<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
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>
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.
July 2, 1997 By: /s/ I. Vincent Rice
---------------------------------
I. Vincent Rice
President
<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]
KELLEY, GALLOWAY & COMPANY, PSC
CERTIFIED PUBLIC ACCOUNTANTS
1200 BATH AVENUE
P.O. BOX 990
ASHLAND, KENTUCKY 41105-0990
(606) 329-1811
FAX (606) 329-8756
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.
/s/ Kelley, Galloway & Company, PSC
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
