<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1997
OR
- ----- TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
ECURITIES 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 45638
Ironton, Ohio
- ------------------------------ --------------------------------
(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: $4.1 million
As of December 16, 1997, the aggregate value of the 530,999 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
115,384 shares held by all directors and executive officers of the Registrant
as a group, was approximately $8.7 million. This figure is based on the last
known trade price of $16.44 per share of the Registrant's Common Stock on
December 16, 1997.
Number of shares of Common Stock outstanding as of December 22, 1997:
646,383 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, 1997 are incorporated into Parts II and IV.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III.
<PAGE>
PART I.
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
First Federal Financial Bancorp, Inc. (the "Company") is a Delaware
corporation and sole stockholder of First Federal Savings Bank of Ironton
(the "Savings Bank") which converted from a federally-chartered mutual
savings and loan association to a federally-chartered stock savings bank in
June 1996. The only significant assets of the Company are the capital stock
of the Savings Bank, the Company's loan to its employee stock ownership plan,
and the balance of the net conversion proceeds retained by the Company. The
business of the Company initially consists of the business of the Savings
Bank. At September 30, 1997, the Company had $59.2 million in total
consolidated assets, $48.7 million in total consolidated liabilities and
$10.5 million in total consolidated stockholders' equity.
The Company's principal executive office is located in Ironton, Ohio. The
Savings Bank conducts business from its main office in Ironton, Ohio and one
branch office located in Proctorville, Ohio. The Savings Bank began
conducting business in 1935. The Savings Bank's deposits are insured by the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC") to the maximum extent permitted by law.
The Savings Bank is a community oriented savings bank which has
traditionally offered a variety of savings products to its retail customers.
The Company has concentrated its lending activities on originating real
estate loans secured by single-family residential properties in the local
markets it serves. See "-Competition." At September 30, 1997, the total gross
loan portfolio amounted to $40.3 million, or 68.1%, of total consolidated
assets, of which $36.0 million, or 89.2%, were single-family residential
mortgage loans, $.7 million, or 1.7%, were multi-family residential loans,
$1.9 million, or 4.8%, were commercial real estate loans and $1.7 million, or
4.3%, were comprised of other loans, including home improvement loans,
automobile loans and loans secured by savings accounts.
The Company also invests its funds in U.S. Government and agency
securities, as well as mortgage-backed and related securities (hereinafter
"mortgage-backed securities"), municipal and corporate debt securities and
other short-term investments. At September 30, 1997, investment securities
(both "held to maturity" as well as "available for sale") were $9.0 million,
or 15.2% of total consolidated assets, and mortgage-backed securities (both
"held to maturity" as well as "available for sale") were $7.8 million, or
13.2% of total consolidated assets. The Company derives its income
principally from interest earned on loans, securities and its other
investments and, to a lesser extent, from fees received in connection with
the origination of loans and for other services. The Company's primary
expenses are interest expense on deposits and noninterest expenses. Funds are
provided primarily by deposits, amortization and prepayments of outstanding
loans and mortgage-backed securities and other sources.
<PAGE>
Operating characteristics of the Company and the Savings Bank in recent
years include the following:
- PROFITABILITY. For the year ended September 30, 1997, the Company had
net income of $287,000 as compared to $217,000 for the year ended
September 30, 1996, and as compared to the Savings Bank's net income of
$353,000 for the year ended September 30, 1995. The Company's net
income in fiscal 1996 was negatively impacted by a one-time assessment
of $177,780, net of related tax benefits, to recapitalize the SAIF, as
described under "--Regulation--Insurance of Accounts." Without such
special assessment net income would have been $394,000. The Company's
net income is primarily dependent on its net interest income, the
difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities. Net interest income
amounted to $1.7 million, $1.5 million and $1.4 million for the years
ended September 30, 1997, 1996 and 1995, respectively. The interest
rate spreads were 2.12%, 2.36% and 2.62% for the years ended September
30, 1997, 1996 and 1995, respectively. Return on average assets was
.49%, .41% (.75% without the SAIF assessment) and 0.73% for the years
ended September 30, 1997, 1996 and 1995, respectively.
- NONINTEREST EXPENSE. The Company's profitability has been enhanced by
management's emphasis on operating efficiency. The Company's ratio of
noninterest expense to average total consolidated assets amounted to
2.24% for the year ended September 30, 1997 and averaged 2.22% for the
three years ended September 30, 1997. Non-interest income historically
has not been a source of profitability.
- ASSET QUALITY. Management of the Company believes that good asset
quality is the key to long-term financial strength and, as a result,
the Company's investments are intended to maintain asset quality and
control credit risk. In accordance with this approach, the Company has
predominantly emphasized single-family residential real estate loans,
which comprised 89.2% of total loans receivable at September 30, 1997.
As of such date, total non-performing assets constituted $134,000, or
.22% of total consolidated assets.
- STRONG CAPITAL POSITION. At September 30, 1997, the Company had total
stockholders' equity of $10.5 million. The Savings Bank exceeded all of
its regulatory capital requirements, with tangible, core and risk-based
capital ratios of 15.0%, 15.0% and 33.7%, respectively, as compared to
the minimum requirements of 1.5%, 3.0% and 8.0%, respectively.
The Company, as a registered savings and loan holding company, is subject
to examination and regulation by the Office of Thrift Supervision ("OTS") and
is subject to various reporting and other requirements of the Securities and
Exchange Commission ("SEC"). The Savings Bank is subject to examination and
comprehensive regulation by the
2
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OTS, which is the Savings Bank's chartering authority and primary regulator.
The Savings Bank is also regulated by the FDIC, the administrator of the
SAIF. The Savings Bank is also subject to certain reserve requirements
established by the Board of Governors of the Federal Reserve System and is a
member of the Federal Home Loan Bank ("FHLB") of Cincinnati, which is one of
the 12 regional banks comprising the FHLB System.
LENDING ACTIVITIES
GENERAL. The Company's primary lending emphasis has been, and continues
to be, the origination of conventional loans secured by first liens on
single-family residences located primarily in Lawrence County, Ohio.
Conventional residential real estate loans are loans which are neither
insured by the Federal Housing Administration ("FHA") nor partially
guaranteed by the Veterans Administration ("VA"). The Company does not
originate either FHA-insured or VA-guaranteed real estate loans. The
Company's single-family residential loans constituted 89.2% of the total loan
portfolio at September 30, 1997. To a significantly lesser extent, the
Company's loan portfolio also includes loans secured by multi-family
residential properties and commercial real estate, loans secured by savings
deposits, automobile loans, home improvement loans and miscellaneous other
loans.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the Company's loan portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
AMOUNT % AMOUNT % AMOUNT %
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential................................... $ 35,984 89.2% $ 32,673 90.0% $ 30,536 89.7%
Multi-family residential.................................... 685 1.7 230 .6 251 .7
Commercial real estate...................................... 1,961 4.8 1,734 4.9 1,748 5.2
--------- --------- --------- --------- --------- ---------
Total real estate loans................................... 38,630 95.7 34,637 95.5 32,535 95.6
--------- --------- --------- --------- --------- ---------
Non-real estate loans:
Loans secured by savings accounts........................... 556 1.4 703 1.9 567 1.7
Home improvement............................................ 86 .2 86 .2 74 .2
Automobile.................................................. 508 1.3 463 1.3 387 1.1
Other(1).................................................... 566 1.4 397 1.1 486 1.4
--------- --------- --------- --------- --------- ---------
Total other loans......................................... 1,716 4.3 1,649 4.5 1,514 4.4
--------- --------- --------- --------- --------- ---------
Total loans............................................... 40,346 100.0% 36,286 100.0% 34,049 100.0%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Less:
Unearned interest........................................... (140) (118) (117)
Loans in process............................................ (880) (909) (1,016)
Deferred loan fees.......................................... (13) (21) (29)
Allowance for loan losses................................... (287) (283) (278)
--------- --------- ---------
Net loans................................................. $ 39,026 $ 34,955 $ 32,609
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Comprised primarily of unsecured consumer loans.
3
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CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth certain information at September 30, 1997 regarding the dollar
amount of loans maturing in the Company's total loan portfolio, based on the
contractual terms to maturity. Demand loans and loans having no stated
schedule of repayments and no stated maturity are reported as due in one year
or less.
<TABLE>
<CAPTION>
DUE 1-3 YEARS DUE 3-5 YEARS DUE 5-10 YEARS DUE 10-15 YEARS DUE 15 YEARS
DUE 1 YEAR AFTER AFTER AFTER AFTER AND MORE AFTER
OR LESS 9/30/97 9/30/97 9/30/97 9/30/97 9/30/97 TOTAL
----------- ------------- ------------- --------------- --------------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Single-family
residential......... $ 1,243 $ 2,606 $ 2,795 $ 7,390 $ 10,506 $ 11,444 $ 35,984
Multi-family
residential......... 20 46 55 61 65 438 685
Commercial real
estate.............. 93 202 205 525 432 504 1,961
Non-real estate....... 776 687 206 47 -- -- 1,716
--------- --------- --------- --------- ----------- ---------- ---------
Total............. $ 2,132 $ 3,541 $ 3,261 $ 8,023 $ 11,003 $ 12,386 $ 40,346
--------- --------- --------- --------- ----------- ---------- ---------
--------- --------- --------- --------- ----------- ---------- ---------
</TABLE>
4
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The following shows for the total loans due after one year from September
30, 1997 the type and amount which have fixed interest rates and those which
have adjustable interest rates.
<TABLE>
<CAPTION>
FIXED FLOATING OR
RATES ADJUSTABLE-RATES TOTAL
--------- --------------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Real estate loans:
Single-family residential................................................. $ 5,806 $ 28,935 $ 34,741
Multi-family residential.................................................. -- 665 665
Commercial real estate.................................................... 49 1,819 1,868
--------- ------- ---------
Total real estate loans................................................. 5,855 31,419 37,274
--------- ------- ---------
Non-real estate loans:
Loan secured by savings accounts.......................................... -- -- --
Home improvement.......................................................... 58 -- 58
Automobile................................................................ 342 -- 342
Other(1).................................................................. 540 -- 540
--------- ------- ---------
Total other loans....................................................... 940 -- 940
--------- ------- ---------
Total loans........................................................... $ 6,795 $ 31,419 $ 38,214
--------- ------- ---------
--------- ------- ---------
</TABLE>
- ------------------------
(1) Comprised primarily of unsecured consumer loans.
Scheduled contractual amortization of loans does not reflect the expected
term of the Company's loan portfolio. The average life of loans is
substantially less than their contractual terms because of prepayments. The
Company also has the right under its mortgage loan documentation to declare a
conventional loan immediately due and payable in the event, among other
things, that the borrower sells the real property subject to the mortgage and
the loan is not repaid. However, depending on whether it is profitable for
the Company to do so, the Company will also permit loan assumptions subject
to the acceptability of the assignee from a full credit underwriting
standpoint. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are lower than
current mortgage loan rates (due to refinancings of adjustable-rate and
fixed-rate loans at lower rates). Under the latter circumstances, the
weighted average yield on loans decreases as higher-yielding loans are repaid
or refinanced at lower rates.
5
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LOAN ACTIVITY. The following table shows total loans originated and
repaid during the periods indicated. There were no loans purchased or sold
during the periods.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Loan originations:
Single-family residential.......................................................... $ 8,509 $ 8,481 $ 9,802
Multi-family residential........................................................... 458 70 --
Commercial real estate............................................................. 536 324 165
Non-real estate.................................................................... 1,112 991 979
--------- --------- ---------
Total loans originated........................................................... 10,615 9,866 10,946
Loan principal reductions.......................................................... (6,495) (6,257) (5,677)
--------- --------- ---------
Net increase (decrease) before other items....................................... 4,120 3,609 5,269
Decrease due to other items, net..................................................... (49) (1,263) (1,407)
--------- --------- ---------
Net increase in loan portfolio....................................................... $ 4,071 $ 2,346 $ 3,862
--------- --------- ---------
--------- --------- ---------
</TABLE>
The lending activities of the Company are subject to underwriting
standards and loan origination procedures established by the Company's Board
of Directors. After a loan application is taken, the Company begins the
process of obtaining credit reports, appraisals (with respect to a mortgage
loan) and other documentation involved with the loan. With respect to loans
on property, the Company generally requires that a property appraisal be
obtained in connection with all new mortgage loans, which are performed by
independent appraisers designated by the Board of Directors. The Company also
requires that hazard insurance be maintained on all security properties and
that flood insurance be maintained if the property is within a designated
flood plain. The Company receives a title opinion from an attorney in
connection with closing a mortgage loan.
Residential mortgage loan applications are primarily developed from
referrals, existing customers and walk-in customers and advertising.
Commercial real estate loan applications are primarily attributable to
walk-in customers and referrals. Consumer loan applications are primarily
obtained through existing and walk-in customers and advertising.
Applications for residential mortgage loans are required to be approved
by either the Loan Committee of the Board of Directors, which is comprised of
at least three directors (for loans of $50,000 or less) or a majority of the
Board of Directors (for loans with greater principal balances). The Company's
President has authority to approve consumer loans in amounts of up to $25,000
(on a secured basis) and $10,000 (on an unsecured basis) provided that the
Company's underwriting requirements are otherwise satisfied.
Most of the Company's single-family residential mortgage loans are
originated for up to 80% of the lesser of the purchase price or appraised
value (although the Company will originate such loans for up to a lesser of
95% of the appraised value of the property
6
<PAGE>
securing a single-family residential loan or the purchase price of the
property) for terms of up to 20 years and 30 years for fixed-rate and
adjustable-rate loans, respectively. The Company will originate multi-family
residential loans up to 70% of the value of the security property for terms
of up to 15 years and commercial real estate loans for up to 60% of the
appraised value for terms of up to 15 years. Share loans are originated in an
amount up to 95% of the savings account balance at 2% over the rate paid on
the account. Automobile loans are for up to five years for new cars and
shorter terms for loans on used cars.
Under applicable federal regulations, the permissible amount of loans to
one borrower may not exceed 15% of unimpaired capital and surplus. Loans in
an amount equal to an additional 10% of unimpaired capital and surplus also
may be made to a borrower if the loans are fully secured by readily
marketable securities. At September 30, 1997, the Company's five largest
loans or groups of loans to one borrower, including related entities, ranged
from an aggregate of $264,000 to $534,000 and the Company's
loans-to-one-borrower limit was $1.3 million at such date. All of such loans
were performing as of September 30, 1997.
SINGLE-FAMILY RESIDENTIAL LOANS. The Company's single-family residential
mortgage loans consist almost exclusively of conventional loans. The Company
originates solely for portfolio retention and has never sold any loans
originated. The single-family residential mortgage loans offered by the
Company currently consist of fixed-rate and adjustable-rate loans. Fixed-rate
loans have maturities of up to 20 years and are fully amortizing with monthly
loan payments sufficient to repay the total amount of the loan with interest
by the end of the loan term. At September 30, 1997, $6.3 million, or 17.5%,
of the Company's single-family residential mortgage loans were fixed-rate
loans.
The adjustable-rate loans currently offered by the Company have
maturities which range up to 30 years, with interest rates which adjust every
year in accordance with a Federal Home Loan Bank index of national contract
averages of single-family loans closed in the prior month, plus a margin. The
margin established by the Company may be more or less than the Federal
Housing Finance Board index rate. The Company's adjustable-rate residential
loans generally have a cap of 1% on any increase or decrease in the interest
rate at any adjustment date and 5% over the life of the loan. The Company's
adjustable-rate loans require that any payment adjustment resulting from a
change in the interest rate be fully amortized by the end of the loan term
and, thus, do not permit so-called negative amortization. With the decline in
market rates of interest over the past few years, the Company's customers
have shown a preference for adjustable-rate loans. Originations of
adjustable-rate residential loans constituted 84.7%, 85.3% and 90.1% of total
origination of single-family residential loans during the years ended
September 30, 1997, 1996 and 1995, respectively. At September 30, 1997, $29.7
million or 82.5% of the Company's single-family residential mortgage loans
were adjustable-rate loans.
Adjustable-rate loans decrease the risks to the Company of holding
long-term mortgages, but involve other risks. In a rising interest rate
environment, as interest rates
7
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increase, the loan payment by the borrower increases to the extent permitted
by the terms of the loan, thereby increasing the potential for default.
Moreover, as interest rates increase, the marketability of the underlying
collateral property may be adversely affected by higher interest rates. The
Company believes that these risks, which have not had a material adverse
effect on the Company to date because of the generally declining interest
rate environment in recent years, generally are less than the risks
associated with holding fixed-rate loans in an increasing interest rate
environment.
The Company currently will lend up to the lesser of 95% of the appraised
value of the property securing a single-family residential loan or the
purchase price of the property. Most loans are made for up to 80% of the
lesser of the purchase price or appraised value. Beginning in May 1994,
however, the Company initiated a "First Time Homebuyer's Program," which has
been popular with customers, pursuant to which it will lend up to the lesser
of 90% of the purchase price or the appraised value of the property and offer
an interest rate which is .25% below its quoted rate. A prospective borrower
must otherwise meet the Company's underwriting standards. The Company
requires either private mortgage insurance or sufficient funds on deposit in
a savings account with the Company on any loans which are originated with a
loan-to-value ratio of greater than 80%. The Company's "First Time
Homebuyer's Program" contributed 22.8%, 22.0% and 23.1% of total residential
originations during fiscal 1995, 1996 and 1997.
The Company began offering home equity loans secured by the underlying
equity in the borrower's home to those borrowers with whom it has a first
mortgage loan in April 1996. Such home equity loans are amortizing loans with
a maximum term of 20 years. The Company's home equity loans require combined
loan-to-value ratios of 95% or less, depending on the borrowers debt to
income ratio.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LENDING. At September
30, 1997, the Company's multi-family residential loan portfolio was comprised
of four apartment buildings which contain between 6 and 20 units. The Company
will originate loans up to 70% of the value of the security property for
terms of up to 15 years. At September 30, 1997, the Company had $.7 million,
or 1.7% of the total loan portfolio, invested in multi-family residential
loans.
At September 30, 1997, the Company's commercial real estate portfolio was
comprised of 32 properties, with principal balances of up to $182,600. The
properties which secure such loans are local facilities and include a
warehouse, churches, a multi-purpose building, and various other small
commercial facilities. The Company will originate loans for up to 60% of the
appraised value for terms of up to 15 years. At September 30, 1997, the
Company's commercial real estate loan portfolio amounted to $1.9 million or
4.8% of the total loan portfolio.
The Company evaluates various aspects of commercial and multi-family
residential real estate loan transactions in an effort to mitigate risk to
the extent possible. In
8
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underwriting these loans, consideration is given to the stability of the
property's cash flow history, future operating projections, current and
projected occupancy, position in the market, location and physical condition.
The underwriting analysis also includes credit checks and a review of the
financial condition of the borrower and guarantor, if applicable. An
appraisal report is prepared by an independent appraiser to substantiate
property values for every commercial real estate and multi-family loan
transaction.
Multi-family and commercial real estate lending entails different and
significant risks when compared to single-family residential lending because
such loans typically involve large loan balances to single borrowers and
because the payment experience on such loans is typically dependent on the
successful operation of the project or the borrower's business. These risks
can also be significantly affected by supply and demand conditions in the
local market for apartments, offices, or other commercial space. The Company
attempts to minimize its risk exposure by limiting such lending to proven
owners, only considering properties with existing operating performance which
can be analyzed, requiring conservative debt coverage ratios, and
periodically monitoring the operation and physical condition of the
collateral.
NON-REAL ESTATE LOANS. At September 30, 1997, the Company had $556,000,
or 1.4% of the total loan portfolio, invested in loans secured by savings
accounts. The Company will originate such loans in an amount up to 95% of the
account balance at 2% over the rate paid on the account. In addition, as of
such date, the Company had $508,000, or 1.3% of the total loan portfolio,
invested in new and used automobile loans, which are fixed-rate loans with
terms ranging up to five years in the case of loans on new cars and shorter
terms for loans on used cars; $86,000, or .2% of the total loan portfolio,
invested in home improvement loans and $566,000, or 1.4% of the total loan
portfolio, invested in other miscellaneous loans, primarily small, short-term
unsecured loans to customers.
ASSET QUALITY
GENERAL. When a borrower fails to make a required payment on a loan, the
Company attempts to cure the deficiency by contacting the borrower and
seeking payment. A notice is sent 15 days after a payment is due and, if
payment has not been received within approximately 10 days, the borrower is
contacted by phone. In most cases, deficiencies are cured promptly. If a
delinquency continues, additional efforts are made to collect the loan. While
the Company generally prefers to work with borrowers to resolve such
problems, when a real estate loan becomes 90 days delinquent, the Company
institutes foreclosure proceedings or takes such other action as may be
necessary to minimize any potential loss. The Company believes that the
attention paid by its collection department to late payments is a major
reason for the low level of non-performing assets over the last several years.
Real estate loans are placed on non-accrual status when, in the judgment
of management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a real estate loan is placed on
non-accrual status, previously accrued
9
<PAGE>
but unpaid interest is deducted from interest income. As a matter of policy,
the Company does not accrue interest on real estate loans past due 90 days or
more.
The Company generally follows the same rigorous collection procedure
described above for its consumer loans. The Company charges off all consumer
loans after the fifth payment due is missed.
Real estate acquired as a result of foreclosure or by deed-in-lieu of
foreclosure are classified as real estate owned until sold. Pursuant to a
statement of position (SOP 92-3) issued by the AICPA in April 1992, which
provides guidance on determining the balance sheet treatment of foreclosed
assets in annual financial statements for periods ending on or after December
15, 1992, there is a rebuttable presumption that foreclosed assets are held
for sale and such assets are recommended to be carried at the lower of fair
value minus estimated costs to sell the property, or cost (generally the
balance of the loan on the property at the date of acquisition). After the
date of acquisition, all costs incurred in maintaining the property are
expenses and costs incurred for the improvement or development of such
property are capitalized up to the extent of their net realizable value.
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of the Company's non-performing assets at the dates indicated. The
Company had no troubled debt restructurings during the periods presented.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accruing loans:
Single-family residential................................................................. $ 84 $ 109 $ 46
--------- --- ---
Total non-accruing loans................................................................ 84 109 46
--------- --- ---
Accruing loans greater than 90 days delinquent.............................................. -- -- --
--------- --- ---
Total non-performing loans(1)........................................................... 84 109 46
--------- --- ---
Real estate owned(1)........................................................................ 50 33 --
--------- --- ---
Total non-performing assets............................................................. $ 134 $ 142 $ 46
--------- --- ---
--------- --- ---
Total non-performing loans as a percentage of total loans............................... .21% 0.31% 0.14%
--------- --- ---
--------- --- ---
Total non-performing assets as a percentage of total assets............................. .22% 0.25% 0.09%
--------- --- ---
--------- --- ---
</TABLE>
(Footnotes on following page)
10
<PAGE>
- ------------------------
(1) The decrease in total non-performing loans is attributable to three loans
on non-accrual status at September 30, 1997 (the largest of which was
$35,000) as compared to five loans at September 30, 1996, net of the
transfer of one single-family residential loan to real estate owned
during the 1997 fiscal year. Management does not expect any material
losses to be sustained as a result of these non-accrual loans.
For the years ended September 30, 1997 and 1996, gross interest income
which would have been recorded had the loans accounted for on a non-accrual
basis been current in accordance with their original terms amounted to $3,447
and $3,584, respectively. For the years ended September 30, 1997 and 1996,
$3,213 and $3,895 were included in interest income for these same loans prior
to the time they were placed on non-accrual status.
ALLOWANCE FOR LOAN LOSSES. The Company's policy is to establish reserves
for estimated losses on loans when it determines that a significant and
probable decline in value occurs. The allowance for losses on loans is
maintained at a level believed adequate by management to absorb estimated
losses in the portfolio. Management's determination of the adequacy of the
allowance is based on an evaluation of the portfolio, past loss experience,
current economic conditions, volume, growth and composition of the portfolio,
and other relevant factors. The allowance is increased by provisions for loan
losses which are charged against income. The Company's allowance for loan
losses has historically been predicated on its low loss experience.
11
<PAGE>
The following table sets forth an analysis of the Company's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.............................................................. $ 283 $ 278 $ 265
--- --- ---
Charge-offs:
Single-family residential................................................................. (2) (2) --
Consumer and other........................................................................ -- (8) (1)
Recoveries:
Single-family residential................................................................. 1 -- --
Consumer and other........................................................................ 2 1 1
--- --- ---
Net (charge-offs) recoveries.............................................................. 1 (9) --
--- --- ---
Provision for loan losses................................................................... 3 14 13
--- --- ---
Balance at end of period.................................................................... $ 287 $ 283 $ 278
--- --- ---
--- --- ---
Allowance for loan losses as a percent of total loans outstanding........................... 0.73% 0.81% 0.85%
--- --- ---
--- --- ---
Ratio of net charge-offs to average loans outstanding....................................... --% 0.03% 0.00%
--- --- ---
--- --- ---
</TABLE>
The following table sets forth information concerning the allocation of
the Company's allowance for loan losses by loan category at the dates
indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- ------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
----------- ------------- ----------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential.............. $ 255 88.9% $ 235 90.4% $ 225 87.4%
Multi-family residential............... 5 1.7 7 .6 8 3.0
Commercial real estate................. 14 4.9 14 4.8 13 5.2
Other loans............................ 13 4.5 27 4.2 32 4.4
----- ----- ----- ----- ----- -----
Total.............................. $ 287 100.0% $ 283 100.0% $ 278 100.0%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
12
<PAGE>
MORTGAGE-BACKED SECURITIES AND INVESTMENT SECURITIES
GENERAL. Federally-chartered savings institutions have authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies and of state and
municipal governments, certificates of deposit at federally-insured banks and
savings and loan associations, certain bankers' acceptances and Federal
funds. Subject to various restrictions, federally-chartered savings
institutions may also invest a portion of their assets in commercial paper,
corporate debt securities and mutual funds, the assets of which conform to
the investments that federally-chartered savings institutions are otherwise
authorized to make directly.
The Company's President has authority to implement the Company's
Board-approved investment policy. The President may make investments of up to
$500,000 without prior approval of the Board; however, the President generally
seeks Board approval on all investments over $250,000. All of such investments
are required to be reported to the Board for ratification at the next scheduled
meeting. Pursuant to the Company's investment policy, all securities are to be
purchased with the primary objective of safety of principal and liquidity and,
secondarily, with consideration given to the yield to be earned. The Company is
authorized to invest in U.S. Government and agency issues, mortgage-backed
securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA") and Government National Mortgage
Association ("GNMA"), municipal bonds issued by state or local authorities
(which generally must be rated in one of the top categories by one of the
nationally recognized rating services) and certificates of deposit in insured
institutions up to a maximum of $99,000 per institution.
MORTGAGE-BACKED SECURITIES. The Company maintains a significant portfolio of
mortgage-backed securities as a means of investing in housing-related mortgage
instruments without the costs associated with originating mortgage loans for
portfolio retention and with limited credit risk of default which arises in
holding a portfolio of loans to maturity. Mortgage-backed securities (which also
are known as mortgage participation certificates or pass-through certificates)
represent a participation interest in a pool of single-family mortgages. The
principal and interest payments on mortgage-backed securities are passed from
the mortgage originators, as servicer, through intermediaries (generally U.S.
Government agencies and government-sponsored enterprises) that pool and
repackage the participation interests in the form of securities, to investors
such as the Company. Such U.S. Government agencies and government sponsored
enterprises, which guarantee the payment of principal and interest to investors,
primarily include the FHLMC, the FNMA and the GNMA.
The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 Federal Home Loan Banks and federally-insured savings
institutions. The FHLMC issues participation certificates backed principally
by conventional mortgage loans. The FHLMC guarantees the timely payment of
interest and the ultimate return of principal on participation certificates.
The FNMA is a private corporation chartered by the U.S.
13
<PAGE>
Congress with a mandate to establish a secondary market for mortgage loans.
The FNMA guarantees the timely payment of principal and interest on FNMA
securities. FHLMC and FNMA securities are not backed by the full faith and
credit of the United States, but because the FHLMC and the FNMA are U.S.
Government-sponsored enterprises, these securities are considered to be among
the highest quality investments with minimal credit risks. The GNMA is a
government agency within the Department of Housing and Urban Development
which is intended to help finance government-assisted housing programs. GNMA
securities are backed by FHA-insured and VA-guaranteed loans, and the timely
payment of principal and interest on GNMA securities are guaranteed by the
GNMA and backed by the full faith and credit of the U.S. Government. Because
the FHLMC, the FNMA and the GNMA were established to provide support for low-
and middle-income housing, there are limits to the maximum size of loans that
qualify for these programs. At September 30, 1997, the Company had an
aggregate of $6.6 million, or 84.6% of total mortgage-backed securities (held
to maturity and available for sale), invested in GNMA, FNMA and FHLMC
certificates and, as of such date, the Company had $1.2 million, or 15.4% of
total mortgage-backed securities, invested in four collateralized mortgage
obligations ("CMOs").
In contrast to pass-through mortgage-backed securities, in which cash
flow is received pro rata by all security holders, the cash flow from the
mortgages underlying a CMO is segmented and paid in accordance with a
predetermined priority to investors holding various CMO classes. By
allocating the principal and interest cash flows from the underlying
collateral among the separate CMO classes, different classes of bonds are
created, each with its own stated maturity, estimated average life, coupon
rate and prepayment characteristics. The Company's CMO's were issued by the
GNMA and FNMA and are performing in accordance with their terms. As of
September 30, 1997, the Company did not own any mortgage-related securities
designated as "high-risk mortgage securities" under OTS pronouncements.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate loans. As a result, the risk characteristics of the underlying
pool of mortgages, (i.e., fixed-rate or adjustable-rate) as well as prepayment
risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security thus approximates the life of the underlying mortgages.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize certain obligations. At September 30, 1997, none of the
Company's mortgage-backed securities were pledged as security for an
obligation. Mortgage-backed securities issued or guaranteed by the FNMA or
the FHLMC (except interest-only securities or the residual interests in CMOs)
are weighted at no more
14
<PAGE>
than 20.0% for risk-based capital purposes, compared to a weight of 50.0% to
100.0% for residential loans. See "--Regulation--The Savings Bank--Capital
Requirements."
The Company's mortgage-backed securities are classified as either held to
maturity or available for sale based upon the Company's intent and ability to
hold such securities to maturity at the time of purchase, in accordance with
GAAP. The mortgage-backed securities of the Company which are held to maturity
are carried at cost, adjusted for the amortization of premiums and the accretion
of discounts using a method which approximates a level yield, while
mortgage-backed securities available for sale are carried at the lower of cost
or current market value. See Notes 1, 5 and 6 of the Notes to Consolidated
Financial Statements.
The following table sets forth the composition of the Company's
mortgage-backed securities held to maturity at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
GNMA certificates.................................................................... $ 40 $ 43 $ 656
FNMA certificates.................................................................... 1,591 1,762 3,185
FHLMC certificates................................................................... 2,600 3,142 4,401
Collateralized mortgage obligations.................................................. 356 124 163
--------- --------- ---------
Total mortgage-backed securities held to maturity.................................. 4,587 5,071 8,405
Unamortized premiums................................................................. 123 137 194
Unearned discounts................................................................... (14) (18) (31)
--------- --------- ---------
Net mortgage-backed securities held to maturity.................................... $ 4,696 $ 5,190 $ 8,568
--------- --------- ---------
--------- --------- ---------
Weighted average interest rate....................................................... 6.01% 6.47% 6.52%
--------- --------- ---------
--------- --------- ---------
</TABLE>
15
<PAGE>
The following table sets forth the composition of the Company's
mortgage-backed securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
GNMA certificates...................................................................... $ 831 $ 955 $ 465
FNMA certificates...................................................................... 854 945 397
FHLMC certificates..................................................................... 575 657 131
Collateralized mortgage obligations.................................................... 848 -- --
--------- --------- -----
Total mortgage-backed securities available for sale.................................. 3,108 2,557 993
Unamortized premiums................................................................... 27 31 15
Unearned discounts..................................................................... (36) (8) (4)
Unrealized holding gain (loss) on mortgage-backed securities available for sale........ 31 (4) (14)
--------- --------- -----
Net mortgage-backed securities available for sale.................................... $ 3,130 $ 2,576 $ 990
--------- --------- -----
--------- --------- -----
Weighted average interest rate......................................................... 6.67% 6.60% 6.09%
--------- --------- -----
--------- --------- -----
</TABLE>
The following table sets forth the activity in the Company's aggregate
mortgage-backed securities portfolio (held to maturity and available for sale)
during the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-backed securities at beginning of period................................... $ 7,766 $ 9,558 $ 10,712
Purchases........................................................................... 1,124 -- --
Repayments.......................................................................... (1,081) (1,769) (1,133)
Sales............................................................................... -- -- --
Accretion and amortization, net..................................................... (18) (33) (38)
Net change in unrealized holding gain on available for sale securities.............. 35 10 17
--------- --------- ---------
Mortgage-backed securities at end of period......................................... $ 7,826 $ 7,766 $ 9,558
--------- --------- ---------
--------- --------- ---------
</TABLE>
16
<PAGE>
At September 30, 1997, the weighted average contractual maturity of the
Company's aggregate mortgage-backed securities (held to maturity and
available for sale) was approximately 23 years. The actual maturity of a
mortgage-backed security is less than its stated maturity due to prepayments
of the underlying mortgages. Prepayments that are faster than anticipated may
shorten the life of the security and adversely affect its yield to maturity.
The yield is based upon the interest income and the amortization of any
premium or discount related to the mortgage-backed security. In accordance
with GAAP, premiums and discounts are amortized over the estimated lives of
the securities, which decrease and increase interest income, respectively.
The prepayment assumptions used to determine the amortization period for
premiums and discounts can significantly affect the yield of the
mortgage-backed security, and these assumptions are reviewed periodically to
reflect actual prepayments. Although prepayments of underlying mortgages
depend on many factors, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is
the most significant determinant of the rate of prepayments. During periods
of falling mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest rates offered for mortgage
loans, refinancing generally increases and accelerates the prepayment of the
underlying mortgages and the related security. Under such circumstances, the
Company may be subject to reinvestment risk because to the extent that the
Company's mortgage-related securities amortize or prepay faster than
anticipated, the Company may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.
INVESTMENT SECURITIES. The following table sets forth certain information
relating to the Company's investment securities held to maturity at the dates
indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury securities............................................................. $ -- $ 250 $ 250
U.S. Government agency securities.................................................... 4,380 5,078 1,843
Municipal bonds...................................................................... 1,628 1,447 1,008
Certificates of deposit.............................................................. 779 1,771 1,780
FHLB stock........................................................................... 470 438 409
--------- --------- ---------
Total.............................................................................. $ 7,257 $ 8,984 $ 5,290
--------- --------- ---------
--------- --------- ---------
</TABLE>
17
<PAGE>
The following table sets forth certain information relating to the Company's
investment securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------
1997 1996 1995
--------- --------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Government agency securities....................................................... $ 1,549 $ 2,391 $ --
Obligations of states and political subdivisions........................................ 140 140 --
--------- --------- -----
Total investment securities available for sale........................................ 1,689 2,531 --
Unrealized holding gain on investment securities available for sale..................... 5 1 --
--------- --------- -----
Net investment securities available for sale............................................ $ 1,694 $ 2,532 $ --
--------- --------- -----
--------- --------- -----
</TABLE>
The following table sets forth certain information regarding the maturities
of the Company's investment securities at September 30, 1997.
<TABLE>
<CAPTION>
CONTRACTUALLY MATURING
--------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
UNDER 1 AVERAGE AVERAGE AVERAGE OVER 10 AVERAGE
YEAR YIELD 1-5 YEARS YIELD 6-10 YEARS YIELD YEARS YIELD
------- -------- --------- -------- ---------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agency
securities....................... $ -- --% $4,083 6.21% $1,492 6.97% $ 500 7.00%
Municipal bonds.................... 150 4.65 484 5.90 898 5.25 95 4.95
Certificates of deposit............ 297 5.55 482 6.16 -- -- -- --
FHLB stock......................... -- -- -- -- -- -- 470 7.09
------- ---- --------- ---- ---------- ---- ------- ----
Total.............................. $447 5.24% $5,049 6.18% $2,390 5.87% $1,065 6.85%
------- ---- --------- ---- ---------- ---- ------- ----
------- ---- --------- ---- ---------- ---- ------- ----
</TABLE>
The Company's investment securities are classified as either held to
maturity or available for sale at the time of purchase, in accordance with
Generally Accepted Accounting Principles.
SOURCES OF FUNDS
GENERAL.
The Company's principal source of funds for use in lending and for other
general business purposes has traditionally come from deposits obtained
through its main and branch offices. The Company also derives funds from
amortization and prepayments of outstanding loans and mortgage-backed
securities, from maturing investment securities and, occasionally, from
advances from the FHLB of Cincinnati. Loan repayments are a relatively stable
source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates
18
<PAGE>
and money market conditions. The Company may use borrowings to
supplement its deposits as a source of funds.
DEPOSITS. The Company's current deposit products primarily include passbook
accounts and certificates of deposit ranging in terms from six months to 37
months, and to a lesser extent, demand accounts. The Company's deposit products
also include Individual Retirement Account ("IRA") certificates.
The Company's deposits are obtained from residents in its primary market
area. The Company attracts local deposit accounts by offering competitive
interest rates. The Company utilizes traditional marketing methods to attract
new customers and savings deposits, including print media and radio advertising.
The following table sets forth the dollar amount and average interest rates
of deposits in the various types of deposit programs offered by the Company at
the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
2.00--4.00%..................................... $ 1,006 2.2% $ 1,662 3.7% $ 2,452 5.3%
4.01--6.00%..................................... 13,142 29.2 21,321 47.6 8,698 18.8
6.01--8.00%..................................... 20,630 45.9 10,965 24.5 22,945 49.7
--------- ------ --------- ----- --------- -----
Total certificate accounts........................ 34,778 77.3 33,948 75.8 34,095 73.8
--------- ------ --------- ----- --------- -----
Transaction accounts:
Passbook accounts............................... 9,054 20.1 9,863 22.0 11,191 24.2
Christmas Club.................................. 91 .2 96 .2 94 0.2
Demand accounts................................. 1,070 2.4 902 2.0 818 1.8
--------- ------ --------- ----- --------- -----
Total transaction accounts........................ 10,215 22.7 10,861 24.2 12,103 26.2
--------- ------ --------- ----- --------- -----
Total deposits.................................... $ 44,993 100.0% $ 44,809 100.0% $ 46,198 100.0%
--------- ------ --------- ----- --------- -----
--------- ------ --------- ----- --------- -----
</TABLE>
19
<PAGE>
The following table sets forth the savings activities of the Company during
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits......................................................................... $ 35,414 $ 39,002 $ 35,225
Withdrawals...................................................................... (37,046) 42,057 32,457
--------- --------- ---------
Net increase (decrease) before interest credited............................... (1,632) (3,055) 2,768
Interest credited................................................................ 1,816 1,666 1,468
--------- --------- ---------
Net increase (decrease) in deposits............................................ $ 184 $ (1,389) $ 4,236
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table shows the contractual interest rate and maturity
information for the Company's certificates of deposit at September 30, 1997.
<TABLE>
<CAPTION>
MATURITY DATE
-----------------------------------------------------------
ONE YEAR OVER OVER OVER
OR LESS 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
--------- ----------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
2.00--4.00% $ 2,980 $ 26 $ -- $ -- $ 3,006
4.01--6.00% 21,079 3,163 786 16 25,044
6.01--8.00% 3,309 1,292 1,794 333 6,728
--------- --------- --------- --------- ---------
Total $ 27,368 $ 4,481 $ 2,580 $ 349 $ 34,778
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The following table sets forth the maturities of the Company's certificates
of deposit having principal amounts of $100,000 or more at September 30, 1997.
The Company does not use brokered deposits and the substantial majority of all
funds are from within the local market area.
<TABLE>
<CAPTION>
CERTIFICATES OF DEPOSIT MATURING
IN QUARTER ENDING: (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------- ---------------
<S> <C>
December 31, 1997................................................................................. $ 532
March 31, 1998.................................................................................... 437
June 30, 1998..................................................................................... 442
September 30, 1998................................................................................ 877
After September 30, 1998.......................................................................... 1,380
------
Total certificates of deposit with balances of $100,000 or more................................... $ 3,668
------
------
</TABLE>
20
<PAGE>
BORROWINGS. The Company may obtain advances from the FHLB of Cincinnati
upon the security of the common stock it owns in that bank and certain of its
residential mortgage loans and securities held to maturity, provided certain
standards related to creditworthiness have been met. Such advances are made
pursuant to several credit programs, each of which has its own interest rate and
range of maturities. At September 30, 1997, the Company had $3.3 million in
outstanding advances from the FHLB of Cincinnati.
The following table sets forth the maximum month-end balance and average
balance of the Company's FHLB advances during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Maximum balance........................................................................ $ 3,300 $ 500 $ 5,600
Average balance........................................................................ 1,318 27 1,105
Year end balance....................................................................... 3,300 500 --
Weighted average interest rate:
At end of year....................................................................... 6.25% 5.45% --%
During the year...................................................................... 5.61 5.45 6.15
</TABLE>
SUBSIDIARIES
The Savings Bank is permitted to invest up to 2% of its assets in the
capital stock of, or secured or unsecured loans to, subsidiary corporations,
with an additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. The Savings Bank has no
subsidiaries.
COMPETITION
The Company faces strong competition both in attracting deposits and making
real estate loans. Its most direct competition for deposits has historically
come from other savings associations, credit unions and commercial banks located
within 15 miles of Ironton, which covers Lawrence County, Ohio, Boyd and Greenup
Counties, Kentucky and Cabell County, West Virginia, including many large
financial institutions which have greater financial and marketing resources
available to them.
The Company's primary market area is Lawrence County, Ohio. Lawrence County
has three banks with nine offices and four thrift institutions with eight
offices which all compete for deposits and loans. Lawrence County has a very
competitive financial institution market dominated in total deposits by banks.
The Company is much smaller in size than many of its competitors in terms of
assets and is less diversified.
21
<PAGE>
In addition, during times of high interest rates, the Company has faced
additional significant competition for investors' funds from short-term money
market securities, mutual funds and other corporate and government securities.
The ability of the Company to attract and retain savings deposits depends on its
ability to generally provide a rate of return, liquidity and risk comparable to
that offered by competing investment opportunities.
The Company experiences strong competition for real estate loans
principally from other savings associations, commercial banks and mortgage
banking companies. The Company competes for loans principally through
interest rates, by minimizing loan fees, and the efficiency and quality of
services it provides borrowers. Competition may increase as a result of the
continuing reduction of restrictions on the interstate operations of
financial institutions.
REGULATION
SET FORTH BELOW IS A BRIEF DESCRIPTION OF THOSE LAWS AND REGULATIONS WHICH,
TOGETHER WITH THE DESCRIPTIONS OF LAWS AND REGULATIONS CONTAINED ELSEWHERE
HEREIN, ARE DEEMED MATERIAL TO AN INVESTOR'S UNDERSTANDING OF THE EXTENT TO
WHICH THE COMPANY AND THE SAVINGS BANK ARE REGULATED. THE DESCRIPTION OF THE
LAWS AND REGULATIONS HEREUNDER, AS WELL AS DESCRIPTIONS OF LAWS AND REGULATIONS
CONTAINED ELSEWHERE HEREIN, DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO APPLICABLE LAWS AND REGULATIONS.
THE COMPANY. The Company, as a savings and loan holding company within the
meaning of the Home Owners Loan Act ("HOLA"), has registered with the OTS and is
subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the Savings
Bank is subject to certain restrictions in its dealings with the Company and
affiliates thereof.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one
subsidiary savings institution. However, if the Director of the OTS
determines that there is reasonable cause to believe that the continuation by
a savings and loan holding company of an activity constitutes a serious risk
to the financial safety, soundness or stability of its subsidiary savings
institution, the Director may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the
above rules as to permissible business activities of unitary savings and loan
holding companies, if the savings institution subsidiary of such a holding
company fails to meet the QTL test, as discussed under "--The Savings
Bank--Qualified Thrift Lender Test," then such unitary holding company also
shall become subject to the activities restrictions applicable to multiple
savings and loan holding companies and, unless the savings institution
requalifies as a QTL within one year thereafter, shall register as, and
become subject to the restrictions applicable to, a bank holding company. See
"--The Savings Bank--Qualified Thrift Lender Test."
22
<PAGE>
If the Company were to acquire control of another savings institution, other
than through merger or other business combination with the Savings Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Savings Bank or other subsidiary savings
institutions) would thereafter be subject to further restrictions. Among other
things, no multiple savings and loan holding company or subsidiary thereof which
is not a savings institution shall commence or continue for a limited period of
time after becoming a multiple savings and loan holding company or subsidiary
thereof any business activity, upon prior notice to, and no objection by the
OTS, other than: (i) furnishing or performing management services for a
subsidiary savings institution; (ii) conducting an insurance agency or escrow
business; (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings institution; (iv) holding or managing properties used
or occupied by a subsidiary savings institution; (v) acting as trustee under
deeds of trust; (vi) those activities authorized by regulation as of March 5,
1987 to be engaged in by multiple savings and loan holding companies; or (vii)
unless the Director of the OTS by regulation prohibits or limits such activities
for savings and loan holding companies, those activities authorized by the
Federal Reserve Board ("FRB") as permissible for bank holding companies. Those
activities described in (vii) above also must be approved by the Director of the
OTS prior to being engaged in by a multiple savings and loan holding company.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
institution may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution.
23
<PAGE>
In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires
that loans to directors, executive officers and principal stockholders be
made on terms substantially the same as offered in comparable transactions to
other persons unless the loans are made pursuant to a benefit or compensation
program that (i) is widely available to employees of the institution and (ii)
does not give preference to any director, executive officer or principal
stockholder, or certain affiliated interests of either, over other employees
of the savings institution. Section 22(h) also requires prior board approval
for certain loans. In addition, the aggregate amount of extensions of credit
by a savings institution to all insiders cannot exceed the institution's
unimpaired capital and surplus. Furthermore, Section 22(g) places additional
restrictions on loans to executive officers. At September 30, 1997, the
Savings Bank was in compliance with the above restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the multiple savings and loan holding
company involved controls a savings institution which operated a home or branch
office located in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
Under the Bank Holding Company Act of 1956, the FRB is authorized to approve
an application by a bank holding company to acquire control of a savings
institution. In addition, a bank holding company that controls a savings
institution may merge or consolidate the assets and liabilities of the savings
institution with, or transfer assets and
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liabilities to, any subsidiary bank which is a member of the BIF with the
approval of the appropriate federal banking agency and the FRB. As a result
of these provisions, there have been a number of acquisitions of savings
institutions by bank holding companies in recent years.
THE SAVINGS BANK. The OTS has extensive authority over the operations of
federally chartered savings institutions. As part of this authority, savings
institutions are required to file periodic reports with the OTS and are subject
to periodic examinations by the OTS and the FDIC. The last regulatory
examination of the Savings Bank by the OTS was as of September 30, 1997. The
investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and such institutions are prohibited from engaging
in any activities not permitted by such laws and regulations. Those laws and
regulations generally are applicable to all federally chartered savings
institutions and may also apply to state-chartered savings institutions. Such
regulation and supervision is primarily intended for the protection of
depositors.
The OTS' enforcement authority over all savings institutions and their
holding companies includes, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS.
INSURANCE OF ACCOUNTS. The deposits of the Savings Bank are currently
insured by the SAIF of the FDIC. 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
eliminated the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The legislation provided that all SAIF member institutions pay a one-time
special assessment to recapitalize the SAIF, which in the aggregate was
sufficient to bring the reserve ratio of the SAIF to 1.25% of insured deposits.
The legislation also provided for the merger of the BIF and the SAIF, with such
merger being conditioned upon the prior elimination of the thrift charter.
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Effective October 8, 1996, FDIC regulations imposed a one-time special
assessment of 65.7 basis points on SAIF-assessable deposits as of March 31,
1995, which was collected on November 27, 1996. The Savings Bank's one-time
special assessment amounted to $269,363 ($177,780 net of related tax benefits).
The payment of such special assessment had the effect of immediately reducing
the Savings Bank's capital by such an amount. Nevertheless, management does not
believe that this one-time special assessment will have a material adverse
effect on the Company's consolidated financial condition or cause non-compliance
with the Savings Bank's regulatory capital requirements.
In the fourth quarter of 1996, the FDIC lowered the 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 generally ranged
from zero basis points to 27 basis points, except that during the fourth quarter
of 1996, the rates for SAIF members ranged from 18 basis points to 27 basis
points in order to include assessments paid to the Financing Corporation
("FICO"). From 1997 trough 1999, SAIF members will pay 6.4 basis points to fund
the FICO, while BIF member institutions will pay about 1.3 basis points. The
Savings Bank's insurance premiums, which have amounted to 23 basis points have
been reduced to 6.4 basis points, effective January 1, 1997.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Savings Bank, if it determines after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Savings Bank's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings institutions are
required to maintain minimum levels of regulatory capital. The OTS has
established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual institutions on a
case-by-case basis.
Current OTS capital standards require savings institutions to satisfy three
different capital requirements. Under these standards, savings institutions must
maintain "tangible" capital equal to at least 1.5% of adjusted total assets,
"core" capital equal to at least 3.0% of adjusted total assets and "total"
capital (a combination of core and "supplementary" capital) equal to at least
8.0% of "risk-weighted" assets. For purposes of the regulation, core capital
generally consists of common stockholders' equity (including retained earnings),
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noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount
of all the savings institution's intangible assets, with only a limited
exception for purchased mortgage servicing rights. The Savings Bank had no
goodwill or other intangible assets at September 30, 1997. Both core and
tangible capital are further reduced by an amount equal to a savings
institution's debt and equity investments in subsidiaries engaged in
activities not permissible to national banks (other than subsidiaries engaged
in activities undertaken as agent for customers or in mortgage banking
activities and subsidiary depository institutions or their holding
companies). These adjustments do not materially affect the Savings Bank's
regulatory capital.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided that the amount of supplementary
capital included does not exceed the savings institution's core capital.
Supplementary capital generally consists of hybrid capital instruments;
perpetual preferred stock which is not eligible to be included as core
capital; subordinated debt and intermediate-term preferred stock; and general
allowances for loan losses up to a maximum of 1.25% of risk-weighted assets.
In determining the required amount of risk-based capital, total assets,
including certain off-balance sheet items, are multiplied by a risk weight
based on the risks inherent in the type of assets. The risk weights assigned
by the OTS for principal categories of assets are (i) 0% for cash and
securities issued by the U.S. Government or unconditionally backed by the
full faith and credit of the U.S. Government; (ii) 20% for securities (other
than equity securities) issued by U.S. Government-sponsored agencies and
mortgage-backed securities issued by, or fully guaranteed as to principal and
interest by, the FNMA or the FHLMC, except for those classes with residual
characteristics or stripped mortgage-related securities; (iii) 50% for
prudently underwritten permanent one- to four-family first lien mortgage
loans not more than 90 days delinquent and having a loan-to-value ratio of
not more than 80% at origination unless insured to such ratio by an insurer
approved by the FNMA or the FHLMC, qualifying residential bridge loans made
directly for the construction of one- to four-family residences and
qualifying multi-family residential loans; and (iv) 100% for all other loans
and investments, including consumer loans, commercial loans, and one- to
four-family residential real estate loans more than 90 days delinquent, and
for repossessed assets.
In August 1995, the OTS and other federal banking agencies published a final
rule modifying their existing risk-based capital standards to provide for
consideration of interest rate risk when assessing capital adequacy of a bank.
Under the final rule, the OTS must explicitly include a bank's exposure to
declines in the economic value of its capital due to changes in interest rates
as a factor in evaluating a bank's capital adequacy. In addition, in August
1995, the OTS and the other federal banking agencies published a joint policy
statement for public comment that describes the process the banking agencies
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will use to measure and assess the exposure of a bank's net economic value to
changes in interest rates. Under the policy statement, the OTS will consider
results of supervisory and internal interest rate risk models as one factor in
evaluating capital adequacy. The OTS intends, at a future date, to incorporate
explicit minimum requirements for interest rate risk in its risk-based capital
standards through the use of a model developed from the policy statement, a
future proposed rule and the public comments received therefrom.
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations,
termination of federal deposit insurance and the appointment of a conservator or
receiver. The OTS' capital regulation provides that such actions, through
enforcement proceedings or otherwise, could require one or more of a variety of
corrective actions.
LIQUIDITY REQUIREMENTS. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 4%. At September 30, 1997, the Savings Bank's liquidity
ratio was 13.0%.
CAPITAL DISTRIBUTIONS. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt and
other transactions charged to the capital account of a savings institution to
make capital distributions. Generally, the regulation creates a safe harbor for
specified levels of capital distributions from institutions meeting at least
their minimum capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Savings institutions
and distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Generally, a savings institution that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements (Tier 1
institutions) may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the institution's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. "Fully phased-in capital requirement" is defined to mean an
institution's capital requirement under the statutory and regulatory standards
applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the institution. Failure to
meet fully phased-in or minimum capital requirements will result in further
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restrictions on capital distributions, including possible prohibition without
explicit OTS approval.
In order to make distributions under these safe harbors, Tier 1 and Tier 2
institutions must submit 30 days written notice to the OTS prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. At September 30, 1997, the Savings Bank
was a Tier 1 institution for purposes of this regulation.
In December 1994, the OTS published a notice of proposed rulemaking to amend
its capital distribution regulation. Under the proposal, institutions would be
permitted to only make capital distributions that would not result in their
capital being reduced below the level required to remain "adequately
capitalized." Because the Savings Bank is a subsidiary of a holding company, the
proposal would require the Savings Bank to provide notice to the OTS of its
intent to make a capital distribution. The Savings Bank does not believe that
the proposal will adversely affect its ability to make capital distributions if
it is adopted substantially as proposed.
LOANS TO ONE BORROWER. The permissible amount of loans-to-one borrower now
generally follows the national bank standard for all loans made by savings
institutions, as compared to the pre-FIRREA rule that applied that standard only
to commercial loans made by federally chartered savings institutions. The
national bank standard generally does not permit loans-to-one borrower to exceed
the greater of $500,000 or 15% of unimpaired capital and surplus. Loans in an
amount equal to an additional 10% of unimpaired capital and surplus also may be
made to a borrower if the loans are fully secured by readily marketable
securities. For information about the largest borrowers from the Savings Bank,
see "--Lending Activities--Loan Activity."
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act of 1977, as
amended ("CRA"), as implemented by OTS regulations, a savings institution has
a continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including
low and moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit
an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with its examination of a
savings institution, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation
of certain applications by such institution. FIRREA amended the CRA to
require public disclosure of an institution's CRA rating and require the OTS
to provide a written evaluation of an institution's CRA performance utilizing
a rating system which identifies four levels of performance that may describe
an institution's record of meeting community needs: outstanding,
satisfactory, needs to improve and substantial noncompliance. The CRA also
requires all institutions to make public disclosure of their CRA ratings. The
Savings Bank received a "satisfactory" rating as a result of its most recent
evaluation.
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NATIONWIDE BANKING. The Savings Bank may face additional competition from
commercial banks headquartered outside of the State of Ohio as a result of the
enactment of the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, which became fully effective on June 1, 1997, and which will allow banks
and bank holding companies headquartered outside of Ohio to enter the Savings
Bank's market through acquisition, merger or de novo branching. For further
information about the Savings Bank's competition, see "--Competition."
BRANCHING BY FEDERAL SAVINGS INSTITUTIONS. OTS policy permits interstate
branching to the full extent permitted by statute (which is essentially
unlimited). Generally, federal law prohibits federal savings institutions from
establishing, retaining or operating a branch outside the state in which the
federal institution has its home office unless the institution meets the IRS'
domestic building and loan test (generally, 60% of a thrift's assets must be
housing-related) ("IRS Test"). The IRS Test requirement does not apply if, among
other things, the law of the state where the branch would be located would
permit the branch to be established if the federal savings institution were
chartered by the state in which its home office is located. Furthermore, the OTS
will evaluate a branching applicant's record of compliance with the Community
Reinvestment Act of 1977 ("CRA"). An unsatisfactory CRA record may be the basis
for denial of a branching application.
QUALIFIED THRIFT LENDER TEST. Under Section 2303 of the Economic Growth and
Regulatory Paperwork Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and
implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended ("Code").
The QTL Test set forth in the HOLA requires that Qualified Thrift
Investments ("QTIs") represent 65% of portfolio assets. Portfolio assets are
defined as total assets less intangibles, property used by a savings association
in its business and liquidity investments in an amount not exceeding 20% of
assets. Generally, QTIs are residential housing related assets. At September 30,
1997, approximately 77.8% of the Savings Bank's assets were invested in QTIs,
which was in excess of the percentage required to qualify the Savings Bank under
the QTI Test in effect at that time.
A savings association that does not comply with the QTL Test must either
convert to a bank charter or comply with the following restrictions on its
operations: (i) the association may not engage in any new activity or make any
new investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the association
shall be restricted to those of a national bank; (iii) the association shall not
be eligible to obtain any advances from its FHLB; and (iv) payment of dividends
by the association shall be subject to the rules regarding payment of dividends
by a national bank. Upon the expiration of three years from the date the
association ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
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ACCOUNTING REQUIREMENTS. Applicable OTS accounting regulations and
reporting requirements apply the following standards: (i) regulatory reports
will incorporate GAAP when GAAP is used by federal banking agencies; (ii)
savings institution transactions, financial condition and regulatory capital
must be reported and disclosed in accordance with OTS regulatory reporting
requirements that will be at least as stringent as for national banks; and
(iii) the Director of the OTS may prescribe regulatory reporting requirements
more stringent than GAAP whenever the Director determines that such
requirements are necessary to ensure the safe and sound reporting and
operation of savings institutions.
The accounting principles for depository institutions are currently
undergoing review to determine whether the historical cost model or market-based
measure of valuation is the appropriate measure for reporting the assets of such
institutions in their financial statements. Such proposal is controversial
because any change in applicable accounting principles which requires depository
institutions to carry mortgage-backed securities and mortgage loans at fair
market value could result in substantial losses to such institutions and
increased volatility in their liquidity and operations. Currently, it cannot be
predicted whether there may be any changes in the accounting principles for
depository institutions in this regard beyond those imposed by SFAS No. 115 or
when any such changes might become effective.
FEDERAL HOME LOAN BANK SYSTEM. The Savings Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administers the home
financing credit function of savings institutions. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB. At
September 30, 1997, the Savings Bank had $3.3 million in FHLB advances.
As a member, the Savings Bank is required to purchase and maintain stock in
the FHLB of Cincinnati in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of its advances from the FHLB of Cincinnati,
whichever is greater. At September 30, 1997, the Savings Bank had $470,100 in
FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid in the past and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future.
FEDERAL RESERVE SYSTEM. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and Super
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NOW checking accounts) and non-personal time deposits. As of September 30, 1997,
the Savings Bank was in compliance with applicable requirements. However,
because required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an institution's earning assets.
FEDERAL TAXATION
GENERAL.
The Company and Savings Bank are subject to the generally applicable
corporate tax provisions of the Code, and Savings Bank is subject to certain
additional provisions of the Code which apply to thrift and other types of
financial institutions. The following discussion of federal taxation is intended
only to summarize certain pertinent federal income tax matters material to the
taxation of the Company and the Savings Bank and is not a comprehensive
discussion of the tax rules applicable to the Company and Savings Bank.
BAD DEBT RESERVES. Prior to the enactment, on August 20, 1996, of the
Small Business Job Protection Act of 1996 (the "Small Business Act"), for
federal income tax purposes, thrift institutions such as the Savings Bank,
which met certain definitional tests primarily relating to their assets and
the nature of their business, were permitted to establish tax reserves for
bad debts and to make annual additions thereto, which additions could, within
specified limitations, be deducted in arriving at their taxable income. The
Savings Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, could be
computed using an amount based on a six-year moving average of the Savings
Bank's actual loss experience (the "Experience Method"), or a percentage
equal to 8.0% of the Savings Bank's taxable income (the "PTI Method"),
computed without regard to this deduction and with additional modifications
and reduced by the amount of any permitted addition to the non-qualifying
reserve.
Under the Small Business Act, the PTI Method was repealed and the Savings
Bank is required to use the Experience Method of computing additions to its
bad debt reserve for taxable years beginning with the Savings Bank's taxable
year beginning January 1, 1996. In addition, the Small Business Act required
banks to recapture (i.e., take into taxable income) over a six-year period,
beginning with the taxable year beginning January 1, 1996, the excess of the
balance of bad debt reserves (other than the supplemental reserve) as of
December 31, 1995 over (a) the greater of the balance of such reserves as of
December 31, 1987 or (b) an amount that would have been the balance of such
reserves as of December 31, 1995 had the bank always computed the additions to
its reserves using the Experience Method. However, under the Small Business Act
such recapture requirements will be suspended for each of the two successive
taxable years beginning January 1, 1996 in which the bank originates a minimum
amount of certain residential loans during such years that is not less than the
average of the principal amounts of such loans made by the bank during its six
taxable years preceding January 1, 1996. The Savings Bank was not subject to any
recapture under these provisions, as it had no excess reserves as defined above.
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At December 31, 1996, the federal income tax reserves of the Savings Bank
included $1.3 million for which no federal income tax has been provided. All of
this amount is attributable to pre-1987 bad debt reserves.
DISTRIBUTIONS. If the Savings Bank were to distribute cash or property to
its sole stockholder, and the distribution was treated as being from its
pre-1987 bad debt reserves, the distribution would cause the Savings Bank to
have additional taxable income. A distribution is deemed to have been made from
pre-1987 bad debt reserves to the extent that (a) the reserves exceed the amount
that would have been accumulated on the basis of actual loss experience, and (b)
the distribution is a "non-qualified distribution." A distribution with respect
to stock is a non-qualified distribution to the extent that, for federal income
tax purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case of a current distribution,
together with all other such distributions during the taxable year, it exceeds
the institution's current and post-1951 accumulated earnings and profits. The
amount of additional taxable income created by a non-qualified distribution is
an amount that when reduced by the tax attributable to it is equal to the amount
of the distribution.
MINIMUM TAX. The Code imposes an alternative minimum tax at a rate of 20%.
The alternative minimum tax generally applies to a base of regular taxable
income plus certain tax preferences ("alternative minimum taxable income" or
"AMTI") and is payable to the extent such AMTI is in excess of an exemption
amount. The Code provides that an item of tax preference is the excess of the
bad debt deduction allowable for a taxable year pursuant to the percentage of
taxable income method over the amount allowable under the experience method.
Other items of tax preference that constitute AMTI include (a) tax-exempt
interest on newly issued (generally, issued on or after August 8, 1986) private
activity bonds other than certain qualified bonds and (b) 75% of the excess (if
any) of (i) adjusted current earnings as defined in the Code, over (ii) AMTI
(determined without regard to this preference and prior to reduction by net
operating losses).
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net
operating losses ("NOLs") to the preceding three taxable years and forward to
the succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At September 30, 1997, the Savings Bank had
no NOL carryforwards for federal income tax purposes.
CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Corporate net
capital gains are taxed at a maximum rate of 35%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, and corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf. However, a corporation may deduct 100% of dividends from a member
of the same affiliated group of corporations.
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OTHER MATTERS. Federal legislation is introduced from time to time that
would limit the ability of individuals to deduct interest paid on mortgage
loans. Individuals are currently not permitted to deduct interest on consumer
loans. Significant increases in tax rates or further restrictions on the
deductibility of mortgage interest could adversely affect the Savings Bank.
The Savings Bank's federal income tax returns for the tax years ended
December 31, 1994 forward are open under the statute of limitations and are
subject to review by the IRS.
STATE TAXATION
The Company is subject to a Delaware franchise tax based on the Company's
authorized capital stock or on its assumed par and no-par capital, whichever
yields a lower result. Under the authorized capital method, each share is taxed
at a graduated rate based on the number of authorized shares with a maximum
aggregate tax of $150,000 per year. Under the assumed par-value capital method,
Delaware taxes each $1,000,000 of assumed par-capital at the rate of $200.
The Company will be subject to an Ohio franchise tax only to the extent it
is determined to be doing business in Ohio. The Company, a Delaware corporation,
does not expect to transact business in Ohio. To the extent that the Ohio
franchise tax is determined to apply to the Company, the tax is computed based
on the greater of a Company's tax liability as determined under separate net
worth and net income computations. The Company would exclude its investment in
the Savings Bank in determining its tax liability under the net worth
computation. The tax liability under the net worth computation will be computed
at 0.596% of the Company's net taxable value. The tax liability under the net
income method would be computed at a graduated rate not exceeding 9.12% of the
Company's Ohio taxable income.
The Savings Bank is subject to an Ohio franchise tax based on its net worth
plus certain reserve amounts. Total net worth for this purpose is reduced by
certain exempted assets. The resultant net worth is taxed at a rate of 1.5% for
the 1997 return, which is based on net worth as of December 31, 1997.
The Savings Bank's state franchise tax returns for the tax years ended
December 31, 1994 forward are open under the statute of limitations and are
subject to review by state taxing authorities.
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ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal executive office is located at 415 Center Street,
Ironton, Ohio 45638. The following table sets forth certain information with
respect to the offices and other properties of the Savings Bank at September 30,
1997.
NET BOOK VALUE
DESCRIPTION/ADDRESS LEASED/OWNED OF PROPERTY DEPOSITS
- --------------------------- ------------- --------------- ---------
(IN THOUSANDS)
Main Office(1)
415 Center Street
Ironton, Ohio 45638........ Owned $ 1,125 $ 33,509
Branch Office(2):
201 State Street
Proctorville, Ohio 45669... Owned 821 11,484
- ------------------------
(1) Drive-through facility expansion completed in October 1997. Located at the
corner of 5th and Railroad Streets.
(2) This branch office opened on August 4, 1997. Former Chesapeake, Ohio branch
was relocated to the new Proctorville location. The Company intends to sell
the Chesapeake facility, which had a net book value of $107,000 at September
30, 1997.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Company is a party or
to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference from pages 39
and 40 of the Company's 1997 Annual Report to Stockholders ("Annual Report").
35
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The information required herein is incorporated by reference from pages
three to 13 of the Company's 1997 Annual Report.
ITEM 7. FINANCIAL STATEMENTS.
The information required herein is incorporated by reference from pages 2,
and 14 to 37 of the Company's 1997 Annual Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required herein is incorporated by reference from pages two
to six, and nine of the Company's Proxy Statement dated December 19, 1997
("Proxy Statement").
ITEM 10. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages ten
to 16 of the Company's Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from pages
seven to nine of the Company's Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page 16 of
the Company's Proxy Statement.
PART IV
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Document filed as part of this Report.
36
<PAGE>
(1) The following documents are filed as part of this report and
are incorporated herein by reference from the Registrant's 1997 Annual Report.
Independent Auditor's Report.
Consolidated Balance Sheets as of September 30, 1997 and 1996.
Consolidated Statements of Income for the Years Ended September 30, 1997,
1996 and 1995.
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended September 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are omitted
because they are not applicable or the required information is included in
the Consolidated Financial Statements or notes thereto.
(3)(a) The following exhibits are filed as part of this Form 10-KSB, and
this list includes the Exhibit Index.
NO. DESCRIPTION
- --------- -------------------------------------------------------------------
3.1 Certificate of Incorporation of First Federal Financial Bancorp, Inc.(1)
3.2 Bylaws of First Federal Financial Bancorp, Inc.(1)
4 Stock Certificate of First Federal Financial Bancorp, Inc.(1)
10.1 Employment Agreement among First Federal Financial Bancorp, Inc., First
Federal Savings Bank of Ironton and I. Vincent Rice (representative of a
similar agreement entered into with Jeffery W. Clark)*(2)
10.2 Stock Option Plan*(2)
10.3 Recognition and Retention Plan and Trust*(2)
13 1997 Annual Report to Stockholders specified portion (p. two to 37, and
40) of the Registrant's Annual Report to Stockholders for the year ended
September 30, 1997.
21 Subsidiaries of the Registrant--Reference is made to Item 1.Business
for the Required information
27 Financial Data Schedule
(Footnotes on following page)
37
<PAGE>
- ------------------------
(1) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-1672) filed by the Registrant with the Securities and
Exchange Commission ("SEC") on February 26, 1996, as amended.
(2) Incorporated by reference from the Form 10-KSB for the fiscal year ended
September 30, 1996 filed by the Registrant with the SEC on December 26,
1996.
* Management contract or compensatory plan or arrangement.
(3) (b) Reports filed on Form 8-K.
None.
38
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST FEDERAL FINANCIAL BANCORP, INC.
BY: /s/ I. Vincent Rice
-----------------------------------------
I. Vincent Rice
PRESIDENT
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
/s/ I. VINCENT RICE
- ------------------------------------------ December 15, 1997
I. Vincent Rice
President (Principal Executive Officer)
/s/ JEFFERY W. CLARK
- ------------------------------------------ December 15, 1997
Jeffery W. Clark
Comptroller (Principal
Financial and Accounting Officer)
/s/ THOMAS D. PHILLIPS
- ------------------------------------------ December 15, 1997
Thomas D. Phillips
Chairman
/s/ JAMES E. WALDO
- ------------------------------------------ December 15, 1997
James E. Waldo
Vice Chairman
<PAGE>
/s/ EDITH M. DANIELS
- ------------------------------------------ December 15, 1997
Edith M. Daniels
Corporate Secretary and Director
/s/ EDWARD R. RAMBACHER
- ------------------------------------------ December 15, 1997
Edward R. Rambacher
Director
/s/ STEVEN C. MILLESON
- ------------------------------------------ December 15, 1997
Steven C. Milleson
Director
/s/ WILLIAM P. PAYNE
- ------------------------------------------ December 15, 1997
William P. Payne
Director
<PAGE>
Exhibit 13
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION AND OTHER DATA:
Total assets............................................... $ 59,198 $ 56,637 $ 51,296 $ 46,679 $ 47,461
Cash and cash equivalents.................................. 807 801 2,528 983 2,440
Investment securities(1)................................... 8,951 11,516 5,290 4,975 4,657
Mortgage-backed securities(2).............................. 7,826 7,766 9,558 10,712 12,263
Loans receivable, net...................................... 39,026 34,955 32,609 28,747 26,627
Real estate owned.......................................... 50 33 -- -- 234
Deposits................................................... 44,993 44,809 46,198 41,962 43,092
FHLB advances.............................................. 3,300 500 -- -- --
Stockholders' equity, net.................................. 10,479 10,884 4,929 4,565 4,212
Full service offices....................................... 2 2 2 2 2
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income............................................ $ 4,134 $ 3,871 $ 3,437 $ 3,208 $ 3,507
Total interest expense........................................... 2,448 2,331 2,004 1,765 2,037
--------- --------- --------- --------- ---------
Net interest income............................................ 1,686 1,540 1,433 1,443 1,470
Provision for loan losses........................................ 3 14 13 50 52
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses............ 1,683 1,526 1,420 1,393 1,418
Non-interest income.............................................. 52 41 32 80 23
Non-interest expense(3).......................................... 1,306 1,298 944 934 833
--------- --------- --------- --------- ---------
Income before provision for income taxes...................... 429 269 508 539 608
Provision for income taxes....................................... 142 52 155 165 203
--------- --------- --------- --------- ---------
Net income....................................................... $ 287 $ 217 $ 353 $ 374 $ 405
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per share............................................. $ .46 $ .35 N/A N/A N/A
Book value per share............................................. $ 16.21 $ 16.20 N/A N/A N/A
SELECTED OPERATING RATIOS(4):
Return on average assets ........................................ 49% 0.41% 0.73% 0.79% 0.86%
Return on average equity......................................... 2.70 3.43 7.35 8.45 10.15
Average equity to average assets................................. 18.23 12.00 9.90 9.34 8.43
Equity to assets at end of year.................................. 17.70 19.22 9.61 9.78 8.87
Interest rate spread(5).......................................... 2.12 2.36 2.62 2.79 2.85
Net interest margin(5)........................................... 2.97 2.95 3.02 3.11 3.17
Average interest-earning assets to average interest-bearing
liabilities.................................................... 119.77 113.16 109.30 108.53 107.27
Net interest income after provision for loan losses to total
expense........................................................ 128.87 117.57 150.42 149.14 170.23
Non-interest expense to average total assets..................... 2.24 2.46 1.95 1.97 1.76
ASSET QUALITY RATIOS:(6)
Non-performing loans to total loans at end of year............... 0.21 0.31 0.14 -- 0.64
Non-performing assets to total assets at end of year............. 0.22 0.25 0.09 -- 0.86
Allowance for loan losses to total loans outstanding at end of
year........................................................... 0.73 0.81 0.85 0.91 0.97
</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 Proctorville, 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, 1997, the Company had total consolidated
assets of $59.2 million, total consolidated liabilities of $48.7 million, and
total stockholders' equity of $10.5 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 United 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 at
September 30, 1997 and 1996, and the years then ended, is for the Bank only,
since prior to 1996, the Company had not yet completed the Conversion or
issued any stock.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
In addition to historical information, forward-looking statements are
contained herein that are subject to risks and uncertainties that could cause
actual results to differ materially from those reflected in the
forward-looking statements. Factors that could cause future results to vary
from current expectations, include, but are not limited to, the impact of
economic conditions (both generally and more specifically in the markets in
which the Bank operates), the impact of competition for the Bank's customers
from other providers of financial services, the impact of government
legislation and regulation (which change from time to time and over which the
Bank has no control), and other risks detailed in this Annual Report and in
the Company's other Securities and Exchange Commission filings. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements,
to reflect events or circumstances that arise after the date hereof. Readers
should carefully review the risk factors described in other documents the
Company files from time to time
3
<PAGE>
with the Securities and Exchange Commission, including the Quarterly Reports
on Form 10-QSB to be filed by the Company in 1998 and any Current Reports on
Form 8-K filed by the Company.
FINANCIAL CONDITION
ASSETS. Total assets increased by $2.6 million, or 4.6%, from $56.6
million at September 30, 1996 to $59.2 million at September 30, 1997. The
increase consisted primarily of increases in loans receivable of $4.0 million
and office properties and equipment of $1.0 million, offset by a decrease in
investment securities (both held to maturity and available for sale) of $2.5
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. Cash and cash equivalents remained relatively
unchanged, totaling $807,000 at September 30, 1997 as compared to $801,000 at
September 30, 1996.
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. Investment securities, both held to
maturity and available for sale, decreased $2.5 million, or 21.7%, from $11.5
million at September 30, 1996 to $9.0 million at September 30, 1997. Net cash
generated from maturities of investments was used primarily to fund increased
loan demand.
LOANS RECEIVABLE. The Company's loans receivable, net, increased by $4.0
million, or 11.4%, from $35.0 million at September 30, 1996 to $39.0 million
at September 30, 1997. Total loan originations during the year amounted to
$10.6 million, of which $8.5 million were for single-family residential loans
within the Company's local trade area.
LOAN CONCENTRATIONS. The Company does not have a concentration of its
loan portfolio in any one industry or to any one borrower. Real estate
lending (both mortgage and construction loans) continues to be the largest
component of the loan portfolio, representing $38.6 million, or 95.7%, of
total gross loans outstanding at September 30, 1997, while consumer loans,
including installment loans and loans secured by deposit accounts, totaled
$1.7 million, or 4.3% of total gross loans outstanding.
The Company's lending is concentrated to borrowers who reside in and/or
which are collateralized by real estate and property 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.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses as a percentage
of total loans decreased slightly from .81% at September 30, 1996 to .73% at
September 30, 1997. The total dollar amount of the allowance increased
slightly, from $283,000 at September 30, 1996 to $287,000 at September 30,
1997.
Charge-off activity for the year ended September 30, 1997 totaled $1,718
as compared to $9,262 for the preceding year. Recoveries totaled $2,177 and
$437 for the years ended September 30, 1997 and 1996, respectively.
The Company had $84,000 and $109,000 of non-accrual loans at September
30, 1997 and 1996, respectively. At the same dates, there were no loans
greater than 90 days delinquent which were still accruing interest.
4
<PAGE>
The Company had no troubled debt restructurings during the years ended
September 30, 1997 and 1996.
Management has determined that the allowance for loan losses is adequate at
September 30, 1997 and 1996.
MORTGAGE-BACKED SECURITIES. The Company invests primarily in adjustable-
rate mortgage-backed securities, which are classified either as held to
maturity or available for sale. Aggregate balances of mortgage-backed
securities remained unchanged totaling $7.8 million at September 30, 1997 and
1996. During the year ended September 30, 1997, there were $1.1 million of
mortgage-backed securities purchased, and $1.1 million in principal
repayments.
OFFICE PROPERTIES AND EQUIPMENT. The Company constructed a drive-through
facility expansion at its Ironton office and a new branch banking facility
located in Proctorville, Ohio during the year. The total cost of both
projects approximated $1.0 million. In connection with the opening of the new
branch, the Chesapeake, Ohio branch was relocated to Proctorville. The
Company intends to sell the Chesapeake facility. The branch relocation is
expected to provide increased business opportunities for the Company.
DEPOSITS. The Company's deposit accounts consist of passbook savings
accounts, certificates of deposit and checking accounts. Deposits remained
relatively unchanged totaling $44.8 million and $45.0 million at September
30, 1996 and 1997, respectively. The Bank continues to offer competitive
interest rates on deposit accounts.
ADVANCE FROM FEDERAL HOME LOAN BANK. The Company obtained advances
totaling $6.8 million during the year ended September 30, 1997 to meet its
loan demand and other funding needs. Approximately $4.0 million of advances
were repaid during the year. Outstanding advances totaled $3.3 million and
$.5 million at September 30, 1997 and 1996, respectively. The Company has
ample borrowing capacity if needed to fund future commitments.
STOCKHOLDERS' EQUITY. Stockholders' equity totaled $10.5 million at
September 30, 1997, as compared to $10.9 million at September 30, 1996. The
$400,000 decrease, or 3.7%, resulted primarily from the purchase of common
shares to fund the Recognition and Retention Plan, the purchase of treasury
shares and the payment of dividends, partially offset by net income for the
year.
5
<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,
-----------------------------------------------------------------------------
1997 1996
------------------------------------- -------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
---------- ----------- ----------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)......................... $ 37,678 $ 2,954 7.84% $ 33,543 $ 2,733 8.15%
Mortgage-backed securities(2)............... 7,661 467 6.09 8,717 519 5.95
Investment securities(3).................... 9,848 638 6.47 7,456 490 6.57
Other interest-earning assets............... 1,464 74 5.06 2,457 129 5.25
---------- ---------- --------- ---------
Total interest-earning assets............. 56,651 4,133 7.30 52,173 3,871 7.42
---------- ---------- --------- -----
Non-interest earning assets................... 1,712 537
---------- ---------
Total assets.............................. $ 58,363 $ 52,710
---------- ---------
---------- ---------
Interest-bearing liabilities:
Deposits.................................... $ 45,982 2,374 5.16 $ 46,079 2,330 5.06
FHLB advances............................... 1,318 74 5.61 27 1 3.70
---------- ---------- --------- ---------
Total interest-bearing liabilities...... 47,300 2,448 5.18 46,106 2,331 5.06
---------- ---------- --------- -----
Non-interest bearing liabilities.............. 425 278
---------- ---------
Total liabilities......................... 47,725 46,384
Stockholders' equity.......................... 10,638 6,326
---------- ---------
Total liabilities and stockholders'
equity.................................. $ 58,363 $ 52,710
---------- -----------
---------- -----------
Net interest income; interest rate spread..... $ 1,685 2.12% $ 1,540 2.36%
----------- ---------- ----------- -------
----------- ---------- ----------- -------
Net interest margin(4)........................ 2.97% 2.95%
---------- -------
---------- -------
Average interest-earning assets to average
interest-bearing liabilities................ 119.77% 113.16%
---------- -------
---------- -------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1995
-------------------------------------
AVERAGE
BALANCE INTEREST YIELD/ RATE
---------- ---------- -----------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)........................... $ 30,973 $ 2,522 8.14%
Mortgage-backed securities(2)................. 10,113 559 5.53
Investment securities(3)...................... 4,965 275 5.54
Other interest-earning assets................. 1,429 81 5.67
---------- ---------
Total interest-earning assets................. 47,480 3,437 7.24
Non-interest earning assets................... 1,034 --------- ----------
----------
Total assets.................................. $ 48,514
----------
----------
Interest-bearing liabilities:
Deposits...................................... $ 42,327 1,936 4.57
FHLB advances................................. 1,105 68 6.15
---------- ---------
Total interest-bearing liabilities............ 43,432 2,004 4.62
--------- ----------
Non-interest bearing liabilities.............. 277
----------
Total liabilities......................... 43,709
Stockholders' equity.......................... 4,805
----------
Total liabilities and stockholders'
equity.................................. $ 48,514
----------
----------
Net interest income; interest rate spread..... $ 1,433 2.62%
--------- ----------
--------- ----------
Net interest margin(4)........................ 3.02%
----------
----------
Average interest-earning assets to average
interest-bearing liabilities................ 109.30%
----------
----------
</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.
6
<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,
---------------------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
-------------------------------------- --------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL
--------------------- INCREASE --------------------- INCREASE
RATE VOLUME (DECREASE) RATE VOLUME (DECREASE)
----- ----------- --------------- ----- ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable........................ $ (104) $ 325 $ 221 $ 27 $ 185 $ 212
Mortgage-backed securities(1)........... 12 (64) (52) 51 (91) (40)
Investment securities(2)................ (7) 155 148 58 157 215
Other interest earning assets........... (3) (52) (55) 3 44 47
----- ----- ----- ----- ----- -----
Total interest-earning assets......... (102) 364 262 139 295 434
----- ----- ----- ----- ----- -----
Interest-bearing liabilities:
Deposits................................ 48 (4) 44 215 179 394
FHLB advances........................... 1 71 72 46 (113) (67)
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities.... 49 67 116 261 66 327
----- ----- ----- ----- ----- -----
Increase (decrease) in net interest
income.................................. $ (151) $ 297 $ 146 $ (122) $ 229 $ 107
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1995 VS. 1994
---------------------------------------
INCREASE
(DECREASE)
DUE TO TOTAL
----------------------- INCREASE
RATE VOLUME (DECREASE)
----- ------------- ---------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable........................ $ (64) $ 260 $ 196
Mortgage-backed securities(1)........... 52 (37) 15
Investment securities(2)................ 11 2 13
Other interest earning assets........... 11 (6) 5
----- --- ---
Total interest-earning assets......... 10 219 229
Interest-bearing liabilities:
Deposits................................ 186 (15) 171
FHLB advances........................... -- 68 68
----- ---- ---
Total interest-bearing liabilities.... 186 53 239
----- ---- ---
Increase (decrease) in net interest
income.................................. $ (176) $ 166 $ (10)
----- ---- ---
----- ---- ---
</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.
7
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND
1996
NET INCOME. Net income was $287,000 for the year ended September 30,
1997 as compared to $394,000 for the year ended September 30, 1996, before a
one-time statutorily mandated assessment and related charge to recapitalize
the Savings Association Insurance Fund ("SAIF") of the Federal Deposit
Insurance Corporation ("FDIC"), a decrease of 27.2%. After taking into
consideration the one-time special SAIF assessment and related charge, the
Company had a 1996 fiscal year net income of $217,000. Comparable earnings
per share, before the 1996 special SAIF assessment and related charge, were
$.46 and $.64 for the years ended September 30, 1997 and 1996, respectively.
The 1996 earnings per share, after the SAIF special assessment and related
charge, was $.35. After taking into consideration the one-time special SAIF
assessment and related charge in 1996, the $70,000 increase in net income
resulted from increases in net interest income of $146,000, or 9.5%,
non-interest income of $11,000, and a decrease in the provision for loan
losses of $11,000, offset by increases in non-interest expenses and the
provision for income taxes of $8,000 and $90,000, respectively.
INTEREST INCOME. Interest income increased $263,000, or 6.8%, to $4.1
million for the year ended September 30, 1997. The increase consisted of
increases of $221,000 and $148,000 in interest earned on loans receivable and
investment securities, offset by declines in interest earned on
mortgage-backed securities and other interest-earning assets of $52,000 and
$55,000, respectively. The increases were primarily due to increases in 1997
as compared to 1996 in the average volume of the respective portfolios,
offset by a decline in interest rates. The decrease in interest earned on
mortgage-backed securities and other interest-earning assets resulted
primarily from a decline in the average volume of the portfolios. Overall,
the interest-earning assets yield decreased 12 basis points, from 7.42% for
the year ended September 30, 1996 to 7.30% for the year ended September 30,
1997.
INTEREST EXPENSE. Interest expense increased $117,000, or 5.0%, from
$2,331,000 for the year ended September 30, 1996 to $2,448,000 for the year
ended September 30, 1997. The increase was primarily due to an increase in the
average rates paid on deposits for 1997 as compared to 1996, from 5.06% to
5.16%, and from an increase in the average volume during 1997 as compared to
1996 in outstanding advances from the FHLB.
PROVISION FOR LOAN LOSSES. For the 1997 fiscal year, the provision for
loan losses was $3,000 as compared to $14,000 for 1996. The 1997 provision
was reduced due to the low levels of non-performing loans during the year and
based on the determination that the allowance was adequate throughout the
1997 fiscal year. In making this determination, management makes a review of
non-performing loans, the overall quality of the loan portfolio, levels of
past due loans and prior loan loss experience.
NON-INTEREST INCOME. The $11,000, or 26.8%, increase in non-interest
income was primarily due to $6,600 of gains on sales of foreclosed real
estate in 1997 as compared to a $1,000 loss for 1996.
NON-INTEREST EXPENSE. Not considering the SAIF special assessment and
related charge referred to above, non-interest expense increased $277,000, or
27.0%, for the year ended September 30, 1997 as compared to 1996. The
increase consisted primarily of increases in compensation and benefits of
$94,000, occupancy expenses of $12,000, franchise taxes of $70,000, and
professional services and other expenses of $81,000 and $52,000,
respectively, offset
8
<PAGE>
by lower SAIF deposit insurance premiums of $61,000. Compensation and
benefits for 1997 reflect a full year of ESOP and RRP compensation expenses
which totaled $106,000 for 1997 as compared to $25,000 for 1996, such benefit
plans not being in effect prior to the Conversion. Occupancy expenses
increased due to the construction and opening of the new facilities in 1997
as discussed above, while professional services and other expenses increased
due to operation as a public company for the full 1997 fiscal year. The
increase in franchise taxes, which are based on total stockholders' equity,
increased due to the additional equity generated from the Conversion
proceeds. After consideration of the one-time special assessment of $269,000
in 1996, non-interest expense increased by $8,000.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
$90,000, from $52,000 for the year ended September 30, 1996 to $142,000 for
the year ended September 30, 1997 due to higher pretax income, taxed at
higher statutory rates.
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,
recapitalized the SAIF to a reserve ratio of 1.25% of insured deposits.
Insurance premiums were lowered, effective January 1, 1997, to approximately
$.064 per $100 of insured deposits, down from the $.23 per $100 previously
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.
9
<PAGE>
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
compensation and benefits expense of $24,000, the regular SAIF deposit
insurance premiums of $10,000, franchise taxes of $6,000, and other
miscellaneous non-interest expenses of $23,000.
In connection with the Conversion, the Company established an ESOP for
the benefit of its officers and employees, resulting in compensation 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. Franchise taxes increased
due to higher levels of Bank capital during 1996 as compared to 1995. The
$23,000 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.
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, 1997, the ratio of
the Company's average interest-earning assets to average interest-bearing
liabilities amounted to 119.77%.
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.
10
<PAGE>
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, 1997, $32.3 million, or 90.7% of total
single-family loans, and $34.8 million, or 90.2% of the total loan portfolio,
had adjustable rates of interest. In addition, $7.5 million, or 96.2% of the
Company's mortgage-backed securities ("held to maturity" as well as
"available for sale"), had underlying loans with adjustable rates of interest
and, at September 30, 1997, $9.0 million, or 15.2%, of the Company's total
assets, consisted of investment securities, 61.1% 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.
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, 1997, 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, 1997
----------------------------------------
MARKET VALUE OF PORTFOLIO EQUITY
CHANGES IN ----------------------------------------
INTEREST RATES BOARD LIMIT $ CHANGE IN NPV
(BASIS POINTS) % CHANGE (IN THOUSANDS) % CHANGE IN NPV
- --------------- ------------- ------------------- -------------------
<S> <C> <C> <C>
+400 (40)% $ (3,273) (34)%
+300 (30) (2,207) (23)
+200 (20) (1,252) (13)
+100 (10) (478) (5)
-- -- -- --
(100) (10) 294 2
(200) (20) 505 5
(300) (30) 926 10
(400) (40) 1,466 15
</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
11
<PAGE>
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,
1997, 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, 1997, the Bank would not have a significant
interest rate risk component deducted from its regulatory capital.
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 13.0% at September 30, 1997, as compared to
15.0% at September 30, 1996. At September 30, 1997, the Bank's "liquid"
assets totalled approximately $5.4 million, which was $3.3 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, to the extent deemed necessary, has utilized borrowings from
the FHLB of Cincinnati. Outstanding advances totaled $3.3 million at
September 30, 1997.
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, 1997, the total approved loan
commitments outstanding amounted to $912,000. Certificates of deposit
scheduled to mature in one year or less at September 30, 1997 totalled $27.4
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, 1997, the Bank had regulatory capital which was well in
excess of applicable limits. At September 30, 1997, 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, 1997, the Bank's tangible capital was
12
<PAGE>
$8.6 million or 15.0% of adjusted total assets, core capital was $8.6 million
or 15.0% of adjusted total assets and risk-based capital was $8.9 million or
33.7% of adjusted risk-weighted assets, exceeding the requirements by $7.8
million, $6.9 million and $6.8 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 the Bank. The only significant expenses incurred by the
Company 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 has the ability to obtain dividends
from the Bank.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," which established financial accounting and
reporting standards for stock-based compensation. The new standard defines a
fair value method of accounting for an employee stock option or similar
equity instrument. This statement allows for the choice between adopting the
fair value method or continuing to use the intrinsic value method under
Accounting Principles Board Opinion No. 25 with footnote disclosures of the
pro forma effects if the fair value method had been adopted.
The Company adopted the provisions of Statement No. 123 effective October
1, 1996, and opted to disclose in the footnotes to its financial statements
the pro forma effects as if the fair value method had been adopted. See Note
(15) to the Consolidated Financial Statements.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated 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 the Bank'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, 1997 and
1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the years ended September 30, 1997,
1996 and 1995. 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, 1997
and 1996, and the results of their operations and their cash flows for the years
ended September 30, 1997, 1996 and 1995, in conformity with generally accepted
accounting principles.
/s/ Kelley, Galloway & Company, PSC
Ashland, Kentucky
November 5, 1997
14
<PAGE>
FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH AND CASH EQUIVALENTS, including interest-bearing deposits of $644,885 and
$754,676, respectively.......................................................... $ 807,314 $ 801,243
INVESTMENT SECURITIES HELD TO MATURITY, approximate market value of $7,287,975 and
$8,934,776, respectively........................................................ 7,257,115 8,983,577
INVESTMENT SECURITIES AVAILABLE FOR SALE, at approximate market value............. 1,694,104 2,531,995
LOANS RECEIVABLE, less allowance for loan losses of $286,571 and $283,112,
respectively.................................................................... 39,026,547 34,955,329
MORTGAGE-BACKED SECURITIES HELD TO MATURITY, approximate market value of
$4,620,383 and $5,067,431, respectively......................................... 4,695,838 5,190,066
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE, at approximate market value........ 3,130,178 2,575,973
ACCRUED INTEREST RECEIVABLE....................................................... 360,604 382,997
FORECLOSED REAL ESTATE............................................................ 50,046 33,367
OFFICE PROPERTIES AND EQUIPMENT................................................... 2,052,833 1,037,768
OTHER ASSETS...................................................................... 123,216 144,237
----------- -----------
$59,197,795 $56,636,552
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS.......................................................................... $44,992,698 $44,809,072
ADVANCES FROM FEDERAL HOME LOAN BANK.............................................. 3,300,000 500,000
DEFERRED FEDERAL INCOME TAXES PAYABLE............................................. 101,736 84,015
ACCRUED INTEREST PAYABLE.......................................................... 18,192 5,224
ACCRUED SAIF SPECIAL ASSESSMENT................................................... -- 269,363
OTHER LIABILITIES................................................................. 305,834 85,360
----------- -----------
Total liabilities............................................................... 48,718,460 45,753,034
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 17)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 3,000,000 shares authorized; 646,383 and 671,783
shares, respectively, issued and outstanding.................................... 6,464 6,718
Employee benefit plans............................................................ (739,000) (513,080)
Additional paid-in capital........................................................ 6,060,242 6,280,193
Retained earnings-substantially restricted........................................ 5,127,312 5,111,660
Unrealized holding gain (loss) on securities available for sale, net of taxes..... 24,317 (1,973)
----------- -----------
Total stockholders' equity...................................................... 10,479,335 10,883,518
----------- -----------
$ 59,197,795 $56,636,552
----------- -----------
----------- -----------
</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, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable -
First mortgage loans.................................................. $ 2,817,376 $ 2,620,582 $ 2,414,203
Consumer and other loans.............................................. 137,022 112,697 107,312
Mortgage-backed and related securities.................................. 467,507 518,936 559,362
Investment securities................................................... 637,941 489,666 274,552
Other interest-earning assets........................................... 73,812 129,229 81,282
------------ ------------ ------------
Total interest income............................................... 4,133,658 3,871,110 3,436,711
------------ ------------ ------------
INTEREST EXPENSE:
Interest-bearing checking............................................... 13,782 15,312 15,454
Passbook savings........................................................ 282,994 326,942 417,433
Certificates of deposit................................................. 2,077,772 1,987,887 1,503,530
Advances from Federal Home Loan Bank.................................... 73,607 1,443 67,513
------------ ------------ ------------
Total interest expense.............................................. 2,448,155 2,331,584 2,003,930
------------ ------------ ------------
Net interest income................................................. 1,685,503 1,539,526 1,432,781
PROVISION FOR LOAN LOSSES............................................... 3,000 14,000 13,000
------------ ------------ ------------
Net interest income after provision for loan losses................. 1,682,503 1,525,526 1,419,781
------------ ------------ ------------
NON-INTEREST INCOME:
Gains (losses) on foreclosed real estate................................ 6,633 (1,000) --
Other................................................................... 45,687 42,027 31,930
------------ ------------ ------------
Total non-interest income........................................... 52,320 41,027 31,930
------------ ------------ ------------
NON-INTEREST EXPENSE:
Compensation and benefits............................................... 504,083 409,669 385,785
Occupancy and equipment................................................. 100,314 88,003 83,674
SAIF deposit insurance premiums......................................... 43,406 105,219 94,784
SAIF special assessment................................................. -- 269,363 --
Directors' fees and expenses............................................ 78,814 65,121 64,891
Franchise taxes......................................................... 144,737 74,687 68,821
Data processing......................................................... 63,112 58,702 53,381
Advertising............................................................. 60,201 49,186 52,670
Professional services................................................... 121,910 40,521 25,918
Other................................................................... 189,515 137,223 114,424
------------ ------------ ------------
Total non-interest expense.......................................... 1,306,092 1,297,694 944,348
------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES................................ 428,731 268,859 507,363
------------ ------------ ------------
PROVISION FOR INCOME TAXES:
Current................................................................. 138,732 41,603 141,068
Deferred................................................................ 3,652 10,608 13,491
------------ ------------ ------------
Total provision for income taxes.................................... 142,384 52,211 154,559
------------ ------------ ------------
NET INCOME.............................................................. $ 286,347 $ 216,648 $ 352,804
------------ ------------ ------------
------------ ------------ ------------
NET INCOME PER SHARE.................................................... $ .46 $ .35 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, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
UNREALIZED
HOLDING GAIN
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, 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
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)
CHANGE IN UNREALIZED HOLDING LOSS, net
of deferred taxes of $3,831........... -- -- -- -- 7,437 7,437
----------- ------------ ------------ ------------ ------------- ------------
BALANCES, September 30, 1996............ 6,718 (513,080) 6,280,193 5,111,660 (1,973) 10,883,518
NET INCOME, 1997........................ -- -- -- 286,347 -- 286,347
CHANGE IN UNREALIZED HOLDING LOSS, net
of deferred taxes of $13,543.......... -- -- -- -- 26,290 26,290
ESOP SHARES RELEASED, 5,810 shares;
$12.68 average fair market value...... -- 58,100 17,004 -- -- 75,104
RRP SHARES PURCHASED, 26,871 shares;
$11.75 per share...................... -- (315,734) -- -- -- (315,734)
RRP SHARES AMORTIZED, 2,603 shares...... -- 30,604 -- -- -- 30,604
DIVIDENDS PAID ($.28 per share)......... -- 1,110 281 (166,923) -- (165,532)
PURCHASE OF 25,400 TREASURY SHARES...... (254) -- (237,236) (103,772) -- (341,262)
----------- ------------ ------------ ------------ ------------- ------------
BALANCES, September 30, 1997............ $ 6,464 $ (739,000) $ 6,060,242 $5,127,312 $ 24,317 $10,479,335
----------- ------------ ------------ ------------ ------------- ------------
----------- ------------ ------------ ------------ ------------- ------------
</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, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................... $ 286,347 $ 216,648 $ 352,804
Adjustments to reconcile net income to net cash provided by operating
activities -
(Gains) losses on foreclosed real estate............................... (6,633) 1,000 --
Provision for loan losses.............................................. 3,000 14,000 13,000
Depreciation........................................................... 57,705 50,892 49,605
FHLB stock dividends................................................... (31,800) (29,200) (25,900)
RRP compensation....................................................... 30,604 -- --
Amortization and accretion, net........................................ 11,614 32,730 41,933
ESOP compensation...................................................... 75,104 25,420 --
Change in -
Accrued interest receivable............................................ 22,393 (78,244) (20,530)
Other assets........................................................... 21,021 (42,437) 2,874
Deferred Federal income taxes.......................................... 3,652 10,608 13,491
Accrued interest payable............................................... 12,968 (1,295) (4,944)
Accrued SAIF special assessment........................................ (269,363) 269,363 --
Other liabilities...................................................... 220,474 (8,195) 2,511
----------- ----------- -----------
Net cash provided by operating activities............................ 437,086 461,290 424,844
----------- ----------- -----------
INVESTING ACTIVITIES:
Net increase in loans.................................................... (4,128,478) (2,394,375) (3,875,812)
Proceeds from maturities of investment securities held to maturity....... 2,431,080 1,843,000 790,000
Purchases of investment securities held to maturity...................... (673,151) (5,506,999) (1,081,822)
Proceeds from maturities of investment securities available for sale..... 2,700,000 -- --
Purchases of investment securities available for sale.................... (1,849,883) (2,530,662) --
Principal collected on mortgage-backed securities held to maturity....... 784,192 1,140,551 1,075,646
Purchases of mortgage-backed securities held to maturity................. (305,250) -- --
Principal collected on mortgage-backed securities available for sale..... 297,591 628,267 56,856
Purchases of mortgage-backed securities available for sale............... (819,658) -- --
Purchases of office properties and equipment............................. (1,072,770) (184,646) (80,567)
Proceeds from sales of foreclosed real estate............................ 44,214 -- --
----------- ----------- -----------
Net cash used for investing activities............................... (2,592,113) (7,004,864) (3,115,699)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from sale of stock.............................................. -- 5,748,411 --
RRP stock purchased...................................................... (315,734) -- --
Dividends paid........................................................... (165,532) (43,262) --
Purchase of Treasury shares.............................................. (341,262) -- --
Proceeds from FHLB advances.............................................. 6,800,000 500,000 5,600,000
Principal paid on FHLB advances.......................................... (4,000,000) -- (5,600,000)
Net increase (decrease) in deposits...................................... 183,626 (1,388,748) 4,236,254
----------- ----------- -----------
Net cash provided by financing activities............................ 2,161,098 4,816,401 4,236,254
----------- ----------- -----------
18
<PAGE>
FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... 6,071 (1,727,173) 1,545,399
CASH AND CASH EQUIVALENTS, beginning of year............................. 801,243 2,528,416 983,017
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year................................... $ 807,314 $ 801,243 $ 2,528,416
----------- ----------- -----------
----------- ----------- -----------
NONCASH INVESTING ACTIVITIES:
Loans taken into foreclosed real estate.................................. $ 54,260 $ 34,367 $ --
Unrealized holding gain on securities available for sale................. 40,359 2,991 14,258
Transfer of mortgage-backed securities classified as held to maturity to
available for sale..................................................... -- 2,216,252 --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Federal income taxes paid................................................ $ 68,480 $ 103,635 $ 141,113
Interest paid............................................................ 2,435,187 2,332,879 2,008,874
</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, 1997, 1996 AND 1995
(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 Proctorville, 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, 1997 and 1996, and
for the years 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 for the year ended September 30, 1995,
include only the accounts of the Bank (formerly the Association). The
accompanying financial statements have been prepared on the accrual basis.
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.
20
<PAGE>
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, 1997 and 1996 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.
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
21
<PAGE>
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 non-accrual 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.
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, 1997 and 1996 was
computed using the weighted average number (616,651 and 618,759) of outstanding
common shares, respectively. 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.
22
<PAGE>
RECLASSIFICATION
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 financial statement presentation. These
reclassifications had no effect on net income.
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 (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.
Advances from Federal Home Loan Bank: Due to the short-term maturities
and/or variable interest rates, the advances from the Federal Home Loan Bank
carrying value approximates fair value.
23
<PAGE>
(2) INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
------------ ----------- ----------- ------------
U.S. Government agency securities............................ $ 4,380,383 $ 12,018 $ 22,886 $ 4,369,515
Obligations of states and political subdivisions............. 1,627,481 41,923 195 1,669,209
Certificates of deposit...................................... 779,151 -- -- 779,151
------------ ----------- ----------- ------------
6,787,015 53,941 23,081 6,817,875
Restricted Equity Securities:
Stock in FHLB, at cost..................................... 470,100 -- -- 470,100
------------ ----------- ----------- ------------
$ 7,257,115 $ 53,941 $ 23,081 $ 7,287,975
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
<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
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The amortized cost and estimated market value of investment securities held
to maturity at September 30, 1997, 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
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------ ------------
<S> <C> <C>
Due in one year or less........................................... $ 447,088 $ 447,213
Due after one year through five years............................. 4,349,766 4,359,921
Due after five years through ten years............................ 1,395,161 1,427,367
Due after ten years............................................... 1,065,100 1,053,474
------------ ------------
$ 7,257,115 $ 7,287,975
------------ ------------
------------ ------------
</TABLE>
At September 30, 1997 and 1996, investment securities with a carrying value
of $535,000 were pledged to secure public deposits.
24
<PAGE>
There were no sales of investment securities held to maturity during the
years ended September 30, 1997, 1996 and 1995.
(3) INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
U.S. Government agency securities........ $ 1,548,794 $ 1,787 $ 2,547 $ 1,548,034
Obligations of states and political
subdivisions........................... 140,000 6,070 -- 146,070
------------ ----------- ----------- ------------
$ 1,688,794 $ 7,857 $ 2,547 $ 1,694,104
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED CARRYING
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, 1997, 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.
<TABLE>
<CAPTION>
AMORTIZED CARRYING
COST VALUE
------------ ------------
<S> <C> <C>
Due after one year through five years............................. $ 698,794 $ 699,599
Due after five years through ten years............................ 990,000 994,505
------------ ------------
$ 1,688,794 $ 1,694,104
------------ ------------
------------ ------------
</TABLE>
There were no sales of investment securities available for sale during the
years ended September 30, 1997, 1996 and 1995.
(4) LOANS RECEIVABLE
Loans receivable at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Real estate loans:
Single family residential.................................... $ 35,983,960 $ 32,672,805
Multi-family residential..................................... 685,065 229,561
Commercial real estate....................................... 1,960,557 1,734,269
------------- -------------
Total real estate loans.................................... 38,629,582 34,636,635
25
<PAGE>
Consumer and other loans:
Loans secured by deposit accounts............................ 555,886 703,351
Home improvement............................................. 86,156 85,680
Automobile................................................... 508,114 463,419
Home equity.................................................. 58,072 17,899
Other........................................................ 507,893 379,446
------------- -------------
Total consumer and other loans............................. 1,716,121 1,649,795
------------- -------------
Total loans................................................ 40,345,703 36,286,430
Less:
Unearned interest............................................ (140,099) (118,125)
Loans in process............................................. (879,407) (909,079)
Deferred loan fees and costs................................. (13,079) (20,785)
Allowance for loan losses.................................... (286,571) (283,112)
------------- -------------
Loans receivable, net.......................................... $ 39,026,547 $ 34,955,329
------------- -------------
------------- -------------
Weighted average interest rate................................. 7.44% 7.53%
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year............................... $ 283,112 $ 277,937 $ 265,703
Provision charged to expense............................. 3,000 14,000 13,000
Loans charged off........................................ (1,718) (9,262) (1,379)
Loans recovered.......................................... 2,177 437 613
---------- ---------- ----------
Balance, end of year..................................... $ 286,571 $ 283,112 $ 277,937
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Loans on which the accrual of interest had been discontinued or reduced and
for which impairment had not been recognized totaled approximately $84,000,
$109,000, and $46,000 at September 30, 1997, 1996 and 1995, respectively.
Interest income which would have been recognized under the original terms of
these contracts was $3,447, $3,584, and $1,885, respectively.
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 $11,768 and
$193,558 at September 30, 1997 and 1996, 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:
26
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
Balance, beginning of year............................................ $ 193,558 $ 116,875
New loans advanced.................................................... -- 193,436
Repayments............................................................ (181,790) (116,753)
---------- ----------
Balance, end of year.................................................. $ 11,768 $ 193,558
---------- ----------
---------- ----------
</TABLE>
(5) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity at September 30 consist of the
following:
<TABLE>
<CAPTION>
1997
----------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
------------ ----------- ----------- ------------
FHLMC Certificates....................... $ 2,654,802 $ 16,028 $ 59,408 $ 2,611,422
FNMA Certificates........................ 1,639,449 9,293 39,631 1,609,111
GNMA Certificates........................ 39,817 2,769 -- 42,586
FNMA and FHLMC CMO's..................... 361,770 -- 4,506 357,264
------------ ----------- ----------- ------------
$ 4,695,838 $ 28,090 $ 103,545 $ 4,620,383
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Weighted average rate.................... 6.01%
-----------
-----------
<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%
-----------
-----------
</TABLE>
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, 1997, 1996 and 1995.
27
<PAGE>
(6) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale at September 30 consist of the
following:
<TABLE>
<CAPTION>
1997
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
FHLMC Certificates........................................... $ 585,486 $ 4,165 $ 1,620 $ 588,031
FNMA Certificates............................................ 870,117 1,800 5,150 866,767
GNMA Certificates............................................ 823,997 26,873 -- 850,870
FNMA CMO's................................................... 819,044 5,466 -- 824,510
------------ ----------- ----------- ------------
$ 3,098,644 $ 38,304 $ 6,770 $ 3,130,178
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Weighted average rate........................................ 6.67%
-----------
-----------
<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%
-----------
-----------
</TABLE>
There were no sales of mortgage-backed securities available for sale during
the years ended September 30, 1997, 1996 or 1995.
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Loans............................................................. $ 208,831 $ 181,134
Investment securities............................................. 93,305 140,014
Mortgage-backed and related securities............................ 58,468 61,849
------------ ------------
$ 360,604 $ 382,997
------------ ------------
------------ ------------
</TABLE>
(8) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land.............................................................. $ 475,271 $ 461,096
Buildings and improvements........................................ 1,691,659 690,776
Furniture, fixtures and equipment................................. 278,364 221,831
Automobile........................................................ 13,667 13,667
------------ ------------
2,458,961 1,387,370
Less--accumulated depreciation.................................... (406,128) (349,602)
------------ ------------
$ 2,052,833 $ 1,037,768
------------ ------------
------------ ------------
</TABLE>
28
<PAGE>
(9) OTHER ASSETS
Other assets at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Federal income taxes receivable....................................... $ 30,330 $ 62,090
Prepaid Federal insurance............................................. 7,223 27,397
Prepaid franchise taxes............................................... 31,783 19,110
Other prepaid expenses................................................ 53,880 35,640
---------- ----------
$ 123,216 $ 144,237
---------- ----------
---------- ----------
</TABLE>
(10) DEPOSITS
Deposits at September 30 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RATE 1997 1996
AT SEPTEMBER 30, ------------------------- -------------------------
1997 AMOUNT PERCENT AMOUNT PERCENT
------------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Passbook......................................... 3.00% $ 9,054,018 20.1% $ 9,862,917 22.0%
------------------ ------------ ----------- ------------- -----------
Christmas club................................... 3.00 90,640 .2 95,588 .2
------------------ ------------ ----------- ------------ -----------
Demand accounts.................................. -- 511,713 1.2 354,074 .8
------------------ ------------ ----------- ------------ -----------
NOW accounts..................................... 3.00 558,863 1.2 548,684 1.2
------------------ ------------ ----------- ------------ -----------
Certificates:
3.0-3.99% 3.81 1,005,732 2.2 1,662,214 3.7
4.0-4.99% 4.70 595,701 1.3 4,573,292 10.2
5.0-5.99% 5.49 12,546,441 28.0 16,747,593 37.4
6.0-6.99% 6.62 20,629,590 45.8 10,964,710 24.5
------------------ ------------ ----------- ------------ -----------
6.09 34,777,464 77.3 33,947,809 75.8
------------------ ------------ ----------- ------------ -----------
5.35% $ 44,992,698 100.0% $ 44,809,072 100.0%
------------------ ------------ ----------- ------------ -----------
------------------ ------------ ----------- ------------ -----------
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $3,668,000 and $3,584,000 at
September 30, 1997 and 1996, respectively.
At September 30, 1997, scheduled maturities of certificates of deposit are
as follows:
<TABLE>
<CAPTION>
YEAR
ENDING
SEPTEMBER 30, AMOUNT PERCENT
--------------- ------------- -----------
<S> <C> <C>
1998.......................................................... $ 27,368,039 78.7
1999.......................................................... 4,480,449 12.9
2000.......................................................... 2,580,202 7.4
2001.......................................................... 348,774 1.0
------------- -----
$ 34,777,464 100.0%
------------- -----
------------- -----
</TABLE>
29
<PAGE>
(11) OTHER LIABILITIES
Other liabilities at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Construction payables.................................. $ 180,104 $ --
Escrow accounts........................................ 63,898 59,979
Accrued expenses....................................... 20,845 12,306
Other liabilities...................................... 40,987 13,075
---------- ----------
$ 305,834 $ 85,360
---------- ----------
---------- ----------
</TABLE>
(12) ADVANCES FROM FEDERAL HOME LOAN BANK
The advances from the Federal Home Loan Bank at September 30 consist of the
following:
<TABLE>
<CAPTION>
INTEREST
DATE DUE RATE 1997 1996
------------------------ ----------- ------------ -----------
<S> <C> <C> <C>
11/10/97............................................ 6.53% $ 800,000 $ --
11/25/97............................................ 6.53 500,000 --
12/12/97............................................ 6.53 500,000 --
12/23/97............................................ 6.53 500,000 --
05/20/02............................................ 5.61 1,000,000 --
12/10/96............................................ 5.45 -- 500,000
------------ ----------
$ 3,300,000 $ 500,000
------------ ----------
------------ ----------
</TABLE>
The advances were collateralized by first mortgage loans totaling $4,950,000
and $750,000 at September 30, 1997 and 1996, respectively.
(13) 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, 1997, 1996 and 1995 were $29,417
$22,871 and $35,071, respectively. The Plan was terminated during the year ended
September 30, 1997, and Plan assets were distributed to the participants.
(14) INCOME TAXES
The provision for income taxes differs from the amount computed by applying
the U.S. Federal income tax rate of 34 percent for 1997, 1996 and 1995 to income
before the provision for income taxes as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
Expected provision for income taxes at Federal tax rate... $ 145,769 $ 91,412 $ 172,504
Tax-exempt interest....................................... (16,623) (15,560) (17,712)
Surtax exemption.......................................... -- (10,340) --
Others, net............................................... 13,238 (13,301) (233)
---------- ---------- ----------
$ 142,384 $ 52,211 $ 154,559
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
30
<PAGE>
The net 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 net
deferred tax liability at September 30 consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
FHLB stock dividends not currently taxable........................... $ (86,671) $ (75,859)
Depreciation......................................................... (21,781) (16,962)
Loan fees............................................................ 4,447 7,067
Unrealized holding (gain) loss on investments available for sale..... (12,460) 1,352
Bad debts............................................................ 82,013 85,380
Employee benefit plans............................................... 13,690 --
Others, net.......................................................... 1,039 387
----------- ----------
(19,723) 1,365
Less--valuation allowance for bad debt deferred tax asset............ (82,013) (85,380)
----------- ----------
Net deferred tax liability....................................... $ (101,736) $ (84,015)
----------- ----------
----------- ----------
</TABLE>
Retained earnings at September 30, 1997 and 1996, include approximately
$1,309,000 for which no deferred Federal income tax liability has been
recognized. These amounts represent an allocation of pre-1987 income to bad
debt deductions for tax purposes only. Reduction of amounts so allocated for
purposes other than bad debt 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 at September 30, 1997 and 1996, respectively.
(15) STOCK-BASED COMPENSATION PLANS
The Company's stockholders approved the Stock Option Plan on December 16,
1996. A total of 67,178 common shares have been reserved for issuance pursuant
to the Plan, of which 37,529 options were granted during the year ended
September 30, 1997. Participants vest in the options granted over a five year
period.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, which established financial
accounting and reporting standards for stock-based compensation. The new
standard defines a fair value method of accounting for an employee stock option
or similar equity instrument. This statement allows for the choice between
adopting the fair value method or continuing to use the intrinsic value method
under Accounting Principles Board (APB) Opinion No. 25 with footnote disclosures
of the pro forma effects if the fair value method had been adopted. The Company
has opted for the latter approach. Accordingly, no compensation expense has been
recognized for the stock option plan. Had compensation expense for the Company's
stock option plan been determined based on the fair value at the grant date for
awards in 1997 consistent with the provisions of FASB No. 123, the Company's
1997 results of operations would have been reduced to the pro forma amounts
indicated below:
1997
----------
Net income-as reported.......................................... $ 286,347
Net income-pro forma............................................ $ 281,951
Net income per share-as reported................................ $ .46
Net income per share-pro forma.................................. $ .45
31
<PAGE>
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Expected dividend yield................................................................................. $.28
Expected stock price volatility......................................................................... 5.96%
Risk-free interest rate................................................................................. 6.00%
Expected life of options................................................................................ 7 years
</TABLE>
The following table summarizes information about fixed stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Number Weighted
Range of Contracted Average Exercisable Average
Exercise Number Life Exercise at Exercise
Prices Outstanding (Years) Price 9/30/97 Price
- ----------- ------------- --------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$ 12.00 5,629 10 $ 12.00 -0 - N/A
</TABLE>
Recognition and Retention Plan and Trust ("RRP")
The Company's stockholders approved the RRP on December 16, 1996. The
Company purchased 26,871 shares in the open market to fully fund the RRP at an
aggregate cost of $315,734. Awards are subject to five year vesting periods and
other provisions as more fully described in the RRP document. The deferred cost
of unearned RRP shares totaled $285,130 at September 30, 1997, and is recorded
as a charge against stockholders' equity. Compensation expense will be
recognized ratably over the five year vesting period only for those shares
awarded. Compensation cost charged to expense for the year ended September 30,
1997 was $30,604. RRP shares available which have not been awarded totaled
10,433 at September 30, 1997. 2,603 shares were amortized during the year ended
September 30, 1997.
(16) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by its primary federal regulator, the Office of Thrift Supervision (the "OTS").
Failure to meet minimum regulatory capital requirements can initiate certain
mandatory, and possible additional discretionary actions by regulators, that if
undertaken, could have a direct material affect on the Bank and the consolidated
financial statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines involving quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification under the
prompt corrective action guidelines are also subject to qualitative judgements
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), Tier I capital to adjusted total assets (as defined), and tangible
capital to adjusted total assets (as defined). Management believes, as of
September 30, 1997, the Bank meets all capital adequacy requirements to which it
is subject.
-32-
<PAGE>
As of September 30, 1997, the most recent notification from the OTS, the
Bank was categorized as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as adequately capitalized, the Bank
would have to maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as disclosed in the table below. There are no conditions or
events since the most recent notification that management believes have changed
the Bank's category.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
---------------------- -----------------------------------------------
Amount Ratio Amount Ratio
--------- ----- -------------------- ------------------
<S> <C> <C> <C> <C>
As of September 30, 1997:
-greater -greater
Total Risk-Based Capital than or than or
(to Risk-Weighted Assets)....................... $8,915,924 33.7% equal to- $2,113,520 equal to- 8.0%
-greater -greater
Tier I Capital than or than or
(to Adjusted Total Assets)...................... $8,629,353 15.0% equal to- $1,722,141 equal to- 3.0%
-greater -greater
Tangible Capital than or than or
(to Adjusted Total Assets)...................... $8,629,353 15.0% equal to- $ 861,070 equal to- 1.5%
As of September 30, 1996:
-greater -greater
Total Risk-Based Capital than or than or
(to Risk-Weighted Assets)....................... $8,578,415 35.5% equal to- $1,931,040 equal to- 8.0%
-greater -greater
Tier I Capital than or than or
(to Adjusted Total Assets)...................... $8,295,303 15.3% equal to- $1,621,478 equal to- 3.0%
-greater -greater
than or than or
Tangible Capital (to Adjusted Total Assets)....... $8,295,303 15.3% equal to- $ 810,739 equal to- 1.5%
<CAPTION>
To Be With
Capitalized Under
Prompt Corrective
Action Provisions
---------------------------------
Amount Ratio
-------------------- -----
<S> <C> <C>
As of September 30, 1997:
-greater
Total Risk-Based Capital than or
(to Risk-Weighted Assets)....................... equal to- $2,645,675 10.0%
-greater
Tier I Capital than or
(to Adjusted Total Assets)...................... equal to- $3,451,741 6.0%
-greater
Tangible Capital than or
(to Adjusted Total Assets)...................... equal to- $2,876,451 5.0%
As of September 30, 1996:
-greater
Total Risk-Based Capital than or
(to Risk-Weighted Assets)....................... equal to- $2,416,455 10.0%
-greater
Tier I Capital than or
(to Adjusted Total Assets)...................... equal to- $3,253,060 6.0%
-greater
than or
Tangible Capital (to Adjusted Total Assets)....... equal to- $2,710,883 5.0%
</TABLE>
(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 $912,000 and $913,000 at September 30, 1997
and 1996, 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, 1997 or 1996.
(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
years ended September 30, 1997 and 1996 was $75,104 and $25,420, respectively.
-33-
<PAGE>
The fair value of the unreleased ESOP shares was approximately $703,000 and
$564,000 at September 30, 1997 and 1996, respectively.
(19) PURCHASE OF COMMON STOCK
During the year ended September 30, 1997, the Company purchased 25,400
shares of its outstanding common stock at an aggregate cost of $341,262. The
purchase of these shares has been recorded as a purchase of common stock shares,
which are available for reissuance.
(20) 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.
(21) FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and the estimated fair values of the Company's financial
instruments at September 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............................... $ 807,314 $ 807,314 $ 801,243 $ 801,243
Loans receivable, less allowance........................ 39,026,547 39,446,603 34,955,329 35,323,550
Investment securities held to maturity.................. 7,257,115 7,287,975 8,983,577 8,934,776
Investment securities available for sale................ 1,694,104 1,694,104 2,531,995 2,531,995
Mortgage-backed securities held to maturity............. 4,695,838 4,620,383 5,190,066 5,067,431
Mortgage-backed securities available for sale........... 3,130,178 3,130,178 2,575,973 2,575,973
Accrued interest receivable............................. 360,604 360,604 382,997 382,997
Financial liabilities:
Deposits................................................ 44,992,698 45,022,866 44,809,072 44,839,690
Advances from Federal Home Loan Bank.................... 3,300,000 3,300,000 500,000 500,000
Accrued interest payable................................ 18,192 18,192 5,224 5,224
</TABLE>
-34-
<PAGE>
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, 1997 and 1996, the estimated fair
values would necessarily have been achieved at those dates, since market values
may differ depending on various circumstances. The estimated fair values at
September 30, 1997 and 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 are not
included in the above disclosures. These include, among other items, the trained
work force, customer goodwill, and similar items.
(22) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly consolidated financial data for the year ended September
30, 1997 is as follows:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------
December 31 March 31 June 30 September 30
------------- ----------- --------- -------------
<S> <C> <C> <C> <C>
(Dollars in thousands except per share data)
Total interest income........................................... $ 1,033 $ 1,022 $ 1,040 $ 1,038
Total interest expense.......................................... 588 601 623 636
------ ----------- --------- ------
Net interest income......................................... 445 421 417 402
Provision for loan losses....................................... -- -- -- 3
------ ----------- --------- ------
Net interest income after provision for loan losses......... 445 421 417 399
Non-interest income............................................. 11 11 9 21
Non-interest expense............................................ 346 301 312 347
------ ----------- --------- ------
Income before provision for income taxes........................ 110 131 114 73
Provision for income taxes...................................... 38 41 34 29
------ ----------- --------- ------
Net income...................................................... $ 72 $ 90 $ 80 $ 44
------ ----------- --------- ------
Net income per share............................................ $ .12 $ .14 $ .13 $ .07
------ ----------- --------- ------
Dividends declared per share.................................... $ .07 $ .07 $ .07 $ .07
</TABLE>
(23) 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 is as
follows:
-35-
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents.......................................................... $ 123,803 $ 14,183
Investment in subsidiary........................................................... 8,629,353 8,295,303
Investment securities available for sale........................................... 1,694,104 2,531,995
Accrued interest receivable........................................................ 17,643 43,539
Other assets....................................................................... 21,824 3,763
Deferred income taxes.............................................................. 8,600 387
------------- -------------
$ 10,495,327 $ 10,889,170
------------- -------------
------------- -------------
Liabilities and Stockholders' Equity
Income taxes payable............................................................... $ 6,750 $ 1,836
Other liabilities.................................................................. 9,242 3,816
------------- -------------
Total liabilities.......................................................... 15,992 5,652
------------- -------------
Common stock....................................................................... 6,464 6,718
Employee benefit plans............................................................. (739,000) (513,080)
Additional paid-in capital......................................................... 6,060,242 6,280,193
Retained earnings.................................................................. 5,127,312 5,111,660
Unrealized holding gain (loss) on securities available for sale, net of taxes...... 24,317 (1,973)
------------- -------------
Total stockholders' equity................................................. 10,479,335 10,883,518
------------- -------------
$ 10,495,327 $ 10,889,170
------------- -------------
------------- -------------
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Interest on investment securities........................................................ $ 148,840 $ 39,750
Other non-interest expense............................................................... (181,395) (36,181)
----------- ----------
Income (loss) before income taxes and equity in undistributed income of subsidiary....... (32,555) 3,569
Provision (credit) for income taxes...................................................... (466) 1,115
----------- ----------
Income (loss) before equity in undistributed income of subsidiary........................ (32,089) 2,454
Equity in undistributed income of subsidiary............................................. 318,436 214,194
----------- ----------
Net income............................................................................... $ 286,347 $ 216,648
----------- ----------
----------- ----------
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996
------------- -----------
<S> <C> <C>
Operating activities:
Net income............................................................................ $ 286,347 $ 216,648
Adjustments to reconcile net income to net cash flows provided by (used for) operating
activities --
Equity in undistributed income of subsidiary........................................ (318,436) (214,194)
Accretion........................................................................... (78) (350)
Deferred income taxes............................................................... (9,685) (721)
</TABLE>
-36-
<PAGE>
<TABLE>
<S> <C> <C>
Increase in other assets............................................................ (18,061) (3,763)
(Increase) decrease in accrued interest receivable.................................. 25,896 (43,539)
Increase in income taxes payable.................................................... 4,914 1,836
Increase in other liabilities....................................................... 5,426 3,816
ESOP compensation................................................................... 75,104 25,420
RRP Compensation.................................................................... 30,604 --
------------- -----------
Net cash provided by (used for) operating activities.............................. 82,031 (14,847)
------------- -----------
Investing activities:
Capital contribution to subsidiary.................................................... -- (3,145,457)
Purchases of investment securities available for sale................................. (1,849,883) (2,530,662)
Maturities of investment securities available for sale................................ 2,700,000 --
------------- -----------
Net cash provided by (used for) investing activities.............................. 850,117 (5,676,119)
------------- -----------
Financing activities:
Proceeds from sale of stock........................................................... -- 5,748,411
Purchase of RRP shares................................................................ (315,734) --
Dividends paid........................................................................ (165,532) (43,262)
Purchase of treasury shares........................................................... (341,262) --
------------- -----------
Net cash provided by (used for) financing activities.............................. (822,528) 5,705,149
------------- -----------
Net increase in cash and cash equivalents............................................... 109,620 14,183
Cash and cash equivalents, beginning of year............................................ 14,183 --
------------- -----------
Cash and cash equivalents, end of year.................................................. $ 123,803 $ 14,183
------------- -----------
</TABLE>
-37-
<PAGE>
COMMON STOCK AND RELATED MATTERS:
The common stock of First Federal Financial Bancorp, Inc. is listed for
quotation on the OTC Bulletin Board under the symbol "FFFB". The stock was
issued on June 4, 1996 at $10.00 per share. As of December 3, 1997, there were
177 stockholders of record and 646,383 issued and outstanding shares of common
stock.
The following table sets forth the high and low closing bid prices as
reported by the National Association of Securities Dealers, Inc. and dividends
declared per share of common stock for fiscal years 1996 and 1997:
<TABLE>
<CAPTION>
Price Per Share
------------------ Dividends
Quarter Ended High Low Declared
- ---------------------------------------- ------- ------- -------------
<S> <C> <C> <C>
1996
June 30, 1996......................... $11 1/16 $10 1/2 $ --
September 30, 1996.................... 11 10 .07
1997
December 31, 1996..................... 12 11 .07
March 31, 1997........................ 13 1/4 11 1/2 .07
June 30, 1997......................... 14 1/8 12 7/8 .07
September 30, 1997.................... 15 1/2 14 .07
</TABLE>
Payment of dividends on the common stock is subject to determination and
declaration by the Board of Directors and will depend upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, the Company's results of operations and financial condition, tax
considerations, and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends, once declared, will continue.
-40-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AS OF
SEPTEMBER 30, 1997 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1997
<CASH> 162429
<INT-BEARING-DEPOSITS> 644885
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4824282
<INVESTMENTS-CARRYING> 11952953
<INVESTMENTS-MARKET> 11908358
<LOANS> 39313118
<ALLOWANCE> 286571
<TOTAL-ASSETS> 59197795
<DEPOSITS> 44992698
<SHORT-TERM> 2300000
<LIABILITIES-OTHER> 425762
<LONG-TERM> 1000000
0
0
<COMMON> 6464
<OTHER-SE> 10472871
<TOTAL-LIABILITIES-AND-EQUITY> 59197795
<INTEREST-LOAN> 2954398
<INTEREST-INVEST> 1105448
<INTEREST-OTHER> 73812
<INTEREST-TOTAL> 4133658
<INTEREST-DEPOSIT> 2374548
<INTEREST-EXPENSE> 2448155
<INTEREST-INCOME-NET> 1685503
<LOAN-LOSSES> 3000
<SECURITIES-GAINS> 6633
<EXPENSE-OTHER> 1316092
<INCOME-PRETAX> 428731
<INCOME-PRE-EXTRAORDINARY> 428731
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 286347
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
<YIELD-ACTUAL> 2.97
<LOANS-NON> 87000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 283112
<CHARGE-OFFS> 1718
<RECOVERIES> 2177
<ALLOWANCE-CLOSE> 286571
<ALLOWANCE-DOMESTIC> 286571
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
