:
Capital contribution to subsidiary (3,145,457)
Purchases of investment securities available for sale (2,530,662)
------------
Net cash used for investing activities (5,676,119)
------------
Financing activities:
Proceeds from sale of stock 5,748,411
Dividends paid (43,262)
------------
Net cash provided by financing activities 5,705,149
------------
Net increase in cash and cash equivalents 14,183
Cash and cash equivalents, beginning of year -
------------
Cash and cash equivalents, end of year $ 14,183
------------
------------
</TABLE>
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM(A) FIRST
FEDERAL FINANCIAL BANCORP INC AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AS OF
SEPTEMBER 30, 1996, AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR THEN
ENDED.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 46,567
<INT-BEARING-DEPOSITS> 754,676
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,107,968
<INVESTMENTS-CARRYING> 14,173,643
<INVESTMENTS-MARKET> 14,002,207
<LOANS> 35,238,441
<ALLOWANCE> 283,112
<TOTAL-ASSETS> 56,636,552
<DEPOSITS> 44,809,072
<SHORT-TERM> 500,000
<LIABILITIES-OTHER> 443,962
<LONG-TERM> 0
0
0
<COMMON> 6,718
<OTHER-SE> 10,876,800
<TOTAL-LIABILITIES-AND-EQUITY> 56,636,552
<INTEREST-LOAN> 2,733,279
<INTEREST-INVEST> 1,008,602
<INTEREST-OTHER> 129,229
<INTEREST-TOTAL> 3,871,110
<INTEREST-DEPOSIT> 2,330,141
<INTEREST-EXPENSE> 2,331,584
<INTEREST-INCOME-NET> 1,539,526
<LOAN-LOSSES> 14,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,297,694
<INCOME-PRETAX> 268,859
<INCOME-PRE-EXTRAORDINARY> 216,648
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 216,648
<EPS-PRIMARY> .35
<EPS-DILUTED> 0
<YIELD-ACTUAL> 2.36
<LOANS-NON> 109,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 277,937
<CHARGE-OFFS> 9,262
<RECOVERIES> 437
<ALLOWANCE-CLOSE> 283,112
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 283,112
</TABLE>
