UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to _____________________
Commission file number 0-29276
FIRST ROBINSON FINANCIAL CORPORATION
(Name of small business issuer in its charter)
Delaware 36-4145294
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 East Main Street, Robinson, Illinois 62454
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (618) 544-8621
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year: $2.6 million.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the average of the bid and ask price of
such stock as of March 31, 1998, was approximately $12.5 million.
As of March 31, 1998, there were 859,625 shares issued and outstanding of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II of Form 10-KSB - Annual Report to Stockholders for the fiscal year
ended March 31, 1998.
Part III of Form 10-KSB - Portions of Proxy Statement for 1998 Annual
Meeting of Stockholders.
<PAGE>
FORWARD-LOOKING STATEMENTS
When used in this Annual Report on Form 10-KSB or future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases or other public or shareholder communications, or in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project", "believe" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors--including regional
and national economic conditions, changes in levels of market interest rates,
credit risks of lending activities, and competitive and regulatory
factors--could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake--and specifically disclaims any
obligation--to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
IMPACT OF THE YEAR 2000
The Company has conducted a comprehensive review of its computer systems to
identify applications that could be affected by the "Year 2000" issue, and has
developed an implementation plan to address the issue. The Company's data
processing is performed primarily in-house; however software and hardware
utilized is under maintenance agreements with third party vendors, consequently
the Company is very dependent on those vendors to conduct its business. The
Company has already contacted each vendor to request time tables for year 2000
compliance and expected costs, if any, to be passed along to the Company. To
date, the Company has been informed that its primary service providers
anticipate that all reprogramming efforts will be completed by December 31,
1999, allowing the Company adequate time for testing. Certain other vendors have
not yet responded, however, the Company will pursue other options if it appears
that these vendors will be unable to comply. Management does not expect these
costs to have a significant impact on its financial position or results of
operations however, there can be no assurance that the vendors systems will be
2000 compliant, consequently the Company could incur incremental costs to
convert to another vendor. The Company has identified certain of its hardware
and software equipment that will not be Year 2000 compliant and intends to
purchase new equipment and software prior to March 31, 1999. These capital
expenditures are expected to total approximately $250,000.
2
<PAGE>
PART I
Item 1. Description of Business
General
The Company. First Robinson Financial Corporation (the "Company") was
incorporated under the laws of the State of Delaware in March 1997, at the
direction of the Board of Directors of First Robinson Savings and Loan
Association (the "Association"), the predecessor institution to First Robinson
Savings Bank, National Association (the "Bank") for the purpose of serving as a
holding company of the Bank. The Company has no significant assets other than
the outstanding capital stock of the Bank. Unless otherwise indicated, all
activities discussed below are of the Bank.
The Bank. The Bank is a community-oriented financial institution. The Bank
seeks to serve the financial needs of the residents and businesses in its market
area. The principal business of the Bank has historically consisted of
attracting retail deposits from the general public and investing those funds in
primarily one-to four-family residential real estate loans and, to a lesser
extent, consumer loans, commercial real estate loans and commercial business
loans. At March 31, 1998, substantially all of the Bank's real estate mortgage
loans, were secured by properties located in the Bank's market area. The Bank
also invests in investment and equity securities and mortgage-backed securities,
and other permissible investments.
The Bank currently offers a variety of deposit accounts having a wide range
of interest rates and terms. The Bank's deposits include passbook savings, NOW
accounts, certificate accounts, IRA accounts and non-interest bearing accounts.
The Bank generally solicits deposits in its primary market area. The Bank does
not accept any brokered deposits.
The Bank's revenues are derived principally from interest income, including
primarily interest on loans, deposits in other banks and mortgage-backed
securities and other investments.
Market Area
The Bank primarily serves Crawford County, Illinois. The Bank currently has
four offices located in Robinson, Palestine and Oblong, Illinois.
Robinson, Palestine and Oblong, Illinois are located in Crawford County,
Illinois, approximately 150 miles east of St. Louis, Missouri and 35 miles
northwest of Vincennes, Indiana. The major employers in the Bank's primary
market area include: Marathon Oil Company, Hershey Chocolate, USA, Briggs
Industries, Robinson Correctional Facility, Dana Corporation, Fair Rite
Products, Crawford Memorial Hospital and E.H. Baare Corporation.
The Bank, and therefore the Company, is dependent upon the economy of its
market share for continued success, since the vast majority of its loans are
located in the Bank's market area. See Note 16 of Notes To Consolidated
Financial Statements.
3
<PAGE>
Lending Activities
General. The Bank's loan portfolio consists primarily of conventional,
first mortgage loans secured by one- to four-family residences and, to a lesser
extent, consumer loans, commercial real estate loans, commercial business loans
and multi-family real estate and construction loans. At March 31, 1998, the
Bank's gross loans outstanding totaled $65.6 million, of which $30.4 million or
46.3% were one-to four-family residential mortgage loans. Of the one- to
four-family mortgage loans outstanding at that date, 7.5% were fixed-rate loans,
and 92.5% were adjustable-rate loans. At that same date, consumer loans totaled
$11.6 million or 17.7% of the Bank's total loan portfolio, all of which were
fixed-rate loans. Also at that date, the Bank's commercial real estate loans
totaled $13.5 million or 20.5% of the Bank's total loan portfolio of which 92.0%
were adjustable-rate loans. At March 31, 1998, commercial business loans totaled
$9.4 million or 14.3% of the Bank's total loan portfolio, of which 53.3% were
fixed-rate loans and 46.7% were adjustable-rate loans. At that same date,
multi-family real estate and construction loans totaled $715,000 or 1.1% of the
Bank's total loan portfolio. See Notes 1 and 4 To Consolidated Financial
Statements.
The Bank also invests in mortgage-backed securities, Government securities,
obligations of states or political subdivisions and other debt securities. At
March 31, 1998, mortgage-backed securities totaled $1.4 million or 27.9% of the
Bank's total investment and mortgage-backed securities portfolio, government
securities and obligations of states and political subdivisions and other debt
securities totaled $3.7 million, or 72.1% of the Bank's total investment and
mortgage-backed securities portfolio.
The Bank's loans-to-one borrower limit is generally limited to the greater
of 15% of unimpaired capital and surplus or $500,000. See "Regulation - Federal
Regulation of National Banks." At March 31, 1998, the maximum amount which the
Bank could have lent under this limit to any one borrower and the borrower's
related entities was approximately $1.5 million. At March 31, 1998, the Bank had
no loans or groups of loans to related borrowers with outstanding balances in
excess of this amount. The Bank's five largest lending relationships at March
31, 1998 were as follows: (i) $1.6 million in loans to a motel/lodging
corporation, of which $500,000 was participated to other lenders, secured by
real estate, equipment, inventory, government and personal guarantees; (ii) $3.3
million in loans to a heavy equipment contractor, of which $2.2 million was
participated to other lenders, secured by real estate, equipment, inventory and
accounts receivable as well as certificates of deposit and personal guarantees;
(iii) $1.0 million in loans to a fast food franchise secured by real estate,
equipment, inventory and personal guarantees; (iv) $1.8 million in loans to a
grain farming operation and grain elevator business, of which $775,000 is
participated to other lenders, secured by real estate, warehouse receipts and
personal guarantees; and (v) $772,000 in loans to a custom sledge application
contractor, secured by real estate, equipment, inventory, accounts receivable as
well as personal guarantees. At March 31, 1998, all of these loans totaling $8.5
million in the aggregate, of which $3.5 million was participated to other
lenders, were performing in accordance with their terms.
4
<PAGE>
Loan Portfolio Composition. The following information concerning the
composition of the Bank's loan portfolios in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
For the Five
Months Ended
March 31, October 31,
---------------------- ---------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family ............. $ 30,393 46.32% $ 29,894 46.22% $ 27,784 50.61%
Multi-family .................... 117 .18 124 .19 141 .26
Commercial ...................... 13,466 20.52 12,420 19.20 9,594 17.47
Construction or development ..... 598 .91 578 .89 76 .14
-------- ------ -------- ------- -------- ------
Total real estate loans ..... 44,574 67.93 43,016 66.50 37,595 68.48
-------- ------ -------- ------- -------- ------
Other Loans:
Consumer Loans:
Deposit account ................ 654 1.00 657 1.01 571 1.04
Automobile ..................... 8,536 13.01 9,480 14.66 8,764 15.96
Other .......................... 2,440 3.72 2,392 3.70 2,717 4.95
-------- ------ -------- ------- -------- ------
Total consumer loans ........ 11,630 17.73 12,529 19.37 12,052 21.95
-------- ------ -------- ------- -------- ------
Commercial business loans ....... 9.408 14.34 9,140 14.13 5,257 9.57
-------- ------ -------- ------- -------- ------
Total other ................. 21,038 32.07 21,669 33.50 17,309 31.52
-------- ------ -------- ------- -------- ------
Total loans ................. 65,612 100.00% 64,685 100.00% 54,904 100.00%
-------- ====== -------- ======= -------- ======
Less:
Loans in process ................ (713) (243) (43)
Unearned discounts .............. -- -- --
Allowance for losses ............ (665) (482) (413)
-------- -------- -------
Total loans receivable, net ..... $ 64,234 63,960 $54,448
======== ======== =======
<CAPTION>
October 31,
----------------------------------------------------
1995 1994
-------------------- ---------------------
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family ............. $ 23,448 51.80% $ 21,058 61.04%
Multi-family .................... 174 .38 190 .55
Commercial ...................... 5,560 12.29 3,961 11.48
Construction or development ..... 514 1.14 140 .41
-------- ------ -------- ------
Total real estate loans ..... 29,696 65.61 25,349 73.48
-------- ------ -------- ------
Other Loans:
Consumer Loans:
Deposit account ................ 1,069 2.36 442 1.28
Automobile ..................... 7,273 16.07 5,133 14.88
Other .......................... 2,591 5.73 1,412 4.09
-------- ------ -------- ------
Total consumer loans ........ 10,933 24.16 6,987 20.25
-------- ------ -------- ------
Commercial business loans ....... 4,628 10.23 2,164 6.27
-------- ------ -------- ------
Total other ................. 15,561 34.39 9,151 26.52
-------- ------ -------- ------
Total loans ................. 45,257 100.00% 34,500 100.00%
-------- ====== -------- ======
Less:
Loans in process ................ (148) (119)
Unearned discounts .............. -- --
Allowance for losses ............ (255) (288)
------- -------
Total loans receivable, net ..... $44,854 $34,093
======= =======
</TABLE>
5
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at March 31, 1998. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
--------------------------------------
One- to Four-Family Multi-family and Commercial
and Construction Commercial Consumer Business Total
------------------- ----------------- ---------------- ----------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
-------------------------------------- ---------------- ------------------ -----------------
(Dollars in Thousands)
Due During
Years Ending
March 31,
------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999(1) .................. $10,248 8.79% $ 8,053 9.07% $2,090 10.11% $6,349 9.02% $26,740 9.03%
2000 and 2001 ............ 13,427 8.77 3,656 8.51 4,533 10.66 1,451 8.36 23,067 9.07
2002 and 2003 ............ 1,126 8.30 1,346 7.59 4,798 9.80 805 8.33 8,075 9.08
After 2003 ............... 6,190 7.75 528 7.91 209 10.39 803 7.56 7,730 7.81
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total .................... $30,991 8.56% $13,583 8.73% $11,630 10.20% $9,408 8.73% $65,612 8.91%
======= ===== ======= ===== ======= ===== ====== ===== ======= =====
</TABLE>
- ----------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after March 31, 1999 which have predetermined
interest rates is $14.2 million, while the total amount of loans due after such
dates which have floating or adjustable interest rates is $24.7 million.
6
<PAGE>
Underwriting Standards. All of the Bank's lending is subject to its written
underwriting standards and loan origination procedures. Decisions on loan
applications are made on the basis of detailed applications and, if applicable,
property valuations. Properties securing real estate loans made by the Bank are
generally appraised by Board-approved independent appraisers. In the loan
approval process, the Bank assesses the borrower's ability to repay the loan,
the adequacy of the proposed security, the employment stability of the borrower
and the credit-worthiness of the borrower.
The Bank requires evidence of marketable title and lien position or
appropriate title insurance on all loans secured by real property. The Bank also
requires fire and extended coverage casualty insurance in amounts at least equal
to the lesser of the principal amount of the loan or the value of improvements
on the property, depending on the type of loan. As required by federal
regulations, the Bank also requires flood insurance to protect the property
securing its interest if such property is located in a designated flood area.
Management reserves the right to change the amount or type of lending in
which it engages to adjust to market or other factors.
One- to Four-Family Residential Mortgage Lending. Residential loan
originations are generated by the Bank's marketing efforts, its present
customers, walk-in customers, referrals from real estate brokers. Historically,
the Bank has focused its lending efforts primarily on the origination of loans
secured by one- to four-family residential mortgages in its market area. At
March 31, 1998, the Bank's one- to four-family residential mortgage loans
totaled $30.3 million, or 46.3%, of the Bank's gross loan portfolio of which
$101,000 was non-performing at that date.
The Bank generally offers only adjustable rate mortgage loans, but has in
the past also offered fixed-rate mortgage loans. For the year ended March 31,
1998, the Bank originated $6.8 million of real estate loans, of which $4.1
million were secured by one- to four-family residential real estate, and $2.7
million was secured by commercial real estate. Substantially all of the Bank's
one- to four-family residential mortgage originations are secured by properties
located in its market area.
The Bank offers adjustable-rate mortgage loans at rates and on terms
determined in accordance with market and competitive factors. The Bank currently
originates adjustable-rate mortgage loans with a term of up to 25 years. The
Bank currently offers one-year and three-year adjustable-rate mortgage loans
with a stated interest rate margin generally over the one-year Treasury Bill
Index, which adjusts at one and three year terms, respectively. Increases or
decreases in the interest rate of the Bank's adjustable-rate loans is generally
limited to 100 basis points at any adjustment date for a one-year adjustable
rate loan, 200 basis points for a three-year adjustable rate loan, and 600 basis
points over the life of the loan. As a consequence of using caps, the interest
rates on these loans may not be as rate sensitive as are the Bank's liabilities.
The Bank qualifies borrowers for adjustable-rate loans based on the initial
interest rate of the loan. As a result, the risk of default on these loans may
increase as interest rates increase. See "Asset Quality - Non-Performing
Assets." At March 31, 1998, the total balance of one-to four-family
7
<PAGE>
adjustable-rate loans was $28.1 million or 42.8% of the Bank's gross loan
portfolio. See "-Originations, Purchases and Sales of Loans."
The Bank offers fixed-rate mortgage loans but with only short-term
maturities of up to 5 years. At March 31, 1998, the total balance of one- to
four-family fixed-rate loans was $1.7 million or 2.5% of the Bank's gross loan
portfolio. The Bank also offers U.S. Department of Agriculture (USDA) Guaranteed
Rural Housing Loans to first-time home buyers with minimal to no down payments
and that meet certain income limitations. These loans are 30-year fixed rate
loans with a 90% guarantee from USDA. At March 31, 1998, the total balance of
USDA Guaranteed Rural Housing Loans was $621,000 or .90% of the Bank's gross
loan portfolio. See "- Originations, Purchases and Sales of Loans."
Currently, the Bank will generally lend up to 80% of the lesser of the
sales price or appraised value of the security property on owner occupied one-
to four-family loans. Residential loans do not include prepayment penalties, are
non-assumable (other than government-insured or guaranteed loans), and do not
produce negative amortization. Real estate loans originated by the Bank contain
a "due on sale" clause allowing the Bank to declare the unpaid principal balance
due and payable upon the sale of the security property. The Bank does not
utilize private mortgage insurance.
The loans currently originated by the Bank are not typically underwritten
and documented pursuant to the guidelines of the FHLMC. Under current policy,
the Bank originates these loans for portfolio. See "- Originations, Purchases
and Sales of Loans and Mortgage-Backed Securities."
Consumer Lending. The Bank offers secured and unsecured consumer loans.
Secured loans may be collateralized by a variety of asset types, including
automobiles, mobile homes and deposits. The Bank currently originates
substantially all of its consumer loans in its primary market area. At March 31,
1998, the Bank's consumer loan portfolio totaled $11.6 million, or 17.7% of its
gross loan portfolio, substantially all of which were fixed rate loans. Under
federal law, the Bank's consumer loan portfolio, when aggregated with
investments in investment grade corporate debt, cannot exceed 35% of assets. A
national bank has no consumer loan portfolio limitations.
A significant component of the Bank's consumer loan portfolio consists of
new and used automobile loans. These loans generally have terms that do not
exceed five years. Generally, loans on vehicles are made in amounts up to 80% of
the sales price. At March 31, 1998, the Bank's automobile loans totaled $8.5
million or 13.0% of the Bank's gross loan portfolio. Of this amount
approximately $7.7 million or 90.6% and $800,000 or 9.4% were originated on a
direct and indirect basis, respectively.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Bank for consumer loans include an application, a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan.
8
<PAGE>
Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles. Further, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At March 31, 1998, $24,000 of the Bank's consumer loans were
non-performing. There can be no assurances that additional delinquencies will
not occur in the future.
Commercial Real Estate Lending. The Bank also originates commercial real
estate loans. At March 31, 1998 approximately $13.5 million, or 20.5% of the
Bank's gross loan portfolio, was comprised of commercial real estate loans of
which $36,000 were non-performing at that date. Of this amount, approximately
$1.1 million or 8.0% of these loans were fixed-rate commercial real estate loans
and approximately $12.4 million or 92.0% were adjustable rate loans. The largest
commercial real estate loan was for $1.6 million, of which $500,000 was
participated to other lenders. At March 31, 1998 this borrower had approximately
$1.1 million outstanding to the Bank.
The Bank will generally lend up to 80% of the value of the collateral
securing the loan with a maturity of up to five-years for fixed rate loans and
varying maturities up to 20 years for adjustable rate loans generally with
repricing of one year or less. In underwriting these loans, the Bank currently
analyzes the financial condition of the borrower, the borrower's credit history,
and the reliability and predictability of the cash flow generated by the
property securing the loan. The Bank requires personal guaranties of corporate
borrowers. Appraisals on properties securing commercial real estate loans
originated by the Bank are performed by independent appraisers. The Bank also
offers small business loans, which are generally guaranteed up to 90% by various
governmental agencies. The Bank has typically sold the guaranteed portion of
such loans and retained the uninsured portion as well as the servicing.
Commercial real estate loans generally present a higher level of risk than
loans secured by one- to four-family residences. This greater risk is due to
several factors, including the concentration of principal in a limited number of
loans and borrowers, the effect of general economic conditions on income
producing properties and the increased difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans secured by commercial
real estate is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced (for example,
if leases are not obtained or renewed, or a bankruptcy court modifies a lease
term, or a major tenant is unable to fulfill its lease obligations), the
borrower's ability to repay the loan may be impaired.
9
<PAGE>
Commercial Business Lending. The Bank also originates commercial business
loans. At March 31, 1998 approximately $9.4 million, or 14.3% of the Bank's
gross loan portfolio, was comprised of commercial business loans of which none
were non-performing at that date. Of this amount, approximately $5.0 million or
53.3% were fixed rate loans and approximately $4.4 million or 46.7% were
adjustable rate loans. The largest commercial business loans are loans of
$772,000 to a custom sledge application contractor.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself (which, in turn, is likely to be dependent upon the general economic
environment). The Bank's commercial business loans are usually, but not always,
secured by business assets and generally by personal assets as well. However,
the collateral securing the loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business. A
small portion of the Bank's commercial business loans are unsecured.
The Bank's commercial business lending policy includes credit file
documentation and analysis of the borrower's character, capacity to repay the
loan, the adequacy of the borrower's capital and collateral as well as an
evaluation of conditions affecting the borrower. Analysis of the borrower's
past, present and future cash flows is also an important aspect of the Bank's
current credit analysis. Nonetheless, such loans, are believed to carry higher
credit risk than more traditional investments.
Construction Lending. The Bank had $598,000 in construction loans for one-
to four-family residences or .91% of the total loan portfolio at March 31, 1998.
No construction loans for commercial property existed as of March 31, 1998.
The Bank offers construction loans to individuals for the construction of
one- to four-family residences or commercial buildings. Such loans are offered
with fixed and adjustable rates of interest. Following the construction period,
these loans may become permanent loans.
Construction lending is generally considered to involve a higher level of
credit risk since the risk of loss on construction loans is dependent largely
upon the accuracy of the initial estimate of the individual property's value
upon completion of the project and the estimated cost (including interest) of
the project. If the cost estimate proves to be inaccurate, the Bank may be
required to advance funds beyond the amount originally committed to permit
completion of the project.
Multi-Family Lending. The Bank offers one- to three-year adjustable-rate
multi-family loans for terms of up to 20 years. The Bank will generally lend up
to 80% of the value of the collateral securing the loan. At March 31, 1998, the
Bank had $117,000 of multi-family real estate loans or .18% of the Bank's gross
loan portfolio was comprised of such loans of which none were non-performing at
that date.
10
<PAGE>
Multi-family lending is generally considered to involve a higher level of
credit risk than one- to four-family residential lending. This greater risk in
multi-family lending is due to several factors, including the concentration of
principal in a limited number of loans and borrowers, the effect of general
economic conditions on income producing properties and the increased difficulty
of evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family real estate is typically dependent upon the
successful operation of the related real estate project. If the cash flow from
the project is reduced (for example, if leases are not obtained or renewed, or a
bankruptcy court modifies a lease term, or a major tenant is unable to fulfill
its lease obligations), the borrower's ability to repay the loan may be
impaired.
Originations, Purchases and Sales of Loans
Loan originations are developed from continuing business with depositors
and borrowers, soliciting realtors, builders, walk-in customers.
While the Bank currently originates adjustable-rate and fixed-rate loans,
its ability to originate loans to a certain extent is dependent upon the
relative customer demand for loans in its market, which is affected by the
interest rate environment, among other factors. For the year ended March 31,
1998, the Bank originated $7.8 million in fixed-rate loans and $6.5 million in
adjustable-rate loans.
The Bank sold through participations with other lenders, $58,000 in
commercial business loans for the year ended March 31, 1998. Sales of these
loans generally are beneficial to the Bank since these sales may produce future
servicing income, provide funds for additional lending and other investments and
increase liquidity. The Bank does not sell loans pursuant to forward sales
commitments and, therefore, an increase in interest rates after loan origination
and prior to sale may adversely affect the Bank's income at the time of sale.
During the year ended March 31, 1998, the Bank purchased no loans from
other lenders, none of which was originated by the other lenders, none of which,
were originated by the Bank, participated to other lenders, and then repurchased
by the Bank.
11
<PAGE>
The following table shows the loan origination, purchase, sale and
repayment activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
For the Five
Months Ended
March 31, Year Ended October 31,
------------ ----------------------
1998 1997 1996
---------- -------- -------
<S> <C> <C> <C>
Originations by type:
Real estate:
One to four family ........................ $4,135 $12,592 $11,883
Multi-family .............................. -- -- --
Commercial ................................ 2,705 7,265 4,703
------ ------- -------
Other:
Consumer .................................. 3,683 11,760 12,391
Commercial business ....................... 3,818 9,291 7,717
------ ------- -------
Total loans originated ................. 14,341 40,908 36,694
------ ------- -------
Purchases:
Real Estate:
Commercial ................................ -- 119 --
Other:
Commercial business ....................... -- 498 --
------ ------- -------
Total loan purchases .................... -- 617 --
------ ------- -------
Mortgage-backed securities ..................... -- -- 2,174
------ ------- -------
Total purchases ........................... -- -- 2,174
------ ------- -------
Sales and Repayments:
Real estate:
Commercial ................................ -- 1,727 990
Mortgage-backed securities sales .......... 942 1,727 990
Other:
Commercial business ............................ 58 360 754
------ ------- -------
Total sales ............................... 1,000 2,087 1,744
------ ------- -------
Principal reductions
Loans ..................................... 12,892 29,315 23,917
Mortgaged-backed securities ............... 752 854 1,136
------ ------- -------
Total Reductions ......................... 13,644 30,169 26,797
------ ------- -------
Decreases in other items, net .................. (507) (342) (1,386)
------ ------- -------
Net Increase (decrease) ........................ $(810) $8,927 $10,685
====== ======= =======
</TABLE>
12
<PAGE>
Asset Quality
Delinquencies. When a borrower fails to make a required payment on a loan,
the Bank attempts to cause the delinquency to be cured by contacting the
borrower. In the case of loans secured by real estate, reminder notices are sent
to borrowers. If payment is late, appropriate late charges are assessed and a
notice of late charges is sent to the borrower. If the loan is in excess of 60
days delinquent, the loan will generally be referred to the Bank's legal counsel
for collection.
When a loan becomes more than 90 days delinquent or is otherwise impaired,
the Bank will generally place the loan on non-accrual status and previously
accrued interest income on the loan is charged against current income.
Delinquent consumer loans are handled in a similar manner as to those
described above; however, shorter time frames for each step apply due to the
type of collateral generally associated with such types of loans. The Bank's
procedures for repossession and sale of consumer collateral are subject to
various requirements under applicable consumer protection laws.
The following table sets forth the Bank's loan delinquencies by type, by
amount and by percentage of type at March 31, 1998.
<TABLE>
<CAPTION>
Loans Delinquent For:
-------------------------------------------------------------------------------------
60-89 Days(1) 90 Days and Days(1) Nonaccrual
-------------------- -------------------- -----------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to ................... -- $-- -- -- $-- -- 2 $101 .33
four-family
Commercial ................. -- -- -- -- -- -- 1 36 .27
real estate
Consumer .................... 1 17 .15 -- -- -- 3 24 .20
Commercial
business .................... -- -- -- -- -- -- -- -- --
--- --- --- --- --- --- -- ---- ---
Total .................. 1 $17 .02% -- $-- --% 6 $161 .25%
=== === === === === === == ==== ===
<CAPTION>
Total Delinquent Loans
--------------------------------
Percent
of Loan
Number Amount Category
------ ------ --------
<S> <C> <C> <C>
Real Estate:
One- to ................... 2 $101 .33
four-family
Commercial ................. 1 36 .27
real estate
Consumer .................... 4 41 .35
Commercial
business .................... -- -- --
-- ---- ---
Total .................. 7 $178 .27%
== ==== ===
</TABLE>
- ----------
(1) Loans are still accruing.
13
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. Loans are
placed on non-accrual status when the collection of principal and/or interest
become doubtful. Foreclosed assets include assets acquired in settlement of
loans.
<TABLE>
<CAPTION>
For the Five
Months Ended For the Year Ended
March 31, October 31,
------------ ----------------------------------------
1998 1997 1996 1995 1994
------ ------ ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family ...................... $101 $ 67 $ 44 $ -- $ --
Commercial real estate ................... 36 231 -- -- --
Consumer ................................. 24 16 24 -- --
Commercial business ...................... -- 20 -- -- --
---- ---- ---- ---- ----
Total .................................. 161 334 68 -- --
---- ---- ---- ---- ----
Accruing loans delinquent more than 90 days:
One- to four-family ...................... -- -- 15 10 --
Commercial real estate ................... -- -- 21 -- --
Consumer ................................. -- -- -- 2 5
Commercial business ...................... -- -- -- -- 8
---- ---- ---- ---- ----
Total ................................. -- -- 36 12 13
---- ---- ---- ---- ----
Foreclosed assets:
One- to four-family ...................... 193 287 278 18 19
Commercial real estate ................... 28 48 -- -- --
Consumer ................................. 56 55 7 6 --
---- ---- ---- ---- ----
Total ................................. 277 390 285 24 19
---- ---- ---- ---- ----
Total non-performing assets ................ $438 $724 $389 $ 36 $ 32
==== ==== ==== ==== ====
Total as a percentage of total assets ...... .55% .96% .61% .07% .07%
==== ==== ==== ==== ====
</TABLE>
For the year ended March 31, 1998, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to approximately $5,000. There was $0 that was included
in interest income on such loans for the year ended March 31, 1998.
Classified Assets. Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities, considered by the
OCC to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full" on the basis of
14
<PAGE>
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for losses in an amount deemed
prudent by management. General allowances represent loss allowances which have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as "loss," it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge-off such
amount. An institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the
regulatory authorities, who may order the establishment of additional general or
specific loss allowances. Following the Bank Conversion, the Bank will continue
to be subject to these asset classification requirements.
In connection with the filing of its periodic reports with the OCC and in
accordance with its classification of assets policy, the Bank regularly reviews
loans in its portfolio to determine whether such assets require classification
in accordance with applicable regulations. On the basis of management's review
of its assets, at March 31, 1998, the Bank had classified a total of $2.1
million of its assets as substandard and none as doubtful or loss. At March 31,
1998, total classified assets comprised $2.1 million, or 22.3% of the Bank's
capital, or 2.6% of the Bank's total assets.
Other Loans of Concern. As of March 31, 1998, there were $136,000 million
loans identified, but not classified, by the Bank with respect to which known
information about the possible credit problems of the borrowers or the cash
flows of the security properties have caused management to have some doubts as
to the ability of the borrowers to comply with present loan repayment terms and
which may result in the future inclusion of such items in the non-performing
asset categories.
Allowance for Loan Losses. The allowance for loan losses is maintained at a
level which, in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased by a provision
for loan losses, which is charged to expense and reduced by charge-offs, net of
recoveries.
Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value minus estimated cost to sell. If fair value at the
date of foreclosure is lower than the balance of the related loan, the
difference will be charged-off to the allowance for loan losses at the time of
transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is established by a
charge to operations. At
15
<PAGE>
March 31, 1998, the Bank had three real estate properties acquired through
foreclosure totaling $221,000.
Although management believes that it uses the best information available to
determine the allowance, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Bank's allowance for loan losses will be
the result of periodic loan, property and collateral reviews and thus cannot be
predicted in advance. In addition, federal regulatory agencies, as an integral
part of the examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to increase the allowance based
upon their judgment of the information available to them at the time of their
examination. At March 31, 1998, the Bank had a total allowance for loan losses
of $665,000, representing 1.0% of the Bank's loans. See Note 1 of Notes To
Consolidated Financial Statements.
16
<PAGE>
The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
For the Five Months Ended
March 31, October 31,
------------------------------- ----------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------ ------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- --------- ------ --------- --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-
family .................... $181 $30,393 46.32% $100 $29,894 46.22% $ 77 $27,784 50.61%
Multi-family .............. -- 117 .18 -- 124 .19 -- 141 .26
Commercial
real estate ............ 196 13,466 20.52 110 12,420 19.20 61 9,594 17.47
Construction or
development ............ -- 598 .91 -- 578 .89 -- 76 .14
Consumer .................. 137 11,630 17.73 57 12,529 19.37 58 12,052 21.95
Commercial
business ............... 147 9,408 14.34 66 9,140 14.13 58 5,257 9.57
Unallocated ............... 4 -- -- 149 -- -- 159 -- --
---- ------- ------ ---- ------- ------ ---- ------- ------
Total ......... $665 $65,612 100.00% $482 $64,685 100.00% $413 $54,904 100.00%
==== ======= ====== ==== ======= ====== ==== ======= ======
<CAPTION>
October 31,
----------------------------------------------------------------
1995 1994
-------------------------------- -------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
One- to four-
family ............. $80 $23,448 51.80% $82 $21,058 61.04%
Multi-family ....... -- 174 .38 -- 190 .55
Commercial
real estate ..... 43 5,560 12.29 34 3,961 11.48
Construction or
development ..... -- 514 1.14 -- 140 .41
Consumer ........... 72 10,933 24.16 39 6,987 20.25
Commercial
business ........ 51 4,628 10.23 24 2,164 6.27
Unallocated ........ 9 -- -- 109 -- --
---- ------- ------ ---- ------- ------
Total .. $255 $45,257 100.00% $288 $34,500 100.00%
==== ======= ====== ==== ======= ======
</TABLE>
17
<PAGE>
The following table sets forth an analysis of the Bank's allowance for loan
losses.
For the Five
Months
Ended Year Ended October 31,
March 31, ----------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period ......... $482 $413 $255 $288 $367
Charge-offs:
One- to four-family .................. 15 25 2 -- --
Commercial real estate ............... 147 26
Consumer ............................. 198 110 94 44 59
Commercial business .................. 20 -- 26 -- 157
---- ---- ---- ---- ----
380 161 122 44 216
---- ---- ---- ---- ----
Recoveries:
One- to four-family .................. -- -- -- -- 30
Consumer ............................. 6 24 10 2 2
Commercial business .................. -- -- -- -- 81
---- ---- ---- ---- ----
6 24 10 2 113
---- ---- ---- ---- ----
Net charge-offs ........................ 374 137 112 42 103
Additions charged to operations ........ 557 206 270 9 24
---- ---- ---- ---- ----
Balance at end of period ............... $665 $482 $413 $255 $288
==== ==== ==== ==== ====
Ratio of net charge-offs during
the period to average loans
outstanding during the period(1) ...... .58% .23% .23% .11% .32%
==== ==== ==== ==== ====
Ratio of net charge-offs during
the period to average
non-performing assets ................. 95.17% 32.31% 54.90% 84.00% 97.17%
===== ===== ===== ===== =====
Investment Activities
General. Historically, the Bank has generally maintained liquid assets at
levels believed adequate to meet the requirements of normal operations,
including repayments of maturing debt and potential deposit outflows. Cash flows
projections are regularly reviewed and updated to assure that adequate liquidity
is maintained. A national bank is not subject to prescribed requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources" and "Regulation - Liquidity."
National banking associations have the authority to invest in various types
of liquid assets, including United States Treasury obligations, securities of
various federal agencies, certain certificates of deposit of insured banks and
savings institutions, certain bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, national banks may also invest
their assets in commercial paper, investment grade corporate debt securities and
mutual
18
<PAGE>
funds whose assets conform to the investments that a federally chartered savings
institution is otherwise authorized to make directly.
Generally, the investment policy of the Bank, as established by the Board
of Directors, is to invest funds among various categories of investments and
maturities based upon the Bank's liquidity needs, asset/liability management
policies, investment quality, marketability and performance objectives.
Investment Securities. At March 31, 1998, the Bank's investment securities
(including a $317,000 investment in the common stock of the FHLB of Chicago and
Federal Reserve stock of $123,000) totaled $3.6 million, or 4.6% of its total
assets. It has been the Bank's general policy to invest in obligations of state
and political subdivisions, federal agency obligations and other investment
securities.
National banks are restricted in investments in corporate debt and equity
securities by the Bank. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Bank's unimpaired capital and unimpaired surplus as defined by federal
regulations, which totaled $1.5 million as of March 31, 1998, plus an additional
10% if the investments are fully secured by readily marketable collateral. At
March 31, 1998, the Bank was in compliance with this regulation. See "Regulation
- - Federal Regulation of National Banks" for a discussion of additional
restrictions on the Bank's investment activities. See Notes 1 and 2 of Notes To
Consolidated Financial Statements.
19
<PAGE>
The following table sets forth the composition of the Bank's investment and
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
For the Five Months October 31,
Ended March 31, -----------------------------------------------------
1998 1997 1996 1995
--------------- --------------- --------------- ---------------
Book % of Book % of Book % of Book % of
Value Total Value Total Value Total Value Total
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
Equity Securities:
FHLB stock .......................................... $ 317 7.70% $ 317 8.33% $ 264 6.39% $ 240 8.30%
FHLMC stock ......................................... -- -- -- -- 205 4.96 208 7.20
------ ------ ------ ------ ------ ------ ------ ------
Federal Reserve Bank stock .......................... 123 2.99 123 3.24 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total equity securities ........................... 440 10.69 440 11.57 469 11.35 448 15.50
Investments securities:
FHLB agency ......................................... 2,530 61.42 499 13.12 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total investment securities ...................... 2,530 61.42 499 13.12 -- -- -- --
Mortgage-backed Securities:
GNMA ................................................ 142 3.45 161 4.23 209 5.06 309 10.69
FNMA ................................................ 880 21.36 2,138 56.22 2,730 66.05 1,139 39.42
FHLMC ............................................... 127 3.08 565 14.86 725 17.54 994 34.39
------ ------ ------ ------ ------ ------ ------ ------
Total mortgage-backed securities .................. 1,149 27.89 $2,864 75.31% $3,664 88.65% $2,442 84.50%
------ ------ ------ ------ ------ ------ ------ ------
Total available for sale .......................... $4,119 100.00% $3,803 100.00% $4,133 100.00% $2,890 100.00%
------ ------ ====== ====== ====== ====== ====== ======
HELD TO MATURITY
Investment Securities:
FHLMC step up ....................................... $ -- --% $ -- --% $ -- --% $ 500 38.58%
Municipal bonds ..................................... 190 19.89 210 21.06 245 41.39 265 20.45
U.S. Treasury notes ................................. 500 52.36 500 50.15 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total investment securities ....................... 690 72.25 710 71.21 245 41.39 765 59.03
------ ------ ------ ------ ------ ------ ------ ------
Mortgage-backed Securities:
FHLMC ................................................ 265 27.75 $ 287 28.79% $ 347 58.61% $ 531 40.97%
------ ------ ------ ------ ------ ------ ------ ------
Total held to maturity ............................ $ 955 100.00% $ 997 100.00% $ 592 100.00% $1,296 100.00%
------ ------ ====== ====== ====== ====== ====== ======
Average remaining life of investment securities ........ 2.97 Years 3.96 Years 3.31 Years 3.49 Years
Other interest-earning assets:
Total interest-bearing deposits with banks ........ $5,965 100.00% $2,662 100.00% $ 868 100.00% $2,472 100.00%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
20
<PAGE>
The Bank's investment securities portfolio at March 31, 1998, contained no
securities of any issuer with an aggregate book value in excess of 10% of the
Bank's retained earnings, excluding those issued by the U.S. government, or its
agencies.
First Robinson's investments, including the mortgage-backed securities
portfolio, are managed in accordance with a written investment policy adopted by
the Board of Directors.
OCC guidelines, as well as those of the other federal banking regulators,
regarding investment portfolio policy and accounting require Banks to categorize
securities and certain other assets as held for "investment," "sale," or
"trading." In addition, effective April 1, 1994, the Bank adopted SFAS 115 which
states that securities available for sale are accounted for at fair value and
securities which management has the intent and the Bank has the ability to hold
to maturity are accounted for on an amortized cost basis. The Bank's investment
policy has strategies for each type of security. At March 31, 1998, the Bank
classified $3.0 million of its investments as available for sale and $690,000 as
held to maturity.
Mortgage-backed Securities. The Bank invests primarily in federal agency
obligations. At March 31, 1998, the Bank's investment in mortgage-backed
securities totaled $1.4 million or 1.8% of its total assets. Of this amount,
$265,000 was held to maturity and $1.1 million was available for sale. At March
31, 1998, the Bank did not have a trading portfolio.
The following table sets forth the maturities of the Bank's mortgage-backed
securities at March 31, 1998.
<TABLE>
<CAPTION>
Due in
-------------------------------------
1 Year 1 to 5 to 10 10 Years
or Less 5 Years Years or More Total
------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation $ -- $ 265 $ -- $ 127 $ 392
Weighted Average ................... -- 6.00 -- 7.75 6.57
Federal National Mortgage Company .... -- -- -- 880 880
Weighted Average ................... -- -- -- 7.74 7.74
Government National Mortgage Company . -- -- -- 142 142
----- ----- ------ ------- ---------
Weighted Average ................... -- -- -- 7.30 7.30
----- ----- ------ ------- ---------
Total ........................... $ -- $ 265 $ -- $ 1,149 $ 1,414
===== ===== ====== ======= =========
Weighted Average ................... --% 6.00% --% 7.69% 7.37%
</TABLE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, receipt of
principal and interest on loans and securities, interest earned on deposits with
other banks, and other funds provided from operations.
21
<PAGE>
The Bank has used FHLB advances to support lending activities and to assist
in the Bank's asset/liability management strategy. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Asset\Liability
Management." At March 31, 1998, the Bank had $2.0 million in FHLB advances, but
had the capacity to borrow up to $17.3 million from the FHLB. See Note 8 of
Notes To Consolidated Financial Statements.
At March 31, 1998, the Bank had $1.6 million in repurchase agreements. See
Note 9 of Notes to Consolidated Financial Statements.
Deposits. The Bank offers a variety of deposit accounts having a wide range
of interest rates and terms. The Bank's deposits consist of passbook, money
market deposit, IRA accounts, and certificate accounts. The certificate accounts
currently range in terms from 90 days to five years. The Bank has a significant
amount of deposits that will mature within one year. However, management expects
that virtually all of the deposits will be renewed.
The Bank relies primarily on advertising, competitive pricing policies and
customer service to attract and retain these deposits. Currently, the Bank
solicits deposits from its market area only, and does not use brokers to obtain
deposits. The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition.
The Bank has become more susceptible to short-term fluctuations in deposit
flows as customers have become more interest rate conscious. The Bank endeavors
to manage the pricing of its deposits in keeping with its profitability
objectives giving consideration to its asset/liability management. The ability
of the Bank to attract and maintain savings accounts and certificates of
deposit, and the rates paid on these deposits, has been and will continue to be
significantly affected by market conditions. See Note 7 of Notes To Consolidated
Financial Statements.
22
<PAGE>
The following table sets forth the savings flows at the Bank during the
periods indicated.
For the Five
Months Ended Year Ended October 31,
March 31, --------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
Opening balance............... $61,715 $ 56,691 $ 49,404
Deposits...................... 79,439 231,602 185,451
Withdrawals................... 79,279 228,418 179,660
Interest credited............. 755 1,840 1,496
------- -------- -------
Ending balance................ $62,630 $ 61,715 $ 56,691
======= ======== ========
Net increase.................. $ 915 $ 5,024 $ 7,287
======= ======== ========
Percent increase.............. 1.48% 8.86% 14.75%
======= ======== ========
23
<PAGE>
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by the Bank for the periods indicated.
<TABLE>
<CAPTION>
For the Five Months
Ended March 31, October 31,
---------------------- --------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------- -------- ------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Non-interest bearing demand 0% ................. $ 3,217 5.13% $ 3,494 5.66% $ 2,265 4.00%
Passbook Accounts 3.10% ........................ 6,508 10.39 5,882 9.53 5,540 9.77
NOW Accounts 3.11% ............................. 10,125 16.17 8,381 13.58 6,717 11.85
------- ------ ------- ------ ------- ------
Total Non-Certificates ......................... 19,850 31.69 17,757 28.77 14,522 25.62
------- ------ ------- ------ ------- ------
Certificates:
2.00 - 3.99% .................................. 69 .11 $ 122 .20 $ 94 .17%
4.00 - 5.99% .................................. 23,191 37.03 22,280 36.10 22,958 40.49
6.00 - 7.99% .................................. 19,520 31.17 21,556 34.93 19,117 33.72
------- ------ ------- ------ ------- ------
Total Certificates ............................. 42,780 68.31 43,958 71.23% 42,169 74.38
------- ------ ------- ------ ------- ------
Total Deposits ................................. $62,630 100.00% $61,715 100.00% $56,691 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
24
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of March 31, 1998.
Weighted
2.00- 4.00- 6.00- Percent Average
3.99% 5.99% 7.99% Total of Total Rate
----- ------- ------- ------- -------- --------
Certificate accounts
maturing
in quarter ending:
- -------------------- (Dollars in Thousands)
June 30, 1998 ..... $ 69 $ 6,921 $ 1,872 $ 8,862 20.71% 5.45%
September 30, 1998 -- 4,092 1,948 6,040 14.12 5.46
December 31, 1999 . -- 3,084 2,346 5,430 12.69 5.74
March 31, 1999 .... -- 4,008 2,181 6,189 14.47 5.57
June 30, 1999 ..... -- 917 1,220 2,137 5.00 5.97
September 30, 1999 -- 1,822 1,977 3,799 8.88 5.80
December 31, 1999 . -- 716 1,733 2,449 5.72 6.02
March 31, 2000 .... -- 682 1,543 2,225 5.20 5.90
June 30, 2000 ..... -- 190 1,371 1,561 3.65 6.04
September 30, 2000 -- 503 918 1,421 3.32 5.95
December 31, 2000 . -- 12 646 658 1.54 6.30
Thereafter ........ -- 244 1,765 2,009 4.70 6.08
----- ------- ------- ------- ------ ----
Total .......... $ 69 $23,191 $19,520 $42,780 100.00% 5.70%
===== ======= ======= ======= ====== ====
Percent of total .16% 54.21% 45.63% 100.00%
===== ======= ======= =======
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of March 31,
1998.
<TABLE>
<CAPTION>
Maturity
-------------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 ............. $ 6,303 $ 4,738 $ 9,898 $12,774 $33,713
Certificates of deposit of $100,000 or more ............ 938 1,302 1,616 3,479 7,335
Public funds of $100,000 or more (1) ................... 1,625 -- 107 1,732 1,732
------- ------- ------- ------- -------
Total certificates of deposit ........................... $ 8,866 $ 6,040 $11,621 $16,253 $42,780
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Deposits from governmental and other public entities.
25
<PAGE>
Subsidiary Activities
As a national bank, the Bank is able to invest unlimited amounts in
subsidiaries that are engaged in activities in which the parent bank may engage.
In addition, a national bank may invest limited amounts in subsidiaries that
provide banking services, such as data processing, to other financial
institutions. At March 31, 1998, the Bank had one subsidiary, First Robinson
Service Corporation, Inc.
Competition
The Bank faces strong competition, both in originating real estate,
commercial and consumer loans and in attracting deposits. Competition in
originating loans comes primarily from commercial banks and credit unions
located in the Bank's market area. Commercial banks provide vigorous competition
in consumer lending. The Bank competes for real estate and other loans
principally on the basis of the quality of services it provides to borrowers,
the interest rates and loan processing fees it charges, and the types of loans
it originates. See "- Lending Activities."
The Bank attracts all of its deposits through its retail banking office.
Therefore, competition for those deposits is principally from retail brokerage
offices, commercial banks and credit unions located in the community. The Bank
competes for these deposits by offering a variety of account alternatives at
competitive rates and by providing convenient business hours.
The Bank primarily serves Crawford County, Illinois. There are four
commercial banks which compete for deposits and loans in the Bank's market area.
REGULATION
General. The Bank is a registered bank holding company, subject to broad
federal regulation and oversight by the FRB. First Robinson Savings Bank, N.A.
(the "Bank") is a national bank, the deposits of which are federally insured and
backed by the full faith and credit of the United States Government.
Accordingly, the Bank is subject to broad federal regulation and oversight
extending to all its operations by the OCC, the FDIC and the FRB. The Bank is
also a member of the FHLB of Chicago. The Bank is a member of the SAIF and the
deposits of the Bank are insured by the FDIC.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document. See Note 10 of Notes To Consolidated
Financial Statements.
Federal Regulation of National Banks
The OCC has extensive authority over the operations of national banks. As
part of this authority, the Bank is required to file periodic reports with the
OCC and is subject to periodic examinations by the OCC. All national banks are
subject to a semi-annual assessment, based upon the bank's total assets, to fund
the operations of the OCC.
26
<PAGE>
The OCC also has extensive enforcement authority over all national banks,
including The Bank. This enforcement authority 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 OCC. Except
under certain circumstances, public disclosure of final enforcement actions by
the OCC is required.
The Bank's loans-to-one borrower limit is generally limited to 15% of
unimpaired capital and surplus. At March 31, 1998, the maximum amount which the
Bank could have lent under this limit to any one borrower and the borrower's
related entities was approximately $1.5 million. At March 31, 1998, the Bank had
no loans or groups of loans to related borrowers with outstanding balances in
excess of this amount. The Bank's five largest lending relationships at March
31, 1998 totaled $8.5 million in the aggregate and were performing in accordance
with their terms.
The OCC, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. The OCC and the other federal banking
agencies have also proposed additional guidelines on asset quality and earnings
standards. No assurance can be given as to whether or in what form the proposed
regulations will be adopted.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the FDIC. The FDIC
also has the authority to initiate enforcement actions against banks after
giving the OCC an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
27
<PAGE>
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
In order to equalize the deposit insurance premium schedules for BIF and
SAIF insured institutions, the FDIC imposed a one-time special assessment on all
SAIF-assessable deposits pursuant to federal legislation passed on September 30,
1996. The Bank's special assessment, which was $281,000, was paid in November
1996, but accrued for the fiscal year ended March 31, 1998. Effective January 1,
1997, the premium schedule for BIF and SAIF insured institutions ranged from 0
to 27 basis points. However, SAIF-insured institutions are required to pay a
Financing Corporation (FICO) assessment, in order to fund the interest on bonds
issued to resolve thrift failures in the 1980's, equal to 6.48 basis points for
each $100 in domestic deposits, while BIF-insured institutions pay an assessment
equal to 1.52 basis points for each $100 in domestic deposits. The assessment is
expected to be reduced to 2.43 no later than January 1, 2000, when BIF insured
institutions fully participate in the assessment. These assessments, which may
be revised based upon the level of BIF and SAIF deposits will continue until the
bonds mature in the year 2017.
National Banks. The Bank is subject to the capital regulations of the OCC.
The OCC's regulations establish two capital standards for national banks: a
leverage requirement and a risk-based capital requirement. In addition, the OCC
may, on a case-by-case basis, establish individual minimum capital requirements
for a national bank that vary from the requirements which would otherwise apply
under OCC regulations. A national bank that fails to satisfy the capital
requirements established under the OCC's regulations will be subject to such
administrative action or sanctions as the OCC deems appropriate.
The leverage ratio adopted by the OCC requires a minimum ratio of "Tier 1
capital" to adjusted total assets of 3% for national banks rated composite 1
under the CAMEL rating system for banks. National banks not rated composite 1
under the CAMEL rating system for banks are required to maintain a minimum ratio
of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the level
and nature of risks of their operations. For purposes of the OCC's leverage
requirement, Tier 1 capital generally consists of common stockholders' equity
and retained income and certain non-cumulative perpetual preferred stock and
related income, except that no intangibles and certain purchased mortgage
servicing rights and purchased credit card relationships may be included in
capital.
The risk-based capital requirements established by the OCC's regulations
require national banks to maintain "total capital" equal to at least 8% of total
risk-weighted assets. For purposes of the risk-based capital requirement, "total
capital" means Tier 1 capital (as described above) plus "Tier 2 capital,"
provided that the amount of Tier 2 capital may not exceed the amount of Tier 1
capital, less certain assets. The components of Tier 2 capital include certain
permanent and maturing capital instruments that do not qualify as core capital
and general valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets.
28
<PAGE>
The OCC has revised its risk-based capital requirements to permit the OCC
to require higher levels of capital for an institution in light of its interest
rate risk. In addition, the OCC has proposed that a bank's interest rate risk
exposure would be quantified using either the measurement system set forth in
the proposal or the institution's internal model for measuring such exposure, if
such model is determined to be adequate by the institution's examiner. Small
institutions that are highly capitalized and have minimal interest rate risk,
such as the Bank, would be exempt from the rule unless otherwise determined by
the OCC. Management of the Bank has not determined what effect, if any, the
OCC's proposed interest rate risk component would have on the National Bank's
capital if adopted as proposed.
Prompt Corrective Action. The OCC is authorized and, under certain
circumstances required, to take certain actions against national banks that fail
to meet their capital requirements. The OCC is generally required to take action
to restrict the activities of an "undercapitalized Company" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such Company
must submit a capital restoration plan and until such plan is approved by the
OCC may not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions. The OCC is authorized to impose the additional restrictions that
are applicable to significantly undercapitalized Companys.
Any national banking Company that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the Bank. A Company that becomes "critically
undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to
further mandatory restrictions on its activities in addition to those applicable
to significantly undercapitalized Companys. In addition, the OCC must appoint a
receiver (or conservator with the concurrence of the FDIC) for a Company, with
certain limited exceptions, within 90 days after it becomes critically
undercapitalized. Any undercapitalized Company is also subject to the general
enforcement authority of the OCC, including the appointment of a conservator or
a receiver.
The OCC is also generally authorized to reclassify a bank into a lower
capital category and impose the restrictions applicable to such category if the
institution is engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The imposition by the OCC of any of these measures on the Bank may have a
substantial adverse effect on the Bank's operations and profitability and the
value of the Bank's Common Stock.
Limitations on Dividends and Other Capital Distributions
The Bank's ability to pay dividends is governed by the National Bank Act
and OCC regulations. Under such statute and regulations, all dividends by a
national bank must be paid out of current or retained net profits, after
deducting reserves for losses and bad debts. The National
29
<PAGE>
Bank Act further restricts the payment of dividends out of net profits by
prohibiting a national bank from declaring a cash dividend on its shares of
common stock until the surplus fund equals the amount of capital stock or, if
the surplus fund does not equal the amount of capital stock, until one-tenth of
the Bank's net profits for the preceding half year in the case of quarterly or
semi-annual dividends, or the preceding two half-year periods in the case of
annual dividends, are transferred to the surplus fund. In addition, the prior
approval of the OCC is required for the payment of a dividend if the total of
all dividends declared by a national bank in any calendar year would exceed the
total of its net profits for the year combined with its net profits for the two
preceding years, less any required transfers to surplus or a fund for the
retirement of any preferred stock.
The OCC has the authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice. In addition, the Bank would be prohibited by federal statute
and the OCC's prompt corrective action regulations from making any capital
distribution if, after giving effect to the distribution, the Bank would be
classified as "undercapitalized" under the OCC's regulations. See "-- Prompt
Corrective Action." Finally, the Bank would not be able to pay dividends on its
capital stock if its capital would thereby be reduced below the remaining
balance of the liquidation account established in connection with the Bank's
Conversion.
Accounting
The OCC requires that investment activities of a national bank be in
compliance with approved and documented investment policies and strategies, and
must be accounted for in accordance with generally accepted accounting
principles ("GAAP"). Accordingly, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. The Bank is in compliance with these
requirements.
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices 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 OCC, in connection with the examination of the
Bank, 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, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OCC.
30
<PAGE>
The federal banking agencies, including the OCC, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was examined for CRA compliance in
1996 and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a national bank or its subsidiaries and its
affiliates are required to be on terms as favorable to the Bank as transactions
with non-affiliates. In addition, certain of these transactions, such as loans
to an affiliate, are restricted to a percentage of the Bank's capital.
Affiliates of the Bank include any company which is under common control with
the Bank. In addition, the Bank may not acquire the securities of most
affiliates. Subsidiaries of the Bank are not deemed affiliates. However, the FRB
has the discretion to treat subsidiaries of national banks as affiliates on a
case by case basis.
Certain transactions with directors, officers or controlling persons
("Insiders") are also subject to conflict of interest rules enforced by the OCC.
These conflict of interest regulations and other statutes also impose
restrictions on loans to such persons and their related interests. Among other
things, as a general matter, loans to Insiders must be made on terms
substantially the same as for loans to unaffiliated individuals.
Federal Reserve System
The FRB requires all depository institutions to maintain non-interest
bearing reserves at specified levels against their transaction accounts
(primarily checking, NOW and Super NOW checking accounts). At March 31, 1998,
the Bank had $123,000 FRB stock, which was in compliance with these reserve
requirements.
National banks are authorized to borrow from the Federal Reserve Bank
"discount window," but FRB regulations require Companys to exhaust other
reasonable alternative sources of funds, including FHLB borrowings, before
borrowing from the Federal Reserve Bank.
The Bank is a member of the Federal Reserve System.
Holding Company Regulation
General. The Bank is a bank holding company, registered with the FRB. Bank
holding companies are subject to comprehensive regulation by the FRB under the
BHCA, and the regulations of the FRB. As a bank holding company, the Bank is
required to file reports with the FRB and such additional information as the FRB
may require, and will be subject to regular examinations by the FRB. The FRB
also has extensive enforcement authority over bank holding companies, including,
among other things, the ability to assess civil money penalties, to issue cease
and desist or removal orders and to require that a holding company divest
subsidiaries
31
<PAGE>
(including its bank subsidiaries). In general, enforcement actions may be
initiated for violations of law and regulations and unsafe or unsound practices.
Under FRB policy, a bank holding company must serve as a source of strength
for its subsidiary banks. Under this policy the FRB may require, and has
required in the past, a holding company to contribute additional capital to an
undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain FRB approval before: (i)
acquiring, directly or indirectly, ownership or control of any voting shares of
another bank or bank holding company if, after such acquisition, it would own or
control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the assets
of another bank or bank holding company; or (iii) merging or consolidating with
another bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by FRB regulation or order, have been identified as
activities closely related to the business of banking or managing or controlling
banks. The list of activities permitted by the FRB includes, among other things,
operating a savings institution, mortgage company, finance company, credit card
company or factoring company; performing certain data processing operations;
providing certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; leasing property
on a full-payout, non-operating basis; selling money orders, travelers' checks
and United States Savings Bonds; real estate and personal property appraising;
providing tax planning and preparation services; and, subject to certain
limitations, providing securities brokerage services for customers. The Holding
Company has no present plans to engage in any of these activities.
Interstate Banking and Branching. On September 29, 1994, the Riegle-Neal
Interstate Banking and Branching Act of 1994 (the "Act") was enacted to ease
restrictions on interstate banking. Effective September 29, 1995, the Act allows
the FRB to approve an application of an adequately capitalized and adequately
managed bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The FRB may not approve the acquisition of
the bank that has not been in existence for the minimum time period (not
exceeding five years) specified by the statutory law of the host state. The Act
also prohibits the FRB from approving an application if the applicant (and its
depository institution affiliates) controls or would control more than 10% of
the insured deposits in the United States or 30% or more of the deposits in the
target bank's home state or in any state in which the target bank maintains a
branch. The Act does not affect the authority of states to limit the percentage
of total insured deposits in the state which may be held or controlled by a bank
or bank holding company to the extent such limitation does not discriminate
against out-of-state banks or bank holding companies. Individual states may also
waive the 30% state-wide concentration limit
32
<PAGE>
contained in the Act. The State of Illinois does not currently have any deposit
concentration limits or age protection for new banks.
Additionally, on June 1, 1997, the federal banking agencies were authorized
to approve interstate merger transactions without regard to whether such
transaction is prohibited by the law of any state, unless the home state of one
of the banks opts out of the Act by adopting a law after the date of enactment
of the Act and prior to June 1, 1997 which applies equally to all out-of-state
banks and expressly prohibits merger transactions involving out-of-state banks.
Interstate acquisitions of branches will be permitted only if the law of the
state in which the branch is located permits such acquisitions. Interstate
mergers and branch acquisitions will also be subject to the nationwide and
statewide insured deposit concentration amounts described above. The State of
Illinois has authorized interstate merger transactions effective June 1, 1997.
The Act authorizes the OCC and FDIC to approve interstate branching de novo
by national and state banks, respectively, only in states which specifically
allow for such branching. The Act also requires the appropriate federal banking
agencies to prescribe regulations by June 1, 1997 which prohibit any
out-of-state bank from using the interstate branching authority primarily for
the purpose of deposit production. These regulations must include guidelines to
ensure that interstate branches operated by an out-of-state bank in a host state
are reasonably helping to meet the credit needs of the communities which they
serve.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that the Holding
Company's net income for the past year is sufficient to cover both the cash
dividends and a rate of earning retention that is consistent with the Holding
Company's capital needs, asset quality and overall financial condition. The FRB
also indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, under the
prompt corrective action regulations adopted by the FRB, the FRB may prohibit a
bank holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized". See " -- Regulatory Capital
Requirements -- Prompt Corrective Action."
Bank holding companies are required to give the FRB prior written notice of
any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of their consolidated net worth. The FRB may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe or unsound practice or would violate any law,
regulation, FRB order, or any condition imposed by, or written agreement with,
the FRB. This notification requirement does not apply to any company that meets
the well-capitalized standard for commercial banks, has a safety and soundness
examination rating of at least a "2" and is not subject to any unresolved
supervisory issues.
33
<PAGE>
Capital Requirements. The FRB has established capital requirements for bank
holding companies that generally parallel the capital requirements for national
banks. For bank holding companies with consolidated assets of less than $150
million, such as the Bank, compliance is measured on a bank-only basis. See
"--Regulatory Capital Requirements - National Banks." The Bank's capital exceeds
such requirements.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Chicago, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings Companys.
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 which are subject to the oversight of the Federal
Housing Finance Board. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB. In addition, all
long-term advances are required to provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Chicago. At March 31, 1998, the Bank had $317,000 in FHLB stock, which
was in compliance with this requirement. In the past year, the Bank has received
substantial dividends on its FHLB stock.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings Companys and to contribute to low- and moderately
priced housing programs through direct loans or interest subsidies on advances
targeted for community investment and low- and moderate-income housing projects.
These contributions have affected adversely the level of FHLB dividends paid and
could continue to do so in the future. These contributions could also have an
adverse effect on the value of FHLB stock in the future. A reduction in value of
The Bank's FHLB stock may result in a corresponding reduction in the Bank's
capital.
Federal and State Taxation
Federal Taxation. In addition to the regular income tax, corporations,
including the Bank, generally are subject to a minimum tax. An alternative
minimum tax is imposed at a minimum tax rate of 20% on alternative minimum
taxable income, which is the sum of a corporation's regular taxable income (with
certain adjustments) and tax preference items, less any available exemption. The
alternative minimum tax is imposed to the extent it exceeds the corporation's
regular income tax and net operating losses can offset no more than 90% of
alternative minimum taxable income. For taxable years beginning after 1986 and
before 1996, corporations, such as the Bank, are also subject to an
environmental tax equal to 0.12% of the excess of alternative minimum taxable
income for the taxable year (determined without regard to net operating losses
and the deduction for the environmental tax) over $2 million.
34
<PAGE>
The Bank has recorded a deferred tax liability of approximately $21,000,
relating to unrealized gains on available-for-sale securities, accumulated
depreciation and cash-accrual conversions.
The Company and the Bank file a consolidated income tax return on the cash
basis of accounting. The Company will be filing the next income tax on the
accrual basis of accounting because the total revenue exception has been
exceeded for the cash basis filing requirement.
Neither the Company nor the Bank have never been audited by the IRS with
respect to federal income tax returns.
Illinois Taxation. For Illinois income tax purposes, the Bank is taxed at
an effective rate equal to 7.18% of Illinois taxable income. For these purposes,
"Illinois Taxable Income" generally means federal taxable income, subject to
certain adjustments (including the addition of interest income on state and
municipal obligations and the exclusion of interest income on United States
Treasury obligations). The exclusion of income on United States Treasury
obligations has had the effect of eliminating Illinois taxable income for the
Bank.
The Bank's accounting activities are maintained on an in-house computer
system and its record-keeping activities are maintained on an on-line basis with
an independent service bureau.
Competition
The Bank faces strong competition, both in originating real estate,
commercial and consumer loans and in attracting deposits. Competition in
originating loans comes primarily from commercial banks, credit unions and
savings institutions located in the Bank's market area. Commercial banks, credit
unions and savings institutions provide vigorous competition in consumer
lending. The Bank competes for real estate and other loans principally on the
basis of the quality of services it provides to borrowers, the interest rates
and loan processing fees it charges, and the types of loans it originates. See
"- Lending Activities."
The Bank attracts all of its deposits through its retail banking offices.
Therefore, competition for those deposits is principally from retail brokerage
offices, commercial banks, credit unions and savings institutions located in the
community. The Bank competes for these deposits by offering a variety of account
alternatives at competitive rates and by providing convenient business hours.
The Bank primarily serves Crawford County, Illinois and surrounding
counties. There are four commercial banks and two credit unions, other than The
Bank, which compete for deposits and loans in the Bank's primary market area.
35
<PAGE>
Employees
At March 31, 1998, the Bank had a total of 36 full-time and 8 part-time
employees. The Bank's employees are not represented by any collective bargaining
group. Management considers its employee relations to be good.
Item 2. Description of Properties
The Bank conducts its business through its main office and three branch
offices, which are located in Crawford County, Illinois. The Bank owns its main
office and branch offices. The following table sets forth information relating
to the Bank's office as of March 31, 1998. The total net book value of the
Bank's premises and equipment (including land, buildings and leasehold
improvements and furniture, fixtures and equipment) at March 31, 1998 was
approximately $2.9 million.
Total
Approximate
Date Square Net Book Value at
Location Acquired Footage March 31, 1998
-------- -------- ------- --------------
Main Office:
501 East Main Street 1985 12,420 $1.5 million
Robinson, Illinois
Branch Offices:
119 East Grand Prairie 1995 1,800 384,000
Palestine, Illinois
102 West Main Street 1995 2,260 75,000
Oblong, Illinois
Outer East Main Street 1997 1,000 $226,000
Oblong, Illinois
The Bank believes that its current facilities are adequate to meet the
present and foreseeable needs of the Bank and the Holding Company. See Note 6 of
Notes To Consolidated Financial Statements.
Item 3. Legal Proceedings
The Bank is involved, from time to time, as plaintiff or defendant in
various legal actions arising in the normal course of its businesses. While the
ultimate outcome of these proceedings cannot be predicted with certainty, it is
the opinion of management, after consultation with counsel representing the Bank
in the proceedings, that the resolution of these proceedings should not have a
material effect on Holding Company's results of operations on a consolidated
basis.
36
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Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the year ended March 31, 1998.
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Page 52 of the attached 1998 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Pages 4 through 19 of the attached 1998 Annual Report to Stockholders are
herein incorporated by reference.
Item 7. Financial Statements
The following information appearing in the Bank's Annual Report to
Stockholders for the year ended March 31, 1998, is incorporated by reference in
this Annual Report on Form 10-KSB as Exhibit 13.
37
<PAGE>
<TABLE>
<CAPTION>
Pages in
Annual
Annual Report Section Report
- --------------------- ------
<S> <C>
Report of Independent Auditors.................................................. 21
Consolidated Statements of Financial Condition at the Five Months
Ended March 31, 1998 and the Fiscal Years Ended October 31,
1997 and 1996................................................................ 22 to 23
Consolidated Statements of Income for the Five Months Ended
March 31, 1998 and 1997 and the Years Ended October 31, 1997 and 1996........ 24
Consolidated Statements of Stockholders= Equity for the Five Months
Ended March 31, 1998 and the Years Ended October 31, 1997 and 1996........... 25
Consolidated Statements of Cash Flows for the Five Months March 31, 1998
and the Years Ended October 31, 1997 and 1996................................... 26 to 27
Notes to Consolidated Financial Statements...................................... 28 to 51
</TABLE>
With the exception of the aforementioned information, the Bank's Annual
Report to Stockholders for the year ended March 31, 1998, is not deemed filed as
part of this Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There have been no changes in or disagreements with the Bank's accountants
on accounting and financial disclosure matters.
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act
Directors
Information concerning Directors of the Bank is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1998, a copy of which will be filed not later than
120 days after the close of the fiscal year.
38
<PAGE>
Executive Officers
Information concerning Executive Officers of the Bank is incorporated
herein by reference from the definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on July 29, 1998, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the Bank's
directors and executive officers, and persons who own more than 10% of a
registered class of the Bank's equity securities, to file with the SEC initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Bank. Officers, directors and greater than 10%
stockholders are required by SEC regulation to furnish the Bank with copies of
all Section 16(a) forms they file.
To the Bank's knowledge, based solely on a review of the copies of such
reports furnished to the Bank and written representations that no other reports
were required, during the fiscal year ended March 31, 1998, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10
percent beneficial owners were complied with.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1998, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial
Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1998, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1998, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
39
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Regulation Reference to
S-B Prior Filing or
Exhibit Exhibit Number
Number Document Attached Hereto
------ -------------------------------- ---------------
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession None
3(i) Certificate of Incorporation *
3(ii) By-Laws *
4 Instruments defining the rights of security *
holders, including debentures
9 Voting Trust Agreement None
10 Material Contracts None
11 Statement re: computation of per share
earnings None
13 Annual Report to Stockholders 13
16 Letter re: change in certifying accountants None
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to None
vote of security holders
23 Consents of Experts and Counsel None
24 Power of Attorney Not required
27 Financial Data Schedule 27
99 Additional Exhibits None
- ----------
* Filed as exhibits to the Company's Form S-1 registration statement filed on
March 19, 1997 (File No. 333-23625) of the Securities Act of 1933. All of
such previously filed documents are hereby incorporated herein by reference
in accordance with Item 601 of Regulation S-B.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the last quarter of the
period covered by this Form 10-K.
40
<PAGE>
SIGNATURES
In accordance with Section 13 of 15(d) of the Exchange Act, the Issuer
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST ROBINSON FINANCIAL
CORPORATION
Date: June 29, 1998 By: /s/ Rick L. Catt
--------------------- --------------------------------
Rick L. Catt
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Issuer and in the capacities and on the
dates indicated.
By: /s/ Rick L. Catt By: /s/ Jamie E. McReynolds
--------------------------------- ---------------------------------
Rick L. Catt, Director, President Jamie E. McReynolds, Vice
and Chief Executive Officer President, Chief Financial Officer
(Principal Executive and Operating and Secretary (Chief Financial
Officer) and Accounting Officer)
Date: June 29, 1998 Date: June 29, 1998
------------------------------ ------------------------------
By: /s/ Scott F. Pulliam By: /s/ James D. Goodwine
--------------------------------- --------------------------------
Scott F. Pulliam, Director James D. Goodwine, Director
Date: June 29, 1998 Date: June 29, 1998
------------------------------ ------------------------------
By: /s/ Clell T. Keller By: /s/ Rick L. Catt
--------------------------------- --------------------------------
Clell T. Keller, Director Rick L. Catt, Director
Date: June 29, 1998 Date: June 29, 1998
------------------------------ ------------------------------
By: /s/ William K. Thomas By: /s/ Donald K. Inboden
--------------------------------- --------------------------------
William K. Thomas, Director Donald K. Inboden, Director
Date: June 29, 1998 Date: June 29, 1998
------------------------------ ------------------------------
41
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
[FIRST ROBINSON FINANCIAL CORPORATION LETTERHEAD]
Dear Stockholder,
It is a pleasure to present to you the Annual Report of First Robinson
Financial Corporation for the five month fiscal year ended March 31, 1998. As
you recall, this shortened five month year was necessary to allow the company to
change its fiscal year end from October 31 to March 31.
During the year ended March 31, 1998, total assets increased from $75.6
million to $80.0 million, an increase of $4.4 million or 5.8%. The Company
showed a net loss for the year ended March 31, 1998 of $55,000 as compared to a
net income of $220,000 during the five months ended March 31, 1997. This
decrease was primarily attributable to an increase of $533,000 in provision for
loan losses and an increase of $219,000 in non-interest expense, partially
offset by an increase of $304,000 in net interest income and a decrease of
$174,000 in provision for income taxes. Please review my comments in the
'Management Discussion and Analysis of Financial Condition and Results of
Operations" for further details concerning our fiscal year. As always,
management and the Board of Directors welcome your comments and questions
concerning our Company.
We are very pleased with the progress our institution has made during the
past five months. We believe the Company is poised to go forward successfully
into the next century. Management and the board of directors are fully aware of
the implications of the Year 2000 on our business. We have developed and are
implementing a comprehensive plan to ensure that your Company is ready for the
Year 2000.
The continued commitment and performance of our employees, management and
board of directors in addition to the invaluable support of our customers have
permitted First Robinson to continue our growth and have made the past five
months a success. We are indeed appreciative of this support.
The board of directors and management are committed to increasing the value
of our Company. The Company has been, and intends to continue to be, a
community-oriented financial institution serving the residents and businesses of
Crawford County and surrounding counties. Our share of the market continues to
increase, we believe in large part because of our 'local flavor', your continued
support and a strong commitment to high quality customer service by all of our
staff.
On behalf of all of us at First Robinson, we thank you for your friendship,
your business and your commitment to help us face the challenges and
opportunities of the coming year.
Sincerely,
/s/ Rick L. Catt
Rick L. Catt
President and Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated financial data of
First Robinson Financial Corporation at and for the periods indicated. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation have been included. The consolidated
financial data is derived in part from, and should be read in conjunction with,
the Financial Statements and Notes thereto presented elsewhere in this Annual
Report.
<TABLE>
<CAPTION>
At
March 31, October 31,
--------- -------------------------------------------------------
1998 1997 1996 1995 1994
--------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ............................. $79,968 $75,559 $63,869 $54,708 $43,824
Loans receivable, net .................... 64,234 63,960 54,448 44,854 34,093
Mortgage-backed securities ............... 1,414 3,151 4,011 2,973 3,284
Interest bearing deposits ................ 5,965 2,662 868 2,472 2,602
Investment securities .................... 3,660 1,649 714 1,213 1,221
Deposits ................................. 62,630 61,715 56,691 49,404 39,208
Total borrowings ......................... 3,644 92 1,500 -- --
Stockholders' equity ..................... 12,895 12,804 4,658 4,536 4,111
</TABLE>
<TABLE>
<CAPTION>
For the Five
Months Ended
March 31, Year Ended October 31,
--------- -----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income ............................................. $ 2,600 $ 5,915 $ 4,827 $ 3,755 $ 2,985
Total interest expense ............................................ (1,256) (3,077) (2,655) (1,971) (1,446)
------- ------- ------- ------- -------
Net interest income ............................................ 1,344 2,838 2,172 1,784 1,539
Provision for loan losses ......................................... (557) (206) (270) (9) (24)
------- ------- ------- ------- -------
Net interest income after provision for loan losses ............... 787 2,632 1,902 1,775 1,515
------- ------- ------- ------- -------
Fees and service charges .......................................... 164 320 295 241 223
Gain (loss) on sales of loans, securities and fixed assets ........ (64) 133 60 1 --
Other non-interest income ......................................... 57 63 37 29 21
------- ------- ------- ------- -------
Total non-interest income ......................................... 157 516 392 271 244
------- ------- ------- ------- -------
Total non-interest expense ........................................ (1,033) (2,075) (2,120) (1,414) (1,176)
------- ------- ------- ------- -------
Income (loss) before taxes and extraordinary item ................. (89) 1,073 174 632 583
Income tax provision .............................................. 34 (426) (51) (233) (221)
Extraordinary item ................................................ -- -- -- -- --
------- ------- ------- ------- -------
Net income ........................................................ $ (55) $ 647 $ 123 $ 399 $ 362
======= ======= ======= ======= =======
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
For the Five
Months Ended
March 31, Year Ended October 31,
--------- ----------------------------------------------
1998 1997 1996 1995 1994
--------- ------ ------ -------- -------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average
total assets)(2) ........................................ (.17)% .90% .21% .82% .86%
Return on stockholders equity (ratio of net
income to average equity)(2) ............................ (1.02) 8.54 2.60 9.68 9.08
Interest rate spread information:
Average during period .................................... 3.86 3.71 3.49 3.52 3.60
End of period ............................................ 3.75 3.64 3.76 3.51 3.29
Net interest margin(1)(2) ................................. 4.46 4.20 3.86 3.90 3.88
Ratio of operating expense to average total assets(2) ..... 3.22 2.90 3.54 2.91 2.80
Ratio of average interest-earning assets to average
interest-bearing liabilities ............................ 114.55 110.58 108.01 108.83 107.78
Quality Ratios:
Non-performing assets to total assets at end
of period ................................................ .55 .96 .61 .07 .07
Allowance for loan losses to non-performing loans .......... 413.04 144.31 430.21 2,125.00 2,215.00
Allowance for loan losses to loans receivable, net ......... 1.02 .75 .76 .57 .84
Capital Ratios:
Stockholders equity to total assets at end of period ....... 16.13 16.95 7.29 8.29 9.38
Average stockholders equity average assets ................. 16.80 10.57 7.91 8.49 9.45
Other Data:
Number of full-service offices ............................. 3 3 3 3 1
Number of full-time employees .............................. 36 36 34 30 20
Number of deposit accounts ................................. 9,196 8,775 7,279 5,885 5,284
Number of loan accounts .................................... 3,736 3,838 3,625 2,897 2,375
</TABLE>
- ----------
(1) Net interest income divided by average interest-earning assets.
(2) Annualized.
3
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The principal business of First Robinson Financial Corporation (the
"Company"), through its operating subsidiary, First Robinson Savings Bank,
National Association (the "Bank"), consists of accepting deposits from the
general public and investing these funds primarily in loans, mortgage-backed
securities and other securities. The Bank's loans consist primarily of loans
secured by residential real estate located in its market area, consumer loans
and commercial loans.
The Company's net income is dependent primarily on its net interest income,
which is the difference between interest earned on interest-earning assets and
the interest paid on interest-bearing liabilities. Net interest income is a
function of the Company's "interest rate spread," which is the difference
between the average yield earned on interest-earning assets and the average rate
paid on interest-bearing liabilities. The interest rate spread is affected by
regulatory, economic and competitive factors that influence interest rates, loan
demand and deposit flows. To a lesser extent, the Company's net income also is
affected by the level of general and administrative expenses and the level of
other income, which primarily consists of service charges and other fees.
The operations of the Company, are significantly affected by prevailing
economic conditions, competition and the monetary, fiscal and regulatory
policies of government agencies. Lending activities are influenced by the demand
for and supply of housing, competition among lenders, the level of interest
rates and the availability of funds. Deposit flows and costs of funds are
influenced by prevailing market rates of interest, primarily on competing
investments, account maturities and the levels of personal income and savings in
the Company's market area.
Historically, the Company's mission has been to originate loans on a
profitable basis to the communities it serves. In seeking to accomplish its
mission, the Board of Directors and management have adopted a business strategy
designed (i) to maintain capital level in excess of regulatory requirements;
(ii) to maintain asset quality; (iii) to maintain, and if possible, increase
earnings; and (iv) to manage exposure to changes in interest rates.
Forward-Looking Statements
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all
4
<PAGE>
or some of which could cause actual results to differ materially from historical
earnings and those presently anticipated or projected.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and
advises readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
Business Strategy
The Company's business strategy is to continue to be a community-oriented,
locally-owned financial institution offering financial services to residents and
businesses of Crawford County, Illinois (the primary market area). The Board of
Directors and management are strategically planning the Company's future. New
products and services are being discussed and reviewed for their effect on
profitability and customer service. In the coming year, the Bank plans to
install a new ATM location in Robinson, pending regulatory approval. The Bank
also plans to offer its Internet provider access to the remainder of Crawford
County, this service now reaches over 500 customers in Crawford County. This
past year the Bank implemented a 24-hour, toll-free balance inquiry and transfer
phone service. The Board of Directors intends to maintain a strong presence in
the one- to-four family real estate market and plans to institute new programs
to increase the Company's market share.
Financial Condition
Comparison at March 31, 1998 compared to October 31, 1997
The Company's total assets increased by approximately $4.4 million or 5.8%
to $80.0 million at March 31, 1998 from $75.6 million at October 31, 1997. This
increase in total assets is primarily the result of a $3.7 million increase in
cash and cash equivalents, a $300,000 increase in securities, a $200,000
increase in loans receivable, net and a $100,000 increase in other assets.
Loans receivable, net increased $200,000 or 0.3% to $64.2 million at March
31, 1998 from $64.0 million at October 31, 1997. This small increase was due to
management's desire to restrict consumer loan growth and implement tighter
underwriting standards. Management and the Board of Directors believe, as do
many prominent economists, that tighter underwriting of consumer lending is
necessary to help minimize the effect of the increase of bankruptcies
nationwide.
Held to maturity investment securities decreased slightly from $997,000 at
October 31, 1997 to $955,000 at March 31, 1998. This $42,000 or 4.2% decrease
came from mortgage back payments
5
<PAGE>
received and the maturity of a municipal bond. Mortgage backed securities held
available for sale decreased by $1.8 million or 59.9% from $2.9 million at
October 31, 1997 to $1.1 million as of March 31, 1998. This decrease came from
the sale of $1.0 million in mortgage backed securities with the remaining
portion of the decrease coming from principal payments. Other investment
securities held available for sale increased to $3.0 million at March 31, 1998
from $939,000 at October 31, 1998. The $2.0 million or 216.4% increase came from
the purchase of government securities.
Liabilities increased approximately $4.3 million or 6.8% to $67.1 million
at March 31, 1998 from $62.8 million at October 31, 1997. This increase in
liabilities was primarily the result of a $900,000, or 1.5% increase in deposits
to $62.6 million at March 31, 1998 from $61.7 million at October 31, 1997, an
increase of $1.5 million in repurchase agreements and a $2.0 million Federal
Home Loan Bank ("FHLB") advance. Deposits and repurchase agreements have
increased due to the Bank's focus on providing competitive pricing and service
in its market area.
Stockholders' equity increased to $12.9 million as of March 31, 1998 from
$12.8 million as of October 31, 1997. The $100,000 or 0.8% increase in
stockholders' equity is primarily from the valuation of the ESOP shares that
were allocated to participants as of December 31, 1997 and those shares ratably
released for allocation for the period ending March 31, 1998. However, the
increase was partially offset by a net loss of $55,000 for the period.
Comparison at October 31, 1997 and October 31, 1996
The Company's total assets increased by approximately $11.7 million, or
18.3%, to $75.6 million at October 31,1997 from $63.9 million at October 31,
1996. This increase in total assets was primarily the result of a $1.7 million
increase in cash and cash equivalents and a $9.5 million increase in loans
receivable, net.
Loans receivable, net increased $9.5 million, or 17.5%, to $64.0 million at
October 31, 1997 from $54.4 million at October 31, 1996. This increase was
primarily due to competitive rates and terms, utilization of the proceeds from
the conversion to stock form of ownership and to a national bank charter,
continued customer desire to do business with a locally-owned institution, and
attracting new customer relationships. These increases were also funded by an
increase in deposits of approximately $5.0 million.
Investment securities held to maturity increased $405,000, or 68.4%, to
$997,000 at October 31, 1997 from $592,000 at October 31, 1996. This increase
was due to the purchase of a government security. Investment securities
available for sale decreased by $330,000, or 8.0%, to $3.8 million at October
31, 1997 from $4.1 million at October 31, 1996. This decrease was due primarily
to principal reduction of mortgage-backed securities which was partially offset
by purchase of government securities.
Liabilities increased approximately $3.6 million, or 6.0%, to $62.8 million
at October 31, 1997 from $59.2 million at October 31, 1996. This increase in
liabilities was primarily the result of a $5.0 million, or 8.9%, increase in
deposits to $61.7 million at October 31, 1997 from $56.7 million at October 31,
1996 and an increase of $241,000 in accrued and deferred income taxes which was
partially offset by the elimination of Federal Home Loan Bank ("FHLB") advances
at October 31,
6
<PAGE>
1997 from $1.5 million at October 31, 1996, and a decrease in accrued expense of
$329,000. Deposits have increased due to the Bank's focus on providing
competitive pricing and service in its market area.
Stockholders' equity increased $8.1 million to $12.8 million as of October
31, 1997 from $4.7 million as of October 31, 1996. This increase was primarily
from the net proceeds from the sale of the Company's stock, and to a lesser
extent from net income of $647,000.
Operating Results
Comparison of Operating Results for the Five Months ended March 31, 1998 and the
Five Month Unaudited Period ended March 31, 1997
Performance Summary
The Company reported a net loss of $55,000 during the five month period
ended March 31, 1998, as compared to a net income of $220,000 during the five
months ended March 31, 1997. The $275,000 decrease in net income during the five
month period ended March 31, 1998, as compared to the same period in the prior
year, was primarily attributable to an increase of $533,000 in provision for
loan losses and an increase of $219,000 or 26.9%, in non-interest expense,
partially offset by an increase of $304,000, or 29.2%, in net interest income
and a decrease of $174,000 in provision for income tax. For the five months
ended March 31, 1998 and the five month period ended March 31, 1997 the returns
on average assets were (0.17%) and 0.77% respectively, while the returns on
average equity were (1.02%) and 10.96% respectively.
Net Interest Income
Net interest income increased by $304,000, or 29.2%, for the period ended
March 31, 1998 from the five months ended March 31, 1997. This reflects an
increase of $295,000, or 12.8%, in interest income to $2.6 million from $2.3
million and a decrease in interest expense of $9,000, or 0.7%. The increase in
net interest margin was primarily increases in the balances and rates on
interest earning assets, from the proceeds of the stock conversion, further
enhanced by the slight decrease in rates of interest bearing deposits, primarily
certificate of deposits.
For the five month period ended March 31, 1998, the average yield on
interest-earning assets was 8.64% compared to 8.68% for the same five month
period ended March 31, 1997. The average cost of interest-bearing liabilities
was 4.78% for the five month period ended March 31, 1998, a decrease from 4.86%
for the five months ended March 31, 1997. The average balance of
interest-earning assets increased by $8.4 million, or 13.1%, to $72.3 million
for the five month period ended March 31, 1998, compared to $63.9 million for
the five months ended March 31, 1997. The average balance of interest-bearing
liabilities increased by $700,000, or 1.1%, to $63.1 million for the five months
ended March 31, 1998 from $62.4 million for the five months ended March 31,
1997.
7
<PAGE>
The average interest rate spread was 3.86% for the five month period ended
March 31, 1998 compared to 3.82% for the five month period ended March 31, 1997.
The average net interest margin was 4.46% for the five month period ended March
31, 1998 compared to 3.91% for the five month period ended March 31, 1997.
Non-Interest Income
For the five months ended March 31, 1998, non-interest income remained
basically unchanged, with non-interest income of $157,000 for the five months
ended March 31, 1998 as compared to $158,000 for the five months ended March 31,
1997. An increase in the loss on sale of assets of $64,000 and a decrease in
charges and fees on loans of $21,000, or 28.4%, offset by an increase of
$42,000, or 67.7%, in service charges on deposits and an increase of other
non-interest income of $42,000, or 190.9% resulted in the lack of change in
non-interest income. The significant increase in other non-interest income
resulted primarily from fees charged for Internet service provided to the
community.
Non-Interest Expense
Non-interest expense increased by $219,000, or 26.9%, to $1.0 million for
the five month period ended March 31, 1998 from $814,000 for the five months
ended March 31, 1997. Compensation and employee benefits increased $74,000, or
16.8%, to $515,000 for the five months ended March 31, 1998 from $441,000 for
the same five months ended March 31, 1997. This increase is attributable
primarily to the costs of funding the ESOP benefit plan. Occupancy and equipment
expense increased $21,000, or 13.8%, to $173,000 for the five month period ended
March 31, 1998 from $152,000 for the five months ended March 31, 1997. This
increase is primarily attributed to increased expenses of a new drive-up ATM in
Robinson, which was upgraded during the five months ended March 31, 1998. Data
processing expense increased $16,000, or 72.7%, to $38,000 for the five month
period ended March 31, 1998 as compared to $22,000 for the five months ended
March 31, 1997. This increase is primarily the result of upgrades to data
processing equipment in preparation of the year 2000. Audit, legal and other
professional services increased by $55,000 or 5 times the previous level, to
$66,000 for the five months ended March 31, 1998 as compared to $11,000 for the
five months ended March 31, 1997. This increase is mainly attributable to the
increased costs of being a publicly traded company. SAIF deposit insurance
decreased by $6,000, or 26.1%, to $17,000 for the five month period ended March
31, 1998 from $23,000 for the five months ended March 31, 1997. Other
non-interest expense increased by $49,000, or 45.8%, to $156,000 for the five
months ended March 31, 1998 from $107,000 for the five months ended March 31,
1997. This increase is attributed primarily to increased costs related to
providing Internet service to the community, increased stationary and printing
costs and an increase in costs associated with being a national bank and a
public company.
Provision for Loan Losses
During the five month period ended March 31, 1998, the Company recorded
provision for loan losses of $557,000, as compared to $24,000 for the same
period of the prior year. The bank recorded such provisions to adjust the Bank's
allowance for loan losses to a level deemed
8
<PAGE>
appropriate based on the assessment of the volume and lending presently being
conducted by the Bank, industry standards, past due loans, economic conditions
in the Bank's market area generally and other factors related to the
collectability of the Bank's loan portfolio. The allowance for loan losses is
more closely aligned with peer group averages for national banks as compared to
the previous period allowance for loan losses which reflected peer group
averages for savings and loans. The Bank's non-performing assets as a percentage
of total assets was 0.55% at March 31, 1998, as compared to 0.63% at March 31,
1997.
Management will continue to monitor its allowance for loan losses and make
additions to the allowance through the provision for loan losses as economic
conditions and other factors dictate. Although the Bank maintains its allowance
for loan losses at a level which it considers to be adequate to provide for loan
losses, there can be no assurance that future losses will not exceed estimated
amounts or that additional provisions for loan losses will not be required in
the future.
Provision for Income Taxes
The Company recognized a benefit from income taxes of $34,000 for the five
month period ended March 31, 1998, as compared to a provision for income taxes
of $140,000 for the five month period ended March 31, 1997. The effective tax
rate (federal and state) during the five month period ended March 31, 1998 was
38.2%, as compared to 38.9% during the same period in the prior year.
Comparison of Operating Results for the Years ended October 31, 1997 and
October 31, 1996
Performance Summary
The Company reported net income of $647,000 during the year ended October
31, 1997, as compared to $123,000 during the year ended October 31, 1996. The
$524,000 increase in net income during the year ended October 31, 1997, as
compared to the same period in the prior year, was primarily attributable to an
increase of $730,000 or 38.4% in net interest income after provision for loan
losses, an increase of $124,000, or 31.6%, in non-interest income and a decrease
of $45,000, or 2.1%, in non-interest expense offset by an increase of $375,000
in provision for income tax. For the years ended October 31, 1997 and 1996, the
returns on average assets were 0.9% and 0.2% respectively, while the returns on
average equity were 8.5% and 2.6%, respectively.
Net Interest Income
Net interest income increased by $666,000, or 30.7%, at year ended October
31, 1997 from October 31, 1996. This reflects an increase of $1.1 million, or
22.5%, in interest income to $5.9 million from $4.8 million and an increase in
interest expense of $422,000, or 15.9%, to $3.1 million from $2.7 million. The
increase in net interest margin was primarily increases in the balances and
rates of interest earning assets, particularly loans receivable, offset by
increases of balances and rates of interest bearing deposits, primarily
certificates of deposit.
For the year ended October 31, 1997, the average yield on interest-earning
assets was 8.8% compared to 8.6% for 1996. The average cost of interest-bearing
liabilities was 5.0% for the year ended October 31, 1997, a decrease from 5.1%
for 1996. The average balance of interest-
9
<PAGE>
earning assets increased by $11.3 million, or 20.1%, to $67.6 million for the
year ended October 31, 1997, compared to $56.3 million for 1996. The average
balance of interest-bearing liabilities increased by $9.1 million, or 17.5%, to
$61.2 million for the year ended October 31, 1997 from $52.1 million for the
year ended October 31, 1996.
The average interest rate spread was 3.71% for the year ended October 31,
1997 compared to 3.49% for the year ended October 31, 1996. The average net
interest margin was 4.2% for the year ended October 31, 1997 compared to 3.9%
for 1996.
Non-Interest Income
For the year ended October 31, 1997, non-interest income increased by
$124,000, or 31.6%, to $516,000 from $392,000 at October 31, 1996. This increase
is primarily from an increase in service charges on deposits of $25,000, or
16.0%, an increase in gain on sale of assets of $73,000, or 121.7%, and an
increase in other non-interest income of $26,000, or 70.3%. The increase in gain
on sale of assets resulted primarily from gains on the sale of the SBA
guaranteed portion of three commercial loans. The increase in other non-interest
income resulted primarily from fees charged for Internet service provided to the
community.
Non-Interest Expense
Non-interest expense decreased by $45,000, or 2.1%, to $2.1 million for the
year ended October 31, 1997 from $2.1 million for the year ended October 31,
1996. Compensation and employee benefits increased $89,000, or 8.8%, to $1.1
million for the year ended October 31, 1997 from $1.0 million for 1996. This
increase is attributed to normal salary increases and increased personnel costs
during the stock conversion. SAIF deposit insurance expense decreased by
$347,000, or 88.3%, to $46,000 for the year ended October 31, 1997 from $393,000
for 1996. This decrease is attributed primarily to a one-time assessment to all
SAIF institutions which was $261,000 for the year ended October 31,1996 and to a
significant reduction in the rate of deposit insurance assessment. Other
non-interest expense increased by $115,000, or 71.0%, to $277,000 for the year
ended October 31, 1997 from $162,000 for 1996. This increase is attributed
primarily to increased costs associated with the providing of Internet service
to the community. Occupancy expense increased $42,000, or 11.7%, to $400,000 for
the year ended October 31, 1997 from $358,000 for 1996. This increase is mainly
attributed to increased expenses of a new drive-up facility in Oblong
constructed during 1997.
Provision for Loan Losses
During the year ended October 31, 1997, the Company recorded provision for
loan losses of $206,000, as compared to $270,000 for the same period of the
prior year. The Bank recorded such provisions to adjust the Bank's allowance for
loan losses to a level deemed appropriate based on an assessment of the volume
and lending presently being conducted by the Bank, industry standards, past due
loans, economic conditions in the Bank's market area generally and other factors
related to the collectibility of the Bank's loan portfolio. The Bank's
non-performing assets as a percentage of total assets was .96% at October 31,
1997, as compared to .61% at October 31, 1996.
10
<PAGE>
Management will continue to monitor its allowance for loan losses and make
additions to the allowance through the provision for loan losses as economic
conditions and other factors dictate. Although the flank maintains its allowance
for loan losses at a level which it considers to be adequate to provide for loan
losses, there can be no assurance that future losses will not exceed estimated
amounts or that additional provisions for loan losses will not be required in
the future.
Provision for Income Taxes
The Company recognized provision for income taxes of $426,000 for the year
ended October 31, 1997, as compared to $51,000 for the same period in the prior
year. The effective tax rate (federal and state) during the year ended October
31, 1997 was 40.0%, as compared to 29.3% during the same period in the prior
year.
Federal income tax rates are tier based on level of income. For the year
ended in 1997, the Company's federal income tax rate was 34.0%. For 1996, the
Company's taxable income was below the 34.0% tax rate and was at an effective
rate of 29.3%. State income tax is a flat tax rate of approximately 7.2%. State
income tax allows for offsets against income for U.S. government interest. U.S.
government interest was sufficient to reduce state taxable income to $0 in 1996
but not in 1997 from the increase income before income taxes of $899,000 between
1996 and 1997.
Comparison of Operating Results for the Years ended October 31, 1996 and
October 31, 1995
Performance Summary
Net income decreased by $276,000, or 69.2%, to $123,000 at October 31, 1996
from $399,000 at October 31, 1995. The decrease was primarily due to an increase
of net interest income of $388,000 and an increase of non-operating income of
$121,000 and a reduction in income tax expense of $182,000, offset by an
increase of provision for loan losses of $261,000, an increase of non-interest
expense of $706,000. For the years ended October 31, 1996 and 1995, the returns
on average assets were 0.2% and 0.8% respectively, while the returns on average
equity were 2.6% and 9.7%, respectively.
Net Interest Income
Net interest income increased by $388,000 at year ended October 31, 1996
from October 31, 1995. This reflects an increase of $1.1 million, or 28.6%, in
interest income to $4.8 million from $3.8 million and an increase in interest
expense of $684,000, or 34.7%, to $2.7 million from $2.0 million. The increase
in net interest margin was primarily from increases in the balances and rates of
interest earning assets, particularly loans receivable, offset by increases of
balances and rates of interest bearing deposits, primarily certificates of
deposit. The Company maintained approximately the same interest rate spread for
both years.
For the year ended October 31, 1996, the average yield on interest-earning
assets was 8.6% compared to 8.2% for 1995. The average cost of interest-bearing
liabilities was 5.1% for the year ended October 31, 1996, an increase from 4.7%
for 1995. The average balance of interest-earning assets increased by $10.6
million, or 23.1%, to $56.3 million for the year ended October 31, 1996,
11
<PAGE>
compared to $45.7 million for 1995. The average balance of interest-bearing
liabilities increased by $10.1 million, or 24.0%, to $52.1 million for the year
ended October 31, 1996 from $42.0 million for the year ended October 31, 1995.
The average interest rate spread was 3.5% for the year ended October 31,
1996 compared to 3.5% for the year ended October 31, 1995. The average net
interest margin was 3.9% for the year ended October 31, 1996 compared to 3.9%
for 1995.
Non-Interest Income
For the year ended October 31, 1996, non-interest income increased by
$121,000, or 44.7%, to $392,000 from $271,000 at October 31, 1995. This increase
is primarily from an increase in loan fees of $19,000, or 15.8%, an increase in
service charges on deposits of $35,000, or 28.9%, and an increase in gain on
sale of assets of $59,000. The increase in gain on sale of assets resulted from
a $45,000 gain on the sale of an SBA guaranteed portion of a commercial loan and
a $8,000 gain on the sale of real estate held for investment.
Non-Interest Expense
Non-interest expense increased by $706,000, or 49.9%, to $2.1 million for
the year ended October 31, 1996 from $1.4 million for the year ended October 31,
1995. Compensation and employee benefits increased $274,000, or 36.9%, to $1.0
million for the year ended October 31, 1996 from $743,000 for 1995. This
increase is attributed to a directors retirement plan, which amounted to $94,000
including prior service award, additional employees for the staffing of the two
branches started in late 1995, and normal salary increases. The SAIF made a one
time assessment to all associations which increased the SAIF insurance cost by
$281,000 during 1996. The rate of deposit insurance assessment is expected to
significantly decline commencing January 1, 1997.
In addition, in the future, non-interest expense may increase due to
expenses associated with the ESOP and the costs of being a public company.
Occupancy expense increased $86,000, or 26.9%, to $406,000 for 1996 from
$320,000 for 1995. This increase was mainly attributed to increased expenses of
two branches for all of 1996 as compared to part of a year in 1995.
Provision for Loan Losses
During the year ended October 31, 1996, the Bank recorded a provision for
loan losses of $270,000 compared to $9,000 for the year ended October 31, 1995.
This provision was recorded due to the significant growth in loans of 21.3% for
1996. The Company experienced significant growth in commercial business,
commercial real estate, and consumer loans of 27.4% between the two years or
59.9% of the total loan growth in 1996. The Company increased the provision for
loan losses in 1996 based on the continued growth in this type of lending which
has perceived higher credit risk than traditional thrift lending on residential
real estate loans.
12
<PAGE>
During fiscal 1996, the Company's non-performing loans increased from
$36,000 to $389,000. This increase was primarily attributed to a $260,000
one-to-four family dwelling which was later transferred to real estate owned.
This increase did not have a significant effect on the Company's provisions for
loan losses as management anticipates a minimal loss, if any, when the property
is sold.
Management will continue to monitor its allowance for loan losses and make
additions to the allowance through the provision for loan losses as economic
conditions and other factors dictate. Although the Company maintains its
allowance for loan losses at a level which it considers to be adequate to
provide for loan losses, there can be no assurance that future losses will not
exceed estimated amounts or that additional provisions for loan losses will not
be required in the future.
Provision for Income Taxes
Income taxes decreased by $182,000 to $51,000 for the year ended October
31, 1996 from $233,000 for the year ended October 31, 1995. This decrease
results from the decrease in income before taxes. The Company's effective tax
rates were 29.3% and 36.9% for the years ended October 31, 1996 and October 31,
1995, respectively.
The effective tax rates decreased from 1995 to 1996 as a direct effect of
the decrease in taxable income. In 1995, the Bank was taxed at 34% based on the
IRS tax rate schedule for corporations which is graduated based on taxable
income levels. In 1996, the Company was taxed at an effective tax rate of 29.4%
based on the same IRS tax rate schedule for corporations used in 1995. Both
years had adjustments which lessened taxable income, however, the decrease in
effective tax rates are directly related to the reduction in taxable income of
the two years. State income taxes are calculated at a flat tax rate.
13
<PAGE>
Average Balances/Interest Rates and Yields. The following table presents
for the periods indicated the total dollar amount of interest income 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. No tax equivalent adjustments were made. All average balances
are monthly average balances. Non-accruing loans have been included in the table
as loans carrying a zero yield.
<TABLE>
<CAPTION>
For the Five Months Ended
March 31, Year Ended October 31,
------------------------------- ---------------------------------------------------------
1998 1997 1996
------------------------------- --------------------- ----------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)..................... $65,006 $2,448 9.04% $60,167 $5,494 9.13% $49,543 $4,441 8.96%
Mortgage-backed securities.............. 2,620 59 5.37 3,520 248 7.05 3,872 248 6.40
Investment securities................... 1,866 50 6.46 830 39 4.70 879 57 6.48
Interest-bearing deposits............... 2,790 43 3.74 3,116 134 4.30 1,994 81 4.06
------- ------ ------- ------ ------- ------
Total interest-earning assets.......... 72,282 $2,600 8.64 67,633 $5,915 8.75 56,288 $4,827 8.58
====== ====== ======
Noninterest-earning asset................ 4,602 3,965 3,523
------- ------- -------
Total assets........................... $76,884 $71,598 $59,811
======= ======= =======
Interest-Bearing Liabilities:
Savings deposits........................ $ 5,796 $ 72 2.99 $ 6,373 $ 197 3.09 $ 4,938 $ 156 3.16
Demand and NOW deposits................. 11,825 114 2.31 8,578 251 2.93 6,447 207 3.21
Certificate of deposits................. 43,486 1,028 5.67 44,017 2,505 5.69 40,363 2,271 5.63
Borrowings.............................. 1,973 42 5.12 2,195 124 5.65 367 21 5.72
------- ------ ------- ------ ------- ------
Total interest-bearing liabilities..... 63,080 1,256 4.78 61,163 3,077 5.04 52,115 2,655 5.09
------ ------ ------
Noninterest-bearing liabilities 887 2,863 2,964
------- ------- -------
Total liabilities..................... 63,967 64,026 55,079
Retained earnings....................... 12,888 7,541 4,695
Unrealized gains on securities ........ 29 31 37
------- ------- -------
Total Liabilities and Capital........ $76,884 $71,598 $59,811
======= ======= =======
Net interest income...................... $1,344 $2,838 $2,172
====== ====== ======
Net interest spread...................... 3.86% 3.71% 3.49%
==== ==== ====
Net average earning assets............... $ 9,202 $ 6,470 $ 4,173
======= ======= =======
Net yield on average earning assets..... 4.46% 4.20% 3.86%
==== ==== ====
Average interest-earning assets
to average interest-bearing liabilities 1.15x 1.11x 1.08x
==== ==== ====
</TABLE>
- ----------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
14
<PAGE>
Rate/Volume Analysis of Net Interest Income
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to rate.
<TABLE>
<CAPTION>
For the Five Months Ended
March 31, Year Ended October 31,
----------------------------- -------------------------------------------------------------
1997 vs. 1998 1996 vs. 1997 1995 vs. 1996
----------------------------- ----------------------------- -----------------------------
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Due to Due to
---------------- ---------------- ----------------
Total Total Total
Increase Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------ ------ ---------- ------ ------ ---------- ------ ------ ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ................... $303 $ -- $303 $961 $85 $1,046 $932 $142 $1,074
Mortgage-backed securities ......... (28) (16) (44) (23) 25 2 48 (4) 44
Investments securities ............. 36 (1) 35 (3) (16) (19) (26) 7 (19)
Other .............................. 9 (8) 1 55 4 59 (11) (10) (27)
---- ---- ---- ----- ---- ------ ---- ---- ------
Total interest-earning assets .... $320 $(25) $295 $990 $98 $1,088 $943 $129 $1,072
==== ==== ---- ===== ==== ------ ==== ==== ------
Interest-bearing liabilities:
Savings deposits ................... 4 (5) (1) 44 (3) 41 21 6 27
Demand and NOW accounts ............ 16 (2) 14 67 (18) 49 16 2 18
Certificate accounts ............... (21) 22 1 204 24 228 491 147 638
Borrowings ......................... (18) (5) (23) 104 -- 104 2 (1) 1
---- ---- ---- ----- ---- ------ ---- ---- ------
Total interest-bearing liabilities $(19) $ 10 $ (9) $419 $ 3 $ 422 $530 $154 $ 684
==== ==== ---- ===== ==== ------ ==== ==== ------
Net interest income ................. $304 $ 666 $ 388
==== ====== ======
</TABLE>
15
<PAGE>
Asset/Liability Management
One of the Company's principal financial objectives is to achieve long-term
profitability while reducing its exposure to fluctuations in interest rates. The
Company has sought to reduce exposure of its earnings to changes in market
interest rates by managing the mismatch between asset and liability maturities
and interest rates. The principal element in achieving this objective has been
to increase the interest-rate sensitivity of the Company's assets by originating
loans with interest rates subject to periodic repricing to market conditions.
Accordingly, the Company has emphasized the origination of one to three year
adjustable rate mortgage loans, short-term and adjustable commercial loans, and
consumer loans for retention in its portfolio. Management has offered higher
yields on deposits with extended maturities to assist in matching the rate
sensitivity of its liabilities.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the Company's
assets mature or reprice more quickly or to a greater extent that its
liabilities, the Bank's net portfolio value and net interest income would tend
to increase during periods of rising interest rates but decrease during periods
of falling interest rates.
If the Company's assets mature or reprice more slowly or to a lesser extent
that its liabilities, the Company's net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates.
The Company's Board of Directors has formulated an Interest Rate Risk
Management policy designed to promote long-term profitability while managing
interest-rate risk. The Board of Directors has established an Asset/Liability
Committee which consists primarily of the management team of the Bank. This
committee meets periodically and reports to the Board of Directors quarterly
concerning asset/liability policies, strategies and the Company's current
interest rate risk position. The committee's first priority is to structure and
price the Company's assets and liabilities to maintain an acceptable interest
rate spread while reducing the net effects of changes in interest rates.
Management's principal strategy in managing the Company's interest rate
risk has been to maintain short and intermediate term assets in the portfolio,
including one and three year adjustable rate mortgage loans, as well as
increased levels of commercial, agricultural and consumer loans, which typically
are for short or intermediate terms and carry higher interest rates than
residential mortgage loans. In addition, in managing the Company's portfolio of
investment securities and mortgage-backed and related securities, management
seeks to purchase securities that mature on a basis that approximates as closely
as possible the estimated maturities of the Company's liabilities or purchase
securities that have adjustable rate provision. The Company does not engage in
hedging activities.
In addition to shortening the average repricing of its assets, the Company
has sought to lengthen the average maturity of its liabilities by adopting a
tiered pricing program for its certificates of deposit, which provides higher
rates of interest on its longer term certificates in order to encourage
depositors to invest in certificates with longer maturities.
16
<PAGE>
Net Portfolio Value. The Company voluntarily measures its interest rate
risk ("IRR") into its internal risk based capital calculation. The IRR component
is a dollar amount that measures the terms of the sensitivity of the Company's
net portfolio value ("NPV") to changes in interest rates. NPV is the difference
between incoming and outgoing discounted cash flows from assets, liabilities,
and off-balance sheet contracts. The Company measures the change to its NPV as a
result of a hypothetical 200 basis point ("bp") change in market interest rates.
Management reviews the IRR measurements on a quarterly basis. In addition to
monitoring selected measures on NPV, management also monitors effects on net
interest income resulting from increases or decreases in rates. This measure is
used in conjunction with NPV measures to identify excessive interest rate risk.
The following table presents the Company's NPV at March 31, 1998, as calculated
by the Company.
<TABLE>
<CAPTION>
At March 31, 1998
----------------------------------------------------------------
Change in Rate Net Portfolio Value NPV as % of PV of Assets
- -------------- ----------------------------------- ------------------------
(Basis Points) $ Amount $ Change % Change NPV Ratio BP Change
-------- -------- -------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+200 bp $7,154 $(560) $(7.26) 9.46% (75) bp
100 7,440 (273) (3.54) 9.84 (37)
0 7,714 0 0 10.21 0
-100 7,966 252 3.27 10.54 33
-200 8,185 470 6.10 10.83 62
</TABLE>
In the above table, the first column on the left presents the basis point
increments of yield curve shifts. The second column presents the overall dollar
amount of NPV at each basis point increment. The third and fourth columns
present the Company's actual position in dollar change and percentage change in
NPV at each basis point increment. The remaining columns present the Company's
percentage change and basis point change in its NPV as a percentage of portfolio
value of assets.
Certain shortcomings are inherent in the method of analysis presented in
the computation of NPV. Although certain assets and liabilities may have similar
maturities or periods within which they will reprice, they may react differently
to changes in market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates.
While the Company's Board of' Directors has not established any limits for
changes in NPV, it is responsible for reviewing the Company's asset and
liability policies and meets monthly to review interest rate risk and trends, as
well as liquidity and capital ratios and requirements. The Company's management
is responsible for administering the policies and determinations of the Board of
Directors with respect to the Company's asset and liability goals and
strategies.
Liquidity
The Bank's primary sources of funds are deposits, repayments and
prepayments of loans and interest income. Although maturity and scheduled
amortization of loans are relatively predictable sources of funds, deposit flows
and prepayments on loans are influenced significantly by general interest rates,
economic conditions and competition.
17
<PAGE>
The primary investment activity of the Company is originating one- to-four
family residential mortgages, commercial business and real estate loans, and
consumer loans to be held to maturity. For the five months ended March 31, 1998
and the fiscal years ended October 31, 1997 and 1996, the Company originated
loans for its portfolio in the amount of $14.3 million, $40.9 million and $36.7
million, respectively. For the five months ended March 31, 1998 and the fiscal
years ended October 31, 1997 and 1996, these activities were funded from
repayments of $12.9 million, $29.3 million and $23.9 million, respectively and
sales and participations of $58,000, $2.1 million and $1.7 million,
respectively.
The Company's most liquid assets are cash and cash equivalents, which
include short-term investments. At the five months ended March 31, 1998 and at
October 31, 1997 and 1996, cash and cash equivalents were $6.5 million, $2.9
million and $1.3 million, respectively. In addition, the Company has used jumbo
certificates of deposits as a source of funds. Jumbo certificates of deposits
represented $9.7 million, $11.1 million and $10.7 million at the five months
ended March 31, 1998 and at the years ended October 31, 1997 and 1996,
respectively, or 18.1%, 18.0% and 18.9% of total deposits at the five months
ended March 31, 1998 and the years ended October 31, 1997 and 1996 respectively.
Management has monitored and reviewed its liquidity and maintains a $17.3
million line of credit with the FHLB which can be accessed immediately.
Liquidity management for the Company is both an ongoing and long-term
function of the Company's asset/liability management strategy. Excess funds,
when applicable, generally are invested in deposits at the FHLB of Chicago.
Currently when the Bank requires funds, beyond its ability to generate deposits,
additional sources of funds are available through the FHLB of Chicago. The Bank
has the ability to pledge its FHLB of Chicago stock or certain other assets as
collateral for such advances. The Company has used FHLB advances to fund cash
flow shortages. These advances are generally less than .10% over the average
rate paid on the Company's certificates of deposit. The Bank may also use FHLB
advances in the future to fund loan demand in excess of the available funds.
Management and the Board of Directors believe that due to significant
amounts of adjustable rate mortgage loans that could be sold and the Company's
ability to acquire funds from the FHLB of Chicago, the Bank's liquidity is
adequate.
Impact of Inflation and Changing Prices
The financial statements and related data 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. The primary impact of inflation on the
operation of the Company is reflected in increased operating costs. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates, generally, have
a more significant impact on a financial institution's performance than does
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
18
<PAGE>
Impact of the Year 2000
The Company has conducted a comprehensive review of its computer systems to
identify applications that could be affected by the "Year 2000" issue, and has
developed an implementation plan to address the issue. The Company's data
processing is performed primarily in-house; however software and hardware
utilized is under maintenance agreements with third party vendors, consequently
the Company is very dependent on those vendors to conduct its business. The
Company has already contacted each vendor to request time tables for year 2000
compliance and expected costs, if any, to be passed along to the Company. To
date, the Company has been informed that its primary service providers
anticipate that all reprogramming efforts will be completed by December 31,
1999, allowing the Company adequate time for testing. Certain other vendors have
not yet responded, however, the Company will pursue other options if it appears
that these vendors will be unable to comply. Management does not expect these
costs to have a significant impact on its financial position or results of
operations however, there can be no assurance that the vendors systems will be
2000 compliant, consequently the Company could incur incremental costs to
convert to another vendor. The Company has identified certain of its hardware
and software equipment that will not be Year 2000 compliant and intends to
purchase new equipment and software prior to March 31, 1999. These capital
expenditures are expected to total approximately $250,000.
19
<PAGE>
FIRST ROBINSON FINANCIAL CORPORATION AND SUBSIDIARY
STOCKHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of stockholders will be held at 10:00 a.m., July 29, 1998, at
the Company's office located at 501 East Main Street, Robinson, Illinois.
STOCK LISTING
The Company's stock is traded on the over-the-counter market with quotations
available through the OTC Electronic Bulletin Board under the symbol "FRFC."
PRICE RANGE OF COMMON STOCK
The following table sets forth the high and low bid prices of the Common Stock.
These prices do not represent actual transactions and do not include retail
mark-ups, mark-downs or commissions.
High Low Dividends
---- --- ---------
July 31, 1997...................... $16.50 $16.50 $---
October 31, 1997................... $15.125 $15.125 $---
January 31, 1998................... $15.75 $15.75 $---
March 31, 1998..................... $17.625 $17.625 $---
The Company did not declare a dividend in fiscal 1998. Dividend payment
decisions are made with consideration of a variety of factors including
earnings, financial condition, market considerations and regulatory
restrictions. Restrictions on dividend payments are described in Note H of the
Notes to Financial Statements included in this report.
As of March 31, 1998, the Company had approximately 626 stockholders of record
and 859,625 outstanding shares of common stock.
SHAREHOLDERS AND GENERAL INQUIRIES TRANSFER AGENT
Rick L. Catt, President Register and Transfer Company
First Robinson Financial Corporation 10 Commerce Drive
501 East Main Street Cranford, New Jersey 07016
Robinson, Illinois 62454 (908) 272-8511
(618) 544-8621
ANNUAL AND OTHER REPORTS
The Company is required to file an annual report on Form 10-KSB for its fiscal
year ended March 31, 1998, with the Securities and Exchange Commission. Copies
of the Form 10-KSB annual report and the Company's quarterly reports may be
obtained without charge by contacting:
Rick L. Catt, President
First Robinson Financial Corporation
501 East Main Street
Robinson, Illinois 62454
(618) 544-8621
20
<PAGE>
LARSSON, WOODYARD & HENSON, LLP
CERTIFIED PUBLIC ACCOUNTANTS
MEMBERS OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
ILLINOIS CPA SOCIETY
702 E. COURT STREET o P. O. BOX 426 o PARIS, ILLINOIS 61944
TEL (217) 465-6494 o FAX (217) 465-6499
Independent Auditors' Report
To the Board of Directors
First Robinson Financial Corp.
and Subsidiary
Robinson, Illinois
We have audited the accompanying consolidated statements of financial condition
of First Robinson Financial Corp. and Subsidiary as of March 31, 1998, and
October 31, 1997 and 1996 and the related consolidated statements of income,
stockholders' equity, and cash flows for the five-month period ended March 31,
1998 and for the years ended October 31, 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
Robinson Financial Corp. and Subsidiary as of March 31, 1998, and October 31,
1997 and 1996, and the results of their operations and their cash flows for the
five-month period ended March 31, 1998 and for the years ended October 31, 1997
and 1996 in conformity with generally accepted accounting principles.
The Company, during the current year, changed its annual closing date to March
31 from October 31. Information contained in these consolidated statements and
notes to financial statements as of March 31, 1997 and for the five-month period
ended March 31, 1997 has been provided for comparative purpose only. This
financial information was not audited by us and, accordingly, we do not express
an opinion on the information.
April 22, 1998
-21-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
March 31, October 31,
--------- -----------------
1998 1997 1996
------- ------- ------
1,000's
---------------------------
<S> <C> <C> <C>
Cash and cash equivalents:
Cash $ 609 $ 268 $ 385
Interest bearing deposits 5,965 2,662 868
------- ------- -------
Total cash and cash equivalents 6,574 2,930 1,253
Securities available for sale
(amortized cost of $2,949,000, $940,000
and $464,000 at March 31, 1998,
October 31, 1997 and 1996, respectively) 2,970 939 469
Securities held to maturity (estimated
market value of $700,000, $723,000 and $245,000
at March 31, 1998, October 31, 1997 and
1996, respectively) 690 710 245
Mortgage-backed and related securities available for sale
(amortized cost of $1,116,000, $2,819,000 and
$3,625,000 at March 31, 1998,
October 31, 1997 and 1996, respectively) 1,149 2,864 3,664
Mortgage-backed and related securities held to maturity
(estimated market value of $267,000, $285,000 and
$344,000 at March 31, 1998, October 31, 1997 and 1996,
respectively) 265 287 347
Loans receivable, net 64,234 63,960 54,448
Foreclosed real estate 221 335 278
Premises and equipment 2,897 2,713 2,564
Accrued interest receivable 715 675 514
Prepaid income taxes 29 0 19
Other assets 224 146 68
------- ------- -------
Total Assets $79,968 $75,559 $63,869
======= ======= =======
</TABLE>
-22-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, October 31,
--------- --------------------
1998 1997 1996
--------- -------- --------
1,000's
--------------------------------
<S> <C> <C> <C>
Deposits $ 62,630 $ 61,715 $ 56,691
Federal Home Loan Bank advances 2,000 0 1,500
Repurchase agreements 1,644 92 0
Advances from borrowers for taxes and insurance 75 42 35
Accrued interest payable 348 362 353
Accrued income taxes 0 91 0
Deferred income taxes 157 241 91
Accrued expenses 219 212 541
-------- -------- --------
Total Liabilities 67,073 62,755 59,211
-------- -------- --------
Commitments and contingencies
Stockholders' Equity
Common stock $.01 par value; authorized 2,000,000 shares
859,625 shares issued and outstanding $ 9 $ 9 $ 0
Preferred stock, $.01 par value; authorized 500,000 shares,
no shares issued and outstanding
Paid-in capital 8,232 8,178 0
Retained earnings 5,223 5,278 4,631
Unrealized gain on securities held available for sale 33 27 27
Unearned employee stock ownership plan (602) (688) 0
-------- -------- --------
Total Stockholders' Equity 12,895 12,804 4,658
-------- -------- --------
Total Liabilities and Stockholders' Equity $ 79,968 $ 75,559 $ 63,869
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-23-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Five-Month Periods Ended March 31, 1998 and 1997 and
For the Years Ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
For the Five-Month Period For the Years
Ended March 31 Ended October 31,
------------------------- -------------------------
1998 1997 1997 1996
------- ------- ------- -------
Unaudited
---------
1,000's
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 2,448 $ 2,145 $ 3,525 $ 2,789
Interest on mortgage-backed securities 59 103 1,969 1,652
Interest on securities and
interest-bearing deposits 93 57 421 386
------- ------- ------- -------
Total interest income 2,600 2,305 5,915 4,827
------- ------- ------- -------
Interest expense:
Interest on deposits 1,214 1,205 2,953 2,634
Interest on other
borrowed funds 42 60 124 21
------- ------- ------- -------
Total interest expense 1,256 1,265 3,077 2,655
------- ------- ------- -------
Net interest income 1,344 1,040 2,838 2,172
Provision for loan losses 557 24 206 270
------- ------- ------- -------
Net interest income after
provision for loan losses 787 1,016 2,632 1,902
------- ------- ------- -------
Non-interest income 157 158 516 392
------- ------- ------- -------
Non-interest expense 1,033 814 2,075 2,120
------- ------- ------- -------
Income (loss) before
income taxes (89) 360 1,073 174
Provision for (benefit from)
income tax (34) 140 426 51
------- ------- ------- -------
Net income (loss) ($ 55) $ 220 $ 647 $ 123
======= ======= ======= =======
Basic earnings per share ($ 0.07) N/A $ 0.26 N/A
======= ======= ======= =======
Diluted earnings per share ($ 0.07) N/A $ 0.26 N/A
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
-24-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Five-Month Periods Ended March 31, 1998 and
the Years Ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
Unrealized
Unearned Gain on
Employee Securities
Stock Available
Common Paid-in Retained Ownership For
Stock Capital Earnings Plan Sale Total
----- ------- -------- -------- ------------ -----
(1,000's)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1995 $ 0 $ 0 $ 4,508 $ 0 $ 28 $ 4,536
Net income 0 0 123 0 0 123
Change in unrealized gain on
securities available for sale 0 0 0 0 (1) (1)
-------- -------- -------- -------- -------- --------
Balance at October 31, 1996 0 0 4,631 0 27 4,658
Issuance of common shares 9 8,178 0 (688) 0 7,499
Net income 0 0 647 0 0 647
-------- -------- -------- -------- -------- --------
Balance at October 31, 1997 9 8,178 5,278 (688) 27 12,804
Net loss 0 0 (55) 0 0 (55)
Change in unrealized gain
on securities available for sale 0 0 0 0 6 6
Amortization of ESOP shares 0 54 0 86 0 140
-------- -------- -------- -------- -------- --------
Balance at March 31, 1998 $ 9 $ 8,232 $ 5,223 ($ 602) $ 33 $ 12,895
======== ======== ======== ======== ======== ========
</TABLE>
-25-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Five-Month Periods Ended March 31, 1998 and 1997 and
For the Years Ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
For the Five-Month Periods For the Years
Ended March 31, Ended October 31,
-------------------------- -------------------------
1998 1997 1997 1996
--------- ----------- -------- --------
Unaudited
---------
1,000's
--------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 55) $ 220 $ 647 $ 123
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Provision for depreciation 84 68 178 165
Provision for loan losses 557 24 206 270
Net amortization and accretion on securities
and mortgage-backed securities 23 3 11 19
(Increase) decrease in accrued interest receivable (40) 20 (161) (219)
(Increase) decrease in prepaid income taxes (29) 19 19 0
Increase in other assets (78) (132) (53) (3)
(Decrease) increase in accrued interest payable (14) (57) 9 124
(Decrease) increase in accrued income taxes (91) 92 91 (16)
(Decrease) increase in deferred income taxes (84) 2 150 (131)
Increase (decrease) in accrued expenses 7 (406) (354) 272
Gain on sale of loan 0 0 (133) (45)
Gain on sale of premises and equipment 0 0 0 (8)
Loss on sale of mortgage-backed
securities available for sale 8 0 0 0
-------- -------- -------- --------
Net cash provided by operating activities 288 (147) 610 551
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from sale of securities available for sale 0 0 200 0
Proceeds from maturities of
securities available for sale 500 0 0 0
Proceeds from sale of mortgage-backed
securities available for sale 942 0 0 0
Proceeds from maturities of
securities held to maturity 20 20 35 706
Purchase of securities held to maturity 0 0 (500) 0
Purchase of securities available for sale (2,511) 0 (676) (2,218)
Repayment of principal on
mortgage-backed securities 752 461 855 954
Increase in loans receivable (1,831) (6,574) (11,055) (11,563)
Purchase of loans and participations 0 0 (617) 0
Sale or participation of originated loans 1,000 973 2,087 1,744
Decrease (increase) in foreclosed real estate 114 (45) (57) (260)
Purchase of premises and equipment (268) (77) (327) (246)
Proceeds from sale of premises and equipment 0 0 0 22
-------- -------- -------- --------
Net cash used in investing activities (1,282) (5,242) (10,055) (10,861)
-------- -------- -------- --------
</TABLE>
-26-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Five-Month Periods Ended March 31, 1998 and
For the Years Ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
For the Five-Month Periods For the Years
Ended March 31, Ended October 31,
-------------------------- ------------------------
1998 1997 1997 1996
---------- -------- -------- --------
Unaudited
---------
1,000's
-------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 913 $ 5,614 $ 5,024 $ 7,287
Increase in repurchase agreements 1,552 414 92 0
Advances from Federal Home Loan Bank 3,000 2,250 0 1,500
Repayment of Federal Home
Loan Bank advances (1,000) 0 (1,500) 0
Increase in advances from
borrowers for taxes and insurance 33 26 7 2
Proceeds from issuance of common stock 0 0 8,187 0
Purchase of employee stock
ownership plan 0 0 (688) 0
ESOP shares allocated 140 0 0 0
-------- -------- -------- --------
Net cash provided by financing activities 4,638 8,304 11,122 8,789
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents 3,644 2,915 1,677 (1,521)
Cash and cash equivalents at beginning of year 2,930 1,253 1,253 2,774
-------- -------- -------- --------
Cash and cash equivalents at end of year $ 6,574 $ 4,168 $ 2,930 $ 1,253
======== ======== ======== ========
Supplemental Disclosures:
Additional Cash Flows
Information:
Cash paid for:
Interest on deposits, advances
and other borrowings $ 1,270 $ 1,322 $ 3,068 $ 2,509
Income taxes:
Federal 135 22 147 176
State 29 7 35 40
Schedule of Non-Cash
Investing Activities:
Change in unrealized gain
on securities available for sale 9 5 0 2
Change in deferred income taxes attributed to
unrealized gain on securities available for sale 3 2 0 1
Foreclosed real estate 0 45 57 260
</TABLE>
-27-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Description of the Business
First Robinson Financial Corporation (the Company) was incorporated as
a Delaware corporation in March of 1997 at the direction of the Board
of Directors of First Robinson Savings and Loan, F.A., the predecessor
of First Robinson Savings Bank, National Association (the Bank), to
become the holding company for the Bank upon its conversion from a
mutual federal savings and loan to a national stock bank (the
Conversion). The Bank was originally chartered in 1883. The Conversion
was completed in June of 1997 with the issuance of 859,625 shares of
the Company's common stock at an initial public offering price of $10
per share. The total proceeds from the Conversion were $8,596,250, net
of related conversion cost of $408,686, with net proceeds of
$8,187,564. The Company used fifty percent of the net proceeds to
acquire all of the outstanding common stock of the Bank. As of March
31, 1998, the Company has no significant assets other than the
outstanding stock of the Bank, proceeds from the Conversion, and a
note receivable from the ESOP Trust for the shares purchased for the
Employee Stock Ownership Plan. The Company's principal business is
overseeing and directing the business of the Bank and investing the
assets of the Company. The Company has registered with the Board of
Governors of the Federal Reserve System as a bank holding company.
The Bank operates through four facilities serving Crawford County,
Illinois and contiguous counties in southeastern Illinois. The
principal business of the Bank consists of attracting deposits from
the general public and using such deposits, together with other funds,
to originate one to four family residential mortgage loans, consumer
loans, commercial and agricultural business loans, commercial and
agricultural mortgage loans, and to a lesser extent, multifamily and
construction loans. The Bank's main office is located in Robinson with
facilities in Oblong and Palestine. During the current period the
Company changed the fiscal year end from October 31 to March 31.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary First Robinson Savings Bank,
National Association. All material intercompany transactions and
accounts have been eliminated. Information at March 31, 1997 and for
the five-month period then ended is unaudited. The unaudited
information reflects all adjustments, which consist solely of normal
recurring accruals, which are in the opinion of management, necessary
to a fair presentation of the financial position at March 31, 1997 and
the results of operations and of cash flows for the five-month period
ended March 31, 1997.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the statement of consolidated
financial condition and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and
the valuation of real estate acquired in connection with foreclosures
or in satisfaction of loans.
Management believes the allowance for loan losses and real estate
owned is adequate. Management uses available information to recognize
losses on loans and foreclosed real estate. Future additions to the
allowances may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowances
for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on
their judgments about information available to them at the time of
their examination.
-28-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Cash Equivalents
For purposes of the consolidated statements of cash flows, cash
equivalents consist of daily interest bearing demand deposits, federal
funds sold, and interest bearing deposits and securities having
original maturities of three months or less.
Investments and Mortgage-Backed Securities
Investment and mortgage-backed securities available for sale include
securities that management intends to use as part of its overall
asset/liability management strategy and that may be sold in response
to changes in interest rates and resultant prepayment risk and other
related factors. Securities available for sale are carried at fair
value, and unrealized gains and losses (net of related tax effects)
are excluded from earnings but are included in stockholders' equity.
Upon realization, such gains and losses will be included in earnings
using the specific identification method. Investment securities and
mortgage-backed securities, other than those designated as available
for sale or trading, are comprised of debt securities for which the
Bank has positive intent and ability to hold to maturity and are
carried at cost, adjusted for amortization of premiums and accretion
of discounts using the level-yield method over the estimated lives of
the securities.
Trading account securities are adjusted to market value through
earnings. There were no trading account securities during the periods
presented in these financial statements.
Management determines the appropriate classification of investment and
mortgage-backed securities as either available for sale, held to
maturity, or held for trading at the purchase date.
Loans
Loans are considered a held-to-maturity asset and, accordingly, are
carried at historical cost. Loans are stated at unpaid principal
balances, less the allowance for loan losses and net deferred loan
fees and unearned discounts. Unearned discounts on installment loans
are recognized as income over the term of the loans using the interest
method. Loan origination and commitment fees, as well as certain
direct origination costs, are deferred and amortized as a yield
adjustment over the lives of the related loans using the interest
method when in excess of loan origination cost. Amortization of
deferred loan fees is discontinued when a loan is placed on nonaccrual
status.
Loans are placed on nonaccrual when collection of principal or
interest is considered doubtful (generally loans past due 90 days or
more). Any unpaid interest previously accrued on those loans is
reversed from income. Interest income generally is not recognized on
nonaccrual loans unless the likelihood of further loss is remote.
Income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments is back to
normal, in which case the loan is returned to accrual status.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb probable losses in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical
loss experience, specific impaired loans, and economic conditions. The
allowance is increased by a provision for loan losses, which is
charged to expense, and reduced by charge-offs, net of recoveries.
Loans are charged off when management believes there has been
permanent impairment of their carrying values.
-29-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Loans
The Bank also provides a reserve for losses on specific loans which
are deemed to be impaired. Groups of small balance homogeneous basis
loans (generally residential real estate and consumer loans) are
evaluated for impairment collectively. A loan is considered impaired
when, based upon current information and events, it is probable that
the Bank will be unable to collect on a timely basis, all principal
and interest according to the contractual terms of the loan's original
agreement. When a specific loan is determined to be impaired, the
reserve for possible loan losses is increased through a charge to
expense for the amount of the impairment. For all non-consumer loans,
impairment is measured based on value of the underlying collateral.
The value of the underlying collateral is determined by reducing the
collateral's estimated current value by anticipated selling costs. The
bank's impaired loans are the same as those non-consumer loans
currently reported as nonaccrual. The Bank recognizes interest income
on impaired loans only to the extent that cash payments are received.
Real Estate Held for Investment and Foreclosed Real Estate
Direct investments in real estate properties held for investment are
carried at the lower of cost, including cost of improvements and
amenities subsequent to acquisition, or net realizable value.
Foreclosed real estate held for sale is carried at the lower of cost
or estimated fair market value, net of estimated selling costs. Costs
of holding foreclosed property are charged to expense in the current
period, except for significant property improvements, which are
capitalized to the extent that carrying value does not exceed
estimated fair market value, net of estimated selling cost.
Premises and Equipment
Land is carried at cost. Buildings and furniture, fixtures and
equipment are carried at cost adjusted for accumulated depreciation.
Depreciation is calculated over the estimated useful lives of the
assets. Buildings and furniture, fixtures and equipment are
depreciated using the straight-line method. The estimated useful lives
are five to fifty years for buildings and improvements and five to
fifteen years for equipment.
Income Taxes
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment. Income tax
expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
The Company files a consolidated income tax return with the Bank.
-30-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Earnings Per Share
Earnings per share information is computed based on the weighted
average common shares outstanding during the periods. Unallocated
shares held for the ESOP are not considered outstanding common shares
outstanding for this calculation. ESOP allocated and shares released
for allocation are considered to be outstanding from the beginning of
the period. Weighted average common shares outstanding is the same for
the calculation of basic and diluted earnings per share. The Company
had 799,451 and 795,210 weighted average common shares outstanding at
March 31, 1998 and October 31, 1997, respectively. Earnings per share
information has not been presented for the period ending March 31,
1997 and for the year ended October 31, 1996, which was prior to the
stock conversion on June 27, 1997. Earnings per share information for
the year ended October 31, 1997 has been based on the net income from
June 30, 1997 through October 31, 1997. The period since the stock
conversion on June 27, 1997 through June 30, 1997 was considered
insignificant for this calculation for the year ended October 31,
1997.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Company has entered into
off-balance-sheet financial instruments consisting of commitments to
extend credit, commitments under credit card arrangements, commercial
letters of credit and standby letters of credit. Such instruments are
recorded in the consolidated financial statements when they become
payable.
Reclassifications
Amounts presented in prior years consolidated financial statements
have been reclassified to conform to the 1998 presentation.
New Accounting Standards
In June of 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components in a full set of
general purpose financial statements. This statement requires
classification of items of other comprehensive income by their nature
in the financial statements and display of the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid in capital in the equity section of the statement of
financial position. This statement is effective for fiscal years
beginning after December 31, 1997 and the Company will implement this
for its year ended March 31, 1999.
-31-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
New Accounting Standards
In June of 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which establishes
standards for reporting information about operating segments in annual
financial statements and requires that those businesses report
selective information about operating segments in interim financial
reports to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. This statement is effective for fiscal years beginning
after December 31, 1997. This statement requires disclosure in
information in the financial statements and the Company will implement
this for their year ended March 31, 1999.
In February of 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". SFAS
No. 132 standardizes the disclosure requirements for pensions and
other postretirement benefits. This statement is effective for
financial statements for periods beginning after December 15, 1997.
The management of the Company plans to adopt the appropriate
provisions of the statements at April 1, 1998, and does not currently
believe that the future adoption of this statement will have a
material effect on the Company's financial position or operating
results.
Note 2. Securities
Securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
----------------------------------------------------
<S> <C> <C> <C> <C>
U. S. government and agency securities $2,509 $ 23 $ 2 $2,530
FRB stock 123 0 0 123
FHLB stock 317 0 0 317
------ ------ ------ ------
$2,949 $ 23 $ 2 $2,970
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
October 31, 1997
-----------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
----------------------------------------------------
<S> <C> <C> <C> <C>
U. S. government and agency securities $ 500 $ 0 $ 1 $ 499
FRB stock 123 0 0 123
FHLB stock 317 0 0 317
------ ------ ------ ------
$ 940 $ 0 $ 1 $ 939
====== ====== ====== ======
</TABLE>
-32-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities
<TABLE>
<CAPTION>
October 31, 1996
-----------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
----------------------------------------------------
<S> <C> <C> <C> <C>
FHLB stock $ 264 $ 0 $ 0 $ 264
FHLMC stock 200 5 0 205
------ ------ ------ ------
$ 464 $ 5 $ 0 $ 469
====== ====== ====== ======
</TABLE>
The amortized cost and approximate market value of securities available for
sale, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities from call options and prepayments.
<TABLE>
<CAPTION>
March 31, October 31,
------------------------- ---------------------------------------------------
1998 1997 1996
------------------------- -------------------------- --------------------
Approximate Approximate Approximate
------------------------- -------------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
-------- ----------- --------- ----------- --------- ------
(1,000's)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due in one
year or less $ 500 $ 500 $ 0 $ 0 $ 0 $ 0
Due after one year
through five years 2,009 2,030 500 499 0 0
Due after five years
through ten years 0 0 0 0 0 0
Due after ten years 440 440 440 440 464 469
------ ------ ------ ------ ------ ------
$2,949 $2,970 $ 940 $ 939 $ 464 $ 469
====== ====== ====== ====== ====== ======
</TABLE>
Securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1998
------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- --------- ---------- ------------
(1,000's)
------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agency securities $500 $ 10 $ 0 $510
State and municipal obligations 190 0 0 190
---- ---- ---- ----
$690 $ 10 $ 0 $700
==== ==== ==== ====
</TABLE>
-33-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities
<TABLE>
<CAPTION>
October 31, 1997
-----------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
----------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agency securities $ 500 $ 13 $ 0 $ 513
State and municipal obligations 210 0 0 210
------ ------ ------ ------
$ 710 $ 13 $ 0 $ 723
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
October 31, 1996
-----------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
----------------------------------------------------
<S> <C> <C> <C> <C>
State and municipal obligations $ 245 $ 0 $ 0 $ 245
====== ====== ====== ======
</TABLE>
The amortized cost and approximate market value of securities held to maturity,
by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities from call and prepayment options.
<TABLE>
<CAPTION>
March 31, October 31,
------------------------- ---------------------------------------------------
1998 1997 1996
------------------------- -------------------------- --------------------
Approximate Approximate Approximate
------------------------- -------------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
-------- ----------- --------- ----------- --------- ------
(1,000's)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due in one
year or less $ 35 $ 35 $ 35 $ 35 $ 35 $ 35
Due after one year
through five years 655 665 635 648 190 190
Due after five years
through ten years 0 0 40 40 20 20
Due after ten years 0 0 0 0 0 0
---- ---- ---- ---- ---- ----
$690 $700 $710 $723 $245 $245
==== ==== ==== ==== ==== ====
</TABLE>
Securities with a carrying amount of $3,030,000, $500,000, and $0 at March 31,
1998, October 31, 1997 and 1996 were pledged to secure public deposits and for
other purposes as required or permitted by law. The Company had one derivative
security at October 31, 1996, which was an FHLMC Step Up with interest rate
adjustments at certain dates. The FHLMC Step Up was called during 1997.
-34-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities
Proceeds from sales of securities, gross gains and gross losses from such
sales were as follows:
<TABLE>
<CAPTION>
Five Months
Ended March 31, Year Ended October 31,
--------------------- ----------------------
1998 1997 1997 1996
----- ------- ------ ------
Unaudited
---------
(1,000's)
-------------------------------------------------
<S> <C> <C> <C> <C>
Proceeds from sales $ 0 $ 0 $ 0 $ 0
====== ====== ====== ======
Gross gains $ 0 $ 0 $ 0 $ 0
Gross losses 0 0 0 0
------ ------ ------ ------
$ 0 $ 0 $ 0 $ 0
====== ====== ====== ======
</TABLE>
During 1997, FHLMC stock was redeemed for $200,000 at no gain or loss.
Note 3. Mortgage-Backed and Related Securities
Mortgage-backed and related securities available for sale are summarized as
follows:
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
----------------------------------------------------
<S> <C> <C> <C> <C>
GNMA certificates $ 137 $ 5 $ 0 $ 142
FNMA certificates 854 26 0 880
FHLMC certificates 125 2 0 127
------ ------ ------ ------
$1,116 $ 33 $ 0 $1,149
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
October 31, 1997
-----------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
----------------------------------------------------
<S> <C> <C> <C> <C>
GNMA certificates $ 156 $ 5 $ 0 $ 161
FNMA certificates 2,104 36 2 2,138
FHLMC certificates 559 7 1 565
------ ------ ------ ------
$2,819 $ 48 $ 3 $2,864
====== ====== ====== ======
</TABLE>
-35-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Mortgage-Backed and Related Securities
<TABLE>
<CAPTION>
October 31, 1996
-----------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
----------------------------------------------------
<S> <C> <C> <C> <C>
GNMA certificates $ 204 $ 5 $ 0 $ 209
FNMA certificates 2,698 41 9 2,730
FHLMC certificates 723 7 5 725
------ ------ ------ ------
$3,625 $ 53 $ 14 $3,664
====== ====== ====== ======
</TABLE>
Mortgage-backed and related securities held to maturity are summarized as
follows:
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
----------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC certificates $ 265 $ 2 $ 0 $ 267
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
October 31, 1997
-----------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
----------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC certificates $ 287 $ 0 $ 2 $ 285
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
October 31, 1996
-----------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
----------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC certificates $ 347 $ 0 $ 3 $ 344
====== ====== ====== ======
</TABLE>
Mortgage-backed and related securities with a carrying amount of $1,414,000,
$3,560,000, and $3,811,000 at March 31, 1998, October 31, 1997 and 1996,
respectively, were pledged to secure public deposits and for other purposes as
required or permitted by law.
The weighted average interest rate on mortgage-backed and related securities is
7.37%, 7.29%, and 7.34% at March 31, 1998, October 31, 1997 and 1996,
respectively.
The Bank had gross realized gains of $8,000 and gross realized losses of $16,000
on $942,000 of sales proceeds on mortgage-backed and related securities for the
five-month period ended March 31, 1998. There were no sales for the prior
periods or years.
-36-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans Receivable
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
March 31, October 31,
--------- ---------------------------
1998 1997 1996
------- ------- -------
(1,000's)
---------------------------------------------
<S> <C> <C> <C>
Real estate loans:
One to four family residential $30,393 $29,894 $27,784
Multi-family residential 117 124 141
Commercial 13,466 12,420 9,594
Construction 598 578 76
------- ------- -------
44,574 43,016 37,595
Other loans:
Deposit accounts 654 657 571
Automobile 8,536 9,480 8,764
Commercial 9,408 9,140 5,257
Other loans 2,440 2,392 2,717
------- ------- -------
Total loans 65,612 64,685 54,904
Less:
Loans in process 713 243 0
Allowance for loan losses 665 482 413
Unearned discounts 0 0 43
------- ------- -------
Net loans $64,234 $63,960 $54,448
======= ======= =======
</TABLE>
Changes in allowance for loan losses are as follows:
<TABLE>
<CAPTION>
March 31, October 31,
--------------------- ---------------------
1998 1997 1997 1996
------ ------ ------ ------
Unaudited
---------
(1,000's)
-------------------------------------------------
<S> <C> <C> <C> <C>
Balance $ 482 $ 413 $ 413 $ 255
Provision for losses 557 24 206 270
Loans charged off (380) (37) (161) (122)
Recoveries 6 4 24 10
------ ------ ------ ------
Balance $ 665 $ 404 $ 482 $ 413
====== ====== ====== ======
</TABLE>
The weighted average interest rate on loans at March 31, 1998, October 31,
1997 and 1996 were 8.91%, 9.14% and 8.84%, respectively.
Impaired loans totaled $161,000, $326,000 and $0 at March 31, 1998, October
31, 1997 and 1996, respectively. An allowance for losses was not deemed
necessary for impaired loans totaling $10,000, $60,000 and $0 at March 31,
1998, October 31, 1997 and 1996, respectively. An allowance of $32,000,
$85,000 and $0 was recorded for the remaining balance of impaired loans of
$151,000, $266,000 and $0 at March 31, 1998, October 31, 1997 and 1996,
respectively. Impaired loans averaged $203,000, $26,000 and $0 for 1998,
1997 and 1996, respectively. Interest income and cash receipts of interest
totaled $0, $5,000 and $0 for the five-month period ended March 31, 1998,
and for the years ended October 31, 1997 and 1996, respectively.
-37-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans Receivable
Loans on which the accrual of interest was discontinued or reduced amounted
to $161,000, $334,000 and $68,000 at March 31, 1998, October 31, 1997 and
1996, respectively. Additional interest income of approximately $5,000,
$7,000, and $2,000 would have been recorded had income on these loans been
accounted for on the accrual basis.
The Company sold participating interest in real estate and commercial loans
of $0, $956,000, and $1,138,000 and whole loans of $1,000,000, $1,131,000,
and $606,000 for the five-month period ended March 31, 1998 and for the
respective years ending October 31, 1997, and 1996. The Company recognized
gains on the loans sold of $0, $133,000, and $45,000 for the five-month
period ended March 31, 1998 and for the respective years ended October 31,
1997 and 1996. The Company purchased participating interest and whole loans
in the amount of $0, $617,000, and $0 for the five-month period ended March
31, 1998 and for the respective years ended October 31, 1997 and 1996.
Note 5. Accrued Interest Receivable
Accrued interest receivable consisted of the following:
<TABLE>
<CAPTION>
March 31, October 31,
--------- ---------------------------
1998 1997 1996
------- ------- -------
(1,000's)
---------------------------------------------
<S> <C> <C> <C>
Loans $ 661 $ 634 $ 478
Securities 45 19 9
Mortgage-backed and related securities 9 22 27
------- ------- -------
$ 715 $ 675 $ 514
======= ======= =======
</TABLE>
Note 6. Premises and Equipment
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
March 31, October 31,
--------- ---------------------------
1998 1997 1996
------- ------- -------
(1,000's)
---------------------------------------------
<S> <C> <C> <C>
Land $ 334 $ 334 $ 313
Building 2,331 2,309 2,246
Furniture and equipment 1,631 1,384 1,143
------- ------- -------
4,296 4,027 3,702
Accumulated depreciation (1,399) (1,314) (1,138)
------- ------- -------
$ 2,897 $ 2,713 $ 2,564
======= ======= =======
</TABLE>
Depreciation included in the consolidated statements of income amounted to
$84,000, $68,000, $178,000, and $165,000 for the five-month periods ended
March 31, 1998 and 1997, and for the years ended October 31, 1997 and 1996,
respectively.
Included in the buildings is $187,000 of capitalized interest from the 1985
building project. Amortization of capitalized interest, which is included
in premises, occupancy and equipment expense, amounted to $2,000, $2,000,
$4,000, and $4,000 for the five-month periods ended March 31, 1998 and 1997
and for the years ended October 31, 1997 and 1996, respectively.
-38-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Premises and Equipment
The Company completed a drive up facility in Oblong at a cost of $277,000
during the year ended October 31, 1997.
Note 7. Deposit Analysis
Deposits and weighted average interest rates are summarized as follows:
<TABLE>
<CAPTION>
March 31, October 31,
-------------------------- ----------------------------------------------------
1998 1997 1996
-------------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Interest Interest Interest
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(1,000's)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing $ 3,217 .00% $ 3,494 .00% $ 2,265 .00%
NOW accounts 10,125 3.20 8,381 3.11% 6,717 3.12%
Passbook 6,508 3.02 5,882 3.10% 5,540 3.00%
Certificates 42,780 5.70 43,958 5.72% 42,169 5.65%
------- ------- -------
Total deposits $62,630 4.72% $61,715 4.79% $56,691 4.87%
======= ======= =======
</TABLE>
Certificates had the following remaining maturities:
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------------------------------------------------------------
Less Than One to Two to After
One Year Two Years Three Years Three Years Totals
-------- --------- ----------- ----------- ------
(1,000's)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2.00 to 3.99% $ 69 $ 0 $ 0 $ 0 $ 69
4.00 to 5.99% 18,105 4,137 755 194 23,191
6.00 to 7.99% 8,347 6,473 3,298 1,402 19,520
------- ------- ------- ------- -------
Totals $26,521 $10,610 $ 4,053 $ 1,596 $42,780
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
October 31, 1997
-----------------------------------------------------------------------------------
Less Than One to Two to After
One Year Two Years Three Years Three Years Totals
-------- --------- ----------- ----------- ------
(1,000's)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2.00 to 3.99% $ 122 $ 0 $ 0 $ 0 $ 122
4.00 to 5.99% 17,730 3,692 685 173 22,280
6.00 to 7.99% 7,797 7,907 3,969 1,883 21,556
------- ------- ------- ------- -------
Totals $25,649 $11,599 $ 4,654 $ 2,056 $43,958
======= ======= ======= ======= =======
</TABLE>
-39-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Deposit Analysis
<TABLE>
<CAPTION>
October 31, 1996
-----------------------------------------------------------------------------------
Less Than One to Two to After
One Year Two Years Three Years Three Years Totals
-------- --------- ----------- ----------- ------
(1,000's)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3.00 to 3.99% $ 307 $ 0 $ 0 $ 0 $ 307
4.00 to 4.99% 18,311 3,907 375 100 22,693
5.00 to 5.99% 10,320 3,366 1,084 4,399 19,169
------- ------- ------- ------- -------
Totals $28,938 $ 7,273 $ 1,459 $ 4,499 $42,169
======= ======= ======= ======= =======
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
March 31, October 31,
-------------------- --------------------
1998 1997 1997 1996
------ ------ ------ ------
Unaudited
---------
(1,000's)
-------------------------------------------------
<S> <C> <C> <C> <C>
Passbook $ 72 $ 73 $ 197 $ 156
NOW accounts 114 99 251 207
Certificates 1,028 1,033 2,505 2,271
------ ------ ------ ------
$1,214 $1,205 $2,953 $2,634
====== ====== ====== ======
</TABLE>
At March 31, 1998, October 31, 1997 and 1996, the Company had $11,347,000,
$11,104,000 and $10,737,000, respectively, of deposit accounts with
balances of $100,000 or more. The Company did not have brokered deposits at
March 31, 1998, October 31, 1997 or 1996. Deposits in excess of $100,000
are not federally insured. The Company has pledged mortgage-backed
certificates and securities, when requested by depositors, for deposits of
$100,000 or more.
Note 8. Federal Home Loan Bank Advances
The Company has entered into an FHLB advance agreement on March 19, 1991.
The agreement covers the terms and collateral requirements. The advances
are secured by pledged securities and a portion of the qualified mortgage
loans of the Company. The Company had outstanding advances of $2,000,000,
$0, and $1,500,000 at March 31, 1998 and October 31, 1997 and 1996,
respectively. In addition, the Company had $9,000, $0 and $7,000 of accrued
interest payable at March 31, 1998 and October 31, 1997 and 1996,
respectively.
Information concerning FHLB advances is summarized as follows:
<TABLE>
<CAPTION>
March 31, October 31,
--------------------- ---------------------
1998 1997 1997 1996
------ ------ ------ ------
Unaudited
---------
(1,000's)
-------------------------------------------------
<S> <C> <C> <C> <C>
Average balance $1,404 $2,570 $2,064 $ 367
Average interest rate 5.15% 5.59% 5.67% 5.72%
Maximum month-end balance $2,000 $3,750 $5,500 $1,500
</TABLE>
-40-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Repurchase Agreements
The Company has entered into repurchase agreements with customers at
various interest rates with an average maturity of less than three months.
Securities are pledged to secure the repurchase agreements. Interest
expense amounted to $12,000, $5,000, $7,000 and $0 for the five-month
periods ended March 31, 1998 and 1997 and for the years ended October 31,
1997 and 1996, respectively.
Information concerning repurchase agreements is summarized as follows:
<TABLE>
<CAPTION>
March 31, October 31,
--------------------- ---------------------
1998 1997 1997 1996
------ ------ ------ ------
Unaudited
---------
(1,000's)
-------------------------------------------------
<S> <C> <C> <C> <C>
Average balance $ 569 $ 232 $ 131 $ 0
Average interest rate 5.13% 5.44% 5.27% 0.00%
Maximum month-end balance $1,553 $ 414 $ 414 $ 0
</TABLE>
Note 10. Regulatory Matters
The Company is regulated by the Board of Governors of the Federal Reserve
System ("FRB") and is subject to securities registration and public
reporting regulations of the Securities and Exchange Commission. The Bank
is regulated by the Office of the Comptroller of the Currency ("OCC").
The Bank is subject to the capital requirements of the OCC. The OCC
requires the Bank to maintain minimum ratios of Tier 1 capital to total
risk-weighted assets and total capital to risk-weighted assets of 4% and
8%, respectively. Tier 1 capital consists of total shareholders' equity
calculated in accordance with generally accepted accounting principles less
intangible assets, and total capital is comprised of Tier 1 capital plus
certain adjustments, the only one of which is applicable to the Bank is the
allowance for possible loan losses. Risk-weighted assets refer to the on-
and off-balance sheet exposures of the Bank adjusted for relative risk
levels using formulas set forth in OCC regulations. The Bank is also
subject to an OCC leverage capital requirement, which calls for a minimum
ratio of Tier 1 capital (as defined above) to quarterly average total
assets of 3% to 5%, depending on the institution's composite ratings as
determined by its regulators.
At March 31, 1998, October 31, 1997 and 1996, the Bank was in compliance
with all of the aforementioned capital requirements as summarized below.
<TABLE>
<CAPTION>
March 31, October 31,
--------- ---------------------------
1998 1997 1996
--------- -------- ------
(1,000's)
----------------------------------------------
<S> <C> <C> <C>
Tier I Capital:
Common stockholders' equity $ 9,318 $ 9,377 $ 4,658
Unrealized holding gain on securities
available for sale (33) (27) (27)
------- ------- -------
Total Tier I capital $ 9,285 $ 9,350 $ 4,631
======= ======= =======
</TABLE>
-41-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Regulatory Matters
<TABLE>
<CAPTION>
March 31, October 31,
--------- ---------------------------
1998 1997 1996
--------- -------- ------
(1,000's)
----------------------------------------------
<S> <C> <C> <C>
Tier II Capital:
Total Tier I capital $ 9,285 $ 9,350 $ 4,631
Qualifying allowance for loan losses 665 482 412
------- ------- -------
Total capital $ 9,950 $ 9,832 $ 5,043
======= ======= =======
Risk-weighted assets $56,598 $54,647 $47,251
Average assets $78,012 $71,709 $59,811
</TABLE>
<TABLE>
<CAPTION>
To be Well Capitalized
under the Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
--------------------- -------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1998:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 9,950 17.58% $ 4,528 $8.0% $ 5,660 $10.0%
Tier I Capital
(to Risk-Weighted Assets) 9,285 16.41% 2,264 $4.0% 3,396 $6.0%
Tier I Capital
(to Average Assets) 9,285 11.90% 3,120 $4.0% 3,901 $5.0%
</TABLE>
<TABLE>
<CAPTION>
To be Well Capitalized
under the Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
--------------------- -------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of October 31, 1997:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 9,832 17.99% $ 4,372 > 8.0% $ 5,464 > 10.0%
Tier I Capital - -
(to Risk-Weighted Assets) 9,350 17.10% 2,186 > 4.0% 3,278 > 6.0%
Tier I Capital - -
(to Average Assets) 9,350 13.04% 2,868 > 4.0% 3,585 > 5.0%
- -
</TABLE>
-42-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Regulatory Matters
<TABLE>
<CAPTION>
To be Well Capitalized
under the Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
--------------------- -------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of October 31, 1996:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 5,043 10.67% $ 3,780 > $8.0% $ 4,725 > 10.0%
Tier I Capital - -
(to Risk-Weighted Assets) 4,631 9.80% 2,890 > $4.0% 3,396 > 6.0%
Tier I Capital - -
(to Average Assets) 4,631 7.74% 2,392 > $4.0% 2,991 > 5.0%
- -
</TABLE>
At the time of the conversion of the Bank to a stock organization, a
special liquidation account was established for the benefit of eligible
account holders and the supplemental eligible account holders in an amount
equal to the net worth of the Bank. The special liquidation account will be
maintained for the benefit of eligible account holders and the supplemental
eligible accounts holders who continue to maintain their accounts in the
Bank after the conversion on June 27, 1997. In the event of a complete
liquidation, each eligible and the supplemental eligible accounts holders
will be entitled to receive a liquidation distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying
balances for accounts then held. With the reorganization completed on June
27, 1997, this liquidation account became part of stockholders' equity for
the Company under the same terms and conditions as if the reorganization
had not occurred. The Bank may not declare or pay cash dividends on or
repurchase any of its common stock if stockholders' equity would be reduced
below applicable regulatory capital requirements or below the special
liquidation account.
Subject to applicable law, the Boards of Directors of the Company and the
Bank may each provide for the payment of dividends. Future declarations of
cash dividends, if any, by the Company may depend upon dividend payments by
the Bank to the Company. Subject to regulations of the OCC, the Bank may
not declare or pay a cash dividend if its stockholder's equity would
thereby be reduced below either the aggregate amount then required for the
liquidation account or the minimum regulatory capital requirements imposed
by federal regulations. The Bank may not declare or pay a cash dividend to
the Company in excess of 100% of its net income to date, less dividends
paid, during the current calendar year plus the preceding year's net
income, less any dividends paid or declared during that year without prior
regulatory approval.
Retained earnings at March 31, 1998 and October 31, 1997 and 1996 include
approximately $1,257,000 for which federal income tax has not been
provided. If the amounts that qualify as deductions for federal income tax
purposes are later used for purposes other than for bad debt losses, they
will be subject to federal income tax at the then current corporate rate.
The unrecorded deferred tax liability on the above amount is approximately
$427,000.
-43-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Non-Interest Income and Expense
Non-interest income and expense is summarized as follows:
<TABLE>
<CAPTION>
For the Five-Month Periods For the Years
Ended March 31, Ended October 31,
------------------------- ----------------------
1998 1997 1997 1996
------ -------- ------- -------
Unaudited
---------
1,000's
-------------------------------------------------------
<S> <C> <C> <C> <C>
Non-interest income
Charges and fees on loans $ 53 $ 74 $ 139 $ 139
Charges and fees on deposit accounts 111 62 171 156
Net loss on sale of assets (56) 0 0 15
Net loss on sale of mortgage-backed securities (8) 0 0 0
Gain on sale of loans 0 0 133 45
Internet fees 44 10 43 0
Other 13 12 30 37
------ ------ ------ ------
$ 157 $ 158 $ 516 $ 392
====== ====== ====== ======
Non-interest expense
Compensation and employee benefits $ 515 $ 441 $1,106 $1,017
Occupancy and equipment 173 152 400 358
Data processing expense 38 22 56 48
Audit, legal and other professional services 66 11 40 32
Federal Deposit Insurance Premium 17 23 46 393
Advertising 28 24 69 47
Telephone and postage 40 34 81 63
Internet expenses 38 27 68 0
Other 118 80 209 162
------ ------ ------ ------
$1,033 $ 814 $2,075 $2,120
====== ====== ====== ======
</TABLE>
Note 12. Income Tax
The components of the provision for income taxes are summarized as follows:
<TABLE>
<CAPTION>
March 31, October 31,
--------------------- ---------------------
1998 1997 1997 1996
------ ------ ------ ------
Unaudited
---------
(1,000's)
-------------------------------------------------
<S> <C> <C> <C> <C>
Currently payable:
Federal $ 44 $ 115 $ 227 $ 147
State 10 24 47 33
Deferred:
Federal (71) 1 125 (105)
State (17) 0 27 (24)
------ ------ ------ ------
($ 34) $ 140 $ 426 $ 51
====== ====== ====== ======
</TABLE>
-44-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Income Tax
An analysis of tax expense for the three years setting forth the reasons for
the variations from the federal statutory rate of 34% is as follows:
<TABLE>
<CAPTION>
March 31, October 31,
--------------------- ---------------------
1998 1997 1997 1996
------ ------ ------ ------
Unaudited
---------
(1,000's)
-------------------------------------------------
<S> <C> <C> <C> <C>
Computed tax at statutory rates ($ 19) $ 122 $ 365 $ 51
Increase (decrease) in tax expense resulting from:
State and local taxes based on income,
net of federal income tax benefit (7) 23 67 15
Municipal interest (3) (2) (5) (6)
Other (5) (3) (1) (9)
------ ------ ------ ------
($ 34) $ 140 $ 426 $ 51
====== ====== ====== ======
Effective tax rate 38.2% 38.9% 40.0% 29.3%
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
March 31, October 31,
--------- ---------------------------
1998 1997 1996
--------- -------- ------
(1,000's)
----------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 227 $ 147 $ 119
Directors' retirement 43 41 36
------- ------- -------
270 188 155
------- ------- -------
Deferred tax liabilities:
Accrual basis adjustment 232 233 51
Depreciation 164 169 169
FHLB stock 10 10 9
Allowance for unrealized gain on
securities available for sale 21 17 17
------- ------- -------
427 429 246
------- ------- -------
Net deferred tax liabilities $ 157 $ 241 $ 91
======= ======= =======
</TABLE>
No valuation allowance was required for deferred tax assets at March 31,
1998 or October 31, 1997 and 1996.
-45-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Employee Benefit Plans
The Company has established a 401(k) profit sharing plan which covers all
employees with three months of service and minimum age of 21. This plan
allows for individual employees to elect a portion of their salary to be
deferred with a matching provision of the first four percent of salary
deferral at a rate of twenty-five percent from the Company. The plan has a
five year vesting schedule. Contributions to this plan by the Company
amounted to $2,000, $2,000, $4,000 and $3,000 for the five-month periods
ended March 31, 1998 and 1997 and for the years ended October 31, 1997 and
1996, respectively, which are included in compensation and employee
benefits. Total pension cost including administration and other fees
amounted to $2,000, $4,000, $7,000, and $12,000 for the five-month periods
ended March 31, 1998 and 1997 and for the years ended October 31, 1997 and
1996, respectively, which are included in compensation and employee
benefits.
The Bank approved a directors' retirement plan during 1996. The plan
provided for a one-time contribution of $2,000 per year of service for each
director, future contributions of $2,000 per year for each director, and a
discretionary annual contribution for each director using performance
standards similar to those used under the existing 401(k) plan. Each
director's account will include a rate of return equal to the highest
interest rate paid on the Bank's one year or less certificate of deposits.
Future annual contributions will be made for each director to the plan as
of January 1 of each year starting with January 1, 1998. The Company's
contribution, including prior service, for the five-month periods ended
March 31, 1998 and 1997 and for the years ended October 31, 1997 and 1996
were $5,000, $3,000, $10,000 and $94,000. The plan expense is included in
compensation and employee benefits.
Note 14. Employee Stock Ownership Plan (ESOP)
In June 1997 the Company established an Employee Stock Ownership Plan (the
ESOP) in connection with the stock conversion in which employees meeting
age and service requirements are eligible to participate. A participant is
100% vested after five years of credit service. The ESOP borrowed $688,000
from the Company and purchased 68,770 shares of common stock of the Company
at the date of the conversion. This debt carries an interest rate of 7.11%
and requires annual principal and interest payments. The Company has
committed to make annual contributions, on December 31, to the ESOP
necessary to repay the loan including interest.
As the debt is repaid, ESOP shares which were initially pledged as
collateral for its debt, are released from collateral and allocated to
active employees, based on the proportion of debt service paid in the year.
Accordingly, the shares pledged as collateral are reported as unearned ESOP
shares in the consolidated balance sheets. As shares are determined to be
ratably released from collateral, the Company reports compensation expense
equal to the current market price of the shares, and the shares become
outstanding for earnings per share computations. Dividends on allocated
ESOP shares are recorded as a reduction of stockholders' equity and
dividends on unallocated ESOP shares are used to pay debt servicing costs.
The trustees' of the plan may direct payments of cash dividends be paid to
the participants or to be credited to participant accounts and invested.
Compensation expense for the ESOP was $72,000 and $68,000 for the period
ended March 31, 1998 and October 31, 1997, respectively. The ESOP shares
were as follows:
<TABLE>
<CAPTION>
March 31, 1998 October 31, 1997
-------------- ----------------
<S> <C> <C>
Allocated shares 6,877 0
Shares ratably released for allocation 1,719 4,355
Unallocated shares 60,174 64,415
---------- ----------
Total ESOP shares 68,770 68,770
========== ==========
Fair value of unreleased shares $1,060,567 $ 974,277
========== ==========
</TABLE>
-46-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Stock Benefit Plans
The Company anticipates establishing a recognition and retention plan (RRP)
and stock option plan (SOP) for the year ended March 31, 1999. The RRP
assumes that up to 5% of the stock issued in the conversion would be
purchased or shares would be newly issued for the benefit of certain
directors and employees with a five year vesting period. If this plan is
approved, additional expense will be incurred by the Company and the
effects to the existing shareholders would be diluted. The SOP assumes up
to 12% of the stock issued in the conversion would be granted to certain
directors and employees with a five year vesting period and a ten year
option period. If the shares in this plan are awarded, the interest of the
existing shareholders would be diluted.
Note 16. Economic Dependency
The Company is a nondiscriminatory lender in their market area as defined
by their Community Reinvestment Act. The Company is a full service
institution with facilities located in southeast central Illinois. The
Company has no economic dependency other than the general market area.
Note 17. Commitments and Contingencies
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company is
a defendant in certain claims and legal actions arising in the ordinary
course of business. In the opinion of management, after consultation with
legal counsel, the ultimate disposition of these matters is not expected to
have a material adverse effect on the consolidated financial statements of
the Company.
The Company had outstanding commitments to originate mortgage loans as
follows:
<TABLE>
<CAPTION>
March 31, October 31,
--------- ---------------------------
1998 1997 1996
--------- ------ ------
(1,000's)
----------------------------------------------
<S> <C> <C> <C>
Fixed rate $ 129 $ 180 $ 538
======= ======= =======
Variable rate $ 813 $ 594 $ 2,892
======= ======= =======
</TABLE>
Interest rates for fixed rate loan commitments at March 31, 1998, October
31, 1997 and 1996 were from 7.75% to 10.00%, 8.00% to 13.25%, and from
5.00% to 10.00%, respectively. Interest rates for variable rate loan
commitments at March 31, 1998, October 31, 1997 and 1996 were from 8.00% to
9.25%, 8.50% to 9.00% and from 8.00% to 9.75%, respectively. The Bank had
unused lines of credit in the amount of $3,399,000, $3,889,000 and
$2,118,000 at March 31, 1998, October 31, 1997 and 1996, respectively. The
Bank had outstanding letters of credit in the amount of $270,000, $220,000
and $225,000 at March 31, 1998, October 31, 1997 and 1996, respectively.
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amounts recognized in the
consolidated statements of financial condition.
-47-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Commitments and Contingencies
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit
is represented by the contractual notional amount of these instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance- sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case-by-case basis. The
amount and type of collateral obtained, if deemed necessary by the Company
upon extension of credit, varies and is based on management's credit
evaluation of the counterparty.
In September 1996, the FDIC imposed the one-time assessment on all SAIF
insured deposits as of March 31, 1995. The Company has included the FDIC
assessment in the amount of $281,000 as SAIF deposit insurance in the
consolidated statements of income for the year ended October 31, 1996.
Note 18. Related Parties
The Company has entered into transactions with its directors, and executive
officers, and their affiliates. Such transactions were made in the ordinary
course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same
time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present
other unfavorable features. A summary of loans to such related parties is
as follows:
<TABLE>
<CAPTION>
March 31, October 31,
--------- ---------------------------
1998 1997 1996
--------- -------- ------
(1,000's)
----------------------------------------------
<S> <C> <C> <C>
Balance $ 223 $ 210 $ 222
New loans 156 145 140
Repayments (105) (132) (152)
------- ------- -------
Balance $ 274 $ 223 $ 210
======= ======= =======
</TABLE>
Note 19. Carrying Amounts and Fair Value of Financial Instruments
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
For cash and cash equivalents, Federal Home Loan Bank stock, Federal
Reserve Bank stock, and accrued interest receivable, the carrying value is
a reasonable estimate of fair value. The fair value of investment
securities is based on quoted market prices, dealer quotes and prices
obtained from independent pricing services. The fair value of loans
receivable is estimated based on present values using the Bank's current
pricing structures to approximate current entry-value interest rates
considering anticipated prepayment speeds, maturity and credit risks.
-48-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Carrying Amounts and Fair Value of Financial Instruments
The fair value of demand deposit accounts, NOW accounts, savings accounts
and money market deposits, and fixed- maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar
remaining maturities at the reporting date. The fair value of FHLB advances
and other borrowings is estimated using rates currently available for debt
with similar terms and remaining maturities. For advance payments by
borrowers for taxes and insurance and accrued interest payable the carrying
value is a reasonable estimate of fair value. Commitments are generally
made at prevailing interest rates at the time of funding and, therefore,
there is no difference between the contract amount and fair value.
The fair value estimates presented herein are based on pertinent
information available to management as of March 31, 1998, October 31, 1997,
and 1996. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have
not been comprehensively revalued for purposes of these financial
statements since the reporting date and, therefore, current estimates of
fair value may differ significantly from the amounts presented herein.
The estimated fair value of the Company's financial instruments is as
follows:
<TABLE>
<CAPTION>
March 31, October 31,
-------------------------- -----------------------------------------------------
1998 1997 1996
-------------------------- ---------------------- ------------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
--------- ------ -------- ----- -------- --------
(1,000's)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and interest
bearing deposits $ 6,574 $ 6,574 $ 2,930 $ 2,930 $ 1,253 $ 1,253
Securities
available for sale 4,119 4,119 3,803 3,803 4,133 4,133
Securities held to maturity 955 967 997 1,008 592 589
Loans receivable, net 64,234 63,214 63,960 63,963 54,448 55,515
Accrued interest receivable 715 715 675 675 514 514
LIABILITIES
Deposits 62,630 62,966 61,715 61,978 56,691 56,801
FHLB advances 2,000 2,132 0 0 1,500 1,500
Repurchase agreements 1,644 1,644 92 92 0 0
Advances from borrowers
for taxes and insurance 75 75 42 42 35 35
Accrued interest payable 348 348 362 362 353 353
Commitments 0 4,341 0 4,663 0 5,548
</TABLE>
-49-
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. First Robinson Financial Corporation Condensed Financial Information
The parent company's principal assets are its cash and investment in
subsidiary bank. The following are the condensed statements of financial
condition for the parent company only as of March 31, 1998 and October 31,
1997 and its condensed statements of operations and cash flows for the
five-month period ended March 31, 1998 and the period from June 27, 1997 to
October 31, 1997.
CONDENSED STATEMENT OF FINANCIAL CONDITION
March 31, 1998
<TABLE>
<CAPTION>
ASSETS March 31, 1998 October 31, 1997
-------------- ----------------
(1,000's)
--------------------------------------
<S> <C> <C>
Cash $ 3,547 $ 3,506
Investment in First Robinson Savings Bank, N.A 9,318 9,377
Other assets 46 3
------- -------
Total Assets $12,911 $12,886
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 0 $ 69
Accrued income taxes 0 12
Deferred income taxes 1 1
Other accrued expenses 15 0
Stockholders' equity 12,895 12,804
------- -------
Total Liabilities and Stockholders' Equity $12,911 $12,886
======= =======
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Five-Month For the Period from
Period Ended June 27, 1997 to
March 31, 1998 October 31, 1997
------------------ ------------------
(1,000's)
---------------------------------------------
<S> <C> <C>
Income:
Interest income $ 65 $ 47
---- ----
Total income 65 47
---- ----
Expenses:
Professional fees 36 6
Other 12 7
---- ----
Total expense 48 13
---- ----
Income before income taxes and equity
in undistributed earnings of subsidiary 17 34
Provision for income taxes 7 13
---- ----
Income before equity in undistributed
earnings of subsidiary 10 21
---- ----
Equity of Undistributed Earnings of Subsidiary:
First Robinson Savings Bank, N.A (65) 186
---- ----
Net income (loss) ($55) $207
==== ====
</TABLE>
-50-
<PAGE>
FIRST ROBINSON FINANCIAL CORPORATION AND SUBSIDIARY
CORPORATE INFORMATION
COMPANY AND BANK ADDRESS
501 East Main Street
Robinson, Illinois 62454
Telephone: (618) 544-6821
Fax: (618) 544-7506
DIRECTORS OF THE BOARD
Scott F. Pulliam
Public Accountant
Robinson, Illinois
James D. Goodwine
Funeral Director
Robinson, Illinois
Clell T. Keller
Retired Clerk of Crawford
County, Illinois Circuit Court
Robinson, Illinois
Rick L. Catt
President and Chief Executive Officer
First Robinson Financial Corporation
Robinson, Illinois
William K. Thomas
Attorney
Robinson, Illinois
Donald K. Inboden
Retired - Marathon Oil Company
Robinson, Illinois
FIRST ROBINSON FINANCIAL CORPORATION AND SUBSIDIARY OFFICERS
Rick L. Catt
President and Chief Executive Officer
Leslie Trotter, III
Vice President
W. E. Holt
Vice President and Senior Loan Officer
Jamie E. McReynolds
Vice President, Chief Financial Officer and
Secretary
William D. Sandiford
Vice President
INDEPENDENT AUDITORS
Larsson, Woodyard & Henson, LLP
702 East Court Street
Paris, Illinois 61944
SPECIAL COUNSEL
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
Subsidiary or Percent of State of
Parent Organization Ownership Incorporation
------ ------------ --------- -------------
First Robinson Financial First Robinson 100% Federal
Corporation Savings Bank, N.A
First Robinson Savings First Robinson 100% Illinois
Bank, N.A. Service Corporation
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of First Robinson Financial Corporation for
the fiscal period ended March 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 609
<INT-BEARING-DEPOSITS> 5,965
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,119
<INVESTMENTS-CARRYING> 955
<INVESTMENTS-MARKET> 967
<LOANS> 64,899
<ALLOWANCE> (665)
<TOTAL-ASSETS> 79,968
<DEPOSITS> 62,630
<SHORT-TERM> 3,644
<LIABILITIES-OTHER> 799
<LONG-TERM> 0
0
0
<COMMON> 9
<OTHER-SE> 12,886
<TOTAL-LIABILITIES-AND-EQUITY> 79,968
<INTEREST-LOAN> 2,448
<INTEREST-INVEST> 152
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,600
<INTEREST-DEPOSIT> 1,214
<INTEREST-EXPENSE> 1,256
<INTEREST-INCOME-NET> 1,344
<LOAN-LOSSES> 557
<SECURITIES-GAINS> (8)
<EXPENSE-OTHER> 1,033
<INCOME-PRETAX> (34)
<INCOME-PRE-EXTRAORDINARY> (34)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
<YIELD-ACTUAL> 4.46
<LOANS-NON> 161
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 53
<ALLOWANCE-OPEN> (482)
<CHARGE-OFFS> 380
<RECOVERIES> (6)
<ALLOWANCE-CLOSE> (665)
<ALLOWANCE-DOMESTIC> (661)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> (4)
</TABLE>
