<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, 1998
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
Commission File No.: 0-28020
FIRST FEDERAL FINANCIAL BANCORP, INC.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in its charter)
Delaware 31-1456058
- --------------------------------- ---------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
415 Center Street
Ironton, Ohio 45638
- --------------------------------- ---------------------------
(Address of Principal (Zip Code)
Executive Offices)
Issuer's telephone number, including area code: (740) 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. ___
Issuer's revenues for its most recent fiscal year: $4.2 million
As of December 1, 1998, the aggregate value of the 462,906 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
120,455 shares held by all directors and executive officers of the Registrant as
a group, was approximately $6.5 million. This figure is based on the last known
trade price of $14.00 per share of the Registrant's Common Stock on December 1,
1998.
Number of shares of Common Stock outstanding as of December 1, 1998: 583,361
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, 1998 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,
1998, the Company had $62.4 million in total consolidated assets, $52.7 million
in total consolidated liabilities and $9.7 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, 1998, the total gross loan portfolio
amounted to $45.6 million, or 73.1%, of total consolidated assets, of which
$39.1 million, or 85.9%, were single-family residential mortgage loans, $1.5
million, or 3.2%, were multi-family residential loans, $2.5 million, or 5.5%,
were commercial real estate loans and $2.5 million, or 5.4%, were comprised of
other loans, including home improvement loans, automobile loans, home equity
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, 1998, investment securities (both "held
to maturity" as well as "available for sale") were $3.9 million, or 6.3% of
total consolidated assets, and mortgage-backed securities (both "held to
maturity" as well as "available for sale") were $10.9 million, or 17.5% 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, 1998, the
Company had net income of $252,000 as compared to $287,000 and
$217,000 for the years ended September 30, 1997 and 1996,
respectively. 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
$1.6 million, $1.7 million and $1.5 million for the years
ended September 30, 1998, 1997 and 1996, respectively. The
interest rate spreads were 2.04%, 2.12% and 2.36% for the
years ended September 30, 1998, 1997 and 1996, respectively.
Return on average assets was .41%, .49% and .41% (.75% without
the SAIF assessment) for the years ended September 30, 1998,
1997 and 1996, respectively.
- Non-interest Income. Non-interest income historically has not
been a source of profitability for the Company. However, in
recent years, the Company has focused on increasing its market
share of transaction accounts which has resulted in increased
service fee income. Other non-interest income, including
service fee income totaled $71,000 for the year ended
September 30, 1998, as compared to $46,000 and $42,000 for the
years ended September 30, 1997 and 1996, respectively.
- Non-interest 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 2.30% for the year ended
September 30, 1998 and averaged 2.33% for the three years
ended September 30, 1998.
- 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
85.9% of total loans receivable at September 30, 1998. As of
such date, total non-performing assets constituted $136,000,
or .22% of total consolidated assets.
- Strong Capital Position. At September 30, 1998, the Company
had total stockholders' equity of $9.7 million. The Savings
Bank exceeded all of its regulatory capital requirements, with
tangible, core and risk-based capital ratios of 14.4%, 14.4%
and 31.4%, respectively, as compared to the minimum
requirements of 1.5%, 3.0% and 8.0%, respectively.
3
<PAGE>
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 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 85.9% of the total loan portfolio at September 30,
1998. 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.
4
<PAGE>
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,
------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- --------------------------
Amount % Amount % Amount %
----------- ---------- --------- ----------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential $39,143 85.9% $35,984 89.2% $32,673 90.0%
Multi-family residential 1,464 3.2 685 1.7 230 .6
Commercial real estate 2,533 5.5 1,961 4.8 1,734 4.9
------- ------- ------ ----- ------ -----
Total real estate loans 43,140 94.6 38,630 95.7 34,637 95.5
------- ------- ------ ----- ------ -----
Non-real estate loans:
Loans secured by savings
accounts 751 1.7 556 1.4 703 1.9
Home improvement 120 .2 86 .2 86 .2
Automobile 525 1.2 508 1.3 463 1.3
Other(1) 1,054 2.3 566 1.4 397 1.1
------- ------- ------ ----- ------ -----
Total other loans 2,450 5.4 1,716 4.3 1,649 4.5
------- ------- ------ ----- ------ -----
Total loans 45,590 100.0% 40,346 100.0% 36,286 100.0%
------- ------- ------ ----- ------ -----
------- ------- ------ ----- ------ -----
Less:
Unearned interest (154) (140) (118)
Loans in process (448) (880) (909)
Deferred loan fees (57) (13) (21)
Allowance for loan losses (288) (287) (283)
-------- ------ ------
Net loans $44,643 $39,026 $34,955
-------- ------- -------
-------- ------- -------
</TABLE>
- ----------------------
(1) Comprised primarily of unsecured consumer loans and home equity loans.
5
<PAGE>
Contractual Principal Repayments and Interest Rates. The following
table sets forth certain information at September 30, 1998 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 9/30/98 9/30/98 9/30/98 9/30/98 9/30/98 Total
----------- -------------- -------------- -------------- --------------- -------------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Single-family residential $1,308 $2,829 $3,075 $7,862 $ 9,605 $14,464 $39,143
Multi-family residential 26 57 66 216 293 806 1,464
Commercial real estate 113 236 251 639 660 634 2,533
Non-real estate 1,260 628 269 137 111 45 2,450
----- ------ ------ ------ -------- --------- -------
Total $2,707 $3,750 $3,661 $8,854 $10,669 $15,949 $45,590
----- ------ ------ ------ -------- --------- -------
----- ------ ------ ------ -------- --------- -------
</TABLE>
6
<PAGE>
The following shows for the total loans due after one year from
September 30, 1998 the type and amount which have fixed interest rates and those
which have adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Floating or
Rates Adjustable-Rates Total
------------- --------------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Real estate loans:
Single-family residential $ 8,846 $28,989 $37,835
Multi-family residential -- 1,438 1,438
Commercial real estate 802 1,618 2,420
-------- ------- -------
Total real estate loans 9,648 32,045 41,693
-------- ------- -------
Non-real estate loans:
Loan secured by savings
accounts -- -- --
Home improvement 106 -- 106
Automobile 466 -- 466
Other(1) 509 109 618
-------- ------- -------
Total other loans 1,081 109 1,190
-------- ------- -------
Total loans $10,729 $32,154 $42,883
-------- ------- -------
-------- ------- -------
</TABLE>
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(1) Comprised primarily of unsecured consumer loans and home equity 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.
7
<PAGE>
Loan Activity. The following table shows total loans originated and
repaid during the periods indicated. There were no loans purchased or sold
during the periods.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1998 1997 1996
----------- ----------- ------------
(In Thousands)
<S> <C> <C> <C>
Loan originations:
Single-family residential $10,512 $8,509 $8,481
Multi-family residential 1,355 458 70
Commercial real estate 707 536 324
Non-real estate 1,568 1,112 991
------ ------ ------
Total loans originated 14,142 10,615 9,866
Loan principal reductions (6,747) (6,495) (6,257)
------ ------ ------
Net increase (decrease)
before other items 7,395 4,120 3,609
Decrease due to other
items, net (1,778) (49) (1,263)
------ ------ ------
Net increase in loan portfolio $ 5,617 $4,071 $2,346
------ ------ ------
------ ------ ------
</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 securing a single-family residential loan or the
purchase price of the property) for terms of up to 20 years and 30 years for
8
<PAGE>
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, 1998, the Company's five largest loans or groups of
loans to one borrower, including related entities, ranged from an aggregate of
$448,000 to $612,000 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,
1998.
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, 1998, $9.1 million, or 23.3%, 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 58.3%, 84.7% and 85.3% of total origination of
single-family residential loans during the years ended September 30, 1998, 1997
and 1996, respectively. At September 30, 1998, $30.0 million or 76.7% 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 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
9
<PAGE>
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 22.0%,
23.1% and 15.0% of total residential originations during fiscal 1996, 1997 and
1998.
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, 1998, the Company's multi-family residential loan portfolio was
comprised of six 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, 1998, the Company had $1.5 million, or
3.2% of the total loan portfolio, invested in multi-family residential loans.
At September 30, 1998, the Company's commercial real estate portfolio
was comprised of 44 properties, with principal balances of up to $302,000. The
properties which secure such loans are local facilities and include land, 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, 1998, the
Company's commercial real estate loan portfolio amounted to $2.5 million or 5.5%
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 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.
10
<PAGE>
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, 1998, the Company had $751,000,
or 1.7% 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 $525,000, or 1.2% 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; $120,000, or .2% of the total loan portfolio, invested in home
improvement loans and $1,054,000, or 2.3% of the total loan portfolio, invested
in other miscellaneous loans, primarily small, short-term unsecured loans to
customers and home equity loans.
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 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.
11
<PAGE>
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,
--------------------------------
1998 1997 1996
--------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
Single-family residential $125 $ 84 $109
---- ---- ----
Total non-accruing loans 125 84 109
---- ---- ----
Accruing loans greater than
90 days delinquent -- -- --
---- ---- ----
Total non-performing loans(1) 125 84 109
---- ---- ----
Real estate owned(1) 11 50 33
---- ---- ----
Total non-performing
assets $136 $134 $142
---- ---- ----
---- ---- ----
Total non-performing
loans as a percentage of
total loans 0.27% 0.21% 0.31%
---- ---- ----
---- ---- ----
Total non-performing
assets as a percentage of
total assets 0.22% 0.22% 0.25%
---- ---- ----
---- ---- ----
</TABLE>
- -----------------
(1) The increase in total non-performing loans is attributable to four
loans on non-accrual status at September 30, 1998 (the largest of which
was $53,000) as compared to three loans at September 30, 1997 (the
largest of which was $35,000). Management does not expect any material
losses to be sustained as a result of these non-accrual loans.
12
<PAGE>
For the years ended September 30, 1998 and 1997, 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 $8,598
and $3,447, respectively. For the years ended September 30, 1998 and 1997,
$2,033 and $3,213 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.
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,
-----------------------------------
1998 1997 1996
---------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 287 $ 283 $ 278
----- ----- -----
Charge-offs:
Single-family residential (6) (2) (2)
Consumer and other (5) -- (8)
Recoveries:
Single-family residential -- 1 --
Consumer and other -- 2 1
----- ----- -----
Net (charge-offs) recoveries (11) 1 (9)
Provision for loan losses 12 3 14
----- ----- -----
Balance at end of period $ 288 $ 287 $ 283
----- ----- -----
----- ----- -----
Allowance for loan losses
as a percent of total
loans outstanding 0.64% 0.73% 0.81%
----- ----- -----
----- ----- -----
Ratio of net charge-offs
to average loans outstanding 0.03% --% 0.03%
----- ----- -----
----- ----- -----
</TABLE>
13
<PAGE>
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,
-----------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ------------------------------
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 $247 85.9% $255 88.9% $235 90.4%
Multi-family residential 9 3.1 5 1.7 7 .6
Commercial real estate 16 5.6 14 4.9 14 4.8
Other loans 16 5.6 13 4.5 27 4.2
-- --- --- ----- --- ----
Total $288 100.0% $287 100.0% $283 100.0%
--- ----- --- ----- --- -----
--- ----- --- ----- --- -----
</TABLE>
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
14
<PAGE>
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. 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, 1998, the Company had an
aggregate of $5.3 million, or 48.6% 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 $5.6 million, or 51.4% of total
mortgage-backed securities, invested in nine 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, 1998, the Company
did not own any mortgage-related securities designated as "high-risk mortgage
securities" under OTS pronouncements.
15
<PAGE>
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, 1998, 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 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.
16
<PAGE>
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,
--------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
(Dollars in Thousands)
<S> <C> <C> <C>
GNMA certificates $ 19 $ 40 $ 43
FNMA certificates 1,405 1,591 1,762
FHLMC certificates 2,107 2,600 3,142
Collateralized mortgage
obligations 1,593 356 124
------- ------ -------
Total mortgage-backed
securities held to maturity 5,124 4,587 5,071
Unamortized premiums 155 123 137
Unearned discounts (10) (14) (18)
------- ------ -------
Net mortgage-backed securities
held to maturity $5,269 $4,696 $5,190
------- ------ -------
------- ------ -------
Weighted average interest rate 6.66% 6.01% 6.47%
------- ------ -------
------- ------ -------
</TABLE>
17
<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,
--------------------------------------------------------------
1998 1997 1996
------------------- ------------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C>
GNMA certificates $ 613 $ 831 $ 955
FNMA certificates 571 854 945
FHLMC certificates 445 575 657
Collateralized mortgage
obligations 3,983 848 --
------- ------ -------
Total mortgage-backed
securities available for sale 5,612 3,108 2,557
Unamortized premiums 41 27 31
Unearned discounts (133) (36) (8)
Unrealized holding gain (loss)
on mortgage-backed securities
available for sale 98 31 (4)
------- ------ -------
Net mortgage-backed securities
available for sale $5,618 $3,130 $2,576
------- ------ -------
------- ------ -------
Weighted average interest rate 6.46% 6.67% 6.60%
------- ------ -------
------- ------ -------
</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,
---------------------------------------------------------------
1998 1997 1996
------------------- -------------------- -------------------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at
beginning of period $ 7,826 $7,766 $9,558
Purchases 4,375 1,124 --
Repayments (1,357) (1,081) (1,769)
Sales -- -- --
Accretion and amortization, net (23) (18) (33)
Net change in unrealized holding
gain on available for sale securities 66 35 10
------- ------- -------
Mortgage-backed securities at
end of period $10,887 $7,826 $7,766
------- ------- -------
------- ------- -------
</TABLE>
18
<PAGE>
At September 30, 1998, 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,
-----------------------------------------------------------------
1998 1997 1996
-------------------- --------------------- -----------------
(In Thousands)
<S> <C> <C> <C>
U.S. Treasury securities $ -- $ -- $ 250
U.S. Government agency
securities 849 4,380 5,078
Municipal bonds 1,473 1,628 1,447
Certificates of deposit 483 779 1,771
FHLB stock 505 470 438
------ ------ -----
Total $3,310 $7,257 $8,984
------ ------ -----
------ ------ -----
</TABLE>
19
<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,
--------------------------------------------------------------------
1998 1997 1996
--------------------- ---------------------- ------------------
(In Thousands)
<S> <C> <C> <C>
U.S. Government agency
securities $600 $1,549 $2,391
Obligations of states and
political subdivisions -- 140 140
------ ----- -----
Total investment
securities available
for sale 600 1,689 2,531
Unrealized holding gain on
investment securities
available for sale 10 5 1
------ ----- -----
Net investment securities
available for sale $610 $1,694 $2,532
------ ----- -----
------ ----- -----
</TABLE>
The following table sets forth certain information regarding the
maturities of the Company's investment securities at September 30, 1998.
<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
--------- --------- --------- --------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
U.S. Government
agency securities $ 100 7.13% $ 859 6.51% $ -- --% $ 500 7.00%
Municipal bonds 416 6.15 812 5.25 246 4.97 -- --
Certificates of deposit 293 6.11 189 6.60 -- -- -- --
FHLB stock -- -- -- -- -- -- 505 7.31
------ ----- ------ ------ ------ ----- ------ -----
Total $ 809 6.25% $1,860 5.97% $ 246 4.97% $1,005 7.16%
------ ----- ------ ------ ------ ----- ------ -----
------ ----- ------ ------ ------ ----- ------ -----
</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 and money market conditions. The Company may use
borrowings to supplement its deposits as a source of funds.
20
<PAGE>
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,
---------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ---------------------------- -------------------------------
Amount Percentage Amount Percentage Amount Percentage
------------ -------------- ------------ -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Certificate accounts:
2.00 - 4.00% $ 290 .7% $ 1,006 2.2% $ 1,662 3.7%
4.01 - 6.00% 20,307 44.7 13,142 29.2 21,321 47.6
6.01 - 8.00% 14,514 31.9 20,630 45.9 10,965 24.5
------- ------- ------ ------- ------- -------
Total certificate accounts 35,111 77.3 34,778 77.3 33,948 75.8
------- ------- ------ ------- ------- -------
Transaction accounts:
Passbook accounts 8,797 19.4 9,054 20.1 9,863 22.0
Christmas Club 98 .2 91 .2 96 .2
Demand accounts 1,431 3.1 1,070 2.4 902 2.0
------- ------- ------ ------- ------- -------
Total transaction accounts 10,326 22.7 10,215 22.7 10,861 24.2
------- ------- ------ ------- ------- -------
Total deposits $45,437 100.0% $44,993 100.0% $44,809 100.0%
------- ------- ------ ------- ------- -------
------- ------- ------ ------- ------- -------
</TABLE>
21
<PAGE>
The following table sets forth the savings activities of the Company
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended
September 30,
----------------------------------------------------
1998 1997 1996
------------- ---------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Deposits $37,946 $35,414 $39,002
Withdrawals (39,377) (37,046) (42,057)
------- ------- -------
Net increase (decrease)
before interest credited (1,431) (1,632) (3,055)
Interest credited 1,875 1,816 1,666
------- ------- -------
Net increase (decrease) in
deposits $ 444 $ 184 $(1,389)
------- ------- -------
------- ------- -------
</TABLE>
The following table shows the contractual interest rate and maturity
information for the Company's certificates of deposit at September 30, 1998.
<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% $ 598 $ 12 $ -- $ -- $ 610
4.01 - 6.00% 15,461 1,543 405 3 17,412
6.01 - 8.00% 8,811 3,192 4,603 483 17,089
-------- -------- ------- ------- --------
Total $24,870 $4,747 $5,008 $486 $35,111
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
</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, 1998. 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, 1998 $ 428
March 31, 1999 568
June 30, 1999 542
September 30, 1999 869
After September 30, 1999 1,350
-----
Total certificates of deposit with
balances of $100,000 or more $3,757
-----
-----
</TABLE>
22
<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, 1998, the Company had $7.0 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,
------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum balance $7,004 $3,300 $ 500
Average balance 5,458 1,318 27
Year end balance 7,004 3,300 500
Weighted average
interest rate:
At end of year 5.34% 6.25% 5.45%
During the year 5.43 5.61 5.45
</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
23
<PAGE>
deposits by banks. The Company is much smaller in size than many of its
competitors in terms of assets and is less diversified.
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
24
<PAGE>
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."
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.
25
<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, 1998, the Savings Bank was in compliance
with the above restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings institution or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock, may acquire control of any savings
institution, other than a subsidiary savings institution, or of any other
savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the multiple savings and loan holding
company involved controls a savings institution which operated a home or branch
office located in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
Under the Bank Holding Company Act of 1956, the FRB is authorized to
approve an application by a bank holding company to acquire control of a savings
institution. In addition, a bank holding company that controls a savings
institution may merge or consolidate the assets and liabilities of the savings
institution with, or transfer assets and liabilities to, any subsidiary bank
which is a member of the BIF with the approval of the appropriate federal
banking agency and the FRB. As a result of these provisions, there have been a
number of acquisitions of savings institutions by bank holding companies in
recent years.
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The Savings Bank. The OTS has extensive authority over the operations
of federally chartered savings institutions. As part of this authority, savings
institutions are required to file periodic reports with the OTS and are subject
to periodic examinations by the OTS and the FDIC. The last regulatory
examination of the Savings Bank by the OTS was as of 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.
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
27
<PAGE>
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), 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, 1998. 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
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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
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.
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<PAGE>
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, 1998, the Savings Bank's liquidity
ratio was 5.4%.
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
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, 1998, the
Savings Bank was a Tier 1 institution for purposes of this regulation.
On January 7, 1998, the OTS published a notice of proposed rulemaking
to amend its capital distribution regulation. Under the proposal, a savings
institution that would remain at least "adequately capitalized" following the
capital distribution and that meets other specified requirements, would not be
required to provide any notice or application to the OTS for cash dividends
below a specified amount. A savings institution is "adequately capitalized" if
it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based
capital ratio of 4.0% or more, a Tier 1
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leverage capital ratio of 4.0% or more (or 3% or more if the savings institution
is assigned a composite rating of 1), and does not meet the definition of "well
capitalized." Because the Savings Bank is a subsidiary of the Company, the
proposal, however, would require the Savings Bank to provide notice to the OTS
of its intent to make a capital distribution, unless an application is otherwise
required. 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
15% of unimpaired capital and unimpaired surplus. Loans in an amount equal to an
additional 10% of unimpaired capital and unimpaired surplus also may be made to
a borrower if the loans are fully secured by readily marketable securities. If a
savings institution's aggregate lending limitation is less than $500,000, then,
notwithstanding the aforementioned aggregate limitation, such savings
institution may have total loans and extensions of credit, for any purpose, to
one borrower outstanding at one time not to exceed $500,000. For information
about the largest borrowers from the Savings Bank, see "- Lending Activities -
Loan Activity."
Community Reinvestment. Under the Community Reinvestment Act of 1977,
as amended ("CRA"), as implemented by OTS regulations, a savings institution has
a continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a savings
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. FIRREA amended the CRA to require public
disclosure of an institution's CRA rating and require the OTS to provide a
written evaluation of an institution's CRA performance utilizing a rating system
which identifies four levels of performance that may describe an institution's
record of meeting community needs: outstanding, satisfactory, needs to improve
and substantial noncompliance. The CRA also requires all institutions to make
public disclosure of their CRA ratings. The Savings Bank received a
"satisfactory" rating as a result of its most recent evaluation.
Nationwide Banking. The Savings Bank may face additional competition
from commercial banks headquartered outside of the State of Ohio as a result of
the enactment of the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994, which 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."
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<PAGE>
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,
1998, approximately 92% 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).
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.
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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, 1998, the Savings Bank had $7.0 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, 1998, the Savings Bank had
$505,000 in FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid in the past and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future.
Federal Reserve System. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and Super
NOW checking accounts) and non-personal time deposits. As of September 30, 1998,
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
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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.
At December 31, 1997, 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-
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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, 1998, the Savings Bank had
no NOL carryforwards for federal income tax purposes.
Capital Gains and Corporate Dividends-Received Deduction. Corporate net
capital gains are taxed at a maximum rate of 35%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, and corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf. However, a corporation may deduct 100% of dividends from a member
of the same affiliated group of corporations.
Other Matters. Federal legislation is introduced from time to time that
would limit the ability of individuals to deduct interest paid on mortgage
loans. Individuals are currently not permitted to deduct interest on consumer
loans. Significant increases in tax rates or further restrictions on the
deductibility of mortgage interest could adversely affect the Savings Bank.
The Savings Bank's federal income tax returns for the tax years ended
December 31, 1995 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.
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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 1998 return, which is based on net worth as of December 31, 1998.
The Savings Bank's state franchise tax returns for the tax years ended
December 31, 1995 forward are open under the statute of limitations and are
subject to review by state taxing authorities.
Item 2. Description of Property.
The Company's principal executive office is located at 415 Center
Street, Ironton, Ohio 45638. The following table sets forth certain information
with respect to the offices and other properties of the Savings Bank at
September 30, 1998.
<TABLE>
<CAPTION>
Net Book Value
Description/Address Leased/Owned of Property Deposits
- ---------------------------- --------------------- -------------------- ----------------
(In Thousands)
<S> <C> <C> <C>
Main Office(1)
415 Center Street Owned $973 $34,360
Ironton, Ohio 45638
Branch Office(2):
201 State Street Owned 779 11,077
Proctorville, Ohio 45669
</TABLE>
- -----------------
(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 sold the Chesapeake
facility during fiscal 1998 resulting in a gain of $47,068.
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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
42 and 43 of the Company's 1998 Annual Report to Stockholders ("Annual Report").
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required herein is incorporated by reference from pages
three to 15 of the Company's 1998 Annual Report.
Item 7. Financial Statements.
The information required herein is incorporated by reference from pages
two, and 16 to 40 of the Company's 1998 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 18, 1998
("Proxy Statement").
37
<PAGE>
Item 10. Executive Compensation.
The information required herein is incorporated by reference from pages
ten to 15 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
15 of the Company's Proxy Statement.
PART IV
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Document filed as part of this Report.
(1) The following documents are filed as part of this report and
are incorporated herein by reference from the Registrant's 1998 Annual Report.
Independent Auditor's Report.
Consolidated Balance Sheets as of September 30, 1998 and 1997.
Consolidated Statements of Income for the Years Ended September 30,
1998, 1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended September 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are omitted
because they are not applicable or the required information is included in the
Consolidated Financial Statements or notes thereto.
(3)(a) The following exhibits are filed as part of this Form
10-KSB, and this list includes the Exhibit Index.
38
<PAGE>
<TABLE>
<CAPTION>
No. Description
- ------ ------------------------------------------------------------------------------------------
<S> <C>
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 1998 Annual Report to Stockholders specified portion (p. two to 40,
and 43) of the Registrant's Annual Report to Stockholders for the
year ended September 30, 1998.
21 Subsidiaries of the Registrant - Reference is made to Item 1. "Business" for the Required
information
27 Financial Data Schedule
</TABLE>
- --------------
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.
39
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST FEDERAL FINANCIAL BANCORP, INC.
By: /s/ I. Vincent Rice
----------------------------------
I. Vincent Rice
President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
/s/ I. Vincent Rice December 21, 1998
- -------------------------------------------
I. Vincent Rice
President (Principal Executive Officer)
/s/ Jeffery W. Clark December 21, 1998
- -------------------------------------------
Jeffery W. Clark
Comptroller (Principal Financial and
Accounting Officer)
/s/ Thomas D. Phillips December 21, 1998
- -------------------------------------------
Thomas D. Phillips
Chairman
/s/ James E. Waldo December 21, 1998
- -------------------------------------------
James E. Waldo
Vice Chairman
<PAGE>
/s/ Edith M. Daniels December 21, 1998
- -------------------------------------------
Edith M. Daniels
Corporate Secretary and Director
/s/ Edward R. Rambacher December 21, 1998
- -------------------------------------------
Edward R. Rambacher
Director
/s/ Steven C. Milleson December 21, 1998
- -------------------------------------------
Steven C. Milleson
Director
/s/ William P. Payne December 21, 1998
- -------------------------------------------
William P. Payne
Director
<PAGE>
Exhibit 13
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
September 30,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition and Other Data:
Total assets $ 62,396 $ 59,078 $ 56,637 $ 51,296 $ 46,679
Cash and cash equivalents 746 807 801 2,528 983
Investment securities(1) 3,920 8,951 11,516 5,290 4,975
Mortgage-backed securities(2) 10,887 7,826 7,766 9,558 10,712
Loans receivable, net 44,643 39,026 34,955 32,609 28,747
Real estate owned 11 50 33 - -
Deposits 45,437 44,993 44,809 46,198 41,962
FHLB advances 7,004 3,300 500 - -
Stockholders' equity, net 9,651 10,479 10,884 4,929 4,565
Full service offices 2 2 2 2 2
At or For the Year Ended September 30,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------
(Dollars in Thousands)
Selected Operating Data:
Total interest income $ 4,239 $ 4,134 $ 3,871 $ 3,437 $ 3,208
Total interest expense 2,620 2,448 2,331 2,004 1,765
----------- ----------- ----------- ----------- -----------
Net interest income 1,619 1,686 1,540 1,433 1,443
Provision for loan losses 12 3 14 13 50
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 1,607 1,683 1,526 1,420 1,393
Non-interest income 145 52 41 32 80
Non-interest expense(3) 1,421 1,306 1,298 944 934
----------- ----------- ----------- ----------- -----------
Income before provision
for income taxes 331 429 269 508 539
Provision for income taxes 79 142 52 155 165
----------- ----------- ----------- ----------- -----------
Net income $ 252 $ 287 $ 217 $ 353 $ 374
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Earnings per share:
Basic $ .44 $ .46 $ .35 N/A N/A
Diluted $ .43 $ .46 $ .35 N/A N/A
Book value per share $ 16.54 $ 16.21 $ 16.20 N/A N/A
Selected Operating Ratios(4):
Return on average assets 0.41% 0.49% 0.41% 0.73% 0.79%
Return on average equity 2.56 2.70 3.43 7.35 8.45
Average equity to average assets 15.93 18.23 12.00 9.90 9.34
Equity to assets at
end of year 15.47 17.70 19.22 9.61 9.78
Interest rate spread(5) 2.04 2.12 2.36 2.62 2.79
Net interest margin(5) 2.72 2.97 2.95 3.02 3.11
Average interest-earning assets
to average interest-bearing
liabilities 115.48 119.77 113.16 109.30 108.53
Net interest income after
provision for loan losses to
total expense 113.93 128.87 117.57 150.42 149.14
Non-interest expense to average
total assets 2.30 2.24 2.46 1.95 1.97
Asset Quality Ratios(6):
Non-performing loans to total
loans at end of year 0.27 0.21 0.31 0.14 -
Non-performing assets to total
assets at end of year 0.22 0.22 0.25 0.09 -
Allowance for loan losses to
total loans outstanding
at end of year 0.64 0.73 0.81 0.85 0.91
</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, 1998, the Company had total
consolidated assets of $62.4 million, total consolidated liabilities of $52.7
million, and total stockholders' equity of $9.7 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.
"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 with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-QSB to be filed by the Company in 1999 and any
Current Reports on Form 8-K filed by the Company.
3
<PAGE>
Financial Condition
Assets. Total assets increased by $3.3 million, or 5.6%, from
$59.1 million at September 30, 1997 to $62.4 million at September 30, 1998. The
increase consisted primarily of increases in loans receivable of $5.6 million
and mortgage-backed securities of $3.1 million, partially offset by a decrease
in investment securities of $5.1 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 decreased slightly, totaling
$746,000 at September 30, 1998 as compared to $807,000 at September 30, 1997.
Investment Securities. Investment securities consist primarily of
U.S. Treasury and U.S. Government agency securities. The Company also invests 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 $5.1 million, or 56.7%, from $9.0 million at September 30, 1997 to
$3.9 million at September 30, 1998. Net cash generated from sales and maturities
of investment securities was used primarily to fund increased loan demand and
purchase mortgage-backed securities.
Loans Receivable. The Company's loans receivable, net, increased
by $5.6 million, or 14.4%, from $39.0 million at September 30, 1997 to $44.6
million at September 30, 1998. Total loan originations during the year amounted
to $14.1 million, of which $11.9 million were for single-family and multi-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 $43.1 million, or 94.6%, of total
gross loans outstanding at September 30, 1998, while consumer loans, including
installment loans and loans secured by deposit accounts, totaled $2.5 million,
or 5.4% 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 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.
The allowance for loan losses as a percentage of total loans
decreased slightly from .73% at September 30, 1997 to .64% at September 30,
1998. The total dollar amount of the allowance increased slightly, from $287,000
at September 30, 1997 to $288,000 at September 30, 1998.
4
<PAGE>
Charge-off activity for the year ended September 30, 1998 totaled
$10,222 as compared to $1,718 for the preceding year. Recoveries totaled $-0-
and $2,177 for the years ended September 30, 1998 and 1997, respectively.
The Company had $125,000 and $84,000 of non-accrual loans at
September 30, 1998 and 1997, respectively. At the same dates, there were no
loans greater than 90 days delinquent which were still accruing interest.
The Company had no troubled debt restructurings during the years
ended September 30, 1998 and 1997.
Management has determined that the allowance for loan losses is
adequate at September 30, 1998 and 1997.
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 increased $3.1 million, or 39.7%, totaling $10.9 million at September
30, 1998 and $7.8 million at September 30, 1997. During the year ended September
30, 1998, there were $4.4 million of mortgage-backed securities purchased, and
$1.3 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 ended September 30, 1997.
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 sold the Chesapeake, Ohio facility during the 1998
fiscal year resulting in a $47,000 gain. The Proctorville, Ohio 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 $45.0 million and $45.4 million at
September 30, 1997 and 1998, respectively. The Bank continues to offer
competitive interest rates on deposit accounts.
Advances From Federal Home Loan Bank. The Company utilized $13.3
million in new advances during the year ended September 30, 1998 to meet its
loan demand and other funding needs. Approximately $9.6 million of advances were
repaid during the year. Outstanding advances totaled $7.0 million and $3.3
million at September 30, 1998 and 1997, respectively. The Company has ample
borrowing capacity if needed to fund future commitments.
Stockholders' Equity. Stockholders' equity totaled $9.7 million
at September 30, 1998, as compared to $10.5 million at September 30, 1997. The
$800,000 decrease, or 7.6%, resulted primarily from the purchase of treasury
shares during the 1998 fiscal year at an aggregate cost of $1.1 million,
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,
--------------------------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------------------------------
(Dollars in Thousands)
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $ 43,639 $ 3,189 7.31% $ 37,678 $ 2,954 7.84%
Mortgage-backed
securities(2) 10,128 605 5.98 7,661 467 6.09
Investment securities(3) 5,155 401 7.78 9,848 638 6.47
Other interest-
earning assets 612 44 7.19 1,464 75 5.06
---------- --------- ----------- ----------
Total interest-
earning assets 59,534 4,239 7.12 56,651 4,134 7.30
--------- ------ ---------- ---------
Non-interest earning
assets 2,203 1,712
---------- -----------
Total assets $ 61,737 $ 58,363
---------- -----------
---------- -----------
Interest-bearing liabilities:
Deposits $ 45,259 2,323 5.13 $ 45,982 2,374 5.16
FHLB advances 6,296 297 4.72 1,318 74 5.61
---------- --------- ----------- ----------
Total interest-
bearing liabilities 51,555 2,620 5.08 47,300 2,448 5.18
--------- ------ ---------- ---------
Non-interest bearing
liabilities 345 425
---------- -----------
Total liabilities 51,900 47,725
Stockholders' equity 9,837 10,638
---------- -----------
Total liabilities and
stockholders' equity $ 61,737 $ 58,363
---------- -----------
---------- -----------
Net interest income;
interest rate spread $ 1,619 2.04% $ 1,686 2.12%
--------- ------ ---------- --------
--------- ------ ---------- --------
Net interest margin(4) 2.72% 2.97%
------ -------
------ -------
Average interest-earning
assets to average interest-
bearing liabilities 115.48% 119.77%
------ -------
------ -------
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------
Average Yield/
Balance Interest Rate
------- -------- ----
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $ 33,543 $ 2,733 8.15%
Mortgage-backed
securities(2) 8,717 519 5.95
Investment securities(3) 7,456 490 6.57
Other interest-
earning assets 2,457 129 5.25
---------- ----------
Total interest-
earning assets 52,173 3,871 7.42
----------- -------
Non-interest earning
assets 537
----------
Total assets $ 52,710
==========
Interest-bearing liabilities:
Deposits $ 46,079 2,330 5.06
FHLB advances 27 1 3.70
---------- ----------
Total interest-
bearing liabilities 46,106 2,331 5.06
----------- -------
Non-interest bearing
liabilities 278
----------
Total liabilities 46,384
Stockholders' equity 6,326
----------
Total liabilities and
stockholders' equity $ 52,710
----------
----------
Net interest income;
interest rate spread $ 1,540 2.36%
----------- ------
----------- ------
Net interest margin(4) 2.95%
------
------
Average interest-earning
assets to average interest-
bearing liabilities 113.16%
------
------
</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,
---------------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996 1996 vs. 1995
------------------------------- ----------------------------- --------------------------
Increase Increase Increase
(Decrease) Total (Decrease) Total (Decrease) Total
Due to Increase Due to Increase Due To Increase
--------------- --------------- --------------
Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume (Decrease)
---- ------ ---------- ---- ------ ---------- ---- ------ ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ (232) $ 467 $ 235 $ (104) $ 325 $ 221 $ 27 $ 185 $ 212
Mortgage-backed securities1 (12) 150 138 12 (64) (52) 51 (91) (40)
Investment securities2 66 (303) (237) (7) 155 148 58 157 215
Other interest-earning assets 12 (43) (31) (2) (52) (54) 3 44 47
-------- ------- ------- ------ ------ -------- ------- ------ ------
Total interest-earning
assets (166) 271 105 (101) 364 263 139 295 434
-------- ------- ------- ------ ------ -------- ------- ------ ------
Interest-bearing liabilities:
Deposits (13) (38) (51) 48 (4) 44 215 179 394
FHLB advances (56) 279 223 2 71 73 46 (113) (67)
-------- ------- ------- ------ ------ -------- ------- ------ ------
Total interest-bearing
liabilities (69) 241 172 50 67 117 261 66 327
-------- ------- ------- ------ ------ -------- ------- ------ ------
Increase (decrease) in net
interest income $ (97) $ 30 $ (67) $ (151) $ 297 $ 146 $ (122) $ 229 $ 107
-------- ------- ------- ------ ------ -------- ------- ------ ------
-------- ------- ------- ------ ------ -------- ------- ------ ------
</TABLE>
- --------
1Includes mortgage-backed securities held to maturity as well as those available
for sale. 2Includes investment securities held to maturity as well as those
available for sale.
7
<PAGE>
Comparison of Operating Results for the Years Ended September 30, 1998 and 1997
Net Income. Net income was $252,000 for the year ended September
30, 1998 as compared to $287,000 for the year ended September 30, 1997, a
decrease of $35,000, or 12.2%. Basic earnings per share were $.44 and $.46 for
the years ended September 30, 1998 and 1997, respectively, while diluted
earnings per share were $.43 and $.46 for the 1998 and 1997 fiscal years,
respectively. The $35,000 decrease in net income resulted from a decrease in net
interest income of $67,000, or 4.0%, an increase in the provision for loan
losses of $9,000, and an increase in non-interest expenses of $115,000, or 8.8%,
partially offset by an increase in non-interest income of $93,000 and a
reduction in the provision for income taxes of $63,000, or 44.4%.
Interest Income. Interest income increased $105,000, or 2.5%, to
$4.2 million for the year ended September 30, 1998. The increase consisted of
increases of $235,000 and $138,000 in interest earned on loans receivable and
mortgage-backed securities, offset by declines in interest earned on investment
securities and other interest-earning assets of $237,000 and $31,000,
respectively. The increases in 1998 as compared to 1997 resulted primarily from
increases in the average volume of the loan and mortgage-backed securities
portfolios, offset by declines in the rates earned on the portfolios. The
decreases in interest earned on investment securities and other interest-earning
assets resulted from declines in the average volumes of these portfolios,
partially offset by higher yields earned. Overall, the interest-earning assets
yield declined 18 basis points, from 7.30% for the fiscal year 1997 to 7.12% for
fiscal year 1998.
Interest Expense. Interest expense increased $172,000, or 7.0%,
from $2,448,000 for the year ended September 30, 1997 to $2,620,000 for the year
ended September 30, 1998. The increase resulted primarily from a higher volume
of FHLB advances during fiscal 1998 as compared to fiscal 1997, offset by
decreases in the average volume of interest-bearing deposits, and rates paid on
both FHLB advances and interest-bearing deposits. The average volume of FHLB
advances approximated $6.3 million during fiscal 1998 as compared to $74,000 for
fiscal 1997. The yield paid on all interest-bearing liabilities fell 10 basis
points, from 5.18% for fiscal 1997 to 5.08% for fiscal 1998.
Provision for Loan Losses. For the 1998 fiscal year, the
provision for loan losses was $12,000 as compared to $3,000 for fiscal 1997. The
increased provision represents management's estimate of losses that may be
inherent in the loan portfolio, the average balance of which increased $6.0
million during fiscal 1998. However, past due loans continue to remain at
historically low levels. In providing for loan losses, 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 $93,000 increase in non-interest income,
from $52,000 for the year ended September 30, 1997 to $145,000 for the year
ended September 30, 1998 resulted primarily from a $47,000 gain in fiscal year
1998 on the sale of the former Chesapeake, Ohio branch office facility, from
$22,000 of gains in fiscal year 1998 from sales of securities, and to a lesser
extent, from increased service fee income on deposit accounts. Expansion and
improvements to the Company's main office and branch facilities has enabled the
Company to better compete with other area institutions for transaction accounts,
resulting in increased service fee income.
8
<PAGE>
Non-Interest Expense. The $115,000 increase in non-interest
expense, from $1,306,000 for the year ended September 30, 1997 to $1,421,000 for
the year ended September 30, 1998, resulted primarily from increases in
compensation and benefits of $87,000, occupancy and equipment expenses of
$37,000 and data processing expenses of $26,000, partially offset by reductions
in Savings Association Insurance Fund ("SAIF") deposit insurance premiums,
professional services expenses, and other expenses of $15,000, $18,000 and
$16,000, respectively. Compensation and benefits increased primarily due to
increased salaries and wages from normal percentage salary increases, costs of
additional employees hired to staff new drive-through and branch facilities, and
higher employee insurance and stock award programs costs. Occupancy and
equipment expenses increased due to increased costs associated with the
expansion and improvements made to the Company's facilities during fiscal year
1997. Data processing expenses increased due to the increased number of customer
accounts and increased costs of new services, such as ATM machines. The decline
in SAIF deposit insurance premiums reflects the lower insurance assessment rates
for entire fiscal year 1998, while professional services expenses decreased due
to the recurring nature of services provided to the Company during 1998 in
connection with its public reporting obligations. There was no individually
significant factor contributing to the fiscal 1998 decline in other non-interest
expenses.
Provision for Income Taxes. The $63,000 decrease in the provision
for income taxes, from $142,000 for the year ended September 30, 1997 to $79,000
for the year ended September 30, 1998 reflects lower statutory tax rates being
applied to reduced pretax income.
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
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
basic and diluted 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, both basic and diluted,
after the SAIF special assessment and related charge, were $.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, partially 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.
9
<PAGE>
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 $11,000, franchise taxes of $70,000, and
professional services and other expenses of $79,000 and $51,000, respectively,
offset by lower SAIF deposit insurance premiums of $61,000. Compensation and
benefits for 1997 reflects 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.
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
10
<PAGE>
its liabilities. At September 30, 1998, the ratio of the Company's average
interest-earning assets to average interest-bearing liabilities amounted to
115.48% as compared to 119.77% at September 30, 1997.
The Company's actions with respect to interest rate risk and its
asset/liability gap management are taken under the guidance of the Bank's Board
of Directors, through its Executive/Loan Committee, which generally meets every
two to three weeks.
The Company's attempts to mitigate the interest-rate risk of
holding long-term assets in its portfolio through the origination of
adjustable-rate, residential and commercial 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. The following table presents, as of September 30,
information showing the relative short-term nature of certain of the Company's
assets, the maturity proceeds of which are subject to reinvestment in loans or
securities at then market rates:
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Adjustable rate:
Single family mortgage loans $ 30.0 76.2% $ 29.7 82.6%
Total loans 34.0 74.7 32.5 80.7
Mortgage-backed securities 10.7 98.2 7.5 96.2
Investment securities (maturities of
five years or less) 2.7 68.1 5.5 69.2
</TABLE>
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, 1998 and 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.
11
<PAGE>
<TABLE>
<CAPTION>
Market Value of Portfolio Equity
Changes in --------------------------------------------------------------------
Interest Rates Board Limit As of September 30, 1998 As of September 30, 1997
------------------------ ------------------------
(Basis Points) % Change $ Change in NPV % Change in NPV $ Change in NPV % Change in NPV
-------------- -------- --------------- --------------- --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 (40)% $ (2,594) (32)% $ (3,273) (34) %
+300 (30) (1,595) (20) (2,207) (23)
+200 (20) (840) (10) (1,252) (13)
+100 (10) (349) (4) (478) (5)
-- -- - - - -
-100 (10) 313 4 294 2
-200 (20) 674 8 505 5
-300 (30) 1,103 14 926 10
-400 (40) 1,614 20 1,466 15
</TABLE>
The improvement in the Company's exposure to interest rate risk for
1998 as compared to 1997 resulted primarily from a reduction in the weighted
average contractual maturity of the fixed rate loan portfolio, and to a lesser
extent, from an increase in the weighted average contractual maturity of
certificates of deposit.
The OTS uses the above NPV calculation to monitor an institution's
IRR. The OTS has promulgated regulations regarding a required adjustment to the
institution's risk-based capital based on IRR. The application of the OTS'
methodology quantifies IRR as the change in the NPV which results from a
theoretical 200 basis point increase or decrease in market interest rates. If
the NPV from either calculation would decrease by more than 2% of the present
value of the institution's assets, the institution must deduct 50% of the amount
of the decrease in excess of such 2% in the calculation of risk-based capital.
At September 30, 1998 and 1997, 2% of the present value of the Bank's assets was
approximately $1.1 million and $1.0 million, respectively, 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, 1998 and
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 5.4% at September 30, 1998, as compared to 13.0% at September
30, 1997. At September 30, 1998, the Bank's "liquid" assets totaled
approximately $1.8 million, which was $.2 million in excess of the current OTS
minimum requirement.
12
<PAGE>
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
$7.0 million at September 30, 1998.
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, 1998, the total approved loan
commitments outstanding amounted to $2.5 million. Certificates of deposit
scheduled to mature in one year or less at September 30, 1998 totaled $24.9
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, 1998, the Bank had regulatory capital which was well
in excess of applicable limits. At September 30, 1998, 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, 1998, the Bank's tangible capital was
$8.9 million or 14.4% of adjusted total assets, core capital was $8.9 million or
14.4% of adjusted total assets and risk-based capital was $9.2 million or 31.4%
of adjusted risk-weighted assets, exceeding the requirements by $7.9 million,
$7.0 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 February, 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128 ("the Statement"),
"Earnings Per Share." The Statement requires entities to give effect to all
dilutive potential common shares that were outstanding during the reporting
period for purposes of calculating earnings per share.
13
<PAGE>
The Company adopted the provisions of the Statement effective December
31, 1997. The presentation of primary and diluted earnings per share is
reflected in the accompanying consolidated financial statements for all periods
presented. Although the Company does have potential common shares outstanding in
the form of stock options, application of the Statement was not material to the
reported earnings per share amounts.
In June, 1997, FASB issued Statement of Financial Accounting Standards
No. 130 ("the Statement"), "Reporting Comprehensive Income." The Statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed in the same prominence as other financial
statements. As currently applicable to the Company, unrealized holding gains and
losses on available for sale securities, which are currently displayed as a
separate component of stockholders' equity in the Company's financial
statements, will be added or subtracted from net income to report comprehensive
income.
The Company will adopt the provisions of this Statement effective for
the quarter ending December 31, 1998. Based upon historical volatility in the
Company's available for sale portfolio and the resultant unrealized gains and
losses, management does not anticipate that future reporting of comprehensive
income will be materially different than reporting net income.
YEAR 2000
The Bank's most significant data processing is performed by an outside
service bureau, Fiserv, Inc. Fiserv serves a large client base and has been
keeping the Bank informed as to its progress in addressing its Year 2000
preparations, which significantly impact the Bank.
A "Client Task Force" was formed among Fiserv members which has
already conducted on-site testing at the data center. Exceptions noted as a
result of this testing have been addressed. Based upon overall test results,
Fiserv believes the testing was successful and completes a major step towards
their readiness for Year 2000. The Bank is independently evaluating the test
results.
The Bank has identified the need to replace "teller hardware and
software" and "local area network software" used in daily operations. After a
thorough evaluation, the Bank has ordered replacement hardware and software
which is Year 2000 compliant, and will test these products with the Fiserv
systems during the first half of 1999.
Fiserv efforts include a Disaster Recovery Center to ensure proper
backup. All test results have been made available to the Bank and will be
independently evaluated. Other areas being evaluated by the Bank include systems
for security, vaults, ATMs and others. Management believes the Bank is
continuing to make satisfactory progress in addressing Year 2000 implementation
issues.
The costs associated with the Year 2000 issues are estimated to
approximate $60,000 to $100,000. The majority of such costs will be capitalized
and depreciated over an estimated five year period.
14
<PAGE>
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.
15
<PAGE>
[LOGO]
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, 1998 and 1997, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years ended September 30, 1998, 1997 and 1996. 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, 1998 and
1997, and the results of their operations and their cash flows for the years
ended September 30, 1998, 1997 and 1996, in conformity with generally accepted
accounting principles.
[SIG]
Ashland, Kentucky
November 6, 1998
16
<PAGE>
FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS, including interest-bearing
deposits of $532,417 and $608,815, respectively $ 746,261 $ 807,314
INVESTMENT SECURITIES HELD TO MATURITY, approximate
market value of $3,370,424 and $7,287,975, respectively 3,309,806 7,257,115
INVESTMENT SECURITIES AVAILABLE FOR SALE,
at approximate market value 609,978 1,694,104
LOANS RECEIVABLE, less allowance for loan losses of
$288,350 and $286,571, respectively 44,642,641 39,026,547
MORTGAGE-BACKED SECURITIES HELD TO MATURITY, approximate
market value of $5,227,122 and $4,620,383, respectively 5,268,915 4,695,838
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE,
at approximate market value 5,618,354 3,130,178
ACCRUED INTEREST RECEIVABLE 341,410 360,604
FORECLOSED REAL ESTATE 10,603 50,046
OFFICE PROPERTIES AND EQUIPMENT 1,752,308 1,932,833
OTHER ASSETS 95,621 123,216
------------- -------------
$ 62,395,897 $ 59,077,795
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $ 45,436,581 $ 44,992,698
ADVANCES FROM FEDERAL HOME LOAN BANK 7,004,136 3,300,000
ACCRUED INCOME TAXES PAYABLE:
Current 21,106 -
Deferred 118,486 101,736
ACCRUED INTEREST PAYABLE 32,814 18,192
OTHER LIABILITIES 131,878 185,834
------------- -------------
Total liabilities 52,745,001 48,598,460
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 17)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 3,000,000 shares
authorized; 583,361 and 646,383 shares, respectively,
issued and outstanding 5,834 6,464
Employee benefit plans (643,854) (739,000)
Additional paid-in capital 5,510,264 6,060,242
Retained earnings-substantially restricted 4,707,377 5,127,312
Unrealized holding gain on securities
available for sale, net of taxes 71,275 24,317
------------- -------------
Total stockholders' equity 9,650,896 10,479,335
------------- -------------
$ 62,395,897 $ 59,077,795
------------- -------------
------------- -------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
17
<PAGE>
FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- --------------- --------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable -
First mortgage loans $ 3,022,710 $ 2,812,590 $ 2,619,590
Consumer and other loans 166,851 141,808 113,289
Mortgage-backed and related securities 604,886 467,507 518,936
Investment securities 400,524 637,941 489,666
Other interest-earning assets 43,882 73,812 129,229
-------------- --------------- --------------
Total interest income 4,238,853 4,133,658 3,870,710
-------------- --------------- --------------
INTEREST EXPENSE:
Interest-bearing checking 20,767 13,782 15,312
Passbook savings 272,110 282,994 326,942
Certificates of deposit 2,030,590 2,077,772 1,987,887
Advances from Federal Home
Loan Bank 296,636 73,607 1,443
-------------- --------------- --------------
Total interest expense 2,620,103 2,448,155 2,331,584
-------------- --------------- --------------
Net interest income 1,618,750 1,685,503 1,539,126
PROVISION FOR LOAN LOSSES 12,000 3,000 14,000
-------------- --------------- --------------
Net interest income after
provision for loan losses 1,606,750 1,682,503 1,525,126
-------------- --------------- --------------
NON-INTEREST INCOME:
Gains (losses) on foreclosed real estate 5,599 6,633 (1,000)
Securities gains 22,289 - -
Gain on sale of office property 47,068 - -
Other 70,743 45,687 42,027
-------------- --------------- --------------
Total non-interest income 145,699 52,320 41,027
-------------- --------------- --------------
NON-INTEREST EXPENSE:
Compensation and benefits 590,686 504,083 409,669
Occupancy and equipment 143,226 106,354 95,119
SAIF deposit insurance premiums 28,079 43,406 105,219
SAIF special assessment - - 269,363
Directors' fees and expenses 80,573 78,814 65,121
Franchise taxes 153,455 144,737 74,687
Data processing 102,135 76,441 66,921
Advertising 65,701 60,201 49,186
Professional services 106,990 125,348 46,258
Other 150,255 166,708 115,751
-------------- --------------- --------------
Total non-interest expense 1,421,100 1,306,092 1,297,294
-------------- --------------- --------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 331,349 428,731 268,859
-------------- --------------- --------------
PROVISION FOR INCOME TAXES:
Current 86,730 138,732 41,603
Deferred (7,638) 3,652 10,608
-------------- --------------- --------------
Total provision for income taxes 79,092 142,384 52,211
-------------- --------------- --------------
NET INCOME $ 252,257 $ 286,347 $ 216,648
-------------- --------------- --------------
-------------- --------------- --------------
EARNINGS PER SHARE:
BASIC $ .44 $ .46 $ .35
-------------- --------------- --------------
-------------- --------------- --------------
DILUTED $ .43 $ .46 $ .35
-------------- --------------- --------------
-------------- --------------- --------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
18
<PAGE>
FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Employee Additional
Common Benefit Paid-in
Stock Plans Capital
<S> <C> <C> <C>
BALANCES, September 30, 1995 $ -- $ -- $ --
NET INCOME, 1996 -- -- --
COMMON STOCK ISSUED, $.01 par value 6,718 (537,600) 6,279,293
ESOP SHARES RELEASED, 2,452 shares;
$10.37 average fair market value -- 24,520 900
DIVIDENDS PAID ($.07 per share) -- -- --
CHANGE IN UNREALIZED HOLDING LOSS,
net of deferred taxes of $3,831 -- -- --
------------ ------------ ------------
BALANCES, September 30, 1996 6,718 (513,080) 6,280,193
NET INCOME, 1997 -- -- --
CHANGE IN UNREALIZED HOLDING LOSS,
net of deferred taxes of $13,543 -- -- --
ESOP SHARES RELEASED, 5,810
shares; $12.68 average fair market value -- 58,100 17,004
RRP SHARES PURCHASED, 26,871 shares; $11.75 per share -- (315,734) --
RRP SHARES AMORTIZED, 2,603 shares -- 30,604 --
DIVIDENDS PAID ($.28 per share) -- 1,110 281
PURCHASE OF 25,400 TREASURY SHARES (254) -- (237,236)
------------ ------------ ------------
BALANCES, September 30, 1997 6,464 (739,000) 6,060,242
NET INCOME, 1998 -- -- --
CHANGE IN UNREALIZED HOLDING LOSS,
net of deferred taxes of $24,388 -- -- --
ESOP SHARES RELEASED, 5,554 shares;
$16.76 average fair market value -- 55,540 37,559
RRP SHARES AMORTIZED, 3,254 shares -- 38,236 --
DIVIDENDS PAID ($.28 per share) -- 1,370 1,088
PURCHASE OF 63,022 TREASURY SHARES (630) -- (588,625)
------------ ------------ ------------
BALANCES, September 30, 1998 $ 5,834 $ (643,854) $ 5,510,264
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Holding Gain
Retained (Loss) on
Earnings- Securities Total
Substantially Available Stockholders'
Restricted For Sale Equity
---------- -------- ------
<S> <C> <C> <C>
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 -- -- 5,748,411
ESOP SHARES RELEASED, 2,452 shares;
$10.37 average fair market value -- -- 25,420
DIVIDENDS PAID ($.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 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 -- -- 75,104
RRP SHARES PURCHASED, 26,871 shares; $11.75 per share -- -- (315,734)
RRP SHARES AMORTIZED, 2,603 shares -- -- 30,604
DIVIDENDS PAID ($.28 per share) (166,923) -- (165,532)
PURCHASE OF 25,400 TREASURY SHARES (103,772) -- (341,262)
------------ ------------ ------------
BALANCES, September 30, 1997 5,127,312 24,317 10,479,335
NET INCOME, 1998 252,257 -- 252,257
CHANGE IN UNREALIZED HOLDING LOSS,
net of deferred taxes of $24,388 -- 46,958 46,958
ESOP SHARES RELEASED, 5,554 shares;
$16.76 average fair market value -- -- 93,099
RRP SHARES AMORTIZED, 3,254 shares -- -- 38,236
DIVIDENDS PAID ($.28 per share) (160,419) -- (157,961)
PURCHASE OF 63,022 TREASURY SHARES (511,773) -- (1,101,028)
------------ ------------ ------------
BALANCES, September 30, 1998 $ 4,707,377 $ 71,275 $ 9,650,896
------------ ------------ ------------
------------ ------------ ------------
</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
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 252,257 $ 286,347 $ 216,648
Adjustments to reconcile net income
to net cash provided by operating
activities -
Gain on sale of office property (47,068) - -
Securities gains (22,289) - -
(Gains) losses on foreclosed real estate (5,599) (6,633) 1,000
Provision for loan losses 12,000 3,000 14,000
Depreciation 88,669 57,705 50,892
FHLB stock dividends (34,800) (31,800) (29,200)
RRP compensation 38,236 30,604 -
Amortization and accretion, net 21,490 11,614 32,730
ESOP compensation 93,099 75,104 25,420
Change in -
Accrued interest receivable 19,194 22,393 (78,244)
Other assets 27,595 21,021 (42,437)
Current income taxes 21,106 - -
Deferred income taxes (7,638) 3,652 10,608
Accrued interest payable 14,622 12,968 (1,295)
Accrued SAIF special assessment - (269,363) 269,363
Other liabilities (53,956) 100,474 (8,195)
------------- ------------- -------------
Net cash provided by operating activities 416,918 317,086 461,290
------------- ------------- -------------
INVESTING ACTIVITIES:
Net increase in loans (5,657,816) (4,128,478) (2,394,375)
Proceeds from maturities and calls of
investment securities held to maturity 4,247,000 2,431,080 1,843,000
Purchases of investment securities
held to maturity (249,375) (673,151) (5,506,999)
Proceeds from sales, calls and maturities of
investment securities available for sale 1,347,391 2,700,000 -
Purchases of investment securities
available for sale (249,688) (1,849,883) (2,530,662)
Principal collected on mortgage-backed
securities held to maturity 713,517 784,192 1,140,551
Purchases of mortgage-backed
securities held to maturity (1,303,750) (305,250) -
Principal collected on mortgage-backed
securities available for sale 643,667 297,591 628,267
Purchases of mortgage-backed
securities available for sale (3,071,635) (819,658) -
Purchases of office properties
and equipment (16,076) (952,770) (184,646)
Proceeds from sale of office property 155,000 - -
Proceeds from sales of foreclosed
real estate 74,764 44,214 -
------------- ------------- -------------
Net cash used for investing activities (3,367,001) (2,472,113) (7,004,864)
------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from sale of stock - - 5,748,411
RRP stock purchased - (315,734) -
Dividends paid (157,961) (165,532) (43,262)
Purchase of Treasury shares (1,101,028) (341,262) -
Proceeds from FHLB advances 13,275,000 6,800,000 500,000
Principal paid on FHLB advances (9,570,864) (4,000,000) -
Net increase (decrease) in deposits 443,883 183,626 (1,388,748)
------------- ------------- -------------
Net cash provided by financing activities 2,889,030 2,161,098 4,816,401
------------- ------------- -------------
</TABLE>
20
<PAGE>
FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (61,053) 6,071 (1,727,173)
CASH AND CASH EQUIVALENTS, beginning of year 807,314 801,243 2,528,416
------------- ------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 746,261 $ 807,314 $ 801,243
------------- ------------- --------------
------------- ------------- --------------
NONCASH INVESTING ACTIVITIES:
Loans taken into foreclosed real estate $ 29,722 $ 54,260 $ 34,367
Unrealized holding gain on securities
available for sale $ 71,346 $ 39,833 $ 11,268
Transfer of mortgage-backed securities classified
as held to maturity to available for sale $ - $ - $ 2,216,252
SUPPLEMENTAL DISCLOSURES:
Federal income taxes paid $ 41,385 $ 68,480 $ 103,635
Interest paid $ 2,605,481 $ 2,435,187 $ 2,332,879
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
21
<PAGE>
FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(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, 1998 and
1997, and for the years ended September 30, 1998, 1997 and 1996, include the
accounts of the Company and the Bank. All significant intercompany transactions
and balances have been eliminated in consolidation. 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.
22
<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, 1998 and 1997 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
23
<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
methods.
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:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings and improvements 20-50
Furniture, fixtures and equipment 5-10
Automobile 5
</TABLE>
Earnings Per Share
Basic earnings per share is computed using the weighted average
number of outstanding common shares outstanding during each period. For diluted
earnings per share, the average number of stock options outstanding is included.
24
<PAGE>
All references in the accompanying consolidated financial
statements to earnings per share have been presented to reflect the adoption of
FASB Statement No. 128, "Earnings Per Share" ("the Statement") in fiscal year
1998. The Statement establishes standards for computing and presenting Earnings
Per Share ("EPS") by replacing the presentation of primary EPS with a
presentation of basic EPS. Primary EPS includes common stock equivalents while
basic EPS excludes them. This change simplifies the computation of EPS. It also
requires dual presentation of basic and fully diluted EPS on the face of the
income statement. The Company adopted the Statement effective December 31, 1997.
See Note 20.
Reclassification
Certain reclassifications have been made to the 1997 and 1996
financial statements to conform to the 1998 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
25
<PAGE>
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.
(2) INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity consist of the following:
<TABLE>
<CAPTION>
September 30, 1998
------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Government agency
securities $ 849,225 $ 4,172 $ - $ 853,397
Obligations of states and
political subdivisions 1,473,239 55,888 - 1,529,127
Certificates of deposit 482,442 558 - 483,000
-------------- ------------ ------------ ---------------
Restricted Equity Securities:
Stock in FHLB, at cost 504,900 - - 504,900
-------------- ------------ ------------ ---------------
$ 3,309,806 $ 60,618 $ - $ 3,370,424
-------------- ------------ ------------ ---------------
-------------- ------------ ------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------- ---------- ---------- ------
<S> <C> <C> <C> <C>
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
-------------- ------------ ------------- ---------------
-------------- ------------ ------------- ---------------
</TABLE>
The amortized cost and estimated market value of investment
securities held to maturity at September 30, 1998, 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>
Estimated
Amortized Market
Cost Value
---------------- --------------
<S> <C> <C>
Due in one year or less $ 808,607 $ 814,199
Due after one year through five years 1,250,501 1,289,212
Due after five years through ten years 245,798 260,943
Due after ten years 1,004,900 1,006,070
---------------- --------------
$ 3,309,806 $ 3,370,424
---------------- --------------
---------------- --------------
</TABLE>
26
<PAGE>
At September 30, 1998 and 1997, investment securities with a
carrying value of $535,000 were pledged to secure public deposits.
Gross realized gains from investment securities classified as held
to maturity, which were called prior to scheduled maturity, were $14,898 during
the year ended September 30, 1998. There were no sales or calls of investment
securities held to maturity during the years ended September 30, 1997 and 1996.
(3) INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale consist of the following:
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------------------------------------------
Gross Gross Carrying
Amortized Unrealized Unrealized (Market)
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Government
agency securities $ 599,714 $ 10,264 $ - $ 609,978
-------------- ---------- ----------- --------------
-------------- ---------- ----------- --------------
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
--------------------------------------------------------------------
Gross Gross Carrying
Amortized Unrealized Unrealized (Market)
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
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
-------------- ---------- ----------- --------------
-------------- ---------- ----------- --------------
</TABLE>
The amortized cost and estimated market value of investment
securities available for sale at September 30, 1998, 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>
Carrying
Amortized (Market)
Cost Value
--------------- --------------
<S> <C> <C>
Due after one year through five years $ 599,714 $ 609,978
--------------- --------------
--------------- --------------
</TABLE>
Gross realized gains from sales of investment securities available
for sale were $7,391 for the year ended September 30, 1998. There were no sales
of investment securities available for sale during the years ended September 30,
1997 and 1996.
(4) LOANS RECEIVABLE
Loans receivable at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Real estate loans:
Single family residential $ 39,142,342 $ 35,983,960
Multi-family residential 1,464,320 685,065
Commercial real estate 2,532,767 1,960,557
----------------- -----------------
Total real estate loans 43,139,429 38,629,582
----------------- -----------------
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C>
Consumer and other loans:
Loans secured by deposit accounts 751,202 555,886
Home improvement 120,079 86,156
Automobile 524,971 508,114
Home equity 217,899 58,072
Other 836,090 507,893
----------------- -----------------
Total consumer and other loans 2,450,241 1,716,121
----------------- -----------------
Total loans 45,589,670 40,345,703
Less:
Unearned interest (154,199) (140,099)
Loans in process (447,760) (879,407)
Deferred loan fees and costs (56,720) (13,079)
Allowance for loan losses (288,350) (286,571)
----------------- -----------------
Loans receivable, net $ 44,642,641 $ 39,026,547
----------------- -----------------
----------------- -----------------
Weighted average interest rate 7.59% 7.44%
----------------- -----------------
----------------- -----------------
</TABLE>
Activity in the allowance for loan losses is summarized as follows
for the years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ---------
<S> <C> <C> <C>
Balance, beginning of year $ 286,571 $ 283,112 $ 277,937
Provision charged to expense 12,000 3,000 14,000
Loans charged off (10,221) (1,718) (9,262)
Loans recovered - 2,177 437
------------- ------------- ---------
Balance, end of year $ 288,350 $ 286,571 $ 283,112
------------- ------------- ---------
------------- ------------- ---------
</TABLE>
Loans on which the accrual of interest had been discontinued or
reduced and for which impairment had not been recognized totaled approximately
$125,000, $84,000 and $109,000 at September 30, 1998, 1997 and 1996,
respectively. Interest income which would have been recognized under the
original terms of these contracts was $8,598, $3,447 and $3,584, 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 $11,379
and $11,768 at September 30, 1998 and 1997, 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:
28
<PAGE>
<TABLE>
Year Ended
September 30,
----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Balance, beginning of year $ 11,768 $ 193,558
New loans advanced 4,804 -
Repayments (5,193) (181,790)
------------- ------------
Balance, end of year $ 11,379 $ 11,768
------------- ------------
------------- ------------
</TABLE>
(5) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity at September 30
consist of the following:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
FHLMC Certificates $ 2,152,517 $ 8,290 $ 30,343 $ 2,130,464
FNMA Certificates 1,447,362 6,942 33,431 1,420,873
GNMA Certificates 18,556 1,733 - 20,289
FNMA and FHLMC CMO's 1,650,480 10,082 5,066 1,655,496
-------------- ----------- -------------- ---------------
$ 5,268,915 $ 27,047 $ 68,840 $ 5,227,122
-------------- ----------- -------------- ---------------
-------------- ----------- -------------- ---------------
Weighted average rate 6.66%
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
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%
--------------
--------------
</TABLE>
There were no sales of mortgage-backed securities held to maturity
during the years ended September 30, 1998, 1997 and 1996.
(6) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale at September 30
consist of the following:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
Gross Gross Carrying
Amortized Unrealized Unrealized (Market)
Cost Gains Losses Value
-------------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
FHLMC Certificates $ 452,576 $ 1,077 $ 2,714 $ 450,939
FNMA Certificates 581,099 1,003 5,051 577,051
GNMA Certificates 608,285 12,125 - 620,410
FNMA and FHLMC CMO's 3,878,664 92,292 1,002 3,969,954
-------------- ----------- -------------- --------------
$ 5,520,624 $ 106,497 $ 8,767 $ 5,618,354
-------------- ----------- -------------- ---------------
-------------- ----------- -------------- ---------------
Weighted average rate 6.46%
--------------
--------------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------
Gross Gross Carrying
Amortized Unrealized Unrealized (Market)
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%
--------------
--------------
</TABLE>
There were no sales of mortgage-backed securities available for sale
during the years ended September 30, 1998, 1997 or 1996.
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Loans $ 221,714 $ 208,831
Investment securities 52,480 93,305
Mortgage-backed and related
securities 67,216 58,468
-------------- -------------
$ 341,410 $ 360,604
-------------- -------------
-------------- -------------
</TABLE>
(8) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at September 30 are summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Land $ 445,271 $ 475,271
Buildings and improvements 1,431,375 1,571,659
Furniture, fixtures and equipment 283,302 278,364
Automobile 13,667 13,667
-------------- --------------
2,173,615 2,338,961
Less - accumulated depreciation (421,307) (406,128)
-------------- --------------
$ 1,752,308 $ 1,932,833
-------------- --------------
-------------- --------------
</TABLE>
(9) OTHER ASSETS
Other assets at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
<S> <C> <C>
Federal income taxes receivable $ - $ 30,330
Prepaid Federal insurance 6,556 7,223
Prepaid franchise taxes 32,871 31,783
Other prepaid expenses 56,194 53,880
--------------- -------------
$ 95,621 $ 123,216
-------------- --------------
-------------- --------------
</TABLE>
30
<PAGE>
(10) DEPOSITS
Deposits at September 30 are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average Rate
at September 30,
1998 1998 1997
---- ------------------------------------ ---------------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Passbook 2.75% $ 8,796,838 19.4% $ 9,054,018 20.1%
------- ---------------- ---------- --------------- --------
Christmas club 3.00 97,903 .2 90,640 .2
------- ---------------- ---------- --------------- --------
Demand accounts - 690,374 1.5 511,713 1.2
------- ---------------- ---------- --------------- --------
NOW accounts 2.50 740,062 1.6 558,863 1.2
------- ---------------- ---------- --------------- --------
Certificates:
3.0-3.99% 3.55 289,857 .6 1,005,732 2.2
4.0-4.99% 4.76 233,945 .5 595,701 1.3
5.0-5.99% 5.82 20,073,089 44.2 12,546,441 28.0
6.0-6.99% 6.18 14,514,513 32.0 20,629,590 45.8
------- ---------------- ---------- --------------- --------
5.94 35,111,404 77.3 34,777,464 77.3
------- ---------------- ---------- --------------- --------
5.17% $ 45,436,581 100.0% $ 44,992,698 100.0%
------- ---------------- ---------- --------------- --------
------- ---------------- ---------- --------------- --------
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit
with a minimum denomination of $100,000 was approximately $3,757,000 and
$3,668,000 at September 30, 1998 and 1997, respectively.
At September 30, 1998, scheduled maturities of certificates of
deposit are as follows:
<TABLE>
<CAPTION>
Year
Ending
September 30, Amount Percent
------------- ---------------- --------
<S> <C> <C>
1999 $ 24,869,581 70.8%
2000 4,747,284 13.5
2001 5,008,476 14.3
2002 486,063 1.4
---------------- ---------
$ 35,111,404 100.0%
---------------- ---------
---------------- ---------
</TABLE>
(11) OTHER LIABILITIES
Other liabilities at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
<S> <C> <C>
Construction payables $ - $ 60,104
Escrow accounts 76,330 63,898
Accrued expenses 32,607 20,845
Other liabilities 22,941 40,987
-------------- ------------
$ 131,878 $ 185,834
-------------- ------------
-------------- ------------
</TABLE>
31
<PAGE>
(12) ADVANCES FROM FEDERAL HOME LOAN BANK
The advances from the Federal Home Loan Bank at September 30
consist of the following:
<TABLE>
<CAPTION>
Due in Year
Ending
September 30 1998 1997
------------ ----------------- ------------------
<S> <C> <C>
1998 $ - $ 2,300,000
1999 - -
2000 1,575,000 -
2001 - -
2002 1,000,000 1,000,000
2003 - -
After 2003 4,429,136 -
----------------- ------------------
$ 7,004,136 $ 3,300,000
----------------- ------------------
----------------- ------------------
Weighted average rate 5.34% 6.25%
----------------- ------------------
----------------- ------------------
</TABLE>
The advances were collateralized by first mortgage loans totaling
$10,506,200 and $4,950,000 at September 30, 1998 and 1997, respectively.
(13) PENSION PLAN
The Bank had a non-contributory pension plan covering all
employees who met minimum age and length of service requirements. Pension assets
consisted of the cash value of individual insurance policies. The Bank made
annual payments in amounts equal to the cost of the insurance premiums. The Plan
was terminated during the year ended September 30, 1997, and Plan assets were
distributed to the participants. Contributions charged to expense for the years
ended September 30, 1997 and 1996 were $29,417 and $22,871, respectively.
(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 1998, 1997 and
1996 to income before the provision for income taxes as a result of the
following:
<TABLE>
<CAPTION>
Year Ended
September 30,
----------------------------------------
1998 1997 1996
------------ ---------- -------
<S> <C> <C> <C>
Expected provision for
income taxes at Federal tax rate $ 112,659 $ 145,769 $91,412
Tax-exempt interest (23,851) (16,623) (15,560)
Surtax exemption (1,813) - (10,340)
Others, net (7,903) 13,238 (13,301)
----------- --------- --------
$ 79,092 $ 142,384 $52,211
----------- --------- --------
----------- --------- --------
</TABLE>
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:
32
<PAGE>
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
FHLB stock dividends not currently
taxable $ (98,503) $(86,671)
Depreciation (21,421) (21,781)
Loan fees 19,285 4,447
Unrealized holding gain on
investments available for sale (36,717) (12,460)
Bad debts 83,513 82,013
Employee benefit plans 18,645 13,690
Others, net (1,275) 1,039
--------- ---------
(36,473) (19,723)
Less - valuation allowance for bad
debt deferred tax asset (82,013) (82,013)
-------- ---------
Net deferred tax liability $(118,486) $(101,736)
--------- ---------
--------- ---------
</TABLE>
Retained earnings at September 30, 1998 and 1997, 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, 1998 and 1997, 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 1998 and 1997 results of operations would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
--------- -------
<S> <C> <C>
Net income:
As reported $ 252,257 $286,347
Pro forma $ 244,744 $277,815
Basic earnings per share:
As reported $ .44 $.46
Pro forma $ .42 $.45
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C>
Diluted earnings per share:
As reported $ .43 $.46
Pro forma $ .41 $.45
</TABLE>
The fair value of each option granted is estimated using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997
--------- -------
<S> <C> <C>
Expected dividend yield $ .28 $.28
Expected stock price volatility 7.09% 5.96%
Risk-free interest rate 4.39% 6.00%
Expected life of options 6 years 7 years
</TABLE>
The following table summarizes information about fixed stock
options outstanding:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------
Weighted
Average
Remaining Weighted Number Weighted
Range of Contracted Average Exercisable Average
At Exercise Number Life Exercise at Exercise
September 30, Prices Outstanding (Years) Price Year End Price
- ------------- ------ ----------- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
1997 $ 12.00 5,629 10.0 $ 12.00 - 0 - N/A
1998 $ 12.00 13,135 8.4 $ 12.00 7,506 $12.00
</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 $246,894 and $285,130 at September 30, 1998
and 1997, respectively, 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 years ended September 30, 1998 and 1997 was $38,236 and $30,604,
respectively. RRP shares available which have not been awarded totaled 10,433 at
September 30, 1998 and 1997. There were 3,254 and 2,603 shares amortized during
the years ended September 30, 1998 and 1997, respectively.
(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-
34
<PAGE>
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, 1998, the Bank meets all
capital adequacy requirements to which it is subject.
As of September 30, 1998, 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, 1998:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 9,184,644 31.4% GREATER THAN OR EQUAL TO $ 2,336,720 GREATER THAN OR EQUAL TO 8.0%
Tier I Capital
(to Adjusted Total Assets) $ 8,896,294 14.4% GREATER THAN OR EQUAL TO $ 1,849,110 GREATER THAN OR EQUAL TO 3.0%
Tangible Capital
(to Adjusted Total Assets) $ 8,896,294 14.4% GREATER THAN OR EQUAL TO $ 924,555 GREATER THAN OR EQUAL TO 1.5%
As of September 30, 1997:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 8,915,924 33.7% GREATER THAN OR EQUAL TO $ 2,113,520 GREATER THAN OR EQUAL TO 8.0%
Tier I Capital
(to Adjusted Total Assets) $ 8,629,353 15.0% GREATER THAN OR EQUAL TO $ 1,722,141 GREATER THAN OR EQUAL TO 3.0%
Tangible Capital
(to Adjusted Total Assets) $ 8,629,353 15.0% GREATER THAN OR EQUAL TO $ 861,070 GREATER THAN OR EQUAL TO 1.5%
</TABLE>
<TABLE>
<CAPTION>
To Be With
Capitalized Under
Prompt Corrective
Action Provisions
------------------------------------
Amount Ratio
------ -----
<S> <C> <C>
As of September 30, 1998:
Total Risk-Based Capital
(to Risk-Weighted Assets) GREATER THAN OR EQUAL TO $ 2,920,900 10.0%
Tier I Capital
(to Adjusted Total Assets) GREATER THAN OR EQUAL TO $ 3,698,220 6.0%
Tangible Capital
(to Adjusted Total Assets) GREATER THAN OR EQUAL TO $ 3,081,850 5.0%
As of September 30, 1997:
Total Risk-Based Capital
(to Risk-Weighted Assets) GREATER THAN OR EQUAL TO $ 2,645,675 10.0%
Tier I Capital
(to Adjusted Total Assets) GREATER THAN OR EQUAL TO $ 3,451,741 6.0%
Tangible Capital
(to Adjusted Total Assets) GREATER THAN OR EQUAL TO $ 2,876,451 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 $2,458,000 and $913,000 at September 30,
1998 and 1997, 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, 1998 or 1997.
(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 $537,430 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, 1998, 1997 and 1996 was $93,099, $75,104 and $25,420,
respectively.
35
<PAGE>
The fair value of the unreleased ESOP shares was approximately
$677,000 and $703,000 at September 30, 1998 and 1997, respectively.
(19) PURCHASE OF COMMON STOCK
During the year ended September 30, 1998, the Company purchased
63,022 and 25,400 shares, respectively, of its outstanding common stock at an
aggregate cost of $1,101,028 and $341,262, respectively. The purchase of these
shares has been recorded as a purchase of common stock shares, which are
available for reissuance.
(20) EARNINGS PER SHARE
Basic and full dilution Earnings Per Share (EPS) were calculated
by dividing the consolidated net income by the weighted average number of common
shares, and common stock equivalents outstanding, as set forth below. Shares
which have not been committed to be released to the ESOP are not considered to
be outstanding for purposes of calculating EPS.
<TABLE>
<CAPTION>
Income Shares Per Share
Year Ending September 30, (Numerator) (Denominator) Amount
- ------------------------- ----------- ------------- ------
<S> <C> <C> <C>
1998
Basic EPS $ 252,257 $ 579,613 $ 0.44
Effect of dilutive securities -
options - 10,734 (0.01)
------------ ------------ ---------
Diluted EPS $ 252,257 $ 590,347 $ 0.43
------------ ------------ ---------
------------ ------------ ---------
1997
Basic EPS $ 286,347 $ 611,310 $ 0.46
Effect of dilutive securities -
options - 2,787 -
------------ ------------ ---------
Diluted EPS $ 286,347 $ 614,097 $ 0.46
------------ ------------ ---------
------------ ------------ ---------
1996
Basic EPS $ 216,648 $ 618,759 $ 0.35
Effect of dilutive securities -
options - - -
------------ ------------ ---------
Diluted EPS $ 216,648 $ 618,759 $ 0.35
------------ ------------ ---------
------------ ------------ ---------
</TABLE>
(21) 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.
36
<PAGE>
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.
(22) 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>
1998 1997
------------------------------------ --------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 746,261 $ 746,261 $ 807,314 $ 807,314
Loans receivable, less allowance 44,642,641 45,024,054 39,026,547 39,446,603
Investment securities held to
maturity 3,309,806 3,370,424 7,257,115 7,287,975
Investment securities available
for sale 609,978 609,978 1,694,104 1,694,104
Mortgage-backed securities held
to maturity 5,268,915 5,227,122 4,695,838 4,620,383
Mortgage-backed securities
available for sale 5,618,354 5,618,354 3,130,178 3,130,178
Accrued interest receivable 341,410 341,410 360,604 360,604
Financial liabilities:
Deposits 45,436,581 45,496,789 44,992,698 45,022,866
Advances from Federal Home
Loan Bank 7,004,136 7,004,136 3,300,000 3,300,000
Accrued interest payable 32,814 32,814 18,192 18,192
</TABLE>
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, 1998 and 1997, 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, 1998 and 1997 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.
37
<PAGE>
(23) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly consolidated financial data is as follows:
<TABLE>
<CAPTION>
Fiscal Year 1998
-------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C>
Total interest income $ 1,044 $ 1,066 $ 1,076 $ 1,053
Total interest expense 640 652 663 665
--------- --------- --------- ---------
Net interest income 404 414 413 388
Provision for loan losses 3 3 3 3
--------- --------- --------- ---------
Net interest income after
provision for loan losses 401 411 410 385
Non-interest income 17 18 64 46
Non-interest expense 355 371 342 353
--------- --------- --------- ---------
Income before provision
for income taxes 63 58 132 78
Provision for income taxes 9 9 37 24
--------- --------- --------- ---------
Net income $ 54 $ 49 $ 95 $ 54
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share:
Basic $ .09 $ .08 $ .16 $ .10
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted $ .09 $ .08 $ .16 $ .10
--------- --------- --------- ---------
--------- --------- --------- ---------
Dividends declared per share $ .07 $ .07 $ .07 $ .07
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1997
-------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C>
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>
38
<PAGE>
(24) 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:
BALANCE SHEETS
<TABLE>
<CAPTION>
Assets 1998 1997
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 45,974 $ 123,803
Investment in subsidiary 8,960,795 8,629,353
Investment securities available for sale 609,978 1,694,104
Accrued interest receivable 13,188 17,643
Other assets 22,496 21,824
Income taxes refundable 19,311 -
Deferred income taxes 6,308 8,600
----------------- -----------------
$ 9,678,050 $ 10,495,327
----------------- -----------------
----------------- -----------------
Liabilities and Stockholders' Equity
Income taxes payable $ - $ 6,750
Other liabilities 27,154 9,242
----------------- -----------------
Total liabilities 27,154 15,992
----------------- -----------------
Common stock 5,834 6,464
Employee benefit plans (643,854) (739,000)
Additional paid-in capital 5,510,264 6,060,242
Retained earnings 4,707,377 5,127,312
Unrealized holding gain (loss) on securities
available for sale, net of taxes 71,275 24,317
----------------- -----------------
Total stockholders' equity 9,650,896 10,479,335
----------------- -----------------
$ 9,678,050 $ 10,495,327
----------------- -----------------
----------------- -----------------
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Interest on investment securities $ 89,212 $ 148,840
Non-interest income 8,724 -
Non-interest expense (149,608) (181,395)
----------------- -----------------
Income (loss) before income taxes and equity in
undistributed income of subsidiary (51,672) (32,555)
Credit for income taxes (24,794) (466)
----------------- -----------------
Loss before equity in undistributed
income of subsidiary (26,878) (32,089)
Equity in undistributed income of subsidiary 279,135 318,436
----------------- -----------------
Net income $ 252,257 $ 286,347
----------------- -----------------
----------------- -----------------
</TABLE>
39
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Operating activities:
Net income $ 252,257 $ 286,347
Adjustments to reconcile net income to net
cash flows provided by (used for) operating activities -
Equity in undistributed income of subsidiary (279,135) (318,436)
Accretion (1,233) (78)
Deferred income taxes (8,209) (9,685)
Securities gains (7,391) -
(Increase) decrease in other assets (672) (18,061)
Decrease in accrued interest receivable 4,455 25,896
Increase (decrease) in income taxes payable (26,061) 4,914
Increase in other liabilities 17,912 5,426
ESOP compensation 93,099 75,104
RRP compensation 38,236 30,604
----------------- -----------------
Net cash provided by (used for)
operating activities 83,258 82,031
----------------- -----------------
Investing activities:
Purchases of investment securities available for sale (249,689) (1,849,883)
Proceeds from sales, calls and maturities of investment
securities available for sale 1,347,691 2,700,000
----------------- -----------------
Net cash provided by investing activities 1,098,002 850,117
----------------- -----------------
Financing activities:
Purchase of RRP shares - (315,734)
Dividends paid (157,961) (165,532)
Purchase of treasury shares (1,101,128) (341,262)
----------------- -----------------
Net cash provided by (used for)
financing activities (1,259,089) (822,528)
----------------- -----------------
Net increase in cash and cash equivalents (77,829) 109,620
Cash and cash equivalents, beginning of year 123,803 14,183
----------------- -----------------
Cash and cash equivalents, end of year $ 45,974 $ 123,803
----------------- -----------------
----------------- -----------------
</TABLE>
40
<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 4, 1998, there were
181 stockholders of record and 583,361 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, 1997 and 1998:
<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
1998
----
December 31, 1997 16 7/16 14 1/2 .07
March 31, 1998 17 9/16 16 5/8 .07
June 30, 1998 18 3/4 17 .07
September 30, 1998 17 3/4 16 .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.
41
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULES CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AS OF
SEPTEMBER 30, 1998 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR THEN
ENDED.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> OCT-01-1998
<CASH> 213,844
<INT-BEARING-DEPOSITS> 532,417
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,228,332
<INVESTMENTS-CARRYING> 8,578,721
<INVESTMENTS-MARKET> 8,597,546
<LOANS> 44,930,991
<ALLOWANCE> 288,350
<TOTAL-ASSETS> 62,395,897
<DEPOSITS> 45,436,581
<SHORT-TERM> 0
<LIABILITIES-OTHER> 304,284
<LONG-TERM> 7,004,136
0
0
<COMMON> 5,834
<OTHER-SE> 9,645,062
<TOTAL-LIABILITIES-AND-EQUITY> 62,395,897
<INTEREST-LOAN> 3,189,561
<INTEREST-INVEST> 1,005,410
<INTEREST-OTHER> 43,882
<INTEREST-TOTAL> 4,238,853
<INTEREST-DEPOSIT> 2,323,467
<INTEREST-EXPENSE> 2,620,103
<INTEREST-INCOME-NET> 1,618,750
<LOAN-LOSSES> 12,000
<SECURITIES-GAINS> 22,289
<EXPENSE-OTHER> 1,421,100
<INCOME-PRETAX> 331,349
<INCOME-PRE-EXTRAORDINARY> 331,349
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 252,257
<EPS-PRIMARY> .44
<EPS-DILUTED> .43
<YIELD-ACTUAL> 2.72
<LOANS-NON> 125,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 286,571
<CHARGE-OFFS> 10,221
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 288,350
<ALLOWANCE-DOMESTIC> 288,350
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
