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, 1999
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
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(Name of small business issuer in its charter)
Delaware 36-4145294
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
501 East Main Street, Robinson, Illinois 62454
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(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: $6.9 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 June 21, 1999, was approximately $8.6 million.
As of June 21, 1999, there were 788,323 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, 1999.
Part III of Form 10-KSB - Portions of Proxy Statement for the 1999 Annual
Meeting of Stockholders.
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FORWARD-LOOKING STATEMENTS
When used in this Annual Report on Form 10-KSB or future filings by First
Robinson Financial Corporation (the "Company") or the Company's wholly owned
subsidiary, First Robinson Savings Bank, National Association (the "Bank") 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. All references to the Company prior to March 1997, except where
otherwise indicated, are to the Bank. References in this Annual Report to "we",
"us", and "our" refer to the Company and/or the Bank, as the context requires.
We do not undertake and specifically disclaim 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
We have completed testing of our computer systems which were conducted for
the purpose of identifying applications that could be affected by the Year 2000
issue. Our data processing is performed primarily in-house; however software and
hardware utilized is under maintenance agreements with third party vendors.
Consequently, we are very dependent on those vendors to conduct our business. We
have already contacted each vendor to request time tables for Year 2000
compliance and expected costs, if any, to be passed along to us. To date, and
while we cannot offer assurance with respect to their efforts, we have been
informed that our primary service providers have completed all reprogramming
efforts. Review and testing of core systems has been completed. Management does
not expect any additional costs to have a significant impact on our financial
position or results of continuing operations. There can be no assurance,
however, that the vendors' systems will be Year 2000 compliant. Consequently, we
could incur incremental costs to convert to another vendor. We anticipate that
expenses should not exceed $78,000 for the fiscal year ending March 31, 2000. We
are expensing all costs associated with Year 2000 required system changes as
costs are incurred, and such costs are being funded through operating cash
flows. The cost of internal resources for compliance has not been estimated.
While we cannot guarantee it, we do not expect significant increases in future
data processing costs or other expenses related to Year 2000 compliance. We will
continue to plan for the Year 2000 issue by reviewing and planning for liquidity
needs, conducting additional inspections of environmental systems, and planning
for contingency and business recovery.
2
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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 national bank, the deposits of which are federally
insured and backed by the full faith and credit of the U.S. Government. The Bank
is a community-oriented financial institution and 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 and agricultural real estate loans and commercial business and
agricultural finance loans. At March 31, 1999, 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, consisting of three full service offices and one drive-up, 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 17 of Notes To Consolidated
Financial Statements.
3
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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 and agricultural real estate loans,
commercial business and agricultural finance loans and multi-family real estate
and construction loans. At March 31, 1999, the Bank's gross loans outstanding
totaled $63.5 million, of which $31.6 million or 49.80% were one-to four-family
residential mortgage loans. Of the one- to four-family mortgage loans
outstanding at that date, 19.34% were fixed-rate loans, and 80.66% were
adjustable-rate loans. At that same date, consumer loans totaled $7.9 million or
12.38% of the Bank's total loan portfolio, all of which were fixed-rate loans.
Also at that date, the Bank's commercial and agricultural real estate loans
totaled $11.9 million or 18.68% of the Bank's total loan portfolio of which
92.44% were adjustable-rate loans. At March 31, 1999, commercial business and
agricultural finance loans totaled $10.9 million or 17.13% of the Bank's total
loan portfolio, of which 40.11% were fixed-rate loans and 59.89% adjustable-rate
loans. At that same date, multi-family real estate and construction loans
totaled $1.3 million or 2.01% of the Bank's total loan portfolio. See Notes 1
and 4 of Notes 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, 1999, mortgage-backed securities totaled $8.1 million or 67.15% 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 $4.0 million, or 32.85% 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, 1999, 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, 1999, 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, 1999 were as
follows: (i) $3.0 million in loans to a heavy equipment contractor, of which
$2.0 million was participated to other lenders, secured by real estate,
equipment, inventory, and accounts receivable as well as certificates of deposit
and personal guarantees; (ii) $1.4 million in loans to a grain farming operation
and grain elevator business, of which $499,632 was participated to other
lenders, secured by real estate, warehouse receipts and personal guarantees;
(iii) $880,000 in loans to a grain farming operation, secured by crops,
equipment, inventory, and personal guarantees; (iv) $753,836 in loans to a grain
farmer, secured by real estate, equipment, inventory, warehouse receipts, and an
IFDA guarantee; (v) $735,907 in loans to a fast food franchise secured by real
estate, equipment, inventory, and personal guarantees. At March 31, 1999, all of
these loans totaling $6.8 million in the aggregate, of which $2.5 million was
participated to other lenders, were performing in accordance with their terms.
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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>
March 31, October 31,
-------------------------------------- --------------------------------------------------------
1999 1998 1997 1996 1995
------------------ -------------------- ------------------- ------------------ ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------------------ -------------------- ------------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family ........... $31,609 49.80% $30,393 46.32% $29,894 46.22% $27,784 50.61% $23,448 51.80%
Multi-family .................. 676 1.06 117 0.18 124 .19 141 .26 174 .38
Commercial and agricultural.... 11,857 18.68 13,466 20.52 12,420 19.20 9,594 17.47 5,560 12.29
Construction or development ... 602 0.95 598 0.91 578 .89 76 .14 514 1.14
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans ... 44,744 70.49 44,574 67.93 43,016 66.50 37,595 68.48 29,696 65.61
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Other Loans:
Consumer Loans:
Deposit account .............. 410 0.65 654 1.00 657 1.01 571 1.04 1,069 2.36
Automobile ................... 5,534 8.72 8,536 13.01 9,480 14.66 8,764 15.96 7,273 16.07
Other ........................ 1,913 3.01 2,440 3.72 2,392 3.70 2,717 4.95 2,591 5.73
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total consumer loans ...... 7,857 12.38 11,630 17.73 12,529 19.37 12,052 21.95 10,933 24.16
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Commercial business and
agricultural finance loans .. 10,876 17.13 9,408 14.34 9,140 14.13 5,257 9.57 4,628 10.23
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total other ............... 18,733 29.51 21,038 32.07 21,669 33.50 17,309 31.52 15,561 34.39
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans ............... 63,477 100.00% 65,612 100.00% 64,685 100.00% 54,904 100.00% 45,257 100.00%
------- ====== ------- ====== ------- ====== ------- ====== ------- ======
Less:
Loans in process............... (250) (713) (243) (43) (148)
Unearned discounts............. --- --- --- --- ---
Allowance for losses........... (634) (665) (482) (413) (255)
-------- -------- ------ -------- --------
Total loans receivable, net.... $62,593 $64,234 63,960 $54,448 $44,854
======= ======= ====== ======= =======
</TABLE>
5
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The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at March 31, 1999. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract reprices. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
---------------------------------------------
Multi-family and Commercial Business
One- to Four-Family Commercial and and
and Construction Agriculture Consumer Agricultural Finance Total
-------------------- -------------------- ---------------- --------------------- ---------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
-------------------- -------------------- ---------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Due During
Years Ending
March 31,
2000(1) ..................... $ 9,860 8.55% $ 7,573 8.63% $ 1,369 9.83% $ 7,909 8.64% $26,711 8.67%
2001 and 2002 ................. 10,644 8.86 2,879 8.13 3,700 10.94 1,163 8.92 18,386 9.17
2003 and 2004 ................. 2,635 8.55 1,550 8.19 2,194 9.78 1,266 8.95 7,645 8.90
After 2004 .................... 9,072 7.78 531 7.83 594 8.02 538 9.64 10,735 7.89
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total ......................... $32,211 8.44% $12,533 8.43% $ 7,857 10.20% $10,876 8.76% $63,477 8.71%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
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(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after March 31, 2000 which have predetermined
interest rates is $14.0 million, while the total amount of loans due after such
dates which have floating or adjustable interest rates is $22.8 million.
6
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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, 1999, the Bank's one- to four-family residential mortgage loans
totaled $31.6 million, or 49.80%, of the Bank's gross loan portfolio of which
$53,000 was non-performing at that date.
The Bank offers only adjustable and fixed rate mortgage loans. For the year
ended March 31, 1999, the Bank originated $17.6 million of real estate loans, of
which $10.9 million were secured by one- to four-family residential real estate,
and $6.3 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 30 years. The
Bank generally offers from one to five year adjustable-rate mortgage loans with
a stated interest rate margin generally over the one-year Treasury Bill Index,
which adjusts from one to five year terms. Increases or decreases in the
interest rate of the Bank's adjustable-rate loans is generally limited to 200
basis points at any adjustment date 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, 1999, the
total balance of one-to four-family adjustable-rate loans was $25.5 million or
40.17% of the Bank's gross loan portfolio. See "-- Originations, Purchases and
Sales of Loans."
7
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The Bank offers and retains fixed-rate mortgage loans with a term of up to
30 years. At March 31, 1999, the total balance of one- to four-family fixed-rate
loans was $6.1 million or 9.63% 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, 1999, the total balance of USDA Guaranteed
Rural Housing Loans was $1.8 million or 2.82% 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 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 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. Effective January 1, 1999, the
Bank has entered into an agreement with FHLB to originate loans for them. This
program offers 15 to 30 year fixed rate mortgages. The Bank sells 100% of the
principal and receives a fee. The Bank also receives 25 basis points servicing
per month. A portion of the fee is retained by FHLB to cover any contingent debt
incurred by the Bank if these loans are written off. The Bank anticipated
utilizing this program in the next fiscal year end. During the year ended March
31, 1999, the Bank originated one loan of $75,000. See "-- Originations,
Purchases and Sales of Loans and--Investment Activities--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,
1999, the Bank's consumer loan portfolio totaled $7.9 million, or 12.38% of its
gross loan portfolio, all of which were fixed rate loans.
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, 1999, the Bank's automobile loans totaled $5.5
million or 8.72% of the Bank's gross loan portfolio. These loans were originated
predominately on a direct basis.
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. 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
8
<PAGE>
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, 1999, $39,000 of the Bank's
consumer loans were non-performing. There can be no assurances that additional
delinquencies will not occur in the future.
Commercial and Agricultural Real Estate Lending. The Bank also originates
commercial and agricultural real estate loans. At March 31, 1999 approximately
$11.9 million, or 18.68% of the Bank's gross loan portfolio, was comprised of
commercial and agricultural real estate loans of which $51,000 were
non-performing at that date. Of this amount, approximately $897,000 or 7.56% of
these loans were fixed-rate commercial and agricultural real estate loans and
approximately $11.0 million or 92.44% were adjustable-rate loans. The largest
commercial real estate loan was for $736,000. At March 31, 1999 this borrower
had only that amount outstanding to the Bank.
The Bank will generally lend up to 80% of the value of the collateral
securing the loan with varying maturities up to 20 years for loans generally
with repricing of daily to 5 years. 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 business. The Bank requires personal guaranties of corporate
borrowers. Appraisals on properties securing commercial and agricultural 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, in the past, sold the guaranteed
portion of such loans and retained the uninsured portion as well as the
servicing.
Commercial and agricultural 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 and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by commercial and
agricultural real estate is typically dependent upon the successful operation of
the business. 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
Commercial and Agricultural Business Lending. The Bank also originates
commercial and agricultural business loans. At March 31, 1999 approximately
$10.9 million, or 17.13% of the Bank's gross loan portfolio, was comprised of
commercial and agricultural business loans of which $5,000 were non-performing
at that date. Of the $10.9 million, approximately $4.4 million or 40.11% were
fixed rate loans and approximately $6.5 million or 59.89% were adjustable-rate
loans. The largest commercial business loan was to a heavy equipment contractor
who had loans totaling $3.0 million. Of this amount, $2.0 million was
participated to other lenders.
9
<PAGE>
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 and agricultural finance 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 and agricultural finance 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 and agricultural finance loans are usually secured by
business or personal assets. 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. At March 31, 1999, $60,000 of the Bank's
commercial business and agricultural finance loans were unsecured.
The Bank's commercial and agricultural 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 $602,000 in construction loans for one-
to four-family residences or 0.95% of the total loan portfolio at March 31,
1999. No construction loans for commercial property existed as of March 31,
1999.
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 five-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, 1999, the
Bank had $676,000 of multi-family real estate loans or 1.06% of the Bank's gross
loan portfolio was comprised of such loans of which none were non-performing at
that date.
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
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<PAGE>
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,
1999, the Bank originated $15.9 million in fixed-rate loans and $18.4 million in
adjustable-rate loans.
The Bank sold through participations with other lenders, $1.9 million in
commercial business and agricultural finance loans for the year ended March 31,
1999. 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, 1999 the Bank repurchased $678,000 in
commercial business loans that the Bank originally participated.
11
<PAGE>
<TABLE>
<CAPTION>
The following table shows the loan origination, purchase, sale and
repayment activities of the Bank for the periods indicated.
Year Ended March 31, Year Ended October 31,
--------------------------- -----------------------------
1999 1998 1997 1996
--------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Originations by type:
Real estate:
One to four family................... $10,897 $11,415 $12,592 $11,883
Multi-family......................... 370 105 --- ---
Commercial and agricultural.......... 6,331 5,902 7,265 4,703
-------- -------- -------- --------
Other:
Consumer............................. 5,823 10,902 11,760 12,391
Commercial business and
agricultural finance............... 10,847 8,672 9,291 7,717
------ -------- --------- -------
Total loans originated............ 34,268 36,996 40,908 36,694
------ ------- -------- -------
Purchases:
Real Estate:
Commercial and agricultural finance.. --- --- 119 ---
Other:
Commercial business and
agricultural finance............... 678 608 498 ---
-------- --------- -------- ---------
Total loan purchases............... 678 608 617 ---
-------- ---------
Mortgage-backed securities................ 8,469 --- --- 2,174
------- ----------- ---------- -------
Total purchases...................... 9,147 608 --- 2,174
------- ----------- ---------- -------
Sales and Repayments:
Real estate:
Commercial and agricultural.......... 508 1,484 1,727 990
Mortgage-backed securities sales..... --- 942 1,727 990
Other:
Commercial business and
agricultural finance.................... 1,431 487 360 754
------- --------- --------- ---------
Total sales.......................... 1,939 2,913 2,087 1,744
------- -------- -------- -------
Principal reductions
Loans................................ 33,075 29,783 29,315 23,917
Mortgaged-backed securities.......... 1,716 1,135 854 1,136
------- -------- ---------- --------
Total reductions.................... 34,791 30,918 30,169 26,797
------ ------- -------- --------
Decreases in other items, net (2,103) (729) (342) (1,386)
------- --------- --------- --------
Net increase (decrease)................... $4,582 $ 3,044 $ 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 and collection of
principal and interest is considered doubtful, 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, 1999.
<TABLE>
<CAPTION>
Loans Delinquent For:
------------------------------------------------------------------------------------------------------------
60-89 Days(1) 90 Days and Over(1) Nonaccrual Total Delinquent Loans
----------------------------- -------------------------- -------------------------- ------------------------
Percent of Percent Percent of Percent of
Loan of Loan Loan Loan
Number Amount Category Number Amount Category Number Amount Category Number Amount Category
------- -------- ----------- ------ ------ ------------ ------ ------- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Real Estate:
One- to four-family... 3 $236 0.75 --- $--- --- 3 $ 53 0.17 6 $289 0.92
Commercial and
agricultural
real estate ......... --- --- --- --- --- --- 1 51 0.43 1 51 0.43
Consumer................ 7 79 1.00 --- --- --- 7 39 0.50 14 118 1.50
Commercial business and
agricultural finance.. --- --- --- --- --- --- 1 5 0.05 1 5 0.05
---- ------ ------ --- --- --- --- ------- ---- ---- ----- ----
Total.............. 10 $315 0.50% --- $--- ---% 12 $148 0.23% 22 $463 0.73%
== ==== ==== === ==== === == ==== ==== == ==== ====
</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>
Year Ended For the Year Ended
March 31, October 31,
------------------------- --------------------------------
1999 1998 1997 1996 1995
--------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Non-accruing loans:
One- to four-family.................... $ 53 $ 101 $ 67 $ 44 $---
Commercial and agricultural real estate. 51 36 231 --- ---
Consumer............................... 39 24 16 24 ---
Commercial business and
agricultural finance................. 5 --- 20 --- ---
------ ------ ---- ---- ----
Total............................... 148 161 334 68 ---
------ ---- ---- ---- ----
Accruing loans delinquent more than 90 days:
One- to four-family.................... --- --- --- 15 10
Commercial and agricultural real estate. --- --- --- 21 ---
Consumer............................... --- --- --- --- 2
Commercial business and
agricultural finance................. --- --- --- --- ---
------ ------- ---- ---- ----
Total............................... --- --- --- 36 12
------ ------- ---- ---- ---
Foreclosed assets:
One- to four-family.................... --- 193 287 278 18
Commercial and agricultural real estate. --- 28 48 --- ---
Consumer............................... --- 56 55 7 6
------ ------ ---- ----- -----
Total............................... --- 277 390 285 24
------ ----- ---- ---- ----
Total non-performing assets.............. $148 $438 $724 $389 $ 36
==== ==== ==== ==== ====
Total as a percentage of total assets.... .18% .55% .96% .61% .07%
=== === === === ===
</TABLE>
For the year ended March 31, 1999, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to approximately $28,000. There was $0 that was included
in interest income on such loans for the year ended March 31, 1999.
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
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.
14
<PAGE>
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.
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, 1999, the Bank had classified a total of $2.1
million of its assets as substandard and $233,000 as doubtful or loss. At March
31, 1999, total classified assets comprised $2.4 million, or 24.41% of the
Bank's capital, or 2.82% of the Bank's total assets.
Other Loans of Concern. As of March 31, 1999, there were $4.6 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 business 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. 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
market fair value minus 20% of the market fair value. 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 March 31, 1999, the Bank had no real estate properties acquired
through foreclosure.
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, 1999, the Bank had a total allowance for loan losses
of $634,000, representing 1.00% of the Bank's loans. See Note 4 of Notes To
Consolidated Financial Statements.
15
<PAGE>
The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
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>
(Dollars in thousands)
One- to four-
family......... $ 34 $31,609 49.80% $181 $30,393 46.32%
Multi-family.... --- 676 1.06 --- 117 .18
Commercial and
agricultural
real estate... 45 11,857 18.68 196 13,466 20.52
Construction or
development.... --- 602 .95 --- 598 .91
Consumer........ 157 7,857 12.38 137 11,630 17.73
Commercial
business and
agricultrual
finance ....... 398 10,876 17.13 147 9,408 14.34
Unallocated..... --- --- --- 4 --- ---
--- ------ ------ --- ------ ------
Total...... $634 $63,477 100.00% $665 $65,612 100.00%
=== ====== ====== === ====== ======
October 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------ ---------------------------------
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
------------------------------- ------------------------------- ----------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
One- to four-
family......... $100 $29,894 46.22% $ 77 $27,784 50.61% $ 80 $23,448 51.80%
Multi-family.... --- 124 0.19 --- 141 0.26 --- 174 0.38
Commercial and
agricultural
real estate... 110 12,420 19.20 61 9,594 17.47 43 5,560 12.29
Construction or
development.... --- 578 0.89 --- 76 0.14 --- 514 1.14
Consumer........ 57 12,529 19.37 58 12,052 21.95 72 10,933 24.16
Commercial
business and
agricultrual
finance ....... 66 9,140 14.13 58 5,257 9.57 51 4,628 10.23
Unallocated..... 149 --- --- 159 --- --- 9 --- ---
---- ------ ------ ---- ------ ------ --- ------ ------
Total...... $ 482 $64,685 100.00% $413 $54,904 100.00% $255 $45,257 100.00%
==== ====== ====== ==== ====== ====== === ====== ======
</TABLE>
16
<PAGE>
The following table sets forth an analysis of the Bank's allowance for loan
losses.
<TABLE>
<CAPTION>
Year Ended
March 31, Year Ended October 31,
------------------------------ ------------------------------------
1999 1998 1997 1996 1995
----------------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Balance at beginning of year...................... $665 $404 $413 $ 255 $ 288
Charge-offs:
One- to four-family............................. 56 32 25 2 ---
Commercial and agricultural real estate......... 353 187 26
Consumer........................................ 182 261 110 94 44
Commercial business and agricultural finance.... 22 20 --- 26 ---
----- ----- ----- -------- --------
613 500 161 122 44
---- ---- ---- ------- -------
Recoveries:
One- to four-family............................. 14 --- --- --- ---
Commercial and agricultural real estate......... 22 --- --- --- ---
Consumer........................................ 111 22 24 10 2
Commercial business and agricultural finance.... --- --- --- --- ---
------ ------ ------ -------- -------
147 22 24 10 2
---- -- ----- ------- ------
Net charge-offs................................... 466 478 137 112 42
Additions charged to operations................... 435 739 206 270 9
----- ----- ----- ------- -------
Balance at end of year............................ $634 $665 $482 $ 413 $ 255
==== ==== ==== ======= ======
Ratio of net charge-offs during the year to
average loans outstanding during the year........ .73% .75% .23% .23% .11%
=== ==== === === ===
Ratio of net charge-offs during the year to
average non-performing assets.................... 1.68% 1.10% 32.31% 54.90% 84.00%
==== ==== ===== ===== =====
</TABLE>
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 U.S. 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 funds whose assets conform to the investments that a federally chartered
savings institution is otherwise authorized to make directly.
17
<PAGE>
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, 1999, the Bank's investment securities
(including a $352,000 investment in the common stock of the FHLB of Chicago and
Federal Reserve stock of $123,000) totaled $4.0 million, or 4.73% 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. 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
$9.7 million as of March 31, 1999, plus an additional 10% if the investments are
fully secured by readily marketable collateral. At March 31, 1999, 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 Note 1 of Notes To Consolidated Financial Statements.
18
<PAGE>
The following table sets forth the composition of the Bank's investment and
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
March 31, October 31,
-------------------------------- -----------------------------------
1999 1998 1997 1996
-------------- ----------------- --------------- ------------------
Book % of Book % of Book % of Book % of
Value Total Value Total Value Total Value Total
-------------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
AVAILABLE FOR SALE
Equity securities:
FHLB stock................................ $ 352 2.95% $317 7.70% $ 317 8.33% $ 264 6.39%
FHLMC stock............................... --- --- --- --- --- --- 205 4.96
FRB stock................................. 123 1.03 123 2.99 123 3.24 --- ---
------ ---- --- ---- ------ ----- ----- -----
Total equity securities................. 475 3.98 440 10.69 440 11.57 469 11.35
------ ---- --- ----- ------ ----- ----- -----
Investments securities:
U.S. treasury............................. 1,030 8.64 --- --- --- --- --- ---
Municipal bonds........................... 1,284 10.78 --- --- --- --- --- ---
FHLB agency............................... 999 8.38 2,530 61.42 499 13.12 --- ---
------ ---- ----- ----- ------ ----- ----- -----
Total investment securities............ 3,313 27.80 2,530 61.42 499 13.12 --- ---
Mortgage-backed securities:
GNMA...................................... 5,296 44.43 142 3.45 161 4.23 209 5.06
FNMA...................................... 2,220 18.63 880 21.36 2,138 56.22 2,730 66.05
FHLMC..................................... 615 5.16 127 3.08 565 14.86 725 17.54
------ ---- ----- ----- ------ ----- ----- -----
Total mortgage-backed securities........ $ 8,131 68.22% $1,149 27.89% $ 2,864 75.31% $ 3,664 88.65%
------ ===== ----- ===== ------ ----- ------ -----
Total available for sale................ $11,919 100.00% $4,119 100.00% $ 3,803 100.00% $ 4,133 100.00%
====== ====== ===== ====== ====== ====== ====== ======
HELD TO MATURITY
Investment securities:
Municipal bonds........................... 190 100.00 190 19.89 210 21.06 245 41.39
U.S. treasury notes....................... --- --- 500 52.36 500 50.15 --- ---
------ ------ ----- ----- ------ ------ ------ ------
Total investment securities............. 190 100.00% 690 72.25% 710 71.21% 245 41.39%
------ ------ ----- ----- ------ ------ ------ ------
Mortgage-backed securities:
FHLMC...................................... $ --- --- $ 265 27.75 $ 287 28.79 $ 347 58.61
------ ------ ----- ----- ----- ------ ------ ------
Total held to maturity.................. $ 190 100.00% 955 100.00% $ 997 100.00% $ 592 100.00%
====== ====== ===== ====== ===== ====== ====== ======
Average remaining life of investment
securities.................................. 7.13 Years 2.97 Years 3.96 Years 3.31 Years
Other interest-earning assets:
Total interest-bearing deposits with
banks................................. $ 4,268 100.00% $5,965 100.00% $2,662 100.00% $ 868 100.00%
====== ====== ===== ====== ===== ====== ====== ======
</TABLE>
19
<PAGE>
The Bank's investment securities portfolio at March 31, 1999, 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, 1999, the Bank
classified $11.9 million of its investments as available for sale and $190,000
as held to maturity.
Mortgage-backed Securities. The Bank invests primarily in federal agency
obligations. At March 31, 1999, the Bank's investment in mortgage-backed
securities totaled $8.1 million or 9.70% of its total assets. Of this amount, $0
was held to maturity and $8.1 million was available for sale. At March 31, 1999,
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, 1999.
<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........... 148 403 --- 64 615
Weighted Average............................... 6.00 5.50 --- 7.38 5.82
Federal National Mortgage Company................ --- --- --- 2,220 2,220
Weighted Average............................... --- --- --- 6.72 6.72
Government National Mortgage Company............. --- --- --- 5,296 5,296
Weighted Average............................... --- --- --- 7.03 7.03
Total....................................... 148 403 --- 7,580 8.131
Weighted Average............................... 6.00 5.50 --- 6.94 6.85
</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.
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, 1999, the Bank had $2.0 million in FHLB advances, but
20
<PAGE>
had the capacity to borrow up to $17.8 million from the FHLB. The Bank could
also borrow up to $2.0 million from a correspondent bank located in Chicago,
Illinois. See Note 8 of Notes To Consolidated Financial Statements.
At March 31, 1999, the Bank had $2.2 million in repurchase agreements. See
Note 8 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.
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended
March 31,
---------------------------- Year Ended
October 31,
1999 1998 1997
------------- -------------- --------------
<S> <C> <C> <C>
(Dollars in thousands)
Opening balance............................. $ 62,630 $ 62,305 $ 56,691
Deposits.................................... 503,805 250,998 231,602
Withdrawals................................. 502,294 253,683 228,418
Interest credited........................... 3,184 3,010 1,840
--------- --------- --------
Ending balance.............................. $67,325 $62,630 $61,715
====== ====== =======
Net increase................................ $ 4,695 $ 325 $ 5,024
===== === ========
Percent increase............................ 7.50% 0.52% 8.86%
==== ==== ====
</TABLE>
21
<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>
March 31, October 31,
---------------------------------------- -----------------------------------------
1999 1998 1997 1996
----------------------- ----------------- ----------------- --------------------
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
----------------------- ------------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Transactions and Savings Deposits:
Non-interest bearing demand 0%......... $ 3,444 5.11% $ 3,217 5.13% $ 3,494 5.66% $ 2,265 4.00%
Passbook Accounts 3.00%................ 7,512 11.16 6.508 10.39 5,882 9.53 5,540 9.77
NOW Accounts 3.19%..................... 11,829 17.57 10,125 16.17 8,381 13.58 6,717 11.85
--------- ------ ------ ------ ------ ------ ------- ------
Total non-certificates................. 22,785 33.84 19,850 31.69 17,757 28.77 14,522 25.62
-------- ------ ------ ------ ------ ------ ------- ------
Certificates:
2.00 - 3.99%.......................... $ 474 .70 $ 69 .11 $ 122 .20 $ 94 .17%
4.00 - 5.99%.......................... 30,388 45.14 23,191 37.03 22,280 36.10 22,958 40.49
6.00 - 7.99%.......................... 13,678 20.32 19,520 31.17 21,556 34.93 19,117 33.72
Total certificates..................... 44,540 66.16% 42,780 68.31% 43,958 71.23% 42,169 74.38%
-------- ------ ------ ------ ------ ------ ------- ------
Total deposits......................... $67,325 100.00% $62,630 100.00% $61,715 100.00% $ 56,691 100.00%
======= ====== ====== ====== ====== ====== ======= ======
</TABLE>
22
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of March 31, 1999.
<TABLE>
<CAPTION>
Weighted
2.00- 4.00- 6.00- Percent Average
3.99% 5.99% 7.99% Total of Total Rate
------------ ----------- ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Certificate accounts
maturing
in quarter ending:
- --------------------
June 30, 1999.................. 474 7,712 1,201 9,387 21.07 4.86
September 30, 1999............. --- 6,196 2,955 9,151 20.55 5.43
December 31, 1999.............. --- 3,948 1,785 5,733 12.87 5.29
March 31, 2000................. --- 4,850 1,666 6,516 14.63 5.24
June 30, 2000.................. --- 1,354 1,522 2,876 6.46 5.65
September 30, 2000............. --- 1,802 888 2,690 6.04 5.53
December 31, 2000.............. --- 794 931 1,725 3.87 5.76
March 31, 2001................. --- 2,032 430 2,462 5.53 5.17
June 30, 2001.................. --- 306 500 806 1.81 5.59
September 30, 2001............. --- 190 405 595 1.33 6.17
December 31, 2001.............. --- 5 248 253 .57 6.11
March 31, 2002................. --- 75 322 397 .89 5.99
Thereafter..................... --- 1,124 825 1,949 4.38 5.63
Total....................... 474 30,388 13,678 44,540 100.00% 5.31
=== ====== ====== ====== ====== ====
Percent of total............ 1.06% 68.23% 30.71% 100.00%
==== ===== ===== ======
</TABLE>
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,
1999.
<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....... $6,503 $6,628 $9,365 $11,003 $33,499
Certificates of deposit of $100,000 or more...... 770 1,588 2,205 2,762 7,325
Public funds of $100,000 or more (1)............. 2,115 935 666 --- 3,716
------- -------- ------- ------- -------
Total certificates of deposit.................... $9,388 $9,151 $12,236 $13,765 $44,540
====== ====== ======= ======= =======
</TABLE>
- ---------------
(1) Deposits from governmental and other public entities.
23
<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, 1999, 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 and two credit unions which compete for deposits and loans in
the Bank's market area.
REGULATION
General
The Company is a registered bank holding company, subject to broad federal
regulation and oversight by the FRB. The Bank is a national bank, the deposits
of which are federally insured and backed by the full faith and credit of the
U.S. 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 9 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.
24
<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 as well as 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, 1999, 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, 1999, 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, 1999 totaled $6.8 million in the aggregate and were performing in accordance
with their terms. Of this amount, $2.5 million was participated to other
lenders.
The OCC, as well as the other federal banking agencies, have adopted
regulations and guidelines establishing safety and soundness standards on such
matters as loan underwriting and documentation, internal controls and audit
systems, interest rate risk exposure, asset quality and earnings, and
compensation and other employee benefits as well as Year 2000 readiness. 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.
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 U.S. 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 Tier 1 capital ratio of at least 5%, a ratio of Tier 1
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., Tier 1 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 supervisory
concern pay the highest premium. Risk classification of all insured institutions
will be made by the FDIC for each semi-annual assessment period.
25
<PAGE>
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 1996 fiscal year ended. The premium schedule for BIF
and SAIF insured institutions ranges 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 1980s, equal to approximately 6.48 basis points for each $100 in
domestic deposits, while BIF-insured institutions pay an assessment equal to
approximately 1.52 basis points for each $100 in domestic deposits. The
assessment is expected to be reduced to approximately 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.
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
26
<PAGE>
the OCC. Management of the Bank has not determined what effect, if any, the
OCC's proposed interest rate risk component would have on its 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 institution" (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
institution 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 institutions.
Any national bank 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 national bank 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 institutions. In addition, the OCC must
appoint a receiver (or conservator with the concurrence of the FDIC) for an
institution, with certain limited exceptions, within 90 days after it becomes
critically undercapitalized. Any undercapitalized institution 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 Company'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 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.
27
<PAGE>
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 OCC 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 from mutual to stock form.
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
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the
institution. An unsatisfactory rating may be used as the basis for the denial of
an application by the OCC.
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
Federal Reserve Board (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.
28
<PAGE>
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, 1999,
the Bank had $123,000 FRB stock, which was in compliance with these reserve
requirements.
The Bank is a member of the Federal Reserve System. National banks are
authorized to borrow from the Federal Reserve Bank "discount window," but FRB
regulations require banks to exhaust other reasonable alternative sources of
funds, including FHLB borrowings, before borrowing from the FRB.
Holding Company Regulation
General. The Company 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 Company
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 (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 Banking Holding Company Act (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 U.S. Savings Bonds; real estate and personal property appraising; providing
29
<PAGE>
tax planning and preparation services; and, subject to certain limitations,
providing securities brokerage services for customers. The 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 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 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 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
30
<PAGE>
paying any dividends if the holding company's bank subsidiary is classified as
"undercapitalized". See " -- Regulatory Capital Requirements -- Prompt
Corrective Action."
Redemption. 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, is well
managed and is not subject to any unresolved supervisory issues.
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 Company, compliance is measured on a case-by-case basis.
See "-- Regulatory Capital Requirements -- National Banks." The Company'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
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB 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, 1999, the Bank had $352,000 in FHLB stock, which
was in compliance with this requirement. In the past year, the Bank has received
dividends on its FHLB stock.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings institutions 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
generally are subject to a minimum tax. An alternative minimum tax is imposed at
31
<PAGE>
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.
The Bank has recorded a deferred tax liability of approximately $69,000,
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
accrual basis of accounting. Neither the Company nor the Bank have 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 U.S. Treasury
obligations.
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.
Employees
At March 31, 1999, the Company and the Bank had a total of 39 full-time and
10 part-time employees. The Company's and the Bank's employees are not
represented by any collective bargaining group. Management considers its
employee relations to be good.
32
<PAGE>
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 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, 1999 was approximately $2.9 million. The
following table sets forth information relating to the Bank's offices as of
March 31, 1999.
<TABLE>
<CAPTION>
Total
Approximate
Date Square Net Book Value at
Location Acquired Footage March 31, 1999
- -------------------------- ------------------- ---------------- ---------------------------
<S> <C> <C> <C>
Main Office:
501 East Main Street 1985 12,420 $1.5 million
Robinson, Illinois
Branch Offices:
119 East Grand Prairie 1995 1,800 376,000
Palestine, Illinois
102 West Main Street 1995 2,260 75,000
Oblong, Illinois
Outer East Main Street 1997 1,000 $215,000
Oblong, Illinois
</TABLE>
The Company and the Bank believe that its current facilities are adequate
to meet the present and foreseeable needs. 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 the Company's results of operations on a consolidated basis.
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, for the quarter ended March 31, 1999.
33
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Page 47 of the attached 1999 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 13 of the attached 1999 Annual Report to Stockholders are
herein incorporated by reference.
Item 7. Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended March 31, 1999, is incorporated by reference in
this Annual Report on Form 10-KSB as Exhibit 13.
Pages in
Annual
Annual Report Section Report
---------
Report of Independent Auditors............................ 14
Consolidated Statements of Financial Condition for the
Fiscal Years Ended March 31, 1999 and 1998............. 15-16
Consolidated Statements of Income for the
Years Ended March 31, 1999 and 1998.................... 17
Consolidated Statements of Stockholders' Equity for
Years Ended March 31, 1999 and 1998.................... 18
Consolidated Statements of Cash Flows for the
Years Ended March 31, 1999 and 1998.................... 19-20
Notes to Consolidated Financial Statements................ 21-46
With the exception of the aforementioned information, the Company's Annual
Report to Stockholders for the year ended March 31, 1999, 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 Company's
accountants on accounting and financial disclosure matters.
34
<PAGE>
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 Company is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on July 28, 1999, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Executive Officers
Information concerning Executive Officers of the Company and the Bank is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on July 28, 1999, 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 Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company'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 Company. Officers, directors and greater than
10 percent stockholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended March 31, 1999, 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 on July 28, 1999, 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 on July 28, 1999, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
35
<PAGE>
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 on July 28,1999, a copy of which will
be filed not later than 120 days after the close of the fiscal year. 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 vote None
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
No reports on Form 8-K were filed during the three-month period ended March
31, 1999.
36
<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, 1999 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
(Principal Executive and Operating Officer and Secretary (Chief
Officer) Financial and Accounting
Officer)
Date: June 29, 1999 Date: June 29, 1999
------------- -------------
By: /s/ Scott F. Pulliam By: /s/ James D. Goodwine
----------------------------- -----------------------------
Scott F. Pulliam, Director James D. Goodwine, Director
Date: June 29, 1999 Date: June 29, 1999
------------- -------------
By: /s/ Clell T. Keller By: /s/ Rick L. Catt
----------------------------- -----------------------------
Clell T. Keller, Director Rick L. Catt, Director
Date: June 29, 1999 Date: June 29, 1999
------------- -------------
By: /s/ William K. Thomas By: /s/ Donald K. Inboden
----------------------------- -----------------------------
William K. Thomas, Director Donald K. Inboden, Director
Date: June 29, 1999 Date: June 29, 1999
------------- -------------
37
- ------------------------------------------------------------------------------
1999 ANNUAL REPORT
- ------------------------------------------------------------------------------
FIRST ROBINSON FINANCIAL CORPORATION
<PAGE>
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
Page No.
--------
President's Message............................................... 1
Selected Consolidated Financial Information....................... 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 4
Financial Statements.............................................. 15
Stockholder Information........................................... 47
Corporate Information............................................. 48
i
<PAGE>
[FIRST ROBINSON FINANCIAL CORPORATION LETTERHEAD]
Dear Stockholder,
The board of directors and management are pleased to present to you the
Annual Report of First Robinson Financial Corporation for the twelve-month
fiscal year ended March 31, 1999.
The past twelve months have been eventful as the Company prepares to
successfully go forward into the next century. New products and services have
been introduced to help us better serve our customers. As the new century
approaches, we also recognize the concerns of the public, therefore management
and the board of directors have developed and implemented a comprehensive plan
to ensure that our 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. We are indeed appreciative of
this support.
The board of directors and management are committed to increasing the value
of our Company. The board approved a stock repurchase plan, effective April 1,
1999, that allows management, at their discretion, to purchase up to 5.0% of the
outstanding shares of First Robinson until October 1, 1999. The Company has
been, and intends 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 (the "Company") 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.
March 31, October 31,
---------------- -----------------------
1999 1998 1997 1996 1995
------- -------- ------- ------- -------
(Dollars in thousands)
Selected Financial Condition
Data:
Total assets.................. $83,797 $79,968 $75,559 $63,869 $54,708
Loans receivable, net......... 62,593 64,234 63,960 54,448 44,854
Mortgage-backed securities.... 8,131 1,414 3,151 4,011 2,973
Interest bearing deposits..... 4,268 5,965 2,662 868 2,472
Investment securities......... 3,978 3,660 1,649 714 1,213
Deposits...................... 67,325 62,630 61,715 56,691 49,404
Total borrowings.............. 4,206 3,644 92 1,500 ---
Stockholders' equity.......... 11,562 12,895 12,804 4,658 4,536
<TABLE>
<CAPTION>
Year Ended March 31, Year Ended October 31,
--------------------- --------------------------
1999 1998 1997 1996 1995
--------- ---------- --------- ------- ------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Selected Operations Data:
Total interest income........... $6,545 $6,262 $ 5,915 $ 4,827 $ 3,755
Total interest expense.......... (3,260) (3,068) (3,077) (2,655) (1,971)
------ ------ -------- ------- -------
Net interest income.......... 3,285 3,194 2,838 2,172 1,784
Provision for loan losses....... (435) (739) (206) (270) (9)
------ ------ -------- ------- -------
Net interest income after
provision for loan losses....... 2,850 2,455 2,632 1,902 1,775
------ ------ -------- ------- -------
Fees and service charges........ 269 224 320 295 241
Gain (loss) on sales of loans,
securities and fixed assets..... (31) 69 133 60 1
Other non-interest income....... 130 135 63 37 29
------ ------ -------- ------- -------
Total non-interest income....... 368 428 516 392 271
------ ------ -------- ------- -------
Total non-interest expense...... (2,888) (2,262) (2,075) (2,120) (1,414)
------ ------ -------- ------- -------
Income (loss) before taxes and
extraordinary item.............. 330 621 1,073 174 632
Income tax provision............ 120 248 (426) (51) (233)
Extraordinary item.............. --- --- --- --- ---
------ ------ -------- ------- -------
Net income...................... $ 210 $ 373 $ 647 $ 123 $ 399
====== ====== ======== ======= =======
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31, Year Ended October 31,
----------------------- -----------------------
1999 1998 1997 1996 1995
---------- --------- ----- ------ ------
<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)................... .25% .50% .90% .21% .82%
Return on stockholders equity
(ratio of net
income to average equity)....... 1.76 2.89 8.54 2.60 9.68
Interest rate spread information:
Average during period............ 3.49 3.75 3.71 3.49 3.52
End of period.................... 3.51 3.46 3.64 3.76 3.51
Net interest margin(1)............ 4.20 4.50 4.20 3.86 3.90
Ratio of operating expense to
average total assets............. 3.48 3.01 2.90 3.54 2.91
Ratio of average interest-earning
assets to average
interest-bearing liabilities.... 117.14 117.45 110.58 108.01 108.83
Quality Ratios:
Non-performing assets to total
assets at end
of period........................ .18 .55 .96 .61 .07
Allowance for loan losses to
non-performing loans.............. 428.38 413.04 144.31 430.21 2,125.00
Allowance for loan losses to loans
receivable, net................... 1.01 1.04 .75 .76 .57
Capital Ratios:
Stockholders equity to total
assets at end of period........... 13.80 16.13 16.95 7.29 8.29
Average stockholders equity
average assets.................... 14.34 17.14 10.57 7.91 8.49
Other Data:
Number of full-service offices..... 3 3 3 3 3
Number of full-time employees...... 39 36 36 34 30
Number of deposit accounts......... 10,036 9,196 8,775 7,279 5,885
Number of loan accounts............ 2,973 3,736 3,838 3,625 2,897
</TABLE>
- ----------------
(1) Net interest income divided by average interest-earning assets.
3
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this filing and in future filings by First Robinson Financial
Corporation 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 our market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in our market area and
competition, all or some of which could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. All references to the Company prior to March 1997, except where
otherwise indicated, are to the Bank. References in this Annual Report to "we",
"us", and 'our" refer to the Company and/or the Bank, as the context requires.
We wish 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 our financial performance and could cause our actual
results for future periods to differ materially from those anticipated or
projected.
We do not undertake, and specifically disclaim any obligation, to update
any forward-looking statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements.
General
Our principal business through our 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.
Our net income is dependent primarily on our 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 our "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, our 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.
Our operations are significantly affected by prevailing economic
conditions, competition and the monetary, fiscal and regulatory policies of
government agencies. Lending activities are influenced by 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 our market area.
Historically, our mission has been to originate loans on a profitable basis
to the communities we serve. In seeking to accomplish our mission, the Board of
4
<PAGE>
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.
Business Strategy
We continue to be a community-oriented, locally-owned financial institution
offering financial services to residents and businesses of Crawford County,
Illinois, our primary market area. The Board of Directors and management are
strategically planning our future. New products and services are continually
discussed and reviewed for their effect on profitability and customer service.
This past year, the Bank began a fixed rate mortgage program through the Federal
Home Loan Bank of Chicago. The Bank also revised its checking and savings
products to take advantage of account changes made by some of our competitors.
In addition, the Bank expanded its Internet provider to provide service to all
of Crawford County, which has grown to over 1,000 subscribers. Although the Bank
delayed the installation of a new ATM location in Robinson this past year, we
are still considering this idea. The Bank also intends to employ an investment
brokerage service in response to customer interest by the end of June 1999 and
to investigate the formation of a trust department. We intend to maintain a
strong presence and to take advantage of the Bank's position as the only
independent community bank in Robinson, Palestine and Oblong, Illinois.
Financial Condition
Comparison at March 31, 1999 compared to March 31, 1998
The Company's total assets increased by $3.8 million or 4.8% to $83.8
million at March 31, 1999 from $80.0 million at March 31, 1998. This increase in
total assets is primarily the result of a $7.0 million increase in mortgage
backed securities and investment securities offset by a decrease of $1.3 million
in cash and cash equivalents, a $1.6 million decrease in loans receivable, net,
a decrease of $221,000 in foreclosed real estate and a $45,000 decrease in other
assets.
Loans receivable, net, decreased $1.6 million or 2.6% to $62.6 million at
March 31, 1999 from $64.2 million at March 31, 1998. This decrease was primarily
due to implementation of tighter underwriting standards, which resulted in the
Bank originating less consumer loans. As do many prominent economists, we
believe that tighter underwriting of consumer lending is necessary to help
minimize the effect of the increase of bankruptcies nationwide. Thus, with the
implementation of new consumer loan underwriting policies, automobile loans
decreased by $3.0 million or 35.2% for the year ended March 31, 1999 as compared
to the year ended March 31, 1998.
Held to maturity investment securities decreased from $690,000 at March 31,
1998 to $190,000 at March 31, 1999. This $500,000, or 72.5% decrease resulted
from a one time reclassification of a government security to available for sale.
Mortgage backed securities held to maturity decreased from $265,000 as of
March 31, 1998 to $0 for March 31, 1999. This decrease was the result of a one
time reclassification of a $239,000 mortgage backed security held to maturity to
available for sale and $26,000 in mortgage backed payments.
Mortgage backed securities available for sale increased by $7.0 million or
631.6% from $1.1 million at March 31, 1998 to $8.1 million at March 31, 1999.
The increase is due to the purchase of $8.5 million in mortgage backed
securities and the one-time reclassification of a $239,000 mortgage backed
security held to maturity to available for sale, offset by payments of $1.7
million. In an effort to maintain a lower loan to deposit ratio, excess funds
were reinvested in mortgage backed securities. The Bank chose mortgage backed
securities instead of investment securities or interest bearing cash deposits
because mortgage backed securities have a higher yield.
5
<PAGE>
Investment securities available for sale increased to $3.8 million at March
31, 1999 from $2.9 million at March 31, 1998. The $828,000 or 28.1% increase
came from the one time reclassification of a $500,000 government security, the
purchase of $1.3 million in municipals held available for sale, the purchase of
$35,000 in Federal Home Loan Bank ("FHLB") stock and the purchase of a $500,000
government security, offset by the maturity of $1.5 million in government
securities.
Liabilities increased approximately $5.2 million or 7.7% to $72.2 million
at March 31, 1999 from $67.1 million at March 31, 1998. This increase in
liabilities was primarily the result of a $4.7 million, or 7.5% increase in
deposits to $67.3 million at March 31, 1999 from $62.6 million at March 31, 1998
and an increase of $562,000 or 34.2% in repurchase agreements from $1.6 million
at March 31, 1998 to $2.2 million at March 31, 1999. Deposits and repurchase
agreements have increased due to the Bank's focus on providing competitive
pricing and service in its market area.
Stockholders' equity decreased to $11.6 million at March 31, 1999 from
$12.9 million at March 31, 1998. The $1.3 million or 10.3% decrease in
stockholders' equity is primarily due to the payment of $258,000 in dividends,
the purchase of Company common stock held in treasury at a cost of $747,000, the
purchase of $622,000 in Company common stock for the Recognition and Retention
Plan (the "RRP"), offset by the valuation of $131,000 of the Employee Stock
Ownership Plan (the "ESOP") shares that were allocated to participants as of
December 31, 1998 and those shares ratably released for allocation for the
period ending March 31, 1999, and a decrease in net income of $163,000 for the
fiscal year ended March 31, 1999 as compared to the same period for the prior
year.
Operating Results
Comparison of Operating Results for the Years Ended March 31, 1999 and 1998
Performance Summary
The Company reported a net income of $210,000 for the year ended March 31,
1999, as compared to a net income of $373,000 for the year ended March 31, 1998.
The $163,000, or 43.7%, decrease in net income during the year ended March 31,
1999 as compared to the same period in the prior year, was primarily
attributable to an increase of $626,000, or 27.7%, in non-interest expense and a
decrease of $60,000, or 14.0%, in non-interest income, partially offset by an
increase of $91,000, or 2.8%, in net interest income. In addition, there was a
decrease of $304,000, or 41.1% in provision for loan losses and a decrease of
$128,000, or 51.6%, in provision for income tax. For the years ended March 31,
1999 and 1998, the returns on average assets were 0.25% and 0.50% respectively,
while the returns on average equity were 1.76% and 2.89%, respectively.
Net Interest Income
Net interest income is our largest component of income and represents the
difference between interest and fees earned on loans and investments and the
interest paid on interest bearing liabilities. For the year ended March 31,
1999, net interest income increased by $91,000, or 2.8% to $3.3 million compared
to the year ended March 31, 1998. This reflects an increase of $283,000, or
4.5%, in interest income, offset by an increase of $192,000, or 6.3%, in
interest expense. The increase in interest income was the result of a $187,000,
or 97.4%, increase in interest on mortgage-backed securities and a $174,000, or
80.2%, increase in interest on securities and interest-bearing deposits, offset
by a decrease of $78,000, or 1.3%, in interest on loans. The increase in
interest expense was the result of a $66,000, or 2.2%, increase in interest on
deposits and a $126,000, or 126.0%, increase in interest on other borrowed
funds. The amount of net interest income is affected by changes in the volume
6
<PAGE>
and mix of earning assets and interest bearing deposits and liabilities, and the
interest rates on those assets and liabilities. An analysis of how changes in
volumes and rates have affected net interest income for the years ended March
31, 1999 and 1998 is presented on page 10 of this Annual Report.
For the year ended March 31, 1999, the average yield on interest-earning
assets was 8.38% as compared to 8.82% for the year ended March 31, 1998. The
average cost of interest-bearing liabilities was 4.89% for the year ended March
31, 1999, a decrease from 5.07% for the year ended March 31, 1998. The average
balance of interest-earning assets increased by $ 7.1 million, or 10.0%, to
$78.1 million for the year ended March 31, 1999, as compared to $71.0 million
for the year ended March 31, 1998. The average balance of interest-bearing
liabilities increased by $ 6.2 million or 10.3%, to $66.7 million for the year
ended March 31, 1999 from $60.5 million for the year ended March 31, 1998. A
detailed analysis of net interest income with average balances and related
interest rates comparing the years ended March 31, 1999 and 1998 appears on page
9 of this Annual Report.
The average interest rate spread was 3.49% for the year ended March 31,
1999 compared to 3.75% for the year ended March 31, 1998. The average net
interest margin was 4.20% for the year ended March 31, 1999 compared to 4.50%
for the year ended March 31, 1998.
Non-Interest Income
For the year ended March 31, 1999, non-interest income decreased $60,000,
or 14.0% as compared to the year ended March 31, 1998. This decrease was
primarily from no gains or losses on sales of loans and mortgage backed
securities for the year ended March 31,1999 when compared to $125,000 on sales
of loans and mortgage backed securities for the year ended March 31,1998. We
also had a decrease of $48,000, or 43.2%, in charges and fees on loans for the
year ended March 31, 1999 as compared to the year ended March 31,1998. The
decrease in non-interest income was offset by increases in charges and fees on
deposit accounts of $45,000, or 20.1%, a decrease in net loss on sale of assets
of $25,000, or 44.6%, and an increase in Internet fees, net, of $36,000, a
service we began providing in December 1996. For the year ended March 31, 1998,
the Internet service was still operating at a loss due to start-up costs and
limited number of users. Since that time, however, the Internet service has
grown to over 1,000 customers and operated at a profit of $35,000 for the year
ended March 31, 1999 as compared to the same period in the prior year.
Non-Interest Expense
Non-interest expense increased by $626,000, or 27.7%, for the year ended
March 31, 1999, as compared to the year ended March 31, 1998. Compensation and
employee benefits increased $502,000, or 43.3%, for the year ended March 31,
1999 as compared to the year ended March 31, 1998. This increase is attributable
primarily to the costs of funding the RRP, the ESOP and the hiring of additional
staff to provide better customer service.
Occupancy and equipment expense increased $68,000, or 18.0%, for the year
ended March 31, 1999 as compared to the year ended March 31, 1998. This increase
is the result of an increase in depreciation expense of furniture and fixtures
and an increase in building expense. Data processing expense increased $15,000,
or 20.8%, for the year ended March 31, 1999 as compared to the year ended March
31, 1998. Direct expenses of $9,000 for the Year 2000 issue was the primary
reason for the increase in data processing expenses.
Audit, legal and other professional services increased $38,000, or 40.9%,
for the year ended March 31, 1999 as compared to the year ended March 31, 1998.
This increase is mainly attributable to the increased costs of being a publicly
traded company and fees related to obtaining approval of the employee benefit
plans. Federal Deposit Insurance premiums increased by $15,000, or 37.5%, for
the year ended March 31, 1999 as compared to the year ended March 31, 1998.
7
<PAGE>
Miscellaneous operating expenses increased by $27,000 for the year ended
March 31, 1999 as compared to the year ended March 31, 1998. Advertising expense
decreased $5,000, or 6.8% for the fiscal year ended March 31, 1999 as compared
to the same period ended March 31, 1998. This decrease was the result of
reducing advertising costs in an adjouning county. Other real estate owned
expense decreased $36,000 for the year ended March 31, 1999 as compared to the
year ended March 31, 1998. This decrease was a result of the Bank having less
other real estate owned during the March 31, 1999 fiscal year.
Provision for Loan Losses
During the year ended March 31, 1999, the Bank recorded provision for loan
losses of $435,000 as compared to $739,000 for the same period of the prior
year, a decrease of $304,000, or 41.1%. The Bank recorded such provisions to
adjust for the allowance for loan losses to a level deemed appropriate based on
the assessment of the volume and lending presently being conducted by the Bank,
industry standards, past due loans, economic conditions in our market area
generally and other factors related to the collectability of the Bank's loan
portfolio. The Bank's non-performing assets as a percentage of total assets was
.18% at March 31, 1999 as compared to .55% at March 31, 1998.
Management will continue to monitor the 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 recorded a provision for income taxes of $120,000 for the year
ended March 31, 1999 as compared to a provision for income taxes of $248,000 for
the year ended March 31, 1998, a decrease of $128,000 or 51.6%. The effective
tax rate during the year ended March 31, 1999 was 36.4% (federal and state) as
compared to 39.9% during the same period in the prior year.
Average Balances/Interest Rates and Yields
The following table presents for the years 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.
8
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------------------
1999 1998
----------------------------------- -------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- --------- ------------ ----------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Loans receivable(1)... $63,777 $5,775 9.05 $63,464 $5,853 9.22%
Mortgage-backed
securities........... 6,210 379 6.10 3,014 192 6.38
Investment securities. 4,162 243 5.83 1,308 75 5.70
Interest-bearing
deposits............. 3,998 148 3.70 3,228 142 4.40
------- ------ ------- ------
Total interest-earning
assets............... 78,147 $6,545 8.38 $71,014 $6,262 8.82
====== ======
Noninterest-earning
asset................ 4,932 4,159
------- -------
Total assets......... $83,079 $75,173
======= =======
Interest-bearing
liabilities:
Savings deposits...... $6,819 $206 3.02 $ 6,494 $ 196 3.02
MMDA and NOW deposits. 10,808 342 3.16 8,240 266 3.23
Certificate of
deposits............. 44,987 2,486 5.53 43,875 2,506 5.71
Borrowings............ 4,097 226 5.52 1,856 100 5.37
------- ------ ------- ------
Total interest-bearing
liabilities......... 66,711 3,260 4.89 60,465 $3,068 5.07
------ ------
Noninterest-bearing
liabilities.......... 4,458 1,820
------- -------
Total liabilities... 71,169 62,285
Stockholders' equity... 11,910 12,888
------- -------
Total liabilities
and capital........ $83,079 $75,173
======= =======
Net interest income.... $3,285 $3,194
====== ======
Net interest spread.... 3.49% 3.75%
==== ====
Net average earning
assets................. $11,436 $10,549
======= =======
Net yield on average
earning assets......... 4.20% 4.50%
==== ====
Average interest-earning
assets to average
interest-bearing
liabilities.......... 1.17x 1.17x
====== ======
</TABLE>
- -----------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
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 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.
9
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------
1998 vs. 1999 1997 vs. 1998
------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
------------------------------------------------------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------------------------------------------------------------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable ....... $ 6 $ (84) $ (78) $ 873 $ 55 $ 928
Mortgage-backed ........ 193 (6) 187 (65) (5) (70)
securities
Investments securities . 167 1 168 33 (5) 28
Other .................. 19 (13) 6 54 9 63
----- ------ ----- ----- ----- -----
Total interest-earning
assets ............. $ 385 $(102) $ 283 $ 895 $ 54 $ 949
----- ------ ----- ----- ----- -----
Interest-bearing
liabilities:
Savings deposits ....... 10 0 10 34 (6) 28
Demand and NOW accounts 82 (6) 76 37 4 41
Certificate accounts ... 62 (82) (20) 102 42 144
Borrowings ............. 124 2 126 (9) (3) (12)
----- ------ ----- ----- ----- -----
Total interest-bearing
liabilities......... $ 278 $ (86) $ 192 $ 164 $ 37 $ 201
----- ------ ----- ----- ----- -----
Net interest income ..... $ 107 $ (16) $ 91 $ 731 $ 17 $ 748
===== ====== ===== ===== ===== =====
</TABLE>
Asset/Liability Management
A principal financial objective of ours is to achieve long-term
profitability while reducing our exposure to fluctuations in interest rates. We
have sought to reduce exposure of our earnings to changes in market interest
rates by managing the mismatch between asset and liability maturities and
interest rates. The principle element in achieving this objective has been to
increase the interest-rate sensitivity of our assets by originating loans with
interest rates subject to periodic repricing to market conditions. Accordingly,
we have emphasized the origination of one to five year adjustable rate mortgage
loans, short-term and adjustable commercial loans and consumer loans for
retention in our portfolio. We are offering higher yields on all non-maturity
deposits. This will assist in getting rate sensitive liabilities to off-set the
short term variable rate loans being offered. We have also established a fixed
rate one- to four- family real estate mortgage program, whereby these loans are
sold off to the FHLB. This program allows us to originate and service these
loans and not be subject to any interest rate risk with only a minimal amount of
credit risk while receiving significant fee income.
An asset or liability is interest rate sensitivity within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities, our
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 our assets mature or reprice more slowly or to a lesser extent than our
liabilities, our net portfolio value and net interest income would tend to
decrease during periods of rising interest rates but decrease during periods of
falling interest rates.
Our Board of Directors has formulated an Interest Rate Management Policy
designed to promote long-term profitability while managing interest rate risk.
We have 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 monthly concerning asset/liability policies, strategies
10
<PAGE>
and our current interest rate risk position. The committee's first priority is
to structure and price our assets and liabilities to maintain an acceptable
interest spread while reducing the net effects of changes in interest rates.
Our principal strategy in managing our interest rate risk is to analyze all
assets based on rate, rate adjustment and maturity versus liabilities and equity
with a resulting matrix, (using a one month to greater than three years time
frames) being prepared and a net interest income change computed and compared to
capital. All asset and liability sales strategies are priced on the need of
volume in a particular time frame. We do not engage in hedging activities.
Net Portfolio Value. We voluntarily measure our interest rate risk ("IRR")
into our internal risk based capital calculation. The IRR component is a dollar
amount that measures the terms of the sensitivity of our 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. We measure the change to our NPV as a result of a hypothetical 200
basis point ("bp") change in market interest rates. Management reviews the IRR
measurements on a monthly basis. Management also monitors effects on net
interest income resulting from increases or decreases in rates. The following
table presents our NPV at March 31, 1999, as calculated by us.
At March 31, 1999
- -------------------------------------------------------------------------------
Change in NPV as % of PV of
Rate Net Portfolio Value Assets
- -------------------------------------------------------------------------------
(Basis $ $ %
Points) Amount Change Change NPV Ratio BP Change
-----------------------------------------------------------------
(Dollars in thousands)
+200 bp $8,151 $(1,741) 17.60% 9.65% (206)
100 9,027 (865) 8.74 10.69 (102)
0 9,892 0 0 11.72 0
- -100 10,975 1,083 10.95 13.00 128
- -200 11,772 1,880 19.01 13.94 223
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 our actual position in dollar change and percentage change in NPV at
each basis point increment. The remaining columns present our percentage change
and basis point change in our 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 our Board of' Directors has not established any limits for changes in
NPV, the Board of Directors are responsible for reviewing our asset and
liability policies and meets monthly to review interest rate risk and trends, as
well as liquidity and capital ratios and requirements. Our management is
responsible for administering the policies and determinations of the Board of
Directors with respect to our asset and liability goals and strategies.
11
<PAGE>
Liquidity
Our 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.
Our primary investment activity is originating one- to-four family
residential mortgages, commercial business and real estate loans, and consumer
loans to be held to maturity. For the years ended March 31, 1999 and 1998, we
originated loans for our portfolio in the amount of $34.3 million and $37.0
million, respectively. For the years ended March 31, 1999 and 1998, these
activities were funded from repayments of $33.1 million and $29.8 million,
respectively and sales and participations of $1.9 million and $2.0 million,
respectively.
Our most liquid assets are cash and cash equivalents, which include
short-term investments. For the years ended March 31, 1999 and1998, cash and
cash equivalents were $5.3 million and $6.6 million, respectively. In addition,
we have used jumbo certificates of deposits as a source of funds. Jumbo
certificates of deposits represented $11.0 million and $9.7 million for the
years ended March 31, 1999 and 1998, respectively, or 16.4% and 15.5% of total
deposits for the years ended March 31, 1999 and 1998, respectively. Management
has monitored and reviewed our liquidity and maintains a $15.8 million line of
credit with the FHLB, which can be accessed immediately. The Bank also maintains
a $2 million line of credit with Cole Taylor Bank, a bank located in Chicago,
Illinois.
Our liquidity management is both an ongoing and long-term function of our
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 Bank has used FHLB advances to fund cash flow shortages. These
advances are generally less than .10% over the average rate paid on our
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 our 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 in this Annual Report
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 our operation 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.
Impact of the Year 2000
We have completed testing of our computer systems which were conducted for
the purpose of identifying applications that could be affected by Year 2000
issue. Our data processing is performed primarily in-house; however software and
12
<PAGE>
hardware utilized is under maintenance agreements with third party vendors.
Consequently, we are very dependent on those vendors to conduct our business. We
have already contacted each vendor to request time tables for Year 2000
compliance and expected costs, if any, to be passed along to us. To date, and
while we cannot offer assurance with respect to their efforts, we have been
informed that our primary service providers have completed all reprogramming
efforts. Review and testing of core systems has been completed. Management does
not expect any additional costs to have a significant impact on our financial
position or results of continuing operations. There can be no assurance,
however, that the vendors' systems will be Year 2000 compliant. Consequently, we
could incur incremental costs to convert to another vendor. We anticipate that
expenses should not exceed $78,000 for the fiscal year ending March 31, 2000. We
are expensing all costs associated with Year 2000 required system changes as
costs are incurred, and such costs are being funded through operating cash
flows. The cost of internal resources for compliance has not been estimated.
While we cannot guarantee it, we do not expect significant increases in future
data processing costs or other expenses related to Year 2000 compliance. We will
continue to plan for the Year 2000 issue by reviewing and planning for liquidity
needs, conducting additional inspections of environmental systems, and planning
for contingency and business recovery.
13
<PAGE>
LARSSON, WOODYARD & HENSON, LLP
CERTIFIED PUBLIC ACCOUNTANTS
MEMBERS OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
o 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 balance sheets of First Robinson
Financial Corp. and Subsidiary as of March 31, 1999 and 1998 and the related
consolidated statements of income, stockholders' equity, and cash flows for
the years then ended. 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, 1999 and 1998
and the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/s/ Larsson, Woodyard & Henson, LLP
April 21, 1999
Paris, Illinois
14
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, March 31,
--------- ---------
1999 1998
--------- ---------
(1,000's)
---------------------
Cash and cash equivalents:
Cash $ 1,007 $ 609
Interest bearing deposits 4,268 5,965
------- -------
Total cash and cash equivalents 5,275 6,574
Securities available for sale
(amortized cost of $3,777,000 and $2,949,000
at March 31, 1999 and 1998, respectively) 3,788 2,970
Securities held to maturity (estimated
market value of $195,000 and $700,000
at March 31, 1999 and 1998, respectively) 190 690
Mortgage-backed and related securities available for sale
(amortized cost of $8,165,000 and $1,116,000
at March 31, 1999 and 1998, respectively) 8,131 1,149
Mortgage-backed and related securities held to maturity
(estimated market value of $0 and $267,000
at March 31, 1999 and 1998, respectively) 0 265
Loans receivable, net 62,593 64,234
Foreclosed real estate 0 221
Premises and equipment 2,918 2,897
Accrued interest receivable 698 715
Prepaid income taxes 97 29
Other assets 107 224
------- -------
Total Assets $83,797 $79,968
======= =======
15
<PAGE>
<TABLE>
<CAPTION>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, March 31,
--------- ---------
1999 1998
--------- ---------
(1,000's)
------------------------
<S> <C> <C>
Deposits $ 67,325 $ 62,630
Federal Home Loan Bank advances 2,000 2,000
Repurchase agreements 2,206 1,644
Advances from borrowers for taxes and insurance 98 75
Accrued interest payable 294 348
Accrued income taxes 0 0
Deferred income taxes 69 157
Accrued expenses 243 219
-------- --------
Total Liabilities 72,235 67,073
-------- --------
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.01 par value; authorized 500,000 shares,
no shares issued and outstanding
Common stock $.01 par value; authorized 2,000,000 shares
859,625 shares issued and outstanding 9 9
Treasury stock, at cost (747) 0
Additional paid-in capital 8,277 8,232
Accumulated other comprehensive income (14) 33
Common stock acquired by ESOP/RRP (1,138) (602)
Retained earnings 5,175 5,223
-------- --------
Total Stockholders' Equity 11,562 12,895
-------- --------
Total Liabilities and Stockholders' Equity $ 83,797 $ 79,968
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
16
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
March 31
------------------
1999 1998
-------- ------
(1,000's)
------------------
Interest income:
Interest on loans $5,775 $5,853
Interest on mortgage-backed securities 379 192
Interest on securities and
interest-bearing deposits 391 217
------ ------
Total interest income 6,545 6,262
------ ------
Interest expense:
Interest on deposits 3,034 2,968
Interest on other borrowed funds 226 100
------ ------
Total interest expense 3,260 3,068
------ ------
Net interest income 3,285 3,194
Provision for loan losses 435 739
------ ------
Net interest income after provision for loan losses 2,850 2,455
Non-interest income 368 428
Non-interest expense 2,888 2,262
------ ------
Income before income taxes 330 621
Provision for income tax 120 248
------ ------
Net income $ 210 $ 373
====== ======
Basic earnings per share $ 0.27 $ 0.47
Diluted earnings per share $ 0.27 $ 0.47
See accompanying notes to consolidated financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
ESOP/RRP Other Compre- Compre-
Common Paid-in Retained Treasury Common hensive hensive
Stock Capital Earnings Stock Shares Income Total Income
----- ------- -------- ----- ------ ------ ----- ------
(1,000's)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 $ 0 $ 0 $ 4,850 $ 0 $ 0 $ 30 $ 4,880 $
Comprehensive Income
Net income 0 0 373 0 0 373 373
Other comprehensive income
Unrealized gain (loss) on
Securities, net of related
Tax effects of $1 (2)
Reclassification adjustment for
realized losses, net of related
tax effects of $3 0 0 0 0 0 0 0 5
--------
Total other comprehensive income 0 0 0 0 3 3 3
--------
Total comprehensive income $ 376
========
Issuance of common stock 9 8,178 0 (688) 0 7,499
ESOP shares allocated 0 54 0 86 0 140
-------- -------- -------- -------- -------- -------- --------
Balance at March 31, 1998 9 8,232 5,223 (602) 33 12,895
Comprehensive Income
Net income 0 0 210 0 0 210 210
Other comprehensive income
Unrealized gain (loss) on
Securities, net of related
tax effects of $30 (47)
--------
Total other comprehensive income 0 0 0 0 (47) (47) (47)
--------
Total comprehensive income $ 163
========
Treasury stock, at cost (42,981 shares) 0 0 0 (747) 0 0 (747)
Common stock acquired by RRP
at cost (42,981 shares) 0 0 0 0 (746) 0 (746)
Dividends ($.30 per share) 0 0 (258) 0 0 (258)
Amortization of RRP 0 0 0 124 0 124
ESOP shares allocated 0 45 0 86 0 131
-------- -------- -------- -------- -------- -------- --------
Balance at March 31, 1999 $ 9 $ 8,277 $ 5,175 ($ 747) ($ 1,138) ($ 14) $ 11,562
======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
March 31
----------------
1999 1998
----- ----
(1,000's)
----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 210 $ 373
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Provision for depreciation 245 194
Provision for loan losses 435 739
Net amortization and accretion on securities
and mortgage-backed securities 38 30
Amortization of RRP 124 0
ESOP shares allocated 131 140
Decrease (increase) in accrued interest receivable 17 (225)
Increase in prepaid income taxes (68) (29)
Decrease (increase) in other assets 117 (20)
(Decrease) increase in accrued interest payable (54) 52
Decrease in accrued income taxes 0 (92)
(Decrease) increase in deferred income taxes (88) 64
Increase in accrued expenses 24 83
Gain on sale of loan 0 (133)
Loss on sale of mortgage-backed securities available for sale 0 8
------- -------
Net cash provided by operating activities 1,131 1,184
------- -------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 1,500 200
Proceeds from sale of mortgage-backed securities available for sale 0 942
Proceeds from maturities of securities held to maturity 35 35
Purchase of securities held to maturity (35) (500)
Purchase of securities available for sale (1,832) (2,504)
Purchase of mortgage-backed securities available for sale (8,469) 0
FHLB stock purchased (35) (53)
FRB stock purchased 0 (123)
Repayment of principal on mortgage-backed securities 1,716 1,135
Increase in loans receivable (55) (6,178)
Purchase of loans and participations (678) (608)
Sale or participation of originated loans 1,939 1,971
Decrease in foreclosed real estate 221 102
Purchase of premises and equipment (266) (518)
------- -------
Net cash used in investing activities (5,959) (6,099)
------- -------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
March 31
----------------
1999 1998
---- ----
(1,000's)
----------------
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 4,695 $ 326
Increase in repurchase agreements 562 1,230
Advances from Federal Home Loan Bank 1,500 4,250
Repayment of Federal Home Loan Bank advances (1,500) (6,000)
Increase in advances from borrowers for taxes and insurance 23 14
Proceeds from issuance of common stock 0 8,188
Purchase of treasury stock (747) 0
Purchase of stock for RRP (746) 0
Purchase of employee stock ownership plan 0 (688)
Dividends paid (258) 0
------- -------
Net cash provided by financing activities 3,529 7,320
------- -------
(Decrease) increase in cash and cash equivalents (1,299) 2,405
Cash and cash equivalents at beginning of year 6,574 4,169
------- -------
Cash and cash equivalents at end of year $ 5,275 $ 6,574
======= =======
Supplemental Disclosures:
Additional Cash Flows
Information:
Cash paid for:
Interest on deposits, advances and other borrowings $ 3,314 $ 3,120
Income taxes:
Federal 230 150
State 26 30
See accompanying notes to consolidated financial statements.
</TABLE>
20
<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, 1999, 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" 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.
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.
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 balance sheet 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 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.
21
<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.
Securities 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. All securities are
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, other than loans available for sale, 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.
22
<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 loans other than consumer and residential real estate 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 loans currently reported as nonaccrual other than
consumer and residential real estate loans. The Bank recognizes interest
income on impaired loans only to the extent that cash payments are
received.
Foreclosed Real Estate
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.
23
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Per Share Data
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share." SFAS No. 128 revises the manner in which
earnings per share (EPS) is calculated by replacing the presentation of
primary and fully diluted EPS with a presentation of basic and diluted EPS.
Basic earnings per common share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period less
unvested MRP and unallocated ESOP shares. Diluted earnings per common share
is calculated by dividing net income by the weighted average number of
common shares used to compute basic EPS plus the incremental amount of
potential common stock determined by the treasury stock method.
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
Comprehensive Income
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a
full set of general-purpose financial statements. This statement requires
that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
This statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. This statement is effective
for fiscal years beginning after December 15, 1997. The Company has
adopted the provisions of the statement for the year ended March 31, 1999
and has presented comprehensive income information in the consolidated
balance sheets and statements of stockholders' equity.
24
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
New Accounting Standards
Disclosures about Segments of an Enterprise and Related Information
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" SFAS 131 establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selective information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997. The Company has
adopted the appropriate provisions of the statement for the year ended
March 31, 1999.
Employers' Disclosure about Pension and Other Postretirement Benefits
In February 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 Company has
adopted the appropriate provisions of the statement at April 1, 1998.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model
for accounting for derivatives and hedging activities and supersedes and
amends a number of existing standards. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999, but earlier application is
permitted as of the beginning of any fiscal quarters subsequent to June
15, 1998. Upon the statement's initial application, all derivatives are
required to be recognized in the statement of financial position as
either assets or liabilities and measured at fair value. In addition, all
hedging relationships must be designated, reassessed and documented
pursuant to the provisions of SFAS No. 133. Adoption of SFAS No. 133 is
not expected to have a material effect on the Company's financial
position or operating results.
Accounting for Mortgage-Backed Securities
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134
amends the earlier SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities." The new statement requires that, after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking
activities should classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold
those investments. The statement is effective for the first fiscal
quarter beginning after December 15, 1998. The management of the Company
does not anticipate this statement will have a material effect on the
Company's financial position or operating results.
25
<PAGE>
<TABLE>
<CAPTION>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities
Securities available for sale are summarized as follows:
March 31, 1999
------------------------------------------------------
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 $2,006 $ 23 $ 0 $2,029
State and municipal obligations 1,296 1 13 1,284
FRB stock 123 0 0 123
FHLB stock 352 0 0 352
------ ------ ------ ------
$3,777 $ 24 $ 13 $3,788
====== ====== ====== ======
March 31, 1998
------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
------------------------------------------------------
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
====== ====== ====== ======
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.
March 31,
------------------------------------------------------
1999 1998
------------------------- --------------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
--------- ---------- ---------- -----------
(1,000's)
------------------------------------------------------
Due in one year or less $ 499 $ 502 $ 500 $ 500
Due after one year through five years 1,507 1,527 2,009 2,030
Due after five years through ten years 0 0 0 0
Due after ten years 1,771 1,759 440 440
------ ------ ------ ------
$3,777 $3,788 $2,949 $2,970
====== ====== ====== ======
</TABLE>
26
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities
Securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1999
------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
------------------------------------------------------
<S> <C> <C> <C> <C>
State and municipal obligations $190 $ 5 $ 0 $195
==== ==== ==== ====
March 31, 1998
------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
------------------------------------------------------
U.S. government and agency securities $500 $ 10 $ 0 $510
State and municipal obligations 190 0 0 190
---- ---- ---- ----
$690 $ 10 $ 0 $700
==== ==== ==== ====
</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 options and prepayments.
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------
1999 1998
------------------------- --------------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
--------- ---------- ---------- -----------
(1,000's)
------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 43 $ 43 $ 35 $ 35
Due after one year through five years 147 152 655 665
Due after five years through ten years 0 0 0 0
Due after ten years 0 0 0 0
---- ---- ---- ----
$190 $195 $690 $700
==== ==== ==== ====
</TABLE>
Securities with a carrying amount of $2,029,000, and $3,030,000 at March 31,
1999 and 1998 were pledged to secure public deposits and for other purposes
as required or permitted by law. During the current year, the Company
transferred one U.S. Government security from held to maturity to available
for sale. Carrying value was $500,000 and estimated fair market value was
$513,000 and the increase was included in unrealized gains (loss) on
securities in other comprehensive income.
27
<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:
Year Ended Year Ended
March 31, March 31,
1999 1998
---------- ----------
(1,000's)
---------------------------
Proceeds from sales $0 $0
== ==
Gross gains $0 $0
Gross losses 0 0
-- --
$0 $0
== ==
Note 3. Mortgage-Backed and Related Securities
Mortgage-backed and related securities available for sale are summarized as
follows:
March 31, 1999
---------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
---------------------------------------------------
GNMA certificates $5,328 $ 1 $ 33 $5,296
FNMA certificates 2,222 3 5 2,220
FHLMC certificates 615 0 0 615
------ ------ ------ ------
$8,165 $ 4 $ 38 $8,131
====== ====== ====== ======
March 31, 1998
---------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
---------------------------------------------------
GNMA certificates $ 137 $ 5 $ 0 $ 142
FNMA certificates 854 26 0 880
FHLMC certificates 125 2 0 127
------ ------ ------ ------
$1,116 $ 33 $ 0 $1,149
====== ====== ====== ======
28
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Mortgage-Backed and Related Securities
Mortgage-backed and related securities held to maturity are summarized as
follows:
March 31, 1999
---------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
---------------------------------------------------
FHLMC certificates $0 $0 $0 $0
== == == ==
March 31, 1998
---------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
---------------------------------------------------
FHLMC certificates $265 $ 2 $ 0 $267
==== ==== ==== ====
Mortgage-backed and related securities with a carrying amount of $7,223,000
and $1,414,000 at March 31, 1999 and 1998, 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 6.85% and 7.37% at March 31, 1999 and1998, respectively. Expected
maturities of mortgaged-backed securities will differ from contractual
maturities because issuers may have the right to prepay without penalties.
The contractual weighted average life of the mortgaged-backed securities was
26.2 years at March 31, 1999.
During the current year, the Company transferred one mortgage-backed security
from held to maturity to available for sale. Carrying value was $239,000,
estimated fair market value was $238,000, and the decrease was included in
unrealized gains (loss) on securities in other comprehensive income.
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 year ended March 31, 1998. There were no sales for the
year ended March 31, 1999.
29
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans Receivable
Loans receivable consisted of the following:
March 31,
------------------------
1999 1998
------- -------
(1,000's)
------------------------
Real estate loans:
One to four family residential $31,609 $30,393
Multi-family residential 676 117
Commercial 11,857 13,466
Construction 602 598
------- -------
44,744 44,574
Other loans:
Deposit accounts 410 654
Automobile 5,534 8,536
Commercial 10,876 9,408
Other loans 1,913 2,440
------- -------
Total loans 63,477 65,612
Less:
Loans in process 250 713
Allowance for loan losses 634 665
------- -------
Net loans $62,593 $64,234
======= =======
Changes in allowance for loan losses are as follows:
March 31,
------------------------
1999 1998
------- -------
(1,000's)
------------------------
Balance $ 665 $ 404
Provision for losses 435 739
Loans charged off (613) (500)
Recoveries 147 22
----- -----
Balance $ 634 $ 665
===== =====
The weighted average interest rate on loans at March 31, 1999 and 1998 were
8.43% and 8.91% respectively.
Impaired loans totaled $148,000 and $161,000 at March 31, 1999 and 1998,
respectively. An allowance for losses was not deemed necessary for impaired
loans totaling $88,000 and $10,000 at March 31, 1999 and 1998, respectively.
An allowance of $26,000 and $32,000 was recorded for the remaining balance of
impaired loans of $60,000 and $151,000 at March 31, 1999 and 1998,
respectively. Impaired loans averaged $299,000 and $164,000 for 1999 and
1998, respectively. Interest income recognized was insignificant for the
years ended March 31, 1999 and 1998, respectively.
30
<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 $148,000 and $161,000 at March 31, 1999 and 1998, respectively. Additional
interest income of approximately $28,000 and $5,000 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 $1,000,000 and 1,484,000, and whole loans of $939,000 and $487,000 for the
years ended March 31, 1999 and 1998. The Company recognized gains on the
loans sold of $0 and $133,000 for the years ended March 31, 1999 and 1998.
The Company purchased participating interest and whole loans in the amount of
$678,000 and $608,000 for the years ended March 31, 1999 and 1998.
Note 5. Accrued Interest Receivable
Accrued interest receivable consisted of the following:
March 31,
------------------------
1999 1998
---- ----
(1,000's)
------------------------
Loans $601 $661
Securities 51 45
Mortgage-backed and related securities 46 9
---- ----
$698 $715
==== ====
Note 6. Premises and Equipment
Premises and equipment consisted of the following:
March 31,
------------------------
1999 1998
---- ----
(1,000's)
------------------------
Land $ 334 $ 334
Building 2,367 2,331
Furniture and equipment 1,834 1,631
------- -------
4,535 4,296
Accumulated depreciation (1,617) (1,399)
------- -------
$2,918 $2,897
======= ======
Depreciation included in the consolidated statements of income amounted to
$245,000 and $194,000 for the years ended March 31, 1999 and 1998,
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 $4,000 for each of the
years ended March 31, 1999 and 1998.
31
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Deposit Analysis
Deposits and weighted average interest rates are summarized as follows:
March 31,
---------------------------------------------------
1999 1998
----------------------- -----------------------
Weighted Weighted
Average Average
Interest Interest
Amount Rate Amount Rate
-------- -------- ------- --------
(1,000's)
--------------------------------------------------
Non-interest bearing $ 3,444 .00% $ 3,217 $ .00%
NOW accounts 11,829 3.19 10,125 3.20
Passbook 7,512 3.00 6,508 3.02
Certificates 44,540 5.31 42,780 5.70
------- -------
Total deposits $67,325 4.41% $62,630 4.72%
======= =======
Certificates had the following remaining maturities:
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------------------------------------------
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% $ 474 $ 0 $ 0 $ 0 $ 474
4.00 to 5.99% 22,706 5,982 576 1,124 30,388
6.00 to 7.99% 7,607 3,771 1,475 825 13,678
------- ------- ------- ------- -------
Totals $30,787 $ 9,753 $ 2,051 $ 1,949 $44,540
======= ======= ======= ======= =======
March 31, 1998
-------------------------------------------------------------------
Less Than One to Two to After
One Year Two Years Three Years Three Years Totals
---------- --------- ------------ ----------- -------
(1,000's)
--------------------------------------------------------------------
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>
32
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Deposit Analysis
Interest expense on deposits is summarized as follows:
March 31,
-----------------------------
1999 1998
------- -------
(1,000's)
-----------------------------
Passbook $ 206 $ 196
NOW accounts 342 266
Certificates 2,486 2,506
------ ------
$3,034 $2,968
====== ======
At March 31, 1999 and 1998, the Company had $12,743,000 and $11,347,000,
respectively, of deposit accounts with balances of $100,000 or more. The
Company did not have brokered deposits at March 31, 1999 and 1998. 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. Other Borrowed Funds
The Company has entered into a convertible fixed rate advance with the FHLB
on December 31, 1997 for $2,000,000. This advance has call provisions, at the
FHLB option, on March 31, 1998 and quarterly thereafter with a maturity date
of December 30, 2004 at 4.98%. This advance has not been called by the FHLB.
The FHLB advance is secured by qualified mortgage loans. The Company has used
daily advances from the FHLB for short-term cash flow needs. Interest expense
for advances amounted to $102,000 and $87,000 for year ended March 31, 1999
and 1998, respectively. The Company had only the convertible fixed rate
advance outstanding at March 31, 1999 and 1998 with accrued interest payable
of $9,000 at March 31, 1999 and 1998. Information concerning FHLB advances is
summarized as follows:
March 31,
-----------------------------
1999 1998
------- -------
(1,000's)
-----------------------------
Average balance $2,016 $1,404
Average interest rate 4.98% 5.15%
Maximum month-end balance $3,500 $2,000
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
$124,000 and $13,000 for the years ended March 31, 1999 and 1998,
respectively. Information concerning repurchase agreements is summarized as
follows:
March 31,
-----------------------------
1999 1998
------- -------
(1,000's)
-----------------------------
Average balance $2,199 $ 569
Average interest rate 5.77% 5.13%
Maximum month-end balance $2,304 $1,553
33
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Stockholders' Equity
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, 1999 and 1998, the Bank was in compliance with all of the
aforementioned capital requirements as summarized below.
<TABLE>
<CAPTION>
March 31, March 31,
--------- ---------
1999 1998
--------- ---------
(1,000's)
------------------------
<S> <C> <C>
Tier I Capital:
Common stockholders' equity $ 9,674 $ 9,318
Unrealized holding loss (gain) on securities available for sale 14 (33)
-------- --------
Total Tier I capital $ 9,688 $ 9,285
======== ========
Risk based Capital:
Total Tier I capital $ 9,688 $ 9,285
Qualifying allowance for loan losses 608 633
-------- --------
Total risk-based $ 10,296 $ 9,918
======== ========
Risk-weighted assets $ 54,342 $ 56,598
Average assets $ 83,793 $ 78,012
</TABLE>
34
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Stockholders' Equity
<TABLE>
<CAPTION>
To be Well
Capitalized under the
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Total Risk-Based Capital
(to Risk-Weighted Assets) $10,296 18.95% $ 4,347 8.0% $ 5,434 10.0%
Tier I Capital
(to Risk-Weighted Assets) 9,688 17.83% 2,174 4.0% 3,261 6.0%
Tier I Capital
(to Average Assets) 9,688 11.56% 3,352 4.0% 4,190 5.0%
To be Well
Capitalized under the
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ----- -------- -----
As of March 31, 1998:
Total Risk-Based Capital
(to Risk-Weighted Assets) $9,918 17.52% $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>
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 account holders who continue to maintain their accounts in the Bank
after the conversion on June 27, 1997. The special liquidation account was
$5,070,000 as of conversion date. 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.
35
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Stockholders' Equity
Retained earnings at March 31, 1999 and 1998 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.
Note 10. Non-Interest Income and Expense
Non-interest income and expense is summarized as follows:
Year Ended March 31,
--------------------
1999 1998
---- ----
(1,000's)
--------------------
Non-interest income
Charges and fees on loans $ 63 $ 111
Charges and fees on deposit accounts 269 224
Net loss on sale of assets (31) (56)
Net loss on sale of mortgage-backed securities 0 (8)
Gain on sale of loans 0 133
Internet fees 35 (1)
Other 32 25
------- -------
$ 368 $ 428
======= =======
Non-interest expense
Compensation and employee benefits $ 1,661 $ 1,159
Occupancy and equipment 445 377
Data processing expense 87 72
Audit, legal and other professional services 131 93
Federal Deposit Insurance Premium 55 40
Advertising 69 74
Telephone and postage 89 87
Other 351 360
------- -------
$ 2,888 $ 2,262
======= =======
Note 11. Income Tax
The components of the provision for income taxes are summarized as follows:
Year Ended March 31,
--------------------
1999 1998
---- ----
(1,000's)
--------------------
Currently payable:
Federal $ 153 $ 176
State 24 37
Deferred:
Federal (45) 29
State (12) 6
----- -----
$ 120 $ 248
===== =====
36
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Income Tax
An analysis of tax expense for the two years setting forth the reasons for
the variations from the federal statutory rate of 34% is as follows:
March 31,
---------------------
1999 1998
(1,000's)
---------------------
Computed tax at statutory rates $ 112 $ 212
Increase (decrease) in tax expense resulting from:
State and local taxes based on income,
net of federal income tax benefit 16 35
Municipal interest (5) (4)
Other (3) 5
----- -----
$ 120 $ 248
===== =====
Effective tax rate 36.4% 39.9%
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,
----------------
1999 1998
---- ----
(1,000's)
---------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $235 $227
Allowance for unrealized loss on securities available for sale 9 0
Directors' retirement 47 43
---- ----
291 270
---- ----
Deferred tax liabilities:
Accrual basis adjustment 186 232
Depreciation 164 164
FHLB stock 10 10
Allowance for unrealized gain on securities available for sale 0 21
---- ----
360 427
---- ----
Net deferred tax liabilities $ 69 $157
==== ====
</TABLE>
No valuation allowance was required for deferred tax assets at March 31, 1999
and 1998.
37
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. 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 $7,000 and $4,000 for the years ended March 31, 1999 and 1998,
respectively, which are included in compensation and employee benefits. Total
pension cost including administration and other fees amounted to $9,000 and
$5,000 for the years ended March 31, 1999 and 1998, 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 for the years ended March 31, 1999 and 1998 were $12,000 and
$12,000. The plan expense is included in compensation and employee benefits.
Note 13. 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 to total debt
service of the plan. 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 $113,000 and
$137,000 for the years ended March 31, 1999 and 1998, respectively. The ESOP
shares were as follows:
March 31, 1999 March 31, 1998
-------------- --------------
Allocated shares $ 15,197 $ 6,877
Shares ratably released for allocation 1,992 1,719
Unallocated shares 51,581 60,174
---------- ----------
Total ESOP shares $ 68,770 $ 68,770
========== ==========
Fair value of unreleased shares $ 625,420 $1,060,567
========== ==========
38
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Recognition and Retention Plan
The Company adopted the Recognition and Retention Plan (the RRP) on July 29,
1998. The plan provides for the granting of shares of common stock to the
eligible directors, officers and employees. The RRP was approved for 42,981
shares of common stock of the Company. The RRP granted 35,560 shares to
existing directors, officers and employees with 7,421 available for future
grants. The granted shares will vest in five equal annual installments, with
the first installment vesting immediately upon the plan approval. The vesting
of the granted shares can be accelerated based on certain plan provisions.
Directors, officers and employees granted shares retain voting rights and, if
dividends are paid, dividends during the vesting period. The RRP will
continue in effect for a term of ten years unless otherwise terminated. The
Company's stock price was $17.25 on the RRP approval date.
Note 15. Stock Option and Incentive Plan
The stockholders have approved a Stock Option and Incentive Plan (the SOP) on
July 29, 1998. The terms of the plan provide for the granting of up to 12% of
the outstanding shares of the Company to directors, officers and employees.
The SOP provides for the granting, up to 103,155 shares of common stock, of
incentive stock options, non-qualified stock options, stock appreciation
rights, limited stock appreciation rights or restricted stock, or any
combination thereof, as provided in the plan. These options have a exercise
period not to exceed ten years from the date of the award with the exercise
price equal to the fair market value of stock as of the date of the award.
The following table reflects a summary of the SOP for the year ended March
31, 1999.
Common Exercise
Shares Price
------ --------
Options outstanding, beginning of year 0 0
Granted 87,888 $17.25
Exercised 0 0
Options outstanding, end of year 87,888 $17.25
Information regarding options outstanding and exercisable at March 31, 1999
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------
Weighted
Range of Weighted average Weighted
exercise Common average remain Common average
price shares exercise price life in yrs. Shares exercise plan
- -------- ------- -------------- ------------ ------ -------------
<S> <C> <C> <C> <C> <C>
$17.25 87,888 $17.25 9.3 17,578 $17.25
</TABLE>
39
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Stock Option and Incentive Plan
No compensation cost has been recognized in the consolidated statements of
operations for options granted under the plans. Had compensation cost for
options granted been determined based on the estimated fair value of the
options issued at the dates of grant, the Company's net income and income per
common share amounts for the year ended March 31 would have been as follows:
1999
-------
Net income, as reported $ 210
=======
Net income, pro forma $ 160
=======
Income per common share:
As reported:
Basic $ 0.27
=======
Diluted $ 0.27
=======
Pro forma:
Basic $ 0.21
=======
Diluted $ 0.21
=======
The fair value of the options granted during the year was estimated using the
Black-Scholes model with the following assumptions: dividend yield of 3%;
expected life of 9 years; volatility of 21% and a risk-free interest rate of
5.5%. The effects of applying SFAS No. 123 in this pro-forma disclosure may
not be indicative of future results.
Note 16. Earnings per Share
The following data shows the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock.
<TABLE>
<CAPTION>
1999 1998
-------- --------
(1,000's)
------------------------
<S> <C> <C>
Income available to common stockholders used in basic EPS $ 210 $ 373
======== ========
Income available to common stockholders after assumed -
conversions of dilutive securities $ 210 $ 373
======== ========
Weighted average number of common shares used in basic EPS 771,561 795,732
Effect of dilutive securities:
Stock options 0 0
-------- --------
Weighted number of common shares and dilutive potential
common stock used in diluted EPS 771,561 795,732
======== ========
</TABLE>
40
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. 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 18. 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:
March 31,
--------------------------
1999 1998
---- ----
(1,000's)
--------------------------
Fixed rate $103 $129
==== ====
Variable rate $540 $813
==== ====
Interest rates for fixed rate loan commitments at March 31, 1999 and 1998
were from 8.75% to 9.00%, 7.75% to 10.00%, respectively. Interest rates for
variable rate loan commitments at March 31, 1999 and 1998, were from 8.00% to
9.25%. The Bank had unused lines of credit in the amount of $3,233,000 and
$3,399,000 at March 31, 1999 and 1998, respectively. The Bank had outstanding
letters of credit in the amount of $100,000 and $270,000 at March 31, 1999
and 1998, 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. 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.
41
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. 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:
March 31,
-------------------------
1999 1998
------- ------
(1,000's)
-------------------------
Balance $ 274 $ 223
New loans 85 156
Repayments (208) (105)
----- -----
Balance $ 151 $ 274
===== =====
Note 20. 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.
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, 1999 and 1998. 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.
42
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Carrying Amounts and Fair Value of Financial Instruments
The estimated fair value of the Company's financial instruments is as
follows:
<TABLE>
<CAPTION>
March 31, March 31,
--------------------- --------------------
1999 1998
--------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(1,000's)
----------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and interest bearing deposits $ 5,275 $ 5,275 $ 6,574 $ 6,574
Securities available for sale 11,919 11,919 4,119 4,119
Securities held to maturity 190 195 955 967
Loans receivable, net 62,593 63,162 64,234 63,214
Accrued interest receivable 698 698 715 715
LIABILITIES
Deposits 67,325 67,758 62,630 62,966
FHLB advances 2,000 2,026 2,000 2,132
Repurchase agreements 2,206 2,217 1,644 1,644
Advances from borrowers for taxes and insurance 98 98 75 75
Accrued interest payable 294 294 348 348
</TABLE>
Note 21. 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 balance sheets for the
parent company only as of March 31, 1999 and 1998 and its condensed
statements of operations and cash flows for the years then ended.
CONDENSED BALANCE SHEETS
March 31, 1999 and 1998
ASSETS 1999 1998
------- -------
(1,000's)
--------------------
Cash $ 1,899 $ 3,547
Investment in First Robinson Savings Bank, N.A 9,674 9,318
Prepaid income taxes 78 0
Other assets 65 46
------- -------
Total Assets $11,716 $12,911
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 0 $ 0
Accrued income taxes 0 0
Deferred income taxes 0 1
Other accrued expenses 154 15
Stockholders' equity 11,562 12,895
------- -------
Total Liabilities and Stockholders' Equity $11,716 $12,911
======= =======
43
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. First Robinson Financial Corporation Condensed Financial Information
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
For the Years Ended March 31, 1999 and 1998
1999 1998
---- ----
(1,000's)
----------------
<S> <C> <C>
Income:
Interest income $ 118 $ 112
----- -----
Total income 118 112
----- -----
Expenses:
Professional fees 78 42
Compensation 308 0
Other 48 19
----- -----
Total expense 434 61
----- -----
Income (loss) before income taxes and equity
in undistributed earnings of subsidiary (316) 51
Benefit from (provision for) income taxes 123 (20)
----- -----
Income (loss) before equity in undistributed earnings of subsidiary (193) 31
Equity of Undistributed Earnings of Subsidiary:
First Robinson Savings Bank, N.A 403 121
----- -----
Net income $ 210 $ 152
===== =====
</TABLE>
44
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. First Robinson Financial Corporation Condensed Financial Information
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 1999 and 1998
1999 1998
-------- --------
(1,000's)
----------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 210 $ 152
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity in undistributed net income of subsidiary (403) (121)
RRP amortization 124 0
Increase in other assets (19) (46)
Increase in prepaid income taxes (78) 0
(Decrease) increase in deferred income taxes (1) 1
Increase in other accrued expenses 139 15
------- -------
Net cash (used in) provided by operating activities (28) 1
------- -------
Cash Flows from Investing Activities:
Investment in the Bank 0 (4,094)
------- -------
Net cash used in investing activities 0 (4,094)
------- -------
Cash Flows from Financing Activities:
Proceeds from issuance of stock 0 8,188
Proceeds used to purchase ESOP shares 0 (688)
Proceeds used to purchase RRP shares (746) 0
Purchase of treasury stock (747) 0
Dividends paid (258) 0
ESOP Adjustments 131 140
------- -------
Net cash (used in) provided by financing activities (1,620) 7,640
------- -------
Net (decrease) increase in cash (1,648) 3,547
Cash Beginning of Year 3,547 0
------- -------
Cash End of Year $ 1,899 $ 3,547
======= =======
</TABLE>
45
<PAGE>
FIRST ROBINSON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22. Segment Information
As discussed in Note 1, during the current year the Company adopted the
appropriate provisions of SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." The principal business of the Company is
overseeing the business of the Bank and investing the portion of the net
proceeds from its initial public offering retained by it. The Company has no
significant assets other than its investment in the Bank, a loan to the ESOP
plan, and certain investment securities and cash and cash equivalents. The
Bank's principal business consists of attracting deposits from the general
public and investing these deposits in loans to its customers. The Bank's
operating facilities are contained in Crawford County, Illinois, and its
lending is concentrated within Crawford and contiguous counties. The Bank has
no customer from which it derives 10% or more of its revenue. With these
facts in mind, the Company's management believes that the Company is
comprised of only one reportable operating segment, and that the consolidated
financial statements adequately reflect the financial condition and
operations of that segment.
46
<PAGE>
FIRST ROBINSON FINANCIAL CORPORATION AND SUBSIDIARY
STOCKHOLDER INFORMATION
- ------------------------------------------------------------------------------
ANNUAL MEETING
The annual meeting of stockholders will be held at 10:00 a.m., Wednesday, July
28, 1999, 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 Company's
Common Stock for the periods indicated. The information set forth in the table
below was provided by the OTC Electronic Bulletin Board. The information
reflects interdealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions.
Fiscal 1999 Fiscal 1998
-------------------------------- ------------------------------
High Low Dividends High Low Dividends
-------------------------------- ------------------------------
First Quarter $18.75 $16.75 $0.30 $14.50 $14.50 $---
Second Quarter 17.37 13.50 --- 16.50 14.37 ---
Third Quarter 15.00 11.62 --- 16.87 15.12 ---
Fourth Quarter 14.25 10.75 --- 17.81 15.50 ---
The Company declared and paid a dividend of $0.30 per share 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 9 of the
Notes to Financial Statements included in this Annual Report.
As of June 21, 1999, the Company had approximately 610 stockholders of record
and 788,323outstanding shares of Common Stock.
SHAREHOLDERS AND GENERAL INQUIRIES TRANSFER AGENT
Rick L. Catt Register and Transfer Company
President and Chief Executive Officer 10 Commerce Drive
First Robinson Financial Corporation Cranford, New Jersey 07016
501 East Main Street (908) 272-8511
Robinson, Illinois 62454
(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, 1999, with the Securities and Exchange Commission. Copies
of the Annual Report on Form 10-KSB and the Company's Quarterly Reports on Form
10-QSB may be obtained without charge by contacting:
Rick L. Catt
President and Chief Executive Officer
First Robinson Financial Corporation
501 East Main Street
Robinson, Illinois 62454
(618) 544-8621
47
<PAGE>
FIRST ROBINSON FINANCIAL CORPORATION AND SUBSIDIARY
CORPORATE INFORMATION
- ------------------------------------------------------------------------------
COMPANY AND BANK ADDRESSES
501 East Main Street Telephone: (618) 544-6821
Robinson, Illinois 62454 Fax: (618) 544-7506
DIRECTORS OF THE BOARD
SCOTT F. PULLIAM RICK L. CATT
Chairman of the Board President and Chief Executive Officer
Public Accountant First Robinson Financial Corporation
Robinson, Illinois Robinson, Illinois
JAMES D. GOODWINE WILLIAM K. THOMAS
Funeral Director Attorney
Robinson, Illinois Robinson, Illinois
CLELL T. KELLER DONALD K. INBODEN
Retired Clerk of Crawford Retired - Marathon Oil Company
County, Illinois Circuit Court Robinson, Illinois
Robinson, Illinois
EXECUTIVE OFFICERS
RICK L. CATT JAMIE E. McREYNOLDS
President and Chief Executive Officer Vice President, Chief Financial Officer
and Secretary
LESLIE TROTTER, III WILLIAM D. SANDIFORD
Vice President Vice President
W. E. HOLT
Vice President and Senior Loan Officer
INDEPENDENT AUDITORS SPECIAL COUNSEL
Larsson, Woodyard & Henson, LLP Silver, Freedman & Taff, L.L.P.
702 East Court Street 1100 New York Avenue, N.W.
Paris, Illinois 61944 Seventh Floor, East Tower
Washington, D.C. 20005
48
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
40
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED MARCH 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,007
<INT-BEARING-DEPOSITS> 4,268
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,919
<INVESTMENTS-CARRYING> 190
<INVESTMENTS-MARKET> 195
<LOANS> 63,227
<ALLOWANCE> (634)
<TOTAL-ASSETS> 83,797
<DEPOSITS> 67,325
<SHORT-TERM> 4,206
<LIABILITIES-OTHER> 704
<LONG-TERM> 0
<COMMON> 9
0
0
<OTHER-SE> 11,553
<TOTAL-LIABILITIES-AND-EQUITY> 83,797
<INTEREST-LOAN> 5,775
<INTEREST-INVEST> 770
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,545
<INTEREST-DEPOSIT> 3,034
<INTEREST-EXPENSE> 3,260
<INTEREST-INCOME-NET> 3,285
<LOAN-LOSSES> 435
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,888
<INCOME-PRETAX> 330
<INCOME-PRE-EXTRAORDINARY> 330
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 210
<EPS-BASIC> 0.27
<EPS-DILUTED> 0.27
<YIELD-ACTUAL> 4.17
<LOANS-NON> 148
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 129
<ALLOWANCE-OPEN> 665
<CHARGE-OFFS> (613)
<RECOVERIES> 147
<ALLOWANCE-CLOSE> 634
<ALLOWANCE-DOMESTIC> 634
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
