<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _________________
Commission File Number 0-25049
FIRST PLACE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 34-1880130
-------- ----------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation)
185 E. Market Street, Warren, OH 44482
--------------------------------------
(Address and zip code of principal executive offices)
(330) 373-1221
--------------
(Registrant's telephone number, including area code)
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 $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.
YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
As of September 20, 1999, the Registrant had 11,241,250 shares of Common Stock
issued and outstanding.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $125.1million based upon the last sales price as of September 20,
1999. (The exclusion from such amount of the market value of the shares owned
by any person shall not be deemed an admission by the Registrant that such
person is an affiliate of the Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Annual Report to Stockholders for the fiscal year
ended June 30, 1999.
Part III of Form 10-K - Proxy Statement for Annual Meeting of Stockholders to be
held in 1999.
<PAGE>
PART I
Item I. Description of Business
First Place Financial Corp. (the Company) was organized in August 1998 at the
direction of the Board of Directors of First Federal Savings and Loan
Association of Warren (the Association) for the purpose of becoming a holding
company to own all of the outstanding capital stock of the Association. The
conversion of the Association from a federally chartered mutual savings and loan
association to a federally chartered stock savings and loan association was
completed on December 31, 1998.
The Association's principal business consists of accepting retail deposits from
the general public and investing these funds primarily in one- to four-family
residential loans, automobile and home equity loans and, to a lesser extent,
multi-family, commercial real estate and construction loans. Headquartered in
Warren, Ohio, in proximity to Youngstown, Ohio and approximately halfway between
the cities of Cleveland, Ohio and Pittsburgh, Pennsylvania, the Association is a
community-oriented savings institution that was organized in 1922. The
Association currently operates eleven full-service banking facilities and two
loan production offices in Trumbull and Mahoning Counties of Ohio. In addition,
the Association opened four other loan production offices in 1999 in the cities
of Akron, Newark, Mt. Vernon and Medina, Ohio. While deposit gathering is still
primarily concentrated in Trumbull and Mahoning Counties, the Association's
primary lending area now encompasses all of northeast Ohio.
The major employers in the Youngstown/Warren area include Delphi Packard
Electric Systems, General Motors and HM Health Systems. Additionally, MCI
Worldcom announced in August of 1999 that it would locate a worldwide call
center in the area generating an estimated 1,200 new jobs.
Competition
The Association faces significant competition both in making loans and in
attracting deposits. The State of Ohio has a high density of financial
institutions, many which are branches of significantly larger institutions that
have greater financial resources than the Association, all of which are
competitors of the Association to varying degrees. The Association's
competition for loans comes principally from savings banks, savings and loan
associations, commercial banks, mortgage banking companies, credit unions,
insurance companies and other financial service companies. Its most direct
competition for deposits has historically come from savings and loan
associations, savings banks, commercial banks and credit unions. The
Association faces additional competition for deposits from non-depository
competitors such as the mutual fund industry, securities and brokerage firms and
insurance companies. Competition may also increase as a result of the lifting
of restrictions on the interstate operations of financial institutions.
Forward-Looking Statements
When used in this Form 10-K, or, in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "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 certain risks and uncertainties
including changes in economic conditions in the Association's market area,
changes in policies by regulatory agencies, fluctuation in interest rates,
demand for loans in the Association's market area and competition, that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected. The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, which speak only
as of the date made. The Company wishes to advise readers that the factors
listed above could affect the Company's financial performance and could cause
the Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements. The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Lending Activities
General. The Association's principal lending activity is the origination of
conventional real estate loans secured by one- to four-family residences located
in the Association's primary market area. The Association also originates fixed
rate mortgage loans which, if they qualify, are sold to various investors
including the Federal Home Loan Mortgage Corporation (FHLMC). The Association
also originates automobile and other consumer loans that generally have higher
yields and shorter durations than traditional mortgage loans. The Association
additionally offers multifamily and nonresidential real estate loans.
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The following table sets forth the composition of the Association's loan
portfolio in dollar amounts and in percentages of the respective portfolios at
the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------
Percent Percent Percent
Amount Of Total Amount of Total Amount of Total
-----------------------------------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------------------------------
Real estate mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
One- to four family $357,374 76.09% $267,950 73.77% $215,549 73.92%
Multi-family 4,804 1.02 4,481 1.23 2,293 0.79
Commercial real estate 10,192 2.17 8,627 2.37 6,789 2.33
Construction 13,993 2.98 6,301 1.73 5,376 1.84
Home equity 8,944 1.90 9,189 2.53 9,822 3.37
-------- ------ -------- ------ -------- ------
Total real estate mortgage loans 395,307 84.16 296,548 81.64 239,829 82.25
Consumer loans:
Automobiles 53,243 11.34 52,847 14.55 43,172 14.80
Other(1) 19,217 4.09 11,242 3.10 6,521 2.24
-------- ------ -------- ------ -------- ------
Total consumer loans 72,460 15.43 64,089 17.65 49,693 17.04
Commercial loans 1,925 0.41 2,587 0.71 2,068 0.71
-------- ------ -------- ------ -------- ------
Total loans receivable 469,692 100.00% 363,224 100.00% 291,590 100.00%
====== ====== ======
Less:
Net deferred loan origination fees 1,867 1,319 1,316
Loans in process 10,411 5,866 3,339
Allowance for loan losses 3,623 3,027 1,723
-------- -------- --------
Loans receivable, net $453,791 $353,012 $285,212
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------
1996 1995
--------------------------------------------------
Percent Percent
Amount Of Total Amount of Total
--------------------------------------------------
(Dollars in thousands)
--------------------------------------------------
Real estate mortgage loans:
<S> <C> <C> <C> <C>
One- to four family $202,697 78.14% $185,270 76.15%
Multi-family 1,397 0.54 1,515 0.62
Commercial real estate 7,159 2.76 8,516 3.50
Construction 2,515 0.97 1,859 0.76
Home equity 6,531 2.52 4,309 1.77
-------- ------ -------- ------
Total real estate mortgage loans 220,299 84.93 201,469 82.80
Consumer loans:
Automobiles 31,234 12.04 32,212 13.24
Other(1) 6,675 2.57 8,262 3.40
-------- ------ -------- ------
Total consumer loans 37,909 14.61 40,474 16.64
Commercial loans 1,188 0.46 1,358 0.56
-------- ------ -------- ------
Total loans receivable 259,396 100.00% 243,301 100.00%
====== ======
Less:
Net deferred loan origination fees 1,517 1,228
Loans in process 1,837 1,221
Allowance for loan losses 1,259 1,186
-------- --------
Loans receivable, net $254,783 $239,666
======== ========
</TABLE>
__________
(1) Other consumer loans consists primarily of home equity lines of credit.
3
<PAGE>
Loan Originations. The Association's mortgage lending activities are conducted
primarily by its loan personnel operating at its eleven full-service branch
offices and its six loan production offices. All loans originated by the
Association are underwritten by the Association pursuant to the Association's
policies and procedures. The Association originates both adjustable-rate and
fixed-rate mortgage loans, commercial loans and consumer loans. The
Association's ability to originate fixed- or adjustable-rate loans is dependent
upon the relative customer demand for such loans, which is affected by the
current and expected future level of interest rates. It is the general policy
of the Association to retain all loans originated in its portfolio.
The following tables set forth the Association's loan originations and principal
repayments for the periods indicated.
<TABLE>
<CAPTION>
For the Years Ended June 30,
----------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
(In thousands)
Total loans receivable(1):
<S> <C> <C> <C>
Balance outstanding at beginning of period $357,358 $288,251 $257,559
Loans originated(2):
Real estate mortgage loans:
One- to four-family and home equity 152,962 105,184 49,913
Multi-family and commercial real estate 3,675 4,515 5,494
Construction 15,898 7,882 6,415
Consumer loans(3) 46,158 33,457 31,610
Commercial loans 321 62 92
-------- -------- --------
Total loans originated 219,014 151,100 93,524
Less:
Principal repayments 112,546 79,466 61,330
Change in loans in process(4) 4,545 2,527 1,502
-------- -------- --------
Total loans receivable at end of period $459,281 $357,358 $288,251
======== ======== ========
</TABLE>
____________________
(1) Total loans receivable does not include unearned discounts, deferred loan
fees and the allowance for loan losses.
(2) Amounts for each period include loans in process at period end.
(3) Consists primarily of originations of automobile loans and disbursements on
equity lines of credit.
(4) Represents change in loans in process, which primarily represent undisbursed
funds on construction loans, from first day to last day of the period.
4
<PAGE>
Loan Maturity and Repricing. The following table shows the contractual maturity
of the Association's loan portfolio at June 30, 1999. Demand loans and other
loans having no stated schedule of repayments or no stated maturity are reported
as due in one year or less. The table does not include prepayments, scheduled
principal amortization or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
At June 30, 1999
---------------------------------------------------------------------------
Real Total
Estate Loans
Mortgage Consumer Commercial Receivable
---------------------------------------------------------------------------
(In thousands)
Amounts due:
<S> <C> <C> <C> <C>
Within one year $ 17,139 $ 1,538 $ 703 $ 19,380
-------- ------- ------ --------
After one year:
More than one year to three years 4,253 12,884 226 17,363
More than three years to five years 7,539 33,758 277 41,574
More than five years to 10 years 25,330 6,944 434 32,708
More than 10 years to 20 years 131,725 17,145 285 149,155
More than 20 years 209,321 191 - 209,512
-------- ------- ------ --------
Total due after June 30, 2000 378,168 70,922 1,222 450,312
-------- ------- ------ --------
Total amount due 395,307 72,460 1,925 469,692
-------- ------- ------ --------
Less:
Net deferred loan origination fees 1,867
Loans in process 10,411
Allowance for loan losses 3,623
--------
Loans receivable, net $453,791
========
</TABLE>
5
<PAGE>
The following table sets forth at June 30, 1999, the dollar amount of total
loans receivable contractually due after June 30, 2000, and whether such loans
have fixed interest rates or adjustable interest rates.
Due After June 30, 2000
-------------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
Real estate mortgage loans $279,380 $ 98,788 $378,168
Consumer loans 53,832 17,090 70,922
Commercial loans 436 786 1,222
-------- -------- --------
Total loans $333,648 $116,664 $450,312
======== ======== ========
One- to Four-Family Lending. The Association currently offers both fixed-rate
and adjustable-rate mortgage ("ARM") loans with maturities up to 30 years
secured by one- to four-family residences, substantially all of which are
located in the Association's primary market area. One- to four-family mortgage
loan originations are generally obtained from the Association's in-house loan
representatives, from existing or past customers, through advertising, and
through referrals from local builders, real estate brokers and attorneys. At
June 30, 1999 the Association's one- to four-family mortgage loans totaled
$357.4 million, or 76.1%, of total loans.
The Association currently offers fixed-rate one- to four-family mortgage loans
with terms of up to 30 years. These loans have generally been priced
competitively with current market rates for such loans. The Association
currently offers a number of ARM loans with terms of up to 30 years and interest
rates which adjust every year from the outset of the loan or which adjust
annually after a three, five or seven year initial fixed period. The interest
rates for the Association's ARM loans are indexed to the one-year U.S. Treasury
Index. The Association's ARM loans generally provide for periodic (not more
than 2%) and overall (not more than 6%) caps on the increase or decrease in the
interest rate at any adjustment date and over the life of the loan.
The origination of adjustable-rate one- to four-family mortgage loans, as
opposed to fixed-rate one- to four-family mortgage loans, helps reduce the
Association's exposure to increases in interest rates. However, adjustable-rate
loans generally pose credit risks not inherent in fixed-rate loans, primarily
because as interest rates rise, the underlying payments of the borrower rise,
thereby increasing the potential for default. Periodic and lifetime caps on
interest rate increases help to reduce the risks associated with adjustable-rate
loans but also limit the interest rate sensitivity of such loans.
Generally, the Association originates one- to four-family residential mortgage
loans in amounts up to 97% of the appraised value or selling price of the
property, whichever is lower, securing the loan. Private mortgage insurance
("PMI") may be required for such loans with a loan-to-value ("LTV") ratio of
greater than 85%. One- to four-family mortgage loans originated by the
Association generally include due-on-sale clauses which provide the Association
with the contractual right to deem the loan immediately due and payable in the
event the borrower transfers ownership of the property without the Association's
consent. Due-on-sale clauses are an important means of adjusting the yields on
the Association's fixed-rate one- to four-family mortgage loan portfolio. The
Association requires fire, casualty, and, in required cases, flood insurance on
all properties securing real estate loans made by the Association.
Commercial Lending. The Association also originates on a very limited basis
commercial loans in the form of term loans and lines of credit to small- and
medium-sized businesses operating in the Association's primary market area.
Since commercial loans are made on such an infrequent basis, the Association
handles each such loan request on an individual basis. At June 30, 1999, the
Association had $1.9 million of commercial loans, which amounted to 0.4% of the
Association's total loans.
6
<PAGE>
Unlike mortgage loans, which generally are made on the basis of the borrower's
ability to make repayment from his or her employment, and which are secured by
real property whose value tends to be more easily ascertainable, commercial
loans are of higher risk and 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 loans may be
substantially dependent on the success of the business itself. Further, any
collateral securing such loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business.
Consumer Lending. Consumer loans at June 30, 1999 amounted to $72.5 million, or
15.4% of the Association's total loans, and consisted primarily of new and used
automobile loans, and to a lesser extent, home equity lines of credit and
secured and unsecured personal loans. Such loans are generally originated in
the Association's primary market area and generally are secured by real estate,
deposit accounts, personal property and automobiles. Approximately half of the
Association's automobile loans are made on used vehicles; the Association will
generally not make a loan on a vehicle manufactured before 1992. The average
automobile loan is for $13,000. The Association originates automobile loans
through an automobile dealer network, primarily composed of new car dealers
located in the Association's primary market area. The typical loan term is
sixty-six months. At June 30, 1999, personal loans (both secured and unsecured)
totaled $2.0 million and automobile loans totaled $53.2 million, or 11.3% of
total loans and 73.5% of consumer loans.
The Association also offers a variable rate home equity line of credit line
based on the applicant's income and equity in the home. Generally, the credit
line, when combined with the balance of the prior mortgage liens, may not exceed
95% of the appraised value of the property at the time of the loan commitment.
Home equity lines of credit are secured by a mortgage on the underlying real
estate. The Association holds the first mortgage on a substantial majority of
the properties securing such lines of credit. The Association presently charges
no origination fees for these loans. A borrower is required to make monthly
payments of principal and interest. At June 30, 1999, the Association had
outstanding home equity lines of credit of $17.2 million.
Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than one- to four-family residential mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, collections on these loans are dependent on the borrower's
continuing financial stability and, therefore, are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Finally, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans in the event of a default.
Sale of Mortgage Loans. During the year ended June 30, 1999, the Association
began selling one-to-four-family fixed rate mortgage loans to various secondary
market investors. The Association originated $5.3 million of fixed-rate
mortgages during fiscal year 1999 and recorded a gain of $73,000 on the sale of
$4.4 million of these loans. All loans that the Association sells are sold
servicing released.
Loan Approval Procedures and Authority. The Board of Directors of the
Association establishes the lending policies and loan approval limits of the
Association. As such, the Board of Directors has authorized certain officers of
the Association (the "designated officers") to consider and approve all loans
within their designated authority as established by the Board.
The Board of Directors has authorized the following persons and groups of
persons to approve loans up to the amounts indicated: one- to four-family
mortgage loans up to $240,000 may be approved by any of the designated officers;
one- to four-family mortgage loans in excess of $240,000 and up to $400,000 may
be approved by two of the designated officers; one- to four-family mortgage
loans in excess of $400,000 to $750,000 must be approved by the Residential Loan
Committee plus one outside Board member; one- to four-family mortgage loans in
excess of $750,000 must be approved by the Directors' Loan Committee which is
comprised of three outside directors and the President. Secured consumer loans,
including home equity lines of credit, may be approved by any of the designated
officers up to $150,000. Consumer loans over $150,000 and up to $400,000 must
be approved by two of the designated officers. Commercial loans up to $200,000
may be approved by any designated officer with joint approval required for loans
from $200,000 to $400,000. Commercial loans between $400,000 and $1,000,000
must
7
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be approved by two members of the Commercial Loan Committee plus one outside
Board member. Commercial loans greater than $1,000,000 must be approved by
the Directors' Loan Committee.
With respect to all loans originated by the Association, upon receipt of a
completed loan application from a prospective borrower, a credit report is
ordered and certain other information is verified by an independent credit
agency. If necessary, additional financial information may be required. An
appraisal of real estate intended to secure a proposed loan generally is
required to be performed by the Association's "in-house" appraisers or outside
appraisers approved by the Association. The Board annually approves independent
appraisers used by the Association. The Association's policy is to obtain
hazard insurance on all mortgage loans and flood insurance when necessary and
the Association may require borrowers to make payments to a mortgage escrow
account for the payment of property taxes and insurance premiums.
Delinquent Loans, Classified Assets and Real Estate Owned
Delinquencies, Classified Assets and Real Estate Owned. Reports listing all
delinquent accounts are generated and reviewed by management on a monthly basis
and the Board of Directors performs a monthly review of all loans or lending
relationships delinquent 30 days or more. The procedures taken by the
Association with respect to delinquencies vary depending on the nature of the
loan, period and cause of delinquency and whether the borrower is habitually
delinquent. When a borrower fails to make a required payment on a loan, the
Association takes a number of steps to have the borrower cure the delinquency
and restore the loan to current status. The Association generally sends the
borrower a written notice of non-payment after the loan is first past due. The
Association's guidelines provide that telephone, written correspondence and/or
face-to-face contact will be attempted to ascertain the reasons for delinquency
and the prospects of repayment once a loan becomes 60 days past due. When
contact is made with the borrower at any time prior to foreclosure, the
Association will attempt to obtain full payment, offer to work out a repayment
schedule with the borrower to avoid foreclosure or, in some instances, accept a
deed in lieu of foreclosure. In the event payment is not then received or the
loan not otherwise satisfied, additional letters and telephone calls generally
are made. Once the loan becomes 90 days past due, the Association notifies the
borrower in writing that if the loan is not brought current within two weeks,
the Association will commence foreclosure proceedings against any real property
that secured the loan. If a foreclosure action is instituted and the loan is
not brought current, paid in full, or refinanced before the foreclosure sale,
the property securing the loan generally is sold at foreclosure and, if
purchased by the Association, becomes real estate owned.
Federal regulations and the Association's internal policies require that the
Association utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Association currently
classifies problem and potential problem assets as "Substandard," "Doubtful" or
"Loss" assets. An asset is considered Substandard if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. Substandard assets include those characterized by
the distinct possibility that the Association 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 there continuance as assets, without
the establishment of a specific loss reserve, is not warranted. Assets which do
not currently expose the Association to a sufficient degree of risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When the Association classifies one or more assets, or portions thereof, as
Substandard or Doubtful, it is required to establish an allowance for possible
loan losses in an amount deemed prudent by management unless the loss of
principal appears to be remote. When the Association classifies one or more
assets, or portions thereof, as Loss, it is required either to establish a
specific allowance for losses equal to 100% of the amount of the assets so
classified or to charge off such amount.
The Association's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the Office of Thrift
Supervision (OTS) which can order the establishment of additional general or
specific loss allowances. The OTS, in conjunction with the other federal
banking agencies, recently adopted an interagency policy statement on the
allowance for loan and lease losses. The policy statement provides guidance for
financial institutions on both the responsibilities of management for the
assessment and establishment of adequate
8
<PAGE>
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation guidelines. Generally, the policy statement
recommends that institutions have effective systems and controls to identify,
monitor and address asset quality problems; that management has analyzed all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
While the Association believes that it has established an adequate allowance for
possible loan losses, there can be no assurance that regulators, in reviewing
the Association's loan portfolio, will not request the Association to materially
increase at that time its allowance for possible loan losses, thereby negatively
affecting the Association's financial condition and earnings at that time.
Although management believes that adequate specific and general loan loss
allowances have been established, future provisions are dependent upon future
events such as loan growth and portfolio diversification and, as such, further
additions to the level of specific and general loan loss allowances may become
necessary.
The Association reviews and classifies its assets on a quarterly basis and the
Board of Directors reviews the results of the reports on a quarterly basis. The
Association classifies its assets in accordance with the management guidelines
described above. At June 30, 1999, the Association had $2.0 million, or 0.27%,
of assets designated as Substandard, consisting primarily of mortgage loans
secured by single-family owner-occupied residences. Assets classified as
Doubtful totaled $224,000, consisting primarily of automobile loans, and assets
classified as Loss totaled $90,000 at June 30, 1999. At June 30, 1999, the
Association had $176,000, or 0.02%, of assets designated as Special Mention,
consisting primarily of mortgage loans. At June 30, 1999, these classified
assets totaled $2.5 million, representing 0.55% of loans receivable.
9
<PAGE>
The following tables set forth delinquencies in the Association's loan
portfolio past due 30 days or more:
<TABLE>
<CAPTION>
At June 30, 1999
------------------------------------------------------------
30-89 Days 90 Days or More
------------------------------------------------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate mortgage loans 13 $ 864 37 $1,263
Consumer loans 103 999 45 311
Commercial loans 4 484 - -
---- ------ ------ ------
Total delinquent loans(1) 120 $2,347 82 $1,574
==== ====== ====== ======
Delinquent loans to total loans(1) 0.51% 0.34%
====== ======
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1998
------------------------------------------------------------
30-89 Days 90 Days or More
------------------------------------------------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate mortgage loans 39 $1,298 59 $1,673
Consumer loans 138 1,287 58 470
Commercial loans - - - -
---- ------ ------ ------
Total delinquent loans(1) 177 $2,585 117 $2,143
==== ====== ====== ======
Delinquent loans to total loans(1) 0.73% 0.60%
====== ======
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1997
------------------------------------------------------------
30-89 Days 90 Days or More
------------------------------------------------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate mortgage loans 51 $1,380 82 $1,767
Consumer loans 108 1,053 87 713
Commercial loans - - - -
---- ------ ------ ------
Total delinquent loans(1) 159 $2,433 169 $2,480
==== ====== ====== ======
Delinquent loans to total loans(1) 0.85% 0.86%
====== ======
</TABLE>
____________________
(1) Total loans represent gross loans receivable less deferred loan fees and
loans in process.
10
<PAGE>
Nonperforming Assets. The following table sets forth information regarding
nonperforming loans and REO. At June 30, 1999, the Association had no troubled-
debt restructured loans within the meaning of SFAS 15, and no REO properties
although the Association had 15 repossessed automobiles with a balance of
$208,000. It is the general policy of the Association to cease accruing
interest on loans 90 days or more past due when, in management's opinion, the
collection of all or a portion of the loan principal has become doubtful and to
fully reserve for all previously accrued interest. For the years ended June 30,
1999, 1998, 1997, 1996 and 1995 the amount of additional interest income that
would have been recognized on non-accrual loans if such loans had continued to
perform in accordance with their contractual terms was $90,000, $94,000,
$172,000, $109,000 and $88,000, respectively.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------
(In thousands)
Nonperforming loans (1):
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans $1,263 $1,673 $1,767 $ 825 $ 665
Consumer loans 311 470 713 200 256
Commercial loans - - - 101 71
------ ------ ------ ------ -----
Total nonperforming loans 1,574 2,143 2,480 1,126 992
------ ------ ------ ------ -----
Repossessed automobiles 208 - - - -
Real estate owned, net - - - - -
------ ------ ------ ------ -----
Total nonperforming assets $1,782 $2,143 $2,480 $1,126 $ 992
====== ====== ====== ====== =====
Nonperforming loans as a percent of total loans (2) 0.34% 0.60% 0.86% 0.44% 0.41%
Nonperforming assets as a percent of total assets(3) 0.24 0.35 0.45 0.22 0.21
</TABLE>
__________
(1) Nonperforming loans represent non-accrual loans. The Association had no
loans past due greater than 90 days still accruing.
(2) Loans represent loans receivable, net, excluding the allowance for loan
losses.
(3) Nonperforming assets consist of nonperforming loans, REO and repossessed
automobiles.
Allowance for Loan Losses
The allowance for loan losses is maintained through provisions for loan losses
based on management's on-going evaluation of the risks inherent in its loan
portfolio in consideration of the trends in its loan portfolio, the national and
regional economies and the real estate market in the Association's primary
lending area. The allowance for loan losses is maintained at an amount
management considers adequate to cover estimated losses in its loan portfolio
which are deemed probable and estimable based on information currently known to
management. The Association's loan loss allowance determinations also
incorporate factors and analyses which consider the potential principal loss
associated with the loan, costs of acquiring the property securing the loan
through foreclosure or deed in lieu thereof, the periods of time involved with
the acquisition and sale of such property, and costs and expenses associated
with maintaining and holding the property until sale and the costs associated
with the Association's inability to utilize funds for other income producing
activities during the estimated holding period of the property.
As of June 30, 1999, the Association's allowance for loan losses was $3.6
million, or 0.8% of total loans and 230.2% of nonperforming loans as compared to
$3.0 million, or 0.9%, of total loans and 141.3% of nonperforming loans as of
June 30, 1998. The increased allowance for loan losses was due primarily to the
approximately 28% growth in total loans. The Association had total
nonperforming loans of $1.6 million at June 30, 1999, and nonperforming loans to
total loans of 0.3%. The Association will continue to monitor and modify its
allowance for loan losses as conditions dictate. Management believes that,
based on information currently available, the Association's allowance for loan
losses is sufficient to cover losses inherent in its loan portfolio at this
time.
11
<PAGE>
The following table sets forth activity in the Association's allowance for loan
losses for the periods set forth in the table.
<TABLE>
<CAPTION>
At or For the Years Ended June 30,
----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- ------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 3,027 $ 1,723 $1,259 $ 1,186 $ 1,034
Provision for loan losses 1,062 1,779 590 238 313
Charge-offs:
Real estate mortgage loans:
One- to four-family 6 31 - - -
Consumer 536 484 138 236 205
Commercial - - - - -
------- ------- ------ ------- -------
Total charge-offs 542 515 138 236 205
Recoveries:
Real estate mortgage loans:
One- to four-family 1 2 3 - 12
Consumer 75 38 9 71 32
Commercial - - - - -
------- ------- ------ ------- -------
Total recoveries 76 40 12 71 44
------- ------- ------ ------- -------
Balance at end of period $ 3,623 $ 3,027 $1,723 $ 1,259 $ 1,186
======= ======= ====== ======= =======
Allowance for loan losses as a percent
of loans(1) 0.79% 0.85% 0.60% 0.49% 0.49%
Allowance for loan losses as a percent
of nonperforming loans(2) 230.23 141.25 69.48 111.81 119.56
Net charge-offs as a percent
of average loans 0.12 0.15 0.05 0.07 0.07
</TABLE>
______________
(1) Loans receivable, net, excluding the allowance for loan losses.
(2) Nonperforming loans consist of all nonaccrual loans and all other loans 90
days or more past due.
12
<PAGE>
The following tables set forth the Association's percent of allowance for loan
losses to total allowance and the percent of loans to total loans in each of the
categories listed at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------
1990 1998
---------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Percent of Percent of
Percent of Loans in Percent of Loans in
Allowance Each Allowance Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
------ --------- ----------- ------ --------- -----------
(Dollars in thousands)
Real estate mortgage loans $1,976 54.54% 84.16% $1,458 48.17% 81.64%
Consumer loans 1,086 29.98 15.43 901 29.77 17.65
Commercial loans 19 0.52 0.41 9 0.30 0.71
Unallocated 542 14.96 -- 659 21.76 --
------ ------ ------ ------ ------ ------
Total allowance for loan losses $3,623 100.00% 100.00% $3,027 100.00% 100.00%
====== ======= ======= ====== ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------
1997 1996
---------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Percent of Percent of
Percent of Loans in Percent of Loans in
Allowance Each Allowance Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
------ --------- ----------- ------ --------- -----------
(Dollars in thousands)
Real estate mortgage loans $ 911 52.87% 82.25% $ 836 66.40% 84.86%
Consumer loans 432 25.07 17.04 275 21.84 14.62
Commercial loans 7 0.41 0.71 11 0.87 0.52
Unallocated 373 21.65 -- 137 10.89 --
------ ------ ------ ------ ------ ------
Total allowance for loan losses $1,723 100.00% 100.00% $1,259 100.00% 100.00%
====== ======= ======= ====== ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------
1995
-------------------------------------------
<S> <C> <C> <C>
Percent of
Percent of Loans in
Allowance Each
to Total Category to
Amount Allowance Total Loans
------ --------- -----------
(Dollars in thousands)
Real estate mortgage loans $ 779 65.68% 82.74%
Consumer loans 286 24.11 16.63
Commercial loans 12 1.01 0.63
Unallocated 109 9.20 --
------ ------ ------
Total allowance for loan losses $1,186 100.00% 100.00%
====== ======= =======
</TABLE>
13
<PAGE>
Real Estate Owned. At June 30, 1999, the Association had no REO in its
portfolio. When the Association does acquire property through foreclosure or
deed in lieu of foreclosure, it is initially recorded at fair value of the
related assets at the date of foreclosure, less costs to sell. Any initial loss
is recorded as a charge to the allowance for loan losses before being
transferred to REO. Thereafter, if there is a further deterioration in value,
the Association provides for a specific valuation allowance and charges
operations for the diminution in value.
Investment Activities
The Board of Directors of the Association sets the investment policy and
procedures of the Company and the Association. This policy generally provides
that investment decisions will be made based on the safety of the investment,
liquidity requirements and, to a lesser extent, potential return on the
investments. In pursuing these objectives, the Company and the Association
consider the ability of an investment to provide earnings consistent with
factors of quality, maturity, marketability and risk diversification. While the
Board of Directors has final authority and responsibility for the securities
investment portfolio, the Association has established an Investment Committee
comprised of the Chief Executive Officer, the Chief Financial Officer and at
least one member of the Board of Directors to supervise investment activities.
A chief investment officer is appointed annually to oversee daily investment
activities. The Investment Committee meets quarterly and evaluates all
investment activities for safety and soundness, adherence to the Association's
investment policy, and assurance that authority levels are maintained.
The Association currently does not participate in hedging programs, interest
rate swaps, or other activities involving the use of off-balance sheet
derivative financial instruments. Similarly, the Association does not invest in
mortgage-related securities which are deemed to be "high risk," or purchase
bonds which are not rated investment grade.
On October 1, 1998, the Company adopted SFAS No, 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 allowed the Company a one-
time reclassification of securities held to maturity to classification as
available for sale or trading. The Association transferred securities with an
amortized cost of $27.0 million previously classified as held to maturity to
available for sale upon adoption. The unrealized gain on the securities
transferred totaled $260,000.
Mortgage-backed securities are created by the pooling of mortgages and issuance
of a security with an interest rate which is less than the interest rate on the
underlying mortgage. Mortgage-backed securities typically represent a
participation interest in a pool of single-family or multi-family mortgages.
The issuers of such securities (generally U.S. Government agencies and
government-sponsored enterprises, including FNMA, FHLMC and GNMA) pool and
resell the participation interests in the form of securities to investors and
guarantee the payment of principal and interest. Mortgage-backed securities
generally yield less than the loans that underlie such securities because of the
cost of payment guarantees and credit enhancements. In addition, mortgage-
backed securities are usually more liquid than individual mortgage loans and may
be used to collateralize certain liabilities and obligations of the Association.
Investments in mortgage-backed securities involve a risk that actual prepayments
will be greater than estimated prepayments over the life of the security, which
may require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby reducing the net yield on such
securities. There is also reinvestment risk associated with the cash flows from
such securities or in the event such securities are redeemed by the issuer. In
addition, the market value of such securities may be adversely affected by
changes in interest rates. The Association estimates prepayments for its
mortgage-backed securities at purchase to ensure that prepayment assumptions are
reasonable considering the underlying collateral for the mortgage-backed
securities at issue and current mortgage interest rates and to determine the
yield and estimated maturity of its mortgage-backed security portfolio excluding
FHLB stock. The actual maturity of a mortgage-backed security, however, may be
less than its stated maturity due to prepayments of the underlying mortgages.
Prepayments that are faster than anticipated may shorten the life of the
security and may result in a loss of any premiums paid and thereby reduce the
net yield on such securities. Although prepayments of underlying mortgages
depend on many factors, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, the Association may be subject to reinvestment risk
because, to the extent that the Association's mortgage-backed securities prepay
faster than anticipated, the Association may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate.
14
<PAGE>
Investment Securities. At June 30, 1999, the Association's investment
securities portfolio totaled $34.7 million. Such portfolio primarily consists
of short- to medium-term (maturities of one to five years) U.S. Treasuries,
agency securities and municipal obligations.
The following table sets forth the composition of the Association's investment
and mortgage-backed securities portfolios in dollar amounts and in percentages
at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------
1999 1998 1997
------------------------- ---------------------------- -------------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ---------- ------ ---------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Government agencies $ 22,074 8.86% $ 15,797 6.60% $ 33,678 13.60%
Obligations of states and political subdivisions 6,694 2.69 853 0.36 838 0.34
FHLB stock 5,947 2.39 4,415 1.84 4,893 1.98
Marketable equity securities - - - - 2,980 1.20
-------- ------ -------- ------ -------- ------
Total investment securities 34,715 13.94 21,065 8.80 42,389 17.12
-------- ------ -------- ------ -------- ------
Mortgage-backed securities:
GNMA 45,389 18.22 37,714 15.75 39,823 16.09
FNMA 73,755 29.60 50,518 21.09 57,888 23.38
FHLMC 94,636 37.98 100,898 42.13 60,891 24.60
Other mortgage-backed securities 664 0.26 990 0.41 1,686 0.68
-------- ------ -------- ------ -------- ------
Total mortgage-backed securities 214,444 86.06 190,120 79.38 160,288 64.75
-------- ------ -------- ------ -------- ------
Total securities available for sale $249,159 100.00% 211,185 88.18 202,677 81.87
======== -------- --------
Held to maturity:
U.S. Treasury securities - - 6,005 2.52 14,005 5.66
U.S. Government agencies - - 4,147 1.73 4,239 1.71
Obligations of states and political subdivisions - - 364 0.15 405 0.16
-------- ------ -------- ------
Total investment securities - - 10,516 4.40 18,649 7.53
-------- --------
Mortgage-backed securities:
GNMA - - 1,512 0.63 1,943 0.78
FNMA - - 16,267 6.79 24,283 9.82
-------- ------ -------- ------
Total mortgage-backed securities - - 17,779 7.42 26,226 10.60
-------- ------ -------- ------
Total securities held to maturity - - 28,295 11.82 44,875 18.13
-------- ------ -------- ------
Total securities $249,159 100.00% $239,480 100.00% $247,552 100.00%
======== ======== ====== ======== ======
</TABLE>
15
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Association's
securities portfolio, excluding FHLB stock.
<TABLE>
<CAPTION>
At June 30, 1999
------------------------------------------------------------------------------------
More than One More than Five
One Year or Less Year to Five Years Years to Ten Years
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
------------------------------------------------------------------------------------
(Dollars in thousands)
Available for sale:
<S> <C> <C> <C> <C> <C> <C>
U.S. Government agencies $10,158 6.05% $11,916 5.24% $ - -%
Obligations of state and political subdivisions 336 8.41 3,219 7.68 3,139 7.07
Mortgage-backed securities:
GNMA - - - - 1,146 8.55
FNMA - - - - 18,211 6.33
FHLMC - - 3,566 7.30 12,507 6.47
Other mortgage-backed securities - - - - - -
------- ------- -------
Total securities available for sale $10,494 6.12 $18,701 6.05 $35,003 6.30
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1999
---------------------------------------------------------
More than Ten Years Total
---------------------------------------------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
---------------------------------------------------------
(Dollars in thousands)
Available for sale:
<S> <C> <C> <C> <C>
U.S. Government agencies $ - -% $ 22,074 5.61%
Obligations of state and political subdivisions - - 6,694 7.43
Mortgage-backed securities:
GNMA 44,243 6.81 45,389 6.85
FNMA 55,545 6.23 73,756 6.25
FHLMC 78,562 6.43 94,635 6.47
Other mortgage-backed securities 664 10.03 664 10.03
-------- -------- -------
Total securities available for sale $179,014 6.48 $243,212 6.40
======== ========
</TABLE>
16
<PAGE>
Sources of Funds
General. Deposits, loan repayments, cash flows generated from operations
(primarily cash basis net income) and FHLB advances are the primary sources of
the Association's funds for use in lending, investing and for other general
purposes.
Deposits. The Association offers a variety of deposit accounts with a range of
interest rates and terms. The Association's deposit accounts consist of
savings, retail checking/NOW accounts, business checking accounts, money market
accounts, club accounts and certificate of deposit accounts. The Association
offers jumbo certificates and also offers Individual Retirement Accounts
("IRAs") and other qualified plan accounts.
Although the Association has a significant portion of its deposits in core
deposits, management monitors activity on the Association's core deposits and,
based on historical experience and the Association's current pricing strategy,
believes it will continue to retain a large portion of such accounts. The
Association is not limited with respect to the rates it may offer on deposit
products.
The flow of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and competition. The
Association's deposits are obtained predominantly from the areas in which its
branch offices are located. The Association relies primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits; however, market interest rates and rates offered by competing
financial institutions affect the Association's ability to attract and retain
deposits. The Association uses traditional means of advertising its deposit
products, including radio and print media and generally does not solicit
deposits from outside its primary market area. While jumbo certificates are
accepted by the Association, and may be subject to preferential rates, the
Association does not actively solicit such deposits as such deposits are more
difficult to retain than core deposits. The Association's policies do not
permit the use of brokered deposits.
17
<PAGE>
The following table presents the deposit activity of the Association for
the periods indicated.
<TABLE>
<CAPTION>
For the Years Ended
June 30,
-----------------------------------------------
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
(In thousands)
Beginning balance $435,462 $412,934 $391,715
Net deposits (withdrawals) (25,121) 2,579 2,538
Interest credited on deposit accounts 18,884 19,949 18,681
-------- -------- --------
Total increase (decrease] in deposit accounts (6,237) 22,528 21,219
-------- -------- --------
$429,225 $435,462 $412,934
Ending balance ======== ======== ========
</TABLE>
At June 30, 1999, the Association had outstanding $50.9 million in certificate
of deposit accounts in amounts of $100,000 or more, maturing as follows:
<TABLE>
<CAPTION>
Weighted
Maturity Period Amount Average Rate
- -------------------------------------------- ---------------- -------------------
(Dollars in thousands)
<S> <C> <C>
Three months or less $ 9,505 5.50%
Over three through six months 7,579 5.21
Over six through 12 months 17,874 5.41
Over 12 months 15,896 5.57
-------
Total $50,854 5.48
=======
</TABLE>
18
<PAGE>
The following table sets forth the distribution of the Association's deposit
accounts at June 30, 1999 and the distribution of the average deposit accounts
for the periods indicated and the weighted average interest rates on each
category of deposits presented.
<TABLE>
<CAPTION>
At June 30, 1999 For the Year Ended June 30, 1999
----------------------------------- -----------------------------------
Percent Weighted Percent Weighted
of Total Average Average of Total Average
Balance Deposits Rate Balance Deposits Rate
------- --------- -------- ------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand $ 5,740 1.34% -% $ 6,027 1.39% -%
NOW and money market 112,776 26.27 3.10 114,876 26.43 3.23
Savings 66,629 15.52 2.02 67,145 15.45 2.18
Certificates of deposit 244,080 56.87 5.26 246,584 56.73 5.56
-------- ------ -------- ------
Total deposits $429,225 100.00% 4.16 $434,632 100.00% 4.69
======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended June 30, 1998 For the Year Ended June 30, 1997
----------------------------------- -----------------------------------
Percent Weighted Percent Weighted
Average of Total Average Average of Total Average
Balance Deposits Rate Balance Deposits Rate
------- --------- -------- ------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand $ 4,560 1.08% -% $ 3,681 0.92% -%
NOW and money market 95,871 22.80 3.44 84,388 21.15 3.20
Savings 68,945 16.40 2.41 72,132 18.08 2.47
Certificates of deposit 251,130 59.72 5.93 238,859 59.85 5.87
-------- ------ -------- ------
Total deposits $420,506 100.00% 4.72 $399,060 100.00% 4.64
======== ====== ======== ======
</TABLE>
The following table presents, by various rate categories, the amount of
certificate of deposit accounts outstanding at the dates indicated.
<TABLE>
<CAPTION>
Period to Maturity from June 30, 1999
--------------------------------------------------------------------------------
Less than One to Two to Three Three to Four to Over Five Total at June
One Year Two Years Years Four Years Five Years Years 30, 1999
--------- --------- ------------ -------- ---------- --------- -------------
(Dollars in thousands)
Certificate accounts:
<S> <C> <C> <C> <C> <C> <C> <C>
0 to 4.00% $ 7,809 $ 67 $ 916 $1,787 $ - 1,098 $ 11,677
4.01 to 5.00% 46,291 13,861 4,224 656 148 790 65,970
5.01 to 6.00% 79,299 35,168 9,021 1,294 842 4,528 130,152
6.01 to 7.00% 17,011 3,226 1,609 527 485 9,686 32,544
7.01 to 8.00% 1,265 22 - - - 2 1,289
8.01 to 9.00% 2,448 - - - - - 2,448
-------- ------ ------ ------ ------ ------ --------
Total at June 30, 1999 $154,123 $52,344 $15,770 $4,264 $1,475 $16,104 $244,080
======= ======= ======= ====== ====== ======= ========
</TABLE>
19
<PAGE>
Borrowings. The Association's policy has been to utilize borrowings as an
alternative and/or less costly source of funds. The Association obtains
advances from the FHLB of Cincinnati, which are collateralized by the capital
stock of the Federal Home Loan Bank ("FHLB") of Cincinnati held by the
Association, and certain mortgage loans of the Association. The Association
also borrows funds through reverse repurchase agreements with the FHLB of
Cincinnati and primary broker/dealers. Advances from the FHLB of Cincinnati are
made pursuant to several different credit programs, each of which has its own
interest rate and maturity. The maximum amount that the FHLB of Cincinnati will
advance to member institutions, including the Association, for purposes of other
than meeting withdrawals, fluctuates from time to time in accordance with the
policies of the FHLB of Cincinnati and the OTS. The maximum amount of FHLB of
Cincinnati advances permitted to a member institution generally is reduced by
borrowings from any other source. At June 30, 1999, the Association's FHLB of
Cincinnati advances totaled $94.8 million.
During the year ended June 30, 1999, the Association continued to borrow funds
from primary broker/dealers. The borrowings are collateralized by designated
mortgage-backed securities and investment securities. The total of these
borrowings at June 30, 1999, was $54.4 million. The Association has the right
to freely substitute collateral as long as the margin is at least 95% of all
outstanding borrowings, including accrued interest. The Association has used
these repurchase agreements in arbitrage strategies, using the funds to purchase
a mix of fixed and adjustable rate mortgage-backed securities, to generate a
spread of approximately 100 to 120 basis points, as well as to help reduce the
Association's interest rate risk.
The Association also has an available overnight line-of-credit with the FHLB of
Cincinnati for a maximum of $50.0 million. There was no fee for the line-of-
credit for the year ended June 30, 1999. The Association may continue to
increase borrowings in the future to fund asset growth. To the extent it does
so, the Association may experience an increase in its cost of funds.
Personnel
As of June 30, 1999, the Association had 167 full-time employees and 31 part-
time employees. The employees are not represented by a collective bargaining
unit and the Association considers its relationship with its employees to be
good.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Association will report their income on a June 30
fiscal year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company. The Association has been audited
by the IRS for the 1992 and 1993 tax years.
Bad Debt Reserve. Historically, savings institutions such as the Association
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrifts") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which are deducted
in arriving at their taxable income. The Association's deductions with respect
to "qualifying real property loans," which are generally loans secured by
certain interest in real property, were computed using an amount based on the
Association's actual loss experience, or a percentage equal to 8% of the
Association's taxable income, computed with certain modifications and reduced by
the amount of any permitted addition to the non-qualifying reserve. Due to the
Association's loss experience, the Association generally recognized a bad debt
deduction equal to 8% of taxable income.
20
<PAGE>
In August 1996, the provisions repealing the above thrift bad debt rules were
passed by Congress as part of "The Small Business Job Protection Act of 1996."
The new rules eliminate the 8% of taxable income method for deducting additions
to the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Association has
previously recorded a deferred tax liability equal to the bad debt recapture and
as such, the new rules will have no effect on net income or federal income tax
expense. For taxable years beginning after December 31, 1995, the Association's
bad debt deduction will be equal to net charge-offs. The new rules allow an
institution to suspend the bad debt reserve recapture for the 1996 and 1997 tax
years if the institution's lending activity for those years is equal to or
greater than the institution's average mortgage lending activity for the six
taxable years preceding 1996. For this purpose, only home purchase and home
improvement loans are included and the institution can elect to have the tax
years with the highest and lowest lending activity removed from the average
calculation. If an institution is permitted to postpone the reserve recapture,
it must begin its six year recapture no later than the 1998 tax year. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to a provision
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
Distributions. To the extent that the Association makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Association's taxable income. Non-dividend distributions include
distributions in excess of the Association's current and accumulated earnings
and profits, distributions in redemption of stock, and distributions in partial
or complete liquidation. However, dividends paid out of the Association's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from the
Association's bad debt reserve. Thus, any dividends to the Company that would
reduce amounts appropriated to the Association's bad debt reserve and deducted
for federal income tax purposes would create a tax liability for the
Association. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Association makes a "non-dividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 34% corporate income
tax rate (exclusive of state and local taxes). See "Regulation" and "Dividend
Policy" for limits on the payment of dividends of the Association. The
Association does not intend to pay dividends that would result in a recapture of
any portion of its bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the bad debt
reserve deduction claimed by the Association over the deduction that would have
been allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Association currently has none. AMTI is increased
by an amount equal to 75% of the amount by which the Association's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses).
Dividends Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Association as a member of the
same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company or the Association own more
than 20% of the stock of a corporation distributing a dividend then 80% of any
dividends received may be deducted.
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Ohio Taxation
The Company is subject to the Ohio corporation franchise tax, which, as applied
to the Company, is a tax measured by both net earnings and net worth. The rate
of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable
income and 8.9% of computed Ohio taxable income in excess of $50,000 and (ii)
0.582% times taxable net worth. Under these alternative measures of computing
tax liability, the states to which a taxpayer's adjusted total net income and
adjusted total net worth are apportioned or allocated are determined by complex
formulas. The minimum tax is $50 per year.
A special litter tax is also applicable to all corporations, including the
Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
Ohio corporation franchise tax law is scheduled to change markedly as a
consequence of legislative reforms enacted July 1, 1997. Tax liability,
however, continues to be measured by both net income and net worth. In general,
tax liability will be the greater of (i) 5.1% on the first $50,000 of computed
Ohio taxable income and 8.5% of computed Ohio taxable income in excess of
$50,000 or (ii) 0.40% of taxable net worth. Under these alternative measures of
computing tax liability, the states to which total net income and total net
worth will be apportioned or allocated will continue to be determined by complex
formulas, but the formulas change. The minimum tax will still be $50 per year
and maximum tax liability as measured by net worth will be limited to $150,000
per year. The special litter taxes remain in effect. Various other changes in
the tax law may affect the Company.
The Association is a "financial institution" for State of Ohio tax purposes. As
such, it is subject to the Ohio corporation franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of the Association's
apportioned book net worth, determined in accordance with GAAP, less any
statutory deduction. This rate of tax is scheduled to decrease in each of the
years 1999 and 2000. As a "financial institution," the Association is not
subject to any tax based upon net income or net profits imposed by the State of
Ohio.
Delaware Taxation
As a Delaware holding company, the Company is exempted from Delaware corporate
income tax but is required to file an annual report with and pay an annual
franchise tax to the State of Delaware. The Company is also subject to an
annual franchise tax imposed by the State of Delaware.
REGULATION
General
The Association is subject to extensive regulation, examination and supervision
by the OTS, as its chartering agency, and the Federal Deposit Insurance
Corporation ("FDIC"), as the deposit insurer. The Association is a member of
the FHLB System. The Association's deposit accounts are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF") managed by
the FDIC. The Association must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. There are periodic
examinations by the OTS and the FDIC to test the Association's compliance with
various regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies,
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whether by the OTS, the FDIC or the Congress, could have a material adverse
impact on the Company, the Association and their operations. Under the holding
company form of organization, the Company is also required to file certain
reports with, and otherwise comply with the rules and regulations of the OTS and
of the SEC under the federal securities laws.
Certain of the regulatory requirements applicable to the Association and to the
Company are referred to below.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal associations
may engage. In particular, many types of lending authority for federal
associations, e.g., commercial, non-residential real property loans and consumer
loans, are limited to a specified percentage of the institution's capital or
assets.
Loans-to-One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Association's unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. At June 30, 1999, the Association was in compliance
with this regulation.
Qualified Thrift Lender Test. The HOLA requires savings institutions to meet a
qualified thrift lender ("QTL") test. Under the QTL test, a savings association
is required to qualify as a "domestic building and loan association" as that
term is defined in the Code or maintain at least 65% of its "portfolio assets"
(total assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities) in at least 9 months out of each 12-month period. A savings
association that fails the QTL test must either convert to a bank charter or
operate under certain restrictions. As of June 30, 1999, the Association met
the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations upon
all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. Effective April 1, 1999, the OTS's capital distribution
regulation changed. Under the new regulation, an application to and the prior
approval of the OTS is required before (i) any capital distribution if the
institution does not meet the criteria for "expedited treatment" of applications
under OTS regulations, (ii) the total capital distributions for the calendar
year exceed net income for that year plus the amount of retained net income for
the preceding two years, (iii) the institution would be undercapitalized
following the distribution, or (iv) the distribution would otherwise be contrary
to a statute, regulation or agreement with the OTS. If an application is not
required, institutions in a holding company structure must still give advance
notice to the OTS of the capital distribution. If the Association's capital
fell below its regulatory requirements or if the OTS notified it that it was in
need of more than normal supervision, the Association's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution, which would otherwise be permitted by the
regulation, if the OTS determined that the distribution would be an unsafe or
unsound practice.
Liquidity. The Association is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus short-
term borrowings. Monetary penalties may be imposed for failure to meet these
liquidity requirements. At June 30, 1999, the Association was in compliance
with the applicable regulatory liquidity requirements.
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Assessments. Savings institutions are required by regulation to pay assessments
to the OTS to fund the agency's operations. The general assessment, paid on a
semi-annual basis, is based upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Association's latest
quarterly Thrift Financial Report.
Branching. OTS regulations permit federally-chartered savings associations to
branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations.
Transactions with Related Parties. The Association's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. A savings association
also is prohibited from extending credit to any affiliate engaged in activities
not permitted for a bank holding company and may not purchase the securities of
an affiliate (other than a subsidiary).
Section 22(h) of the FRA restricts a savings association with respect to loans
to directors, executive officers, and principal stockholders. Under Section
22(h), loans to directors, executive officers and stockholders who control,
directly or indirectly, 10% or more of voting securities of a savings
association, and certain related interests of any of the foregoing, may not
exceed, together with all other outstanding loans to such persons and affiliated
entities, the savings association's total capital and surplus. Section 22(h)
also prohibits loans above amounts prescribed by the appropriate federal banking
agency to directors, executive officers, and shareholders who directly or
indirectly control 10% or more of voting securities of a stock savings
association, and their respective related interests, unless such loan is
approved in advance by a majority of the board of directors of the savings
association. Any "interested" director may not participate in the voting. The
loan amount (which includes all other outstanding loans to such person) as to
which such prior board of director approval is required, is the greater of
$25,000 or 5% of capital and surplus or any loans over $500,000. Further,
pursuant to Section 22(h), loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions to other persons except for extensions of credit made
pursuant to a benefit or compensation program that is widely available to the
institution's employees and does not give preference to insiders over other
employees. Section 22(g) of the FRA places additional limitations on loans to
executive officers.
Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility
over savings institutions and has the authority to bring action against all
"institution-affiliated parties," including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establish criminal penalties for
certain violations.
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Standards for Safety and Soundness. The FDI Act requires each federal banking
agency to prescribe for all insured depository institutions standards relating
to, among other things, internal controls, information systems and audit
systems, loan documentation, credit underwriting, interest rate risk exposure,
asset growth, and compensation, fees and benefits and such other operational and
managerial standards as the agency deems appropriate. The federal banking
agencies have adopted final regulations and Interagency Guidelines Establishing
Standards for Safety and Soundness ("Guidelines") to implement these safety and
soundness standards. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
Guidelines address internal controls and information systems; internal audit
system; credit underwriting; loan documentation; interest rate risk exposure;
asset growth; asset quality; earnings; and compensation, fees and benefits. If
the appropriate federal banking agency determines that an institution fails to
meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the FDI Act. The final regulations establish
deadlines for the submission and review of such safety and soundness compliance
plans.
Capital Requirements. The OTS capital regulations require savings institutions
to meet three capital standards: a 1.5% tangible capital standard, a 3% leverage
(core capital) ratio and an 8% risk based capital standard. Effective April 1,
1999, however, the minimum leverage ratio increased to 4% for all institutions
except those with the highest rating on the CAMELS financial institutions rating
system. In addition, the prompt corrective action standards discussed below
also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
(core) capital ratio (3% for institutions receiving the highest CAMELS rating),
and, together with the risk-based capital standard itself, a 4% Tier I risk-
based capital standard. Core capital is defined as common stockholder's equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights
("MSRs") and credit card relationships. The OTS regulations require that, in
meeting the leverage ratio, tangible and risk-based capital standards
institutions generally must deduct investments in and loans to subsidiaries
engaged in activities not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of risk-
weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its regulatory
capital rule. The final interest rate risk rule also adjusts the risk-weighting
for certain mortgage derivative securities. Under the rule, savings
associations with "above normal" interest rate risk exposure would be subject to
a deduction from total capital for purposes of calculating their risk-based
capital requirements. A savings association's interest rate risk would be
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half
of the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based
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on that data. A savings association with assets of less than $300 million and
risk-based capital ratios in excess of 12% is not subject to the interest rate
risk component, unless the OTS determines otherwise. The rule also provides that
the Director of the OTS may waive or defer an association's interest rate risk
component on a case-by-case basis. For the present time, the OTS has deferred
implementation of the interest rate risk component.
At June 30, 1999, the Association met each of its capital requirements, in each
case on a fully phased-in basis.
Prompt Corrective Regulatory Action
Under the OTS prompt corrective action regulations, the OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of capitalization. Generally, a
savings institution that has a total risk-based capital of less than 8.0% or a
leverage ratio or a Tier 1 capital ratio that is less than 4.0% is considered to
be undercapitalized. A savings institution that has a total risk-based capital
less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a
leverage ratio that is less than 3.0% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of
a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. The FDIC assigns
an institution to one of three capital categories based on the institution's
financial information, as of the reporting period ending seven months before the
assessment period, consisting of (1) well capitalized, (2) adequately
capitalized or (3) undercapitalized, and one of three supervisory subcategories
within each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the FDIC by the
institution's primary federal regulator and information which the FDIC
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned.
Assessment rates for SAIF member institutions currently range from 0 basis
points to 27 basis points. The FDIC is authorized to raise the assessment rates
in certain circumstances. The FDIC has exercised this authority several times
in the past and may raise insurance premiums in the future. If such action is
taken by the FDIC, it could have an adverse effect on the earnings of the
Association.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
Community Reinvestment Act
Federal Regulation. Under the Community Reinvestment Act, as amended ("CRA"),
as implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for
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financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the OTS, in
connection with its examination of a savings institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. The FIRREA amended the CRA to require the OTS to provide a written
evaluation of an institution's CRA performance utilizing a four-tiered
descriptive rating system, which replaced the five-tiered numerical rating
system. The Association's latest CRA rating received from the OTS was
"Satisfactory."
Federal Home Loan Bank System
The Association is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Association, as a member of the FHLB, is required to acquire
and hold shares of capital stock in the FHLB in an amount at least equal to 1%
of the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Association was in
compliance with this requirement at June 30, 1999. FHLB advances must be
secured by specified types of collateral and all long-term advances may only be
obtained for the purpose of providing funds for residential housing finance. At
June 30, 1999, the Association had $94.8 million in FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent thrifts
and to contribute funds for affordable housing programs. These requirements
could reduce the amount of dividends that the FHLBs pay to their members and
could also result in the FHLBs imposing a higher rate of interest on advances to
their members. If dividends were reduced, the Association's net interest income
would likely also be reduced. Further, there can be no assurance that the
impact of recent or future legislation on the FHLBs will not also cause a
decrease in the value of the FHLB stock held by the Association.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to maintain
non-interest-earning reserves against their transaction accounts. The Federal
Reserve Board regulations generally require that reserves be maintained against
aggregate transaction accounts as follows: for accounts aggregating $47.8
million or less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts greater than $47.8 million, the reserve
requirement is $1.4 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $47.8 million. The first $4.7 million of otherwise
reservable balances (subject to adjustment by the Federal Reserve Board) are
exempted from the reserve requirements. The Association is in compliance with
the foregoing requirements. Because required reserves must be maintained in the
form of either vault cash, a non-interest-bearing account at a Federal Reserve
Bank or a pass-through account as defined by the Federal Reserve Board, the
effect of this reserve requirement is to reduce the Association's interest-
earning assets. FHLB System members are also authorized to borrow from the
Federal Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding company within
the meaning of the HOLA. As such, the Company is subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution. The Association must notify the OTS 30 days before
declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Association continues
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to be a QTL. Upon any non-supervisory acquisition by the Company of another
savings association, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, as amended (the "BHC
Act"), subject to the prior approval of the OTS, and to other activities
authorized by OTS regulation. Previously proposed legislation would have treated
all savings and loan holding companies as bank holding companies and limit the
activities of such companies to those permissible for bank holding companies.
The HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another savings institution, or holding company thereof, without prior
written approval of the OTS; from acquiring or retaining, with certain
exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a savings and loan holding company from
acquiring more than 5% of a company engaged in activities other than those
authorized for savings and loan holding companies by the HOLA; or acquiring or
retaining control of a depository institution that is not insured by the FDIC.
In evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Federal Securities Laws
The Company's Common Stock has been registered with the SEC under the Exchange
Act. The Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of the Company's Common Stock does not
cover the resale of such shares. Shares of the Common Stock purchased by
persons who are not affiliates of the Company may be resold without
registration. Shares purchased by an affiliate of the Company will be subject
to the resale restrictions of Rule 144 under the Securities Act. If the Company
meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
Item 2. Properties
The Association owns its main office building. At June 30, 1999, the
Association owned three of its branch offices. The remaining eight branch
offices and all six of the loan production offices were leased. At June 30,
1999, the net book value of the Association's investment in premises, equipment
and leaseholds, excluding computer equipment and software, was approximately
$6.6 million.
On July 28, 1999, the Company announced plans to construct a new corporate
headquarters in Warren, OH. The Company had been evaluating alternatives to its
existing facility for several years and came to the
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conclusion that a new facility would be needed to handle anticipated growth and
to provide efficiencies in operations. Final construction plans are still being
evaluated with no timetable established. Based on current designs, the new
facility is estimated to cost $11.9 million.
Item 3. Legal Proceedings
From time to time, the Association is involved either as a plaintiff or
defendant in various legal proceedings which arise during the normal course of
business. Currently, the Association is not involved in any material legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended June 30, 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The information under the caption "Market Prices and Dividends Declared" in the
1999 Annual Report to Shareholders is attached hereto as part of Exhibit 13 and
is herein incorporated by reference.
Item 6. Selected Financial Data
The information contained in the Annual Report to Shareholders under the caption
"Selected Financial Data and Other Data" is attached hereto as part of Exhibit
13 and is herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in the Annual Report under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" is
attached hereto as part of Exhibit 13 and is herein incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained in the Annual Report under the caption "Asset and
Liability Management and Market Risk" is attached hereto as part of Exhibit 13
and is herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
See Item 14 of this report for information concerning financial statements and
schedules filed with this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Prior to the year ended June 30, 1998, the Association's financial statements
were audited by Packer, Thomas & Co. As a result of the Association's decision
to convert, the Association decided on June 29, 1998 to dismiss Packer, Thomas &
Co. and to engage Crowe, Chizek and Company LLP as the independent auditors of
the Association. The decision to change auditors was recommended by the Audit
Committee and was approved by the Board of Directors. Accordingly, the
statements of income, retained earnings and cash flows for the year ended June
30, 1997, were audited by Packer, Thomas & Co. The independent auditors' report
on the financial statements for the year ended June 30, 1997 did not contain an
adverse opinion and was not qualified or modified as to uncertainty, audit scope
or accounting principles.
29
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers of the Company and the Association
The following table sets forth certain information regarding executive officers
of the Company and the Association at June 30, 1999 who are not also directors.
Age at Positions Held with Company
Name June 30, 1999 and Association
---- ------------- ---------------------------
Richard K. Smith 41 Vice President and Treasurer of
the Company and Sr. Vice
President of the Association
Dominique K. Stoeber 35 Corporate Secretary of the
Company and Sr. Vice
President of the Association
R. Patrick Wilkinson 51 Sr. Vice President of the Association
Brian E. Hoopes 41 Sr. Vice President of the Association
James H. Ditch 52 Sr. Vice President of the Association
Richard K. Smith, a certified public accountant, joined the Association in 1990
as Assistant Vice President-Financial. In January 1995, he was named Vice
President-Treasurer. His primary areas of responsibility are overseeing
financial and regulatory reporting, investment policy, interest rate risk policy
and internal controls. Mr. Smith has Bachelor of Science degrees in Accounting
and Industrial Management from the University of Akron.
Dominique K. Stoeber joined the Association in 1990 as Personnel Manager. In
July 1992, she was promoted to Director of Human Resources. In December 1998,
she was made Senior Vice President of Administrative Services and was also
promoted to the position of Corporate Secretary of First Place Financial Corp.
Mrs. Stoeber has a Bachelor of Science degree in Human Resource Management from
Ohio State University.
R. Patrick Wilkinson has been with the Association since 1973. He served in
various positions until he was named Vice President of the Retail Division in
1987. His responsibilities are primarily to plan, develop and implement
policies and procedures in support of the Association's retail function,
including branch operations and general services.
Brian E. Hoopes joined the Association in August 1998 as Vice President-Banking
Systems. He was previously employed with Michelin Tire Corporation for the past
18 years in positions responsible for electronic data processing and financial
operations. His most recent position there was Project Manager for the
installation of a new financial software package in North America.
James H. Ditch joined the Association in November 1998 as Sr. Vice President-
Lending and is responsible for all areas of lending. Prior to joining the
Association, he was Senior Vice President of Lending with Signal Bank (formerly
known as First Federal Savings and Loan Association of Wooster) where he had
worked for 26 years. Mr. Ditch has a Bachelor of Business Administration degree
from Ohio University.
30
<PAGE>
Directors of the Company and the Association
Information concerning Directors of the Company and the Association is
incorporated herein by reference from the definitive Proxy Statement for the
1999 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission on September 30, 1999.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission on
September 30, 1999.
Item 12. 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 1999 Annual Meeting of Stockholders, to be filed with the
Securities and Exchange Commission on September 30, 1999.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
1999 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission on September 30, 1999.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended June 30, 1999, is incorporated by reference in
this Annual Report on Form 10-K as Exhibit 13.
Pages in
Annual Report Section Annual Report
- --------------------- -------------
Selected Financial Data and Other Data 1-2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 3-12
Independent Auditors' Report 13
Consolidated Statements of Financial Condition as of
June 30, 1999 and 1998 14
Consolidated Statements of Income for Years Ended
June 30, 1999, 1998 and 1997 15
Consolidated Statements of Changes in Shareholders'
Equity for Years Ended June 30, 1999, 1998 and 1997 16
Consolidated Statements of Cash Flows for Years Ended
June 30, 1999, 1998 and 1997 17-18
Notes to Consolidated Financial Statements 19-36
31
<PAGE>
With the exception of the aforementioned information, the Company's Annual
Report to Stockholders for the year ended June 30, 1999, is not deemed filed as
part of this Annual Report on Form 10-K.
(a) (2) Financial Statement Schedules
All financial statement schedules have been omitted as the required information
is inapplicable or has been included in the Consolidated Financial Statements.
(a) (3) Exhibits
<TABLE>
<CAPTION>
Regulation Reference to Prior Filing
S-K Exhibit or Exhibit Number
Number Document Attached Herein
- ----------- -------- -------------------------
<S> <C> <C>
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession None
3(i) Articles of Incorporation *
3(ii) Bylaws *
4 Instruments defining the rights of security holders,
including indentures *
9 Voting trust agreement None
10 Material contracts
Executive Compensation Plans and Arrangements *
Employment Contracts *
11 Statement re: computation of per share earnings None
13 Portions of the 1999 Annual Report to stockholders 13
16 Letter re: change in certifying accountant None
18 Letter re: change in accounting principles None
20 Proxy Statement for 1999 Annual Meeting of Stockholders **
21 Subsidiaries of registrant 21
22 Published report regarding matters submitted to vote
of security holders None
23 Consents of experts and counsel None
27 Financial Data Schedule 27
</TABLE>
* Filed as exhibits to the Company's Form S-1 registration statement filed on
September 9, 1998 (File No. 333-63099) pursuant to the Securities Act of 1933,
as amended. All of such previously filed documents are hereby incorporated by
reference in accordance with Item 601 of Regulation S-K.
** Incorporated by reference to the Proxy Statement, to be filed with the
Securities and Exchange Commission on September 30, 1999.
(b) Reports on Form 8-K
During the quarter ended on June 30, 1999, the Company filed a report on
Form 8-K on April 22, 1999, announcing third quarter earnings. On June 30,
1999, the Company filed a report on Form 8-K to declare its first quarterly
dividend.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
<S> <C>
First Place Financial
By: /s/ Steven R. Lewis
Steven R. Lewis, President and
------------------------------------
Chief Executive Officer
(Duly Authorized Representative)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
<S> <C>
/s/ Steven R. Lewis /s/ Richard K. Smith
- ----------------------------------- ------------------------------------
Steven R. Lewis, President, Richard K. Smith, Vice President and
Chief Executive Officer and Director Treasurer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: September 23, 1999 Date: September 23, 1999
/s/ George J. Gentithes /s/ Robert S. McGeough
- ----------------------------------- ------------------------------------
George J. Gentithes, Director Robert S. McGeough, Director
Date: September 23, 1999 Date: September 23, 1999
/s/ Robert P. Grace /s/ E. Jeffrey Rossi
- ----------------------------------- ------------------------------------
Robert P. Grace, Director E. Jeffrey Rossi, Director
Date: September 23, 1999 Date: September 23, 1999
/s/ Thomas M. Humphries /s/ Paul A. Watson
- ----------------------------------- ------------------------------------
Thomas M. Humphries, Director Paul A. Watson, Chairman of the Board
Date: September 23, 1999 Date: September 23, 1999
/s/ William W. Watson
------------------------------------
William W. Watson, Director
Date: September 23, 1999
</TABLE>
33
<PAGE>
Exhibit 13
Annual Report to Security Holders
Exhibit 13 was sent under separate cover
or is enclosed herein.
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $747,332 $609,398 $548,870 $523,131 $481,192
Loans receivable, net 453,791 353,012 285,212 254,435 239,459
Allowance for loan losses 3,623 3,027 1,723 1,259 1,186
Nonperforming assets 1,782 2,143 2,480 1,126 992
Securities available for sale 249,159 211,185 202,677 202,176 148,273
Securities held to maturity - 28,295 44,875 47,918 74,006
Deposits 429,225 435,462 412,934 392,350 377,644
Federal Home Loan Bank advances 94,811 44,820 58,398 76,078 52,436
Repurchase agreements 54,430 60,430 16,000 - -
Total shareholders' equity 158,054 59,357 53,747 48,823 46,209
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended June 30,
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Summary of earnings:
Total interest income $ 48,126 $ 42,482 $ 38,413 $ 36,436 $ 34,362
Total interest expense 25,682 25,512 22,929 21,858 20,150
-------- -------- -------- -------- --------
Net interest income 22,444 16,970 15,484 14,578 14,212
Provision for loan losses 1,062 1,779 590 238 313
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses 21,382 15,191 14,894 14,340 13,899
Total noninterest income 1,981 1,751 444 1,220 565
Total noninterest expense (1) (2) 20,692 10,372 11,898 9,149 8,396
-------- -------- -------- -------- --------
Income before income tax 2,671 6,570 3,440 6,411 6,068
Provision for income tax 616 2,498 1,216 2,262 2,039
-------- -------- -------- -------- --------
Net income $ 2,055 $ 4,072 $ 2,224 $ 4,149 $ 4,029
======== ======== ======== ======== ========
</TABLE>
(1) For the year ended June 30, 1999, noninterest expense included $8.0 million
as a result of the contribution to the Foundation.
(2) For the year ended June 30, 1997, noninterest expense included a one-time
charge of $2.5 million to recapitalize the Savings Association Insurance
Fund (SAIF).
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended June 30,
------------------------------------------------------------------------
Selected Financial Ratios and Other Data: 1999 1998 1997 1996 1995
------------------------------------------------------------------------
Performance Ratios(1):
<S> <C> <C> <C> <C> <C>
Return on average assets 0.30% 0.70% 0.42% 0.82% 0.84%
Return on average equity 1.86 7.00 4.39 8.52 9.74
Interest rate spread(2) 2.67 2.55 2.52 2.48 2.49
Net interest margin(3) 3.42 3.00 2.97 2.94 2.88
Noninterest expense to average assets 3.03 1.77 2.23 1.81 1.75
Efficiency ratio(4) 84.72 55.40 74.70 57.91 56.82
Net interest income to operating expenses 108.47 163.60 130.13 159.35 169.27
Capital Ratios:
Equity to total assets at end of period 21.15 9.74 9.79 9.33 9.60
Average equity to average assets 16.21 9.94 9.51 9.61 8.62
Average interest-earning assets to average 119.07 110.46 109.90 109.94 109.08
interest-bearing liabilities
Tangible capital 14.08 9.52 9.80 9.79 9.81
Core capital 14.08 9.52 9.80 9.79 9.81
Total risk-based capital 30.12 21.84 23.85 25.64 24.87
Asset Quality Ratios:
Nonperforming assets as a percent of total assets(5) 0.24 0.35 0.45 0.22 0.21
Allowance for loan losses as a percent of loans(6) 0.79 0.85 0.60 0.49 0.49
Allowance for loan losses as a percent of 230.23 141.25 69.48 111.81 119.56
nonperforming loans(5)
</TABLE>
(1) The performance ratios include the $8.0 million contribution to the
Foundation in the year ended June 30, 1999, and the $2.5 million charge to
recapitalize SAIF in the year ended June 30, 1997.
(2) The net interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities.
(3) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(4) The efficiency ratio represents the ratio of noninterest expense divided by
the sum of net interest income and noninterest income.
(5) Nonperforming assets consist of nonperforming loans and repossessed autos.
(6) Loans represent loans receivable, net, excluding the allowance for loan
losses.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
General
First Place Financial Corp. (the "Company") was formed with the conversion of
First Federal Savings and Loan Association of Warren (the "Association") from a
federally-chartered mutual savings and loan association to a federally-chartered
stock savings and loan association. The Association is a community-oriented
financial institution engaged primarily in gathering deposits to originate one-
to- four family residential mortgage loans and consumer loans. Management's
discussion should be read in conjunction with the consolidated financial
statements and footnotes.
Financial Condition at June 30, 1999 and 1998
Total assets increased $137.9 million, or 22.6%, and totaled $747.3 million at
June 30, 1999 compared to $609.4 million at June 30, 1998. The increase in
assets was primarily attributable to growth in loans receivable funded by the
sale of the Company's shares in connection with the conversion.
Net loans receivable increased from $353.0 million at June 30, 1998, to $453.8
million at June 30, 1999. This growth was primarily concentrated in one- to-four
family loans with approximately 70% of the growth concentrated in 15-20 year
fixed rate production. The increase reflects the efforts of the Company to
expand into the Mahoning County mortgage market as well as the significant loan
demand brought about by the decrease in long-term interest rates in 1998 and
early 1999.
During the third quarter, the Association opened a secondary market mortgage
origination operation in Akron with satellite facilities in Newark, Mt. Vernon
and Medina, Ohio. These offices originate fixed-rate loans, both 15 and 30
years, which are in turn sold to various secondary market investors including
the Federal Home Loan Mortgage Corporation (FHLMC). Depending upon market
conditions and the needs of the Company, the Association may elect to portfolio
a portion of this production. The opening of these facilities provides a low
cost alternative to generate additional fee income while also providing
geographic diversification to the Company's existing markets.
Total deposits were $429.2 million at June 30, 1999, a decrease of $6.3 million,
or 1.4%, compared to June 30, 1998. This decrease was due to deposits being
withdrawn to purchase shares of the Company in the conversion. In addition,
management allowed some runoff to occur in certificate accounts when the
secondary market (FHLB advances and repurchase agreements) offered more
attractive rates and/or terms.
Federal Home Loan Bank Advances increased $50.0 million to $94.8 million at June
30, 1999 compared to $44.8 million at June 30, 1998. Advances increased to
support the runoff in deposits, the maturity of a repurchase agreement and to
help fund the increase in the loan and security portfolios.
Total shareholders' equity increased to $158.1 million at June 30, 1999 compared
to $59.4 million at June 30, 1998. This increase was primarily due to the
conversion.
<PAGE>
Comparison of Results of Operations for Years Ended June 30, 1999 and 1998
General. Net income for the year ended June 30, 1999 was $2.1 million, compared
to $4.1 million for the year ended June 30, 1998. The decrease in net income was
primarily the result of an $8.0 million contribution to fund the Foundation.
Excluding this item, net income would have been $7.4 million.
Basic and diluted earnings per share (since conversion) for 1999, totaled
($0.02). Earnings per share are not presented for the prior year since the
conversion was not completed until December 31, 1998.
Net interest income. Net interest income increased $5.4 million, or 32.3%, and
totaled $22.4 million for the year ended June 30, 1999 compared to $17.0 million
for the year ended June 30, 1998. The increase in net interest income was mainly
due to an increase in average loans outstanding of $89.3 million, or 28.3%. In
addition, the net interest margin for the year ended June 30, 1999 was 3.42%
compared with 3.00% for the year ended June 30, 1998. Much of the increase in
margin was due to the use of the proceeds from the conversion to fund the
increase in loans outstanding.
Total interest income increased $5.6 million and totaled $48.1 million for the
year ended June 30, 1999 compared to $42.5 million for the year ended June 30,
1998. This 13.3% increase was primarily due to the increase in average loans
outstanding discussed above partially offset by a decrease in the yield on
earning assets of 20 basis points.
Total interest expense remained flat year to year increasing by $170 thousand,
or less than 1%. While deposit expense declined $974 thousand to $18.9 million
for the year ended June 30, 1999, the expense for borrowed funds (FHLB advances
and repurchase agreements) increased $1.1 million to $6.8 million. The decrease
in deposit expense was primarily due to the lower rate environment in 1999
resulting in a reduction in the rates paid on certificates of deposit. The
increase in the cost of borrowed funds reflects the increased volume in 1999
compared to 1998.
Provision for loan losses. The provision for loan losses declined $717 thousand
for the year ended June 30, 1999 compared to the year ended June 30, 1998.
During the year ended June 30, 1998, additional provision was accrued due to
higher levels of nonperforming assets, the increase in the size of the indirect
auto portfolio and the uncertainty surrounding the future of General Motors'
Lordstown plant. For the year ended June 30, 1999, the allowance for loan losses
as a percent of nonperforming loans had improved to 230.2% compared to 141.3%
for the year ended June 30, 1998. Also, General Motors announced its intention
to remain at their Lordstown facility at least through the year 2004. As a
result of these developments, management believes that the allowance for loan
losses is adequate at June 30, 1999.
Noninterest income. Noninterest income increased $230 thousand, or 13.1%, to
$2.0 million for the year ended June 30, 1999, from $1.8 million for the prior
year. This increase was due to increased fee income associated with NOW accounts
and automated teller machine transactions. Also contributing to the increase in
noninterest income were gains realized on the sale of loans from the Akron
secondary market mortgage operation.
Noninterest expense. Noninterest expense increased $10.3 million to $20.7
million for the year ended June 30, 1999 compared to $10.4 million for the prior
year. The increase in expense was primarily attributable to the $8.0 million
contribution to the Foundation.
<PAGE>
Other items included a charge of $495 thousand to terminate a fixed rate advance
from the Federal Home Loan Bank and $330 thousand as a result of the
establishment of the Employee Stock Ownership Plan (ESOP). In addition, results
for the year ended June 30, 1999 include personnel expense for the Akron
operation for approximately three months and a full twelve months of personnel
expense for the Canfield, Ohio lending operation that was opened in May of 1998.
Income taxes. The provision for income taxes totaled $616 thousand in 1999
compared to $2.5 million in 1998. This decrease reflects the lower level of
income before taxes primarily due to the contribution to the Foundation.
Comparison of Results of Operations for the Years Ended June 30, 1998 and 1997
General. Net income for the year ended June 30, 1998 was $4.1 million, an
increase of $1.9 million or 83.1% from $2.2 million for the year ended June 30,
1997. The increase was primarily due to a decrease in noninterest expense, due
to the one-time special assessment to recapitalize the SAIF, which was recorded
in fiscal 1997, as well as the increase in net interest income and noninterest
income, including an increase in gains on sales of securities. The increase in
net income was partially offset by increases in the provision for loan losses
and federal income tax expense.
Net Interest Income. Net interest income is the largest component of the
Association's net income, and consists of the difference between interest income
generated on interest-earnings assets and interest expense incurred on interest-
bearing liabilities. Net interest income is primarily affected by the volume,
interest rates and composition of interest-earning assets and interest-bearing
liabilities.
Net interest income increased approximately $1.5 million, or 9.6%, from $15.5
million in 1997 to $17.0 million in fiscal 1998. The primary component of this
change was a $3.9 million, or 17.7%, increase in interest income on loans. The
increase in interest income on loans consisted of a $3.9 million increase due to
increased average volume in the loan portfolio and a $32,000 decrease due to
decreasing average interest rates. The increase in interest income of $4.1
million was partially offset by a $2.6 million, or 11.3%, increase in interest
expense, primarily due to the $2.1 million increase in repurchase agreement
costs.
Average loans outstanding during fiscal 1998 increased $47.8 million, or 17.8%,
compared to fiscal 1997, while average mortgage-backed securities increased
$12.5 million, or 6.6%, compared to the prior year. The increase in average
loans reflects the Association's expansion efforts into Mahoning County, the
decrease in long term interest rates in 1998 which led to an overall increase in
loan demand due to significant refinancing activity and the continued growth in
the consumer automobile loan portfolio based on successful relationship
development with dealers in the Association's local market. In fiscal 1998, the
Association experienced increases in yield on assets and cost of liabilities of
15 and 12 basis points, resulting in the $4.1 million increase in interest
income and $2.6 million increase in interest expense. Net interest margin
increased three basis points from 2.97% in 1997 to 3.00% in 1998. The
Association's average interest rate spread increased three basis points from
2.52% in 1997 to 2.55% in 1998.
Provision for Loan Losses. The provision for loan losses is based on
management's regular review of the loan portfolio, which considers factors such
as past experience, prevailing general economic conditions and considerations
applicable to specific loans,
<PAGE>
such as the ability of the borrower to repay the loan and the estimated value of
the underlying collateral, as well as changes in the size and growth of the loan
portfolio.
The provision for loan losses increased $1.2 million from $590,000 for 1997 to
$1.8 million for 1998. At June 30, 1998, the allowance for loan losses
represented 0.85% of loans, net of unearned and deferred income, compared to
0.60% at June 30, 1997. The increased provision and resulting increased
allowance for loan losses was due to several factors including an increase in
the level of consumer loan charge-offs, the approximately 25% growth in total
loans, the continued trend of increased non-performing loans over the
Association's historical levels as well as local economic conditions including
significant recent layoffs at GM's Lordstown plant caused by a strike at two of
GM's other facilities. The strike which affected these facilities has
subsequently been settled and the majority of the striking workers have returned
to full employment. Management considered the evaluation of the local economic
conditions and the increase in the level of consumer loan charge-offs as
significant factors in evaluating the allowance for loan losses. While
nonperforming loans have increased in the last two years over historical levels,
the Association's level of nonperforming loans is not above peers. The increase
in nonperforming loans is due primarily to increases in nonperforming real
estate loans which have historically resulted in a relatively low level of
charge-offs. The increase in nonperforming consumer loans and charge-offs is due
to the increase in nonperforming loans and charge-offs from indirect automobile
lending. Both the increase in nonperforming loans and the charge-offs are a
result of increases in consumer bankruptcy filings, which is a national trend.
In an effort to reduce the level of nonperforming consumer loans and charge-
offs, management has implemented more aggressive collection efforts than have
historically been utilized. Management believes the allowance for loan losses is
adequate to absorb losses; however, future additions to the allowance may be
necessary based on changes in economic conditions. In addition, the OTS, as an
integral part of its examination process, periodically reviews the Association's
allowance for loan losses. Such agency may require the Association to make
additional provisions for loan losses based on judgments different from those of
management.
Noninterest Income. The Association experienced a $1.3 million, or 294.5%,
increase in noninterest income during 1998. The increase was primarily due to
sales of securities which generated net gains of $135,000 in 1998, resulting in
an increase of $1.1 million over the loss on sale of securities of $934,000
recognized in fiscal 1997. The increase was due to management's decision to
restructure a portion of its investment portfolio which occurred in 1997. The
restructuring was accomplished by selling assets in the investment portfolio
that were underperforming as compared to the rest of the portfolio and using the
proceeds to fund additional loans. In addition, service charges provided an
increase in noninterest income of $156,000, or 16.8% from $929,000 in fiscal
1997 to $1.1 million in fiscal 1998, due to the increase in the average balance
of deposit accounts.
Noninterest Expense. Noninterest expense decreased $1.5 million, or 12.8%,
primarily due to the special assessment to recapitalize the SAIF recorded in
fiscal 1997. Salaries and benefits increased $607,000, or 12.5%, for 1998,
compared to 1997 due primarily to the staffing requirements for opening two new
offices. The construction in progress at June 30, 1998 represented minor
remodeling projects which will not significantly impact operating expenses in
future periods. The Association expects that salaries and benefits may increase
after the conversion, primarily as a result of the adoption of various employee
benefit plans contemplated in connection with the conversion. In
<PAGE>
addition, noninterest expense may increase in future periods as a result of the
possible renovation or reconstruction of the Association's main office, the cost
of which is currently estimated to be up to $15.0 million. Other expense
includes professional fees, advertising, deposit account expense, telephone,
stationery and printing as well as other miscellaneous expense accounts. There
were no significant changes to any category of expense included within other
expenses.
Income Taxes. The provision for income taxes totaled $2.5 million in fiscal 1998
compared to $1.2 million in fiscal 1997, due to the increase in income before
income taxes. The effective tax rate was 38.0% for fiscal 1998 as compared to
35.3% for fiscal 1997.
<PAGE>
Average Balances, Interest Rates and Yields. The following table presents for
the periods indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed in both dollars and
rates. Average balances are derived from daily average balances.
<TABLE>
<CAPTION>
For the Years Ended June 30,
-------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------- -------- ------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net $405,036 32,087 7.92% $315,726 $25,736 8.15%
Mortgage-backed and related securities(1) 218,181 13,913 6.38 200,866 13,581 6.84
Investment securities(1) (2) 27,177 1,523 5.84 41,498 2,507 6.04
Other earning assets 2,710 235 8.67 4,107 306 7.45
FHLB stock 5,216 368 7.06 4,869 352 7.23
-------- -------- -------- -------
Total interest-earning assets 658,320 48,126 7.32 567,066 42,482 7.52
Noninterest-earning assets: 23,746 18,267
-------- --------
Total assets $682,066 $585,333
======== ========
Interest-bearing liabilities:
NOW and money market accounts $114,876 3,705 3.23 $ 95,871 3,301 3.44
Savings accounts 67,145 1,465 2.18 68,945 1,661 2.41
Time deposits 246,584 13,716 5.56 251,130 14,898 5.93
Repurchase agreements 53,800 3,092 5.75 45,044 2,595 5.76
FHLB advances 70,472 3,704 5.26 52,396 3,057 5.83
-------- -------- -------- -------
Total interest-bearing liabilities 552,877 25,682 4.65 513,386 25,512 4.97
Noninterest-bearing liabilities 18,655 13,739
-------- --------
Total liabilities 571,532 527,125
Stockholders' equity 110,534 58,208
-------- --------
Total liabilities and stockholders' equity $682,066 $585,333
======== ========
Net interest income/interest rate spread $22,444 2.67% $16,970 2.55%
======= ======= ======= ======
Net interest margin (net interest income as a
percent of average interest-earning assets) 3.42% 3.00%
======= ======
Average interest-earning assets to interest-
bearing liabilities 119.07% 110.46%
======= ======
<PAGE>
<CAPTION>
For the Years Ended June 30,
-------------------------------
1997
-------------------------------
Average
Average Yield/
Balance Interest Cost
---------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net $ 267,928 $ 21,872 8.16%
Mortgage-backed and related securities(1) 188,362 12,805 6.76
Investment securities(1) (2) 47,774 2,783 5.83
Other earning assets 10,452 623 5.96
FHLB stock 4,683 330 7.05
---------- ---------
Total interest-earning assets 519,199 38,413 7.37
Noninterest-earning assets: 13,228
----------
$ 532,427
==========
Total assets
Interest-bearing liabilities:
NOW and money market accounts $ 84,388 2,702 3.20
Savings accounts 72,132 1,782 2.47
Time deposits 238,859 14,012 5.87
Repurchase agreements 8,470 480 5.67
FHLB advances 68,596 3,953 5.76
---------- ---------
Total interest-bearing liabilities 472,445 22,929 4.85
Noninterest-bearing liabilities 9,368
----------
Total liabilities 481,813
Stockholders' equity 50,614
----------
Total liabilities and stockholders' equity $ 532,427
==========
Net interest income/interest rate spread $ 15,484 2.52%
========= =======
Net interest margin (net interest income as a
percent of average interest-earning assets) 2.97%
=======
Average interest-earning assets to interest-
bearing liabilities 109.90%
=======
</TABLE>
(1) Includes unamortized discounts and premiums. Average balance is computed
using the carrying value of securities. The average yield has been computed
using the historical amortized cost average balance for available for sale
securities.
(2) Average yields are stated on a fully taxable equivalent basis.
<PAGE>
Rate/Volume Analysis of Net Interest Income. The following table 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 increase or decrease related to changes in balances
and/or changes in interest rates. For each category of interest-earning assets
and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (i.e., changes in volume multiplied by old
rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume).
For purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1999 June 30, 1998
Compared to Compared to
Year Ended Year Ended
June 30, 1998 June 30, 1997
---------------------------------------- ---------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------- -----------------------
Volume Rate Net Volume Rate Net
------------ ---------- --------- ----------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $7,095 $( 744) $ 6,351 $3,896 $ (32) $3,864
Mortgage-backed and related securities 1,225 (893) 332 637 139 776
Investment securities (903) (81) (984) (393) 117 (276)
Other earning assets (93) 22 (71) (445) 128 (317)
FHLB stock 24 (8) 16 13 9 22
------ ------- ------- ------ ----- ------
Total interest-earning assets 7,348 (1,704) 5,644 3,708 361 4,069
------ ------- ------- ------ ----- ------
Interest-bearing liabilities:
NOW and money market accounts 616 (212) 404 385 214 599
Savings accounts (42) (154) (196) (77) (44) (121)
Time deposits (266) (916) (1,182) 728 158 886
Repurchase agreements 502 (5) 497 2,107 8 2,115
FHLB advances 970 (323) 647 (945) 49 (896)
------ ------- ------- ------ ----- ------
Total interest-bearing liabilities 1,780 (1,610) 170 2,198 385 2,583
------ ------- ------- ------ ----- ------
Net change in net interest income $5,568 $( 94) $ 5,474 $1,510 $ (24) $1,486
====== ======= ======= ====== ===== ======
</TABLE>
Asset and Liability Management and Market Risk
General. The principal market risk affecting the Association is interest rate
risk. The Association does not maintain a trading account for any class of
financial instrument, and the Association is not affected by foreign currency
exchange rate risk or commodity price risk. Because the Association does not
hold any equity securities other than stock in the FHLB of Cincinnati, the
Association is not subject to equity price risk.
The Association, like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. As part of its efforts to monitor and manage the
interest rate risk of the Association, the Board of Directors has adopted an
interest rate risk policy which charges the Board with reviewing quarterly
reports related to interest rate risk and to set exposure limits for the
Association as a guide to senior management in setting and implementing day to
day operating strategies.
<PAGE>
Quantitative Aspects of Market Risk. As part of its efforts to monitor and
manage interest rate risk, the Association uses the NPV methodology adopted by
the OTS as part of its capital regulations. In essence, NPV is the difference
between the present value of expected cash flows from assets and the present
value of expected cash flows from liabilities. The Association uses a net
portfolio value simulation model prepared in-house as the primary method of
managing interest rate risk. The model utilizes the actual cash flows and
repricing characteristics of its assets and liabilities and incorporates market-
based assumptions regarding the impact of changing interest rates on future
volumes and prepayment rates. For purposes of valuing core deposit products,
valuations derived by the OTS for the Association each quarter are utilized.
Presented below, as of June 30, 1999, is an analysis of the Association's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts of 100 basis point increments in market interest rates. The
percentage changes fall within the policy limits set forth by the Board of
Directors of the Association.
<TABLE>
<CAPTION>
Change in NPV as % of Portfolio
Interest Rates Net Portfolio Value Value of Assets
------------------------------------------------ -----------------------------
In Basis Points %
(Rate Shock) Amount $ Change Change NPV Ratio Change
- ----------------- ------------ ------------ --------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
300 $ 57,408 ($41,426) -41.91% 9.04% -503 bp
200 72,225 (26,609) -26.92 10.97 -309
100 85,140 (13,694) -13.86 12.52 -155
0 98,834 - - 14.07 -
(100) 112,570 13,736 13.90 15.59 152
(200) 108,439 9,605 9.72 14.98 92
(300) 104,642 5,808 5.88 14.43 37
</TABLE>
As illustrated in the table, the Association's NPV is more sensitive to
increases in interest rates than to decreases. This sensitivity arises because
as interest rates rise, borrowers become less likely to prepay fixed-rate loans
than when rates are falling. Since a majority of the Association's assets have
longer terms and its liabilities have shorter terms, an increase in market
interest rates results in the cash flow characteristics of the Association's
liabilities changing more rapidly than the cash flow characteristics of its
assets resulting in a decrease in NPV from the base.
In evaluating the Association's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in varying
degrees to changes in market interest rates. In addition, 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. Furthermore, in the event of a change in interest
rates, prepayments on loans and mortgage-backed securities and early withdrawals
of certificates of deposit would likely deviate significantly from those assumed
in calculating the table. Therefore, the actual effect of changing interest
rates may differ from that presented in the foregoing table.
<PAGE>
The Board of Directors and management of the Association believe that certain
factors afford the Association the ability to operate successfully despite its
exposure to interest rate risk. The Association manages its interest rate risk
by maintaining capital and liquidity well in excess of regulatory requirements.
The Association continually manages interest rate risk, and formally measures
changes in interest rate risk quarterly using its own interest rate risk model,
as well as the OTS model outlined above. The Board of Directors sets interest
rate risk limits to give management guidelines and limitations as to how much
risk can be maintained. The guidelines are reviewed periodically to ensure
effectiveness. Management makes adjustments to both assets and liabilities
continuously to mitigate interest rate risk exposure.
Liquidity and Capital Resources
Liquidity. The Association's liquidity, primarily represented by cash and cash
equivalents, is a result of its operating, investing and financing activities.
These activities are summarized below for the years ended June 30, 1999 and
1998.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Net income $ 2,055 $ 4,072
Adjustments to reconcile net income to net cash from
Operating activities 6,999 2,700
--------
Net cash from operating activities 9,054 6,772
Net cash used in investing activities (141,286) (60,522)
Net cash from financing activities 131,412 53,662
--------- --------
Net change in cash and cash equivalents (820) (88)
Cash and cash equivalents at beginning of period 6,669 6,757
--------- --------
Cash and cash equivalents at end of period $ 5,849 $ 6,669
========= ========
</TABLE>
The Association's sources of funds include customer deposits, other borrowings
including FHLB advances and repurchase agreements, loan and mortgage-backed
securities repayments and other funds provided by operations. The Association
also has the ability to borrow additional funds from the FHLB of Cincinnati.
The Association maintains investments in liquid assets based upon management's
assessment of (i) the Association's need for funds, (ii) expected deposit flows,
(iii) the yields available on short-term liquid assets, and (iv) the objectives
of the Association's asset/liability management program. The OTS requires
savings associations to maintain minimum levels of liquid assets. OTS
regulations currently require the Association to maintain an average daily
balance of liquid assets equal to at least 4.0% of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. At June 30, 1999, the Association's regulatory liquidity ratio was
45.0%. At June 30, 1999 and 1998, the Association had commitments to originate
loans or fund outstanding lines of credit totaling $38.3 million and $23.9
million, respectively. The Association considers its liquidity sufficient to
meet its outstanding short- and long-term needs. The Association expects to be
able to fund or refinance, on a timely basis, its material commitments and long-
term liabilities.
<PAGE>
Capital Resources. Federally insured savings institutions, such as the
Association, are required to meet a 1.5% tangible capital requirement, a 4.0%
leverage ratio (core capital to risk weighted assets) requirement, a 4.0%
leverage ratio (core capital to adjusted total assets) requirement and an 8.0%
risk-based capital requirement. At June 30, 1999, the Association exceeded
these requirements with a tangible capital ratio of 14.1%, a core capital to
risk weighted assets ratio of 29.2%, a core capital to adjusted total assets of
14.1% and a risk-based capital ratio of 30.1%.
Year 2000 Issues
The Year 2000 issue is the result of many computer programs being written using
two digits rather than four to define an applicable year. The Company's
hardware, data-driven automated equipment, or computer programs that have date
sensitive software, may recognize a date using "00" as the year 1900 rather than
the year 2000. This faulty recognition could result in a system failure or
miscalculation causing disruptions of operations, including, among other things,
a temporary inability to process transactions or engage in normal business
activities.
Through the establishment of a Year 2000 task force, the Company has conducted a
comprehensive review of all of its information technology and non-information
technology systems to identify potential Year 2000 problems. To facilitate the
review of all systems, the task force utilized the guidelines issued by the
Federal Financial Institutions Examination Council (FFIEC). The FFIEC outline
breaks the resolution of the Year 2000 problem into phases which are as follows:
Awareness, Assessment, Renovation, Validation and Implementation. At June 30,
1999, these phases had all been completed.
The Company has additionally developed contingency plans for all mission
critical systems and applications. The contingency plans encompass not only
potential internal disruptions but also the possible external disruptions
associated with utilities and other essential services. The plans detail
procedures that the Company will follow to allow for the delivery of products
and services to our customers should problems occur.
The Company currently anticipates that it will spend another $100,000 related to
Year 2000 issues in addition to the estimated $500,000 spent thus far.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- ------------------------------
Board of Directors
First Place Financial Corp.
Warren, OH
We have audited the accompanying consolidated statements of financial condition
of First Place Financial Corp. as of June 30, 1999 and 1998, and the related
statements of income, changes in shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The 1997 financial statements were
audited by other auditors whose report dated September 9, 1997, expressed an
unqualified opinion on those statements.
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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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 financial position of First Place
Financial Corp. as of June 30, 1999, and 1998, and the results of its operations
and cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/Crowe, Chizek and Company LLP
Cleveland, Ohio
July 15, 1999
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ----------------------------------------------
<TABLE>
<CAPTION>
June 30,
--------
1999 1998
- -------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,849 $ 6,669
Federal funds sold 22,869 1,565
Securities available for sale 249,159 211,185
Securities held to maturity, fair value
of $28,518,985 in 1998 28,295
Loans held for sale 945
Loans receivable, net 453,791 353,012
Premises and equipment, net 6,181 5,899
Accrued interest receivable 2,357 1,835
Federal income taxes receivable 2,511
Other assets 3,670 938
-------- --------
Total assets $747,332 $609,398
======== ========
LIABILITIES
Deposits $429,225 $435,462
Repurchase agreements 54,430 60,430
Federal Home Loan Bank advances 94,811 44,820
Advances by borrowers for taxes and
insurance 2,348 1,983
Accrued interest payable 1,131 1,090
Federal income taxes payable 1,702
Other liabilities 7,333 4,554
-------- --------
Total liabilities 589,278 550,041
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value,
3,000,000
shares authorized, no shares issued and
outstanding
Common stock, $.01 par value, 33,000,000
shares authorized, 11,241,250 shares
issued 112
Additional paid in capital 110,230
Retained earnings, substantially
restricted 59,042 57,763
Unearned employee stock ownership plan
shares (8,693)
Accumulated other comprehensive income (2,637) 1,594
-------- --------
Total shareholders' equity 158,054 59,357
-------- --------
Total liabilities and shareholders'
equity $747,332 $609,398
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
--------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
(Dollars in thousands, except share data)
<S> <C> <C> <C>
Interest income
Loans $32,087 $ 25,736 $ 21,872
Securities 2,126 3,165 3,736
Mortgage-backed and related securities 13,913 13,581 12,805
------- -------- --------
Total interest income 48,126 42,482 38,413
------- -------- --------
Interest expense
Deposits 18,886 19,860 18,496
FHLB advances 3,704 3,057 3,953
Repurchase agreements 3,092 2,595 480
------- -------- --------
Total interest expense 25,682 25,512 22,929
------- -------- --------
Net interest income 22,444 16,970 15,484
Provision for loan losses 1,062 1,779 590
------- -------- --------
Net interest income after provision
for loan losses 21,382 15,191 14,894
------- -------- --------
Noninterest income
Service charges 1,343 1,085 929
Security gains (losses), net (48) 135 (934)
Gain on sale of loans 73
Other 613 531 449
------- -------- --------
Total noninterest income 1,981 1,751 444
------- -------- --------
Noninterest expense
Salaries and benefits 6,571 5,471 4,863
Occupancy and equipment 1,828 1,578 1,432
Federal deposit insurance premiums 265 258 2,971
Franchise taxes 961 776 714
FHLB advances termination charges 495
Contribution to foundation 8,026
Other 2,546 2,289 1,918
------- -------- --------
Total noninterest expense 20,692 10,372 11,898
------- -------- --------
Income before income tax 2,671 6,570 3,440
Provision for income tax 616 2,498 1,216
------- -------- --------
Net income $ 2,055 $ 4,072 $ 2,224
======= ======== ========
Basic and diluted earnings per share
(since conversion) $ (.02) N/A N/A
=======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended June 30, 1999, 1998 and 1997
--------------------------------------------
Additional Obligation Accumulated Other
Common Paid in Retained Under Comprehensive
Stock Capital Earnings ESOP Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1996 $ 51,467 $ (2,644) $ 48,823
Comprehensive income:
Net income 2,224 2,224
Change in unrealized gain (loss) on
securities available for sale, net of tax 2,700 2,700
--------
Total comprehensive income 4,924
-------- -------- --------
Balance at June 30, 1997 53,691 56 53,747
Comprehensive income:
Net income 4,072 4,072
Change in unrealized gain (loss) on
securities available for sale, net of tax 0 1,538 1,538
-------- -------- --------
Total comprehensive income 4,072 1,538 5,610
-------- -------- --------
Balance at June 30, 1998 57,763 1,594 59,357
Comprehensive income:
Net income 2,055 2,055
Cumulative effect of securities
transferred, net of tax 0 172 172
Change in unrealized gain (loss) on
securities available for sale, net of tax 0 (4,403) (4,403)
-------- -------- --------
Total comprehensive income 2,055 (4,231) (2,176)
Issuance of common shares $ 112 $110,200 110,312
Cash dividends declared ($.075 per share) (776) (776)
Employee stock ownership plan obligation $(8,993) (8,993)
Commitment to release employee stock
ownership plan shares 30 300 330
-------- ---------- --------
Balance at June 30, 1999 $ 112 $110,230 $ 59,042 $(8,693) $ (2,637) $158,054
======= ======== ======== ========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
--------------------
1999 1998 1997
- -----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,055 $ 4,072 $ 2,224
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 865 738 570
Provision for loan losses 1,062 1,779 590
Net amortization 649 282 128
Investment security (gains) losses 48 (135) 934
Loss on disposal of fixed assets 27 159
FHLB stock dividend (368) (352) (330)
Contribution of common stock to foundation 8,026
ESOP expense 330
Change in
Loans held for sale (945)
Interest receivable (522) 54 (16)
Interest payable 41 385 (186)
Other assets (2,731) (134) (24)
Other liabilities 2,481 499 573
Deferred loan fees 548 4 (181)
Deferred taxes (2,512) (420) 15
--------- -------- --------
Net cash from operating activities 9,054 6,772 4,456
--------- -------- --------
Cash flows from investing activities
Investment and mortgage-backed securities
available for sale
Proceeds from sales 34,421 37,052 43,294
Proceeds from maturities, calls
and principal paydowns 67,302 41,985 9,480
Purchases (118,203) (85,698) (50,050)
Investment and mortgage-backed securities
held to maturity
Proceeds from maturities, calls
and principal paydowns 1,226 16,438 7,225
Purchases (4,000)
Net decrease (increase) in fed funds sold (21,304) (1,355) 2,361
Purchases of Federal Home Loan Bank Stock (1,165) (330)
Sale of Federal Home Loan Bank Stock 830
Net increase in loans (102,389) (69,583) (30,678)
Premises and equipment expenditures, net (1,174) (191) (2,063)
--------- -------- --------
Net cash from investing activities (141,286) (60,522) (24,761)
--------- -------- --------
</TABLE>
(continued)
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.)
- ---------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
-------------------
1999 1998 1997
- ---------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from financing activities
Net change in deposits $ (6,237) $ 22,528 $ 21,200
Net change in advances by borrowers
for taxes and insurance 365 282 (16)
Proceeds from repurchase agreements (6,000) 44,430 16,000
Net proceeds from issuance of common stock 93,293
Net change in overnight borrowings 51,525
Proceeds from FHLB borrowings 14,000 57,075 59,550
Repayment of FHLB borrowings (15,534) (70,653) (77,230)
--------- -------- --------
Net cash from financing activities 131,412 53,662 19,504
--------- -------- --------
Net change in cash and cash equivalents (820) (88) (801)
Cash and cash equivalents at beginning
of year 6,669 6,757 7,558
--------- -------- --------
Cash and cash equivalents at end of year $ 5,849 $ 6,669 $ 6,757
========= ======== ========
Supplemental disclosures of cash flow
information
Cash paid during the year for
Interest $ 25,641 $ 25,127 $ 23,216
Income taxes 3,408 2,745 1,200
Non-cash transfer of securities from held
to maturity to available for sale 27,039
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
June 30, 1999, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Amounts are in thousands, except per share data
Nature of Operations and Principles of Consolidation: The consolidated
- ----------------------------------------------------
financial statements include First Place Financial Corp. and its wholly-owned
subsidiary, First Federal Savings and Loan Association of Warren, together
referred to as "the Company". Intercompany transactions and balances have been
eliminated in consolidation.
The Company provides financial services through its main office in Warren, Ohio,
eleven branch locations and six loan production offices. Its primary deposit
products are checking, savings and term certificate accounts, and its primary
lending products are residential mortgage, commercial and installment loans.
Substantially all loans are secured by specific items of collateral including
real estate, consumer assets and business assets. Commercial loans are expected
to be repaid from cash flow from operations of businesses. Real estate loans
are secured by both residential and commercial real estate. The majority of the
Company's income is derived from one-to four family residential real estate
loans and mortgage-backed securities.
Use of Estimates: The preparation of financial statements in conformity with
- ----------------
generally accepted accounting principles requires management to make estimates
and assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. Areas involving the use of
management's estimates and assumptions include the allowance for loan losses,
fair values of financial instruments, the realization of deferred tax assets,
the carrying value of impaired loans, depreciation of premises and equipment,
the actuarial present value of pension benefit obligations and the net periodic
pension expense and prepaid pension costs recognized in the consolidated
financial statements.
Cash and Cash Equivalents: Cash and cash equivalents includes cash and deposits
- -------------------------
with other financial institutions under 90 days. Net cash flows are reported
for loan and deposit transactions.
Securities: Securities are classified into held-to-maturity and available-for-
- ----------
sale categories. Held-to-maturity securities are those that the Company has the
positive intent and ability to hold to maturity, and are reported at amortized
cost. Available-for-sale securities are those that the Company may decide to
sell if needed for liquidity, asset-liability management, or other reasons.
Available-for-sale securities are reported at fair value, with unrealized gains
or losses included as a separate component of equity, net of tax.
Realized gains or losses on sales are determined based on the amortized cost of
the specific security sold. Amortization of premiums and accretion of discounts
are computed under a system materially consistent with the level yield method
and are recognized as adjustments to interest income. Prepayment activity on
mortgage-backed securities is affected primarily by changes in interest rates.
Yields on mortgage-backed securities are adjusted as prepayments occur through
changes to premium amortization or discount accretion.
<PAGE>
Loans: Interest income on loans is accrued over the term of the loans based
- -----
upon the principal outstanding. The accrual of interest on loans is suspended
when, in management's opinion, the collection of all or a portion of the loan
principal has become doubtful. When a loan is placed on nonaccrual status,
accrued and unpaid interest at risk is charged against income. Under Statement
of Financial Accounting Standards ("SFAS") No. 114, as amended by SFAS No. 118,
the carrying value of impaired loans is periodically adjusted to reflect cash
payments, revised estimates of future cash flows and increases in the present
value of expected cash flows due to the passage of time. Cash payments
representing interest income are reported as such and other cash payments are
reported as reductions in carrying value. Increases or decreases in carrying
value due to changes in estimates of future payments or the passage of time are
reported as reductions or increases in bad debt expense.
Loan fees, net of direct loan origination costs, are deferred and recognized
over the life of the loan as a yield adjustment.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
- -------------------------
allowance for loan losses is maintained. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the risk
of the loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations including their financial position and collateral values, and other
factors and estimates which are subject to change over time. While management
may periodically allocate portions of the allowance for specific problem-loan
situations, the whole allowance is available for any loan charge-offs that
occur. A loan is charged-off against the allowance by management when deemed
uncollectible, although collection efforts continue and future recoveries may
occur.
A loan is impaired when it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement.
Impaired loans are carried at the present value of expected cash flows
discounted at the loan's effective interest rate or at the fair value of the
collateral if the loan is collateral dependent.
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one- to four-family
residences, residential construction loans and automobile, home equity and
second mortgages. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment.
When analysis of borrower operating results and financial condition indicates
that underlying cash flows of the borrower's business are not adequate to meet
its debt service requirements, the loan is evaluated for impairment. Often this
is associated with a delay or shortfall in payments of 30 days or more. Loans
are generally moved to nonaccrual status when 90 days or more past due or when
collection of principal or interest is in doubt. These loans are often also
considered impaired. Impaired loans, or portions thereof, are charged off when
deemed uncollectible. The nature of disclosures for impaired loans is considered
generally comparable to prior nonaccrual and renegotiated loans and non-
performing and past-due asset disclosures.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
- -----------------
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines, a valuation allowance is recorded through expense.
Costs after acquisition are expensed.
<PAGE>
Premises and Equipment: Premises and equipment are stated at cost less
- ----------------------
accumulated depreciation. Depreciation is computed over the asset useful lives
on an accelerated basis, except for buildings for which the straight-line basis
is used. Maintenance and repairs are expensed and major improvements are
capitalized.
Employee Stock Ownership Plan: The cost of shares issued to the ESOP, but not
- ------------------------------
yet allocated to participants is shown as a reduction of shareholders' equity.
Compensation expense is based on the market price of shares as they are
committed to be released to participant accounts. Dividends on allocated ESOP
shares reduce shareholders' equity; dividends on unearned ESOP shares reduce
debt and accrued interest.
Income Taxes: The Company records income tax expense based on the amount of tax
- ------------
due on its tax return plus deferred taxes computed based on the expected future
tax consequences of temporary differences between the carrying amounts and tax
bases of assets and liabilities, using enacted tax rates. The provision for
income taxes is based on the effective tax rate expected to be applicable for
the entire year.
Earnings Per Common Share: Basic earnings per common share is net income
- -------------------------
divided by the weighted average number of common shares outstanding during the
period. ESOP shares are considered outstanding for this calculation unless
unearned. Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under stock options. Basic and
diluted earnings per share for the year ended June 30, 1999 were computed based
on earnings from the period December 31, 1998 (conversion date) to June 30,
1999, divided by the weighted average number of common shares outstanding for
the period. The earnings for the period December 31, 1998 (conversion date)
through June 30, 1999 were ($170). The weighted average number of shares
outstanding was 10,350,580 for the year ended June 30, 1999. Earnings per share
information for the years ended June 30, 1998 and 1997 is not meaningful since
the mutual to stock conversion was not consummated until December 31, 1998.
Comprehensive Income: Comprehensive income consists of net income and other
- --------------------
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as separate
components of equity. The accounting standard that requires reporting
comprehensive income first applies for 1999, with prior information restated to
be comparable.
Fair Value of Financial Instruments: Fair values of financial instruments are
- -----------------------------------
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Financial Statement Presentation: Certain previously reported consolidated
financial statement amounts have been reclassified to conform to the 1999
presentation.
NOTE 2 - CONSUMMATION OF THE CONVERSION TO A STOCK SAVINGS AND LOAN WITH THE
CONCURRENT FORMATION OF A HOLDING COMPANY
On June 15, 1998, the Board of Directors of the Company unanimously adopted a
plan of conversion to convert from a federally chartered mutual savings and loan
company to a federally chartered stock savings and loan with the concurrent
formation of a holding company, First Place Financial Corp.. The conversion was
consummated on December 31,
<PAGE>
1998 by amending the thrift's federal charter and the sale of the Company's
common shares in an amount equal to the market value of the Company after giving
effect to the conversion. A total of 11,241,250 common shares of the Company
were issued at $10.00 per share and net proceeds from the sale were $93.3
million after deducting the costs of conversion and the shares contributed to
the foundation.
The Company retained 50% of the net proceeds from the sale of common shares.
The remainder of the net proceeds were invested in the capital stock issued by
the Company to the Association as a result of the conversion.
At the time of conversion, the Company established a liquidation account which
was equal to its regulatory capital as of the latest practicable date prior to
the Conversion. In the event of a complete liquidation, each eligible depositor
will be entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for the
accounts then held.
Under Office of Thrift Supervision ("OTS") regulations, limitations have been
imposed on all capital distributions, including cash dividends. The regulation
establishes a three-tiered system of restrictions, with the greatest flexibility
afforded to thrifts which are both well-capitalized and given favorable
qualitative examination ratings by the OTS.
In connection with the conversion, the Company established the First Federal of
Warren Community Foundation. The Foundation was funded with a contribution of
$8,026 of the Company's common stock at the date the conversion was consummated.
The Foundation is dedicated to the promotion of charitable purposes within the
communities in which the Company operates.
NOTE 3 - SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair values
of securities at June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
-------------------1999----------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Investment securities
U.S. Government agencies $ 22,127 $ 33 $ (86) $ 22,074
Federal Home Loan Bank stock 5,947 5,947
Obligations of states and
political subdivisions 6,737 45 (88) 6,694
-------- ------ ------- --------
34,811 78 (174) 34,715
-------- ------ ------- --------
Mortgage-backed securities and
collateralized mortgage obligations
FHLMC 95,644 718 (1,726) 94,636
FNMA 75,008 425 (1,678) 73,755
GNMA 47,033 161 (1,805) 45,389
Other 658 6 664
-------- ------ --------
218,343 1,310 (5,209) 214,444
-------- ------ ------- --------
$253,154 $1,388 $(5,383) $249,159
======== ====== ======= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
---------------------1998--------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Investment securities
U.S. Government agencies $ 15,734 $ 64 $ (1) $ 15,797
Federal Home Loan Bank stock 4,415 4,415
Obligations of states and
political subdivisions 826 27 853
-------- ------ ------ ---------
20,975 91 (1) 21,065
-------- ------ ------ ---------
Mortgage-backed securities and
collateralized mortgage obligations
FHLMC 99,494 1,470 (66) 100,898
FNMA 49,959 1,095 (536) 50,518
GNMA 37,355 376 (17) 37,714
Other 987 3 990
-------- ------ ----- ---------
187,795 2,944 (619) 190,120
-------- ------ ----- ---------
$208,770 $3,035 $(620) $211,185
======== ====== ===== =========
Held to maturity
Investment securities
U.S. Treasury securities $ 6,005 $ 13 $ (4) $ 6,014
U.S. Government agencies 4,147 33 4,180
Obligations of states and
political subdivisions 364 32 396
-------- ------ ------ ---------
10,516 78 (4) 10,590
-------- ------ ------ ---------
Mortgage-backed securities and
collateralized mortgage obligations
FNMA 16,267 210 (110) 16,367
GNMA 1,512 49 1,561
-------- ------ ---------
17,779 259 (110) 17,928
-------- ------ ------ ---------
$ 28,295 $ 337 $(114) $ 28,518
======== ====== ====== =========
</TABLE>
The amortized cost and estimated fair value of debt securities at June 30, 1999,
by contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
- ---------------------------------------------------------------------
<S> <C> <C>
Available for sale
Due in one year or less $ 10,460 $ 10,494
Due after one year through five years 15,224 15,135
Due after five years through ten years 3,180 3,139
-------- --------
28,864 28,768
Mortgage-backed securities and
collateralized mortgage obligations 218,343 214,444
-------- --------
$247,207 $243,212
======== ========
</TABLE>
<PAGE>
Proceeds from the sale of debt securities for the years ended June 30, 1999 and
1998 were $34,421 and $37,052. Gross gains of $103 and $472 and gross losses of
$151 and $337 were realized on sales of securities in 1999 and 1998.
Investment and mortgage-backed securities with a carrying value of $93,372 and
$103,493 as of June 30, 1999 and 1998 were pledged to secure public deposits,
repurchase agreements and for other purposes as required or permitted by law.
On October 1, 1998, the Company adopted SFAS No. 133, "Accounting for
Derivatives Instruments and Hedging Activities". SFAS No. 133 allows the
Company a one-time reclassification of securities held to maturity to
classification as available for sale or trading. The Company transferred
securities with an amortized cost of $27,039 previously classified as held to
maturity to available for sale upon adoption. The unrealized gain on the
securities transferred totaled $260. On October 1, 1998, the Bank's equity
increased $172 as a result of the transfer.
NOTE 4 - LOANS
Loans as presented on the balance sheet are comprised of the following
classifications at June 30:
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------
<S> <C> <C>
Real estate mortgage loans
One- to four- family $357,374 $267,950
Multifamily 4,804 4,481
Commercial 10,192 8,627
Construction 13,993 6,301
Home equity 8,944 9,189
-------- --------
395,307 296,548
Consumer and other loans
Automobile 53,243 52,847
Other 19,217 11,242
-------- --------
72,460 64,089
Commercial loans 1,925 2,587
-------- --------
Less:
Loans in process 10,411 5,866
Net deferred loan origination fees 1,867 1,319
Allowance for loan losses 3,623 3,027
-------- --------
15,901 10,212
-------- --------
$453,791 $353,012
======== ========
</TABLE>
<PAGE>
A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $3,027 $1,723 $1,259
Provision for loan losses 1,062 1,779 590
Charge-offs (542) (515) (138)
Recoveries 76 40 12
------ ------ ------
Balance at end of period $3,623 $3,027 $1,723
====== ====== ======
</TABLE>
Nonaccrual loans totaled $1,574 and $2,143 at June 30, 1999 and 1998. Interest
not recognized on nonaccrual loans totaled approximately $90, $94 and $172 for
the years then ended June 30, 1999, 1998 and 1997. There were no impaired loans
at June 30, 1999 and 1998 or during the fiscal years ended June 30, 1999, 1998
and 1997.
NOTE 5 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has granted loans to executive
officers, directors, and their related business interests. A summary of related
party loan activity is as follows for the year ended June 30, 1999:
<TABLE>
<S> <C>
Balance at beginning of period $ 979
New loans 377
Repayments (511)
-------
Balance at end of period $ 845
=======
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 1,090 $ 1,076
Buildings and improvements 4,542 4,523
Leasehold improvements 996 960
Furniture and equipment 5,261 6,467
Construction in process 438 137
------- -------
Total cost 12,327 13,163
Accumulated depreciation (6,146) (7,264)
------- -------
$ 6,181 $ 5,899
======= =======
</TABLE>
At June 30, 1999, the Company is obligated for rental commitments under non-
cancelable operating leases on real estate and equipment as follows:
<TABLE>
<S> <C>
2000 $ 292
2001 241
2002 223
2003 187
2004 176
Thereafter 1,040
--------
$ 2,159
========
</TABLE>
<PAGE>
NOTE 7 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at June 30, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Investment securities $ 381 $ 461
Mortgage backed
and related securities 1,062 1,062
Loans receivable 914 312
-------- --------
$ 2,357 $ 1,835
======== ========
</TABLE>
NOTE 8 - DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Noninterest-bearing demand $ 5,740 $ 5,217
Savings 66,629 67,402
NOW 36,082 34,141
Money Market 76,694 68,733
Certificates of deposit 244,080 259,969
-------- --------
$429,225 $435,462
======== ========
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100 is $50,854 and $53,225 at June 30, 1999 and 1998.
At June 30, 1999, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<S> <C>
2000 $ 154,123
2001 52,344
2002 15,770
2003 4,264
2004 1,475
Thereafter 16,104
---------
$ 244,080
=========
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Savings $ 1,465 $ 1,661 $ 1,782
NOW 471 557 592
Money Market 3,234 2,744 2,110
Certificates of deposit 13,716 14,898 14,012
-------- -------- --------
$ 18,886 $ 19,860 $ 18,496
======== ======== ========
</TABLE>
<PAGE>
NOTE 9 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are secured by mortgage-backed
securities with a carrying value and fair value of approximately $58,110 at June
30, 1999 and $62,608 at June 30, 1998.
Securities sold under agreements to repurchase are financing arrangements that
mature within three years. Information concerning securities sold under
agreements to repurchase is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Average daily balance during the year $ 53,800 $ 45,044
Average interest rate during the year 5.63% 5.76%
Maximum month-end balance during the year $ 60,430 $ 60,430
</TABLE>
NOTE 10 - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank at year-end were as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- -------------------------
Year of Maturity Interest Rate Amount Interest Rate Amount
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 5.178 - 6.00% $74,325 5.54% $20,000
2000 4.95 6,000
2003 5.20 - 5.99 9,763 5.20 - 5.59 7,669
2004 5.20 - 5.30 1,923 5.20 - 5.30 2,326
2006 6.20 2,800
2008 6.30 3,258
2010 6.05 11,567
------- -------
$94,811 $44,820
======= =======
</TABLE>
At June 30, 1999, scheduled principal payments on FHLB advances are as follows:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------
<S> <C>
2000 $ 75,071
2001 6,786
2002 6,409
2003 3,641
2004 85
Thereafter 2,819
------------
$ 94,811
============
</TABLE>
All advances are collateralized by the Company's FHLB stock and residential
mortgage loans totaling $142,200 and $67,230 at June 30, 1999 and 1998. Based
on the Company investment in FHLB stock, the maximum dollar amount of FHLB
advance borrowings available at June 30, 1999 was $118.9 million.
<PAGE>
NOTE 11 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------
<S> <C> <C> <C>
Current provision $ 3,128 $2,918 $1,201
Deferred provision (benefit) (2,512) (420) 15
------- ------ ------
$ 616 $2,498 $1,216
======= ====== ======
</TABLE>
The differences between the financial statement provision and amounts computed
by applying the statutory federal income tax rate of 34% to income before taxes
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------------
<S> <C> <C> <C>
Income tax computed at the
statutory federal rate $ 908 $2,302 $1,169
Add (subtract) tax effect of
Miscellaneous items (292) 196 47
----- ------ ------
$ 616 $2,498 $1,216
===== ====== ======
</TABLE>
The tax effects of principal temporary differences and the resulting deferred
tax assets and liabilities that comprise the net deferred tax balance are as
follows at June 30:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------------------
<S> <C> <C>
Items giving rise to deferred tax assets:
Deferred loan fees and costs $ 693 $ 525
Charitable contribution carryforward 2,358
Bad debts 352
Nonaccrual loan interest 31 32
Accrued retirement 137
Deferred compensation 69 68
Unrealized loss on securities available for sale 1,358
Other 32 28
------- -------
Deferred tax asset 4,893 790
Items giving rise to deferred tax liabilities:
FHLB stock dividend (731) (606)
Franchise taxes (139) (139)
Depreciation (624) (468)
Bad debts (26)
Unrealized gain on securities available for sale (821)
Other (4) (26)
------- -------
Deferred tax liabilities (1,498) (2,086)
------- -------
Net deferred asset (liability) $ 3,395 $(1,296)
======= =======
</TABLE>
<PAGE>
The Company has sufficient taxes paid in prior years and available for recovery
and expected future taxable income sufficient to warrant recording the full
deferred tax asset without a valuation allowance.
Retained earnings at June 30, 1999, include approximately $11,590 for which no
provision for federal income taxes has been made. This amount represents the tax
bad debt reserve at June 30, 1988, which is the end of the Company's base year
for purposes of calculating the bad debt deduction for tax purposes. If this
portion of retained earnings is used in the future for any purpose other than to
absorb bad debts, the amount used will be added to future taxable income. The
unrecorded deferred tax liability on the above amount at June 30, 1999 was
approximately $3,940.
Tax expense (benefit) attributable to securities gains (losses) approximated
($16), $46 and ($318) for the years ended June 30, 1999, 1998 and 1997.
NOTE 12 - EMPLOYEE BENEFIT PLANS
The Company sponsors a defined benefit pension plan that covers substantially
all employees. The plan calls for benefits to be paid to eligible employees at
retirement based primarily upon years of service with the Company and
compensation rates near retirement. Contributions to the plan reflect benefits
attributed to employees' services to date, as well as services expected to be
earned in the future. Plan assets consist primarily of certificates of deposits
with the Company and insurance contracts.
Information about the pension plan was as follows.
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation:
Beginning benefit obligation $ 3,943 $ 3,744
Service cost 300 225
Interest cost 232 225
Actuarial gain 679 664
Benefits paid (141) (915)
------- -------
Ending benefit obligation 5,013 3,943
Change in plan assets, at fair value:
Beginning plan assets 1,416 2,032
Actual return 143 79
Employer contribution 366 220
Benefits paid (141) (915)
------- -------
Ending plan assets 1,784 1,416
------- -------
Funded status (3,229) (2,527)
Unrecognized net actuarial loss 2,262 1,620
Unrecognized prior service cost 75 158
------- -------
Prepaid (accrued) benefit cost $ (892) $ (749)
======= =======
</TABLE>
<PAGE>
The components of pension expense and related actuarial assumptions were as
follows.
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 300 $ 226 $ 230
Interest cost 232 225 233
Expected return on plan assets (79) (35) (134)
Amortization of prior service cost 9 (42) 22
Recognized net actuarial (gain) loss 37
----- ----- -----
Net $ 499 $ 374 $ 351
===== ===== =====
Discount rate on benefit obligation 5.95% 6.93% 6.93%
Long-term expected rate of return
on plan assets 7.00 7.00 7.00
Rate of compensation increase 5.00 5.00 5.00
</TABLE>
In June 1999, the Company's Board of Directors approved a resolution terminating
the Company's defined benefit pension plan. In June 1999, the Board of Directors
approved ceasing the accumulation of future benefits to plan participants. The
settlement of vested plan benefits will occur upon receipt of a determination
letter from the Commissioner approving the plan termination. Participants may
choose a lump sum payment, the purchase of a nontransferable deferred annuity
contract or a transfer to the 401 (k) plan.
NOTE 13 - EMPLOYEE STOCK OWNERSHIP PLAN
During 1999, the Company established an Employee Stock Ownership Plan ("ESOP")
for the benefit of employees 21 and older and who have completed at least one
thousand hours of service. Contributions under the ESOP are conditioned upon the
ESOP being qualified under Sections 401 and 501 of the Internal Revenue code of
1986, as amended (the "Code").
To fund the plan, the ESOP borrowed $8,993 from the Company for the purposes of
purchasing 899,300 shares of stock at $10 per share in the conversion. Principal
and interest payments on the loan are due in annual installments which begin
December 31, 1999 with the final payments of principal and interest being due
and payable at maturity on December 31, 2013. Interest is payable during the
term of the loan at a fixed rate of 7.75%. The loan is collateralized by the
shares of the Company's common stock purchased with the proceeds. As the
Association periodically makes contributions to the ESOP to repay the loan,
shares will be allocated to participants on the basis of the ratio of each
year's principal and interest payments to the total of all principal and
interest payments. Dividends on allocated shares increase participant accounts.
ESOP compensation expense was $330 for 1999.
<PAGE>
Shares held by the ESOP at June 30 were as follows:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Shares allocated to participants 30,000
Unearned shares 869,300
--------
Total ESOP shares 899,300
========
Fair value of unearned shares $ 10,704
========
</TABLE>
NOTE 14 - COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
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 make loans. The Company's
exposure to credit loss in case of nonperformance by the other party to the
financial instrument for commitments to make loans is represented by the
contractual amount of those instruments. The Company follows the same credit
policy to make such commitments as is followed for those loans recorded in the
financial statements.
As of June 30, 1999, variable rate commitments to make loans or fund outstanding
lines of credit amounted to approximately $30.0 million and fixed-rate
commitments amounted to $8.3 million. The interest rates on variable-rate
commitments ranged from 6.75% to 19.75% and interest rates on fixed-rate
commitments ranged from 6.75% to 8.75% at June 30, 1999. As of June 30, 1998,
commitments to extend credit totaled approximately $23.9 million. Since loan
commitments may expire without being used, the amounts do not necessarily
represent future cash commitments.
NOTE 15- SAVINGS ASSOCIATION INSURANCE FUND RECAPITALIZATION
Included in federal deposit insurance premium expense in the Statement of Income
for the year ended June 30, 1997 is $2,461 for a special assessment resulting
from legislation passed and enacted into law on September 30, 1996 to
recapitalize the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation. Thrifts such as the Company paid a one-time assessment in
November, 1996 of $0.657 for each one hundred dollars in deposits as of March
31, 1995. Because of the recapitalization, the Company began paying lower
deposit insurance premiums in January, 1997.
NOTE 16 - REGULATORY CAPITAL
The Company is subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
<PAGE>
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
Capital to risk-
weighted assets Tier 1 capital
-----------------
Total Tier 1 to average assets
--------- --------------------------- --------------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
</TABLE>
At year end, actual capital levels (in thousands) and minimum
required levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1999
Total capital (to risk weighted assets) $101,358 30.1% $26,918 8.0% $33,648 10.0%
Tier 1 capital (to risk weighted assets) $ 98,106 29.2% $13,459 4.0% $20,189 6.0%
Tier 1 capital (to adjusted total assets) $ 98,106 14.1% $27,871 4.0% $34,839 5.0%
Tangible capital (to adjusted total assets) $ 98,106 14.1% $10,452 1.5% N/A
1998
Total capital (to risk weighted assets) $ 60,418 21.8% $22,134 8.0% $27,667 10.0%
Tier 1 capital (to risk weighted assets) $ 57,763 20.9% $11,067 4.0% $16,600 6.0%
Tier 1 capital (to adjusted total assets) $ 57,763 9.8% $24,279 4.0% $30,349 5.0%
Tangible capital (to adjusted total assets) $ 57,763 9.8% $ 9,105 1.5% N/A
</TABLE>
<PAGE>
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair value and the related carrying
value of the Company's financial instruments at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
------- 1999--------- -------- 1998--------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 5,849 $ 5,849 $ 6,669 $ 6,669
Federal Funds sold 22,869 22,869 1,565 1,565
Securities available
for sale 249,159 249,159 211,185 211,185
Securities held to
maturity 28,295 28,519
Loans held for sale 945 945
Loans receivable, net 453,791 452,135 353,012 368,109
Accrued interest receivable 2,357 2,357 1,835 1,835
Liabilities
Demand and savings deposits $(185,145) $(185,145) $(175,493) $(175,493)
Time deposits (244,080) (244,322) (259,969) (260,580)
Repurchase agreements (54,430) (54,780) (60,430) (60,888)
FHLB advances (94,811) (94,652) (44,820) (44,774)
Advances by borrowers
for taxes and insurance (2,348) (2,348) (1,983) (1,983)
Accrued interest payable (1,131) (1,131) (1,090) (1,090)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used. The estimated fair value for cash and cash equivalents
and federal funds sold is considered to approximate cost. The estimated fair
value of investment and mortgage-backed securities is based on quoted market
values for the individual securities or for equivalent securities. Carrying
value is considered to approximate fair value for loans that contractually
reprice at intervals of six months or less, for short-term borrowings, for
deposit liabilities subject to immediate withdrawal and accrued interest. The
fair values of fixed rate loans, loans that reprice less frequently than each
six months, time deposits and Federal Home Loan Bank borrowings have been
approximated by a discount rate value technique utilizing estimated market
interest rates as of June 30, 1999 and 1998. The fair values of unrecorded
commitments at June 30, 1999 and 1998 are not material.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Company to have
disposed of such items at June 30, 1999 and 1998, the estimated fair values
would necessarily have been achieved at these dates, since market values may
differ depending on various circumstances. The estimated fair values at June 30,
1999 and 1998 should not necessarily be considered to apply at subsequent dates.
<PAGE>
Other assets and liabilities of the Company may have value but are not included
in the above disclosures, such as property and equipment. In addition,
nonfinancial instruments typically not recognized in these financial statements
nevertheless may have value, but are not included in the above disclosures.
These include, among other items, the estimated earnings power of core deposit
accounts, the earnings potential of loan servicing rights, the value of a
trained work force, customer goodwill, and similar items.
NOTE 18 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEET
June 30, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash and cash equivalents $ 410
Interest-bearing deposits 22,559
Securities available for sale 27,653
Note receivable 8,993
Investment in banking subsidiaries 96,094
Other assets 3,246
--------
Total assets $158,955
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 901
Shareholders' equity 158,054
--------
Total liabilities and shareholders' equity $158,955
========
CONDENSED STATEMENTS OF INCOME
Period December 31, 1998 (inception of Company)
through June 30, 1999
INCOME
Interest income $ 1,011
Dividend from subsidiary 4,413
--------
Total income 5,424
EXPENSES
Contribution to Foundation 8,026
Other expenses 167
--------
Total expense 8,193
Loss before income taxes (2,769)
Income tax benefit (2,459)
--------
Loss before undistributed net earnings of subsidiary (310)
Equity in undistributed net earnings of subsidiary 140
--------
Net loss $ (170)
========
</TABLE>
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
Period December 31, 1998 (inception of
Company) through June 30, 1999
<TABLE>
<S> <C>
Cash flows from operating activities
Net income $ (170)
Equity in earnings from subsidiary (140)
Net amortization 12
Contribution of common stock to foundation 8,026
Change in other assets (3,246)
Change in other liabilities 777
--------
Net cash from operating activities 5,259
Cash flows from investing activities
Purchases of mortgage-backed securities (29,259)
Paydowns of mortgage-backed securities 648
Increase in interest bearing accounts (22,559)
Increase in loans to subsidiary association (8,993)
Purchase of capital stock of subsidiary (37,979)
--------
Net cash from investing activities (98,142)
Cash flows from financing activities
Proceeds from sale of stock 93,293
--------
Net cash from financing activities 93,293
Net change in cash and cash equivalents 410
Beginning cash and cash equivalents -
--------
Ending cash and cash equivalents $ 410
========
</TABLE>
<PAGE>
NOTE 19 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
1999 September 30 December 31 March 31 June 30
- ---- ------------ ----------- -------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Summary of earnings:
Total interest income $11,215 $11,851 $12,455 $12,605
Total interest expense 6,700 6,921 5,990 6,071
------- ------- ------- -------
Net interest income 4,515 4,930 6,465 6,534
Provision for loan losses 183 476 166 238
Net interest income after
provision for loan losses 4,332 4,454 6,299 6,296
Total noninterest income 458 453 460 610
Total noninterest expense 2,900 11,450 3,076 3,266
------- ------- ------- -------
Income before income tax 1,890 (6,542) 3,683 3,640
Provision for incomes tax 643 (2,224) 1,105 1,092
------- ------- ------- -------
Net income $ 1,247 $(4,318) $ 2,578 $ 2,548
======= ======= ======= =======
Basic and diluted earnings
per share (since conversion) N/A $(.51) $0.25 $0.25
</TABLE>
<TABLE>
<CAPTION>
1998 September 30 December 31 March 31 June 30
- ---- ------------ ----------- -------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Summary of earnings:
Total interest income $10,194 $10,498 $10,792 $10,998
Total interest expense 6,094 6,358 6,515 6,545
------- ------- ------- -------
Net interest income 4,100 4,140 4,277 4,453
Provision for loan losses 245 95 151 1,288
Net interest income after
provision for loan losses 3,855 4,045 4,126 3,165
Total noninterest income 558 373 238 582
Total noninterest expense 2,649 2,538 2,356 2,829
------- ------- ------- -------
Income before income tax 1,764 1,880 2,008 918
Provision for incomes tax 498 660 691 649
------- ------- ------- -------
Net income $ 1,266 $ 1,220 $ 1,317 $ 269
======= ======= ======= =======
Basic and diluted earnings per share N/A N/A N/A N/A
</TABLE>
NOTE 20 - SUBSEQUENT EVENTS
On July 2, 1999 the Company approved an Employee Stock Option Plan and a
Retention Recognition Plan. Options to buy stock of the Company are granted to
directors and certain key employees under the Employee Stock Option Plan.
The Retention Recognition Plan (RRP) provides to directors and certain key
employees an ownership interest in the Company designed to compensate such
directors and key employees for services to the Company. The Company contributed
sufficient funds to enable the RRP to purchase and issue as awards 449,650
common shares of the Company. The shares awarded vest over a 5-year period
beginning in July 2000.
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
------ ---------- --------- ------------
<S> <C> <C> <C>
First Place Financial First Federal Savings and 100% Federal
Corp. Loan Association of Warren
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 5,849
<INT-BEARING-DEPOSITS> 22,869
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 249,159
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 453,791
<ALLOWANCE> 3,623
<TOTAL-ASSETS> 747,332
<DEPOSITS> 429,225
<SHORT-TERM> 94,811
<LIABILITIES-OTHER> 10,812
<LONG-TERM> 54,430
0
0
<COMMON> 112
<OTHER-SE> 157,942
<TOTAL-LIABILITIES-AND-EQUITY> 747,332
<INTEREST-LOAN> 32,087
<INTEREST-INVEST> 16,039
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 48,126
<INTEREST-DEPOSIT> 18,886
<INTEREST-EXPENSE> 25,682
<INTEREST-INCOME-NET> 22,444
<LOAN-LOSSES> 1,062
<SECURITIES-GAINS> (48)
<EXPENSE-OTHER> 20,692
<INCOME-PRETAX> 2,671
<INCOME-PRE-EXTRAORDINARY> 2,055
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,055
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
<YIELD-ACTUAL> 3.42
<LOANS-NON> 1,574
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,027
<CHARGE-OFFS> 542
<RECOVERIES> 76
<ALLOWANCE-CLOSE> 3,623
<ALLOWANCE-DOMESTIC> 3,623
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 542
</TABLE>
