FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1996
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OR
[ ] 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: 0-20380
FIRST FEDERAL BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-1341110
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
505 Market Street, Zanesville, Ohio 43701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
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(614) 453-0606
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common stock, without par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ _X_ ]
The issuer's revenues for its most recent fiscal year were $14,501,554.
Based upon information regarding the average of the bid and asked
price provided by The Nasdaq Stock Market, the aggregate market value of the
voting shares held by nonaffiliates of the registrant on November 29, 1996,
was $19,544,756.
1,570,116 of the registrant's common shares were issued and outstanding
on November 29, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
The following sections of the definitive Proxy Statement for the 1997
Annual Meeting of Shareholders of First Federal Bancorp, Inc., are
incorporated by reference into Part III of this Form 10-KSB:
1. Proposal One: Election of Directors;
2. Compensation of Executive Officers and Directors; and
3. Voting Securities and Ownership of Certain Beneficial Owners and
Management.
Item 1. Description of Business.
General
First Federal Bancorp, Inc. ("Bancorp"), is a unitary savings and loan
holding company organized under Ohio law. Through its wholly-owned
subsidiary, First Federal Savings Bank of Eastern Ohio ("First Federal"),
Bancorp is engaged in the savings and loan business in Ohio.
First Federal is a stock federal savings bank that has served the
Zanesville, Ohio, area for over 100 years. Originally organized as a mutual
federal savings bank, First Federal completed its conversion from mutual to
stock form on July 14, 1992 (the "Conversion"). The deposits of First
Federal are insured up to applicable limits by the Federal Deposit Insurance
Corporation (the "FDIC") in the Savings Association Insurance Fund (the
"SAIF"). First Federal is a member of the Federal Home Loan Bank (the
"FHLB") of Cincinnati and is subject to regulation and supervision by the
Office of Thrift Supervision (the "OTS").
First Federal is principally engaged in the business of making first
mortgage loans secured by one-to-four family residential real estate located
in First Federal's primary market area. First Federal also originates loans
secured by multifamily real estate (over four units) and nonresidential real
estate. The origination of consumer loans, particularly automobile loans,
also constitutes a significant portion of First Federal's lending
activities. Loan funds are obtained primarily from savings deposits, which
are insured up to applicable limits by the FDIC, FHLB advances, and loan
repayments. In addition to originating loans, First Federal invests in U.S.
government and agency obligations, interest-bearing deposits in banks,
mortgage-backed securities and other investments permitted by applicable
law.
First Federal conducts business from its main office in Zanesville,
Ohio, and from five full-service branch offices. Two of First Federal's
branches are located in Zanesville. The other branches are located in
Roseville, Coshocton and Newcomerstown, Ohio. First Federal's primary
market area consists of the Ohio counties of Muskingum, Coshocton and
Tuscarawas, in which the offices of First Federal are located, and the
adjacent county of Perry.
In addition to the historic financial information contained herein,
the following discussion includes forward-looking statements that involve
risks and uncertainties. Economic circumstances and Bancorp's operations
and actual results could differ significantly from those discussed in those
forward-looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein, but also include
changes in the economy and interest rates in the nation and in Bancorp's
general market area. See Exhibit 99.2 hereto, "Safe Harbor Under the
Private Securities Litigation Reform Act of 1995," which is incorporated
herein by reference.
Selected Consolidated Financial Data
The following table sets forth certain information concerning the
consolidated financial condition and results of operations of First Federal
as of and for the periods indicated:
<TABLE>
<CAPTION>
Selected financial information At or for the year ended September 30,
and other data 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $ 184,467 $ 171,624 $ 156,305 $ 146,048 $ 143,635
Mortgage-backed securities 1,661 1,889 2,063 2,395 2,976
Loans receivable - net 160,298 151,744 138,618 127,149 122,725
Federal funds sold and other short-term investments 3,175 975 550 - 824
Investment securities and FHLB stock 6,478 6,502 6,233 5,638 7,215
Deposits 130,072 129,267 129,013 130,331 132,007
Borrowed funds 37,970 27,600 14,625 3,225 -
Stockholders' equity 13,998 12,745 11,484 11,231 10,005
Number of:
Real estate loans outstanding 3,008 2,675 2,655 2,642 2,620
Consumer loans outstanding 5,189 4,938 4,735 4,483 4,430
Deposit accounts 20,312 20,750 20,237 20,516 21,088
Full service offices 6 6 6 6 6
Summary of operations 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Total interest income $ 13,630 $ 12,205 $ 10,052 $ 10,805 $ 12,365
Total interest expense 7,099 6,452 4,575 5,206 7,003
--------- --------- --------- --------- ---------
Net interest income 6,531 5,753 5,477 5,599 5,362
Provision for loan losses 131 60 192 281 351
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 6,400 5,693 5,285 5,318 5,011
Noninterest income 871 766 731 765 750
Noninterest expense 5,092 4,062 4,084 3,909 3,954
Provision for loss on property held for sale - - - - 548
--------- --------- --------- --------- ---------
Income before federal income tax and cumulative
effect of a change in accounting method 2,179 2,397 1,932 2,174 1,259
Provision for federal income taxes 745 802 573 677 119
--------- --------- --------- --------- ---------
Income before cumulative effect of a
change in accounting method 1,434 1,595 1,359 1,497 1,140
Cumulative effect of change in accounting
for income taxes - - (360) - -
--------- --------- --------- --------- ---------
Net income $ 1,434 $ 1,595 $ 999 $ 1,497 $ 1,140
========= ========= ========= ========= =========
Primary earnings per share before cumulative effect
of a change in accounting method (1) $ .84 $ .97 $ .80 $ .88 $ .69
Change in accounting method - - (.21) - -
--------- --------- --------- --------- ---------
Primary earnings per share $ .84 $ .97 $ .59 $ .88 $ .69
========= ========= ========= ========= =========
Fully diluted earnings per share before cumulative
effect of a change in accounting method (1) $ .84 $ .96 $ .79 $ .87 $ .69
Change in accounting method - - (.21) - -
--------- --------- --------- --------- ---------
Fully diluted earnings per share $ .84 $ .96 $ .58 $ .87 $ .69
========= ========= ========= ========= =========
Cash dividend declared per share (1) $ 0.21 $ 0.18 $ 0.14 $ 0.09 -
Weighted average common and
common equivalent shares (2)
Primary 1,697,094 1,640,194 1,695,948 1,706,096 1,651,700
Fully diluted 1,716,515 1,660,670 1,702,556 1,710,692 1,651,700
____________________
<F1> Information is not applicable to periods prior to July 14, 1992, the
effective date of First Federal's conversion from mutual to stock
form.
<F2> On each of October 26, 1994, and November 6, 1996, the Board of
Directors declared a stock dividend in the nature of a 2-for-1 stock
split. All earnings and dividends per share disclosures have been
restated to reflect these stock dividends.
</TABLE>
<TABLE>
<CAPTION>
At or for the year ended September 30,
--------------------------------------------
Key Operating Ratios 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest rate spread (spread between
weighted average rate on all
interest-earning assets and all
interest-bearing liabilities) at end
of period 3.71% 3.48% 3.73% 3.87% 4.14%
Average interest rate spread 3.92 3.54 3.84 3.99 3.91
Net interest yield (net interest
income divided by average interest-
earning assets) 4.04 3.70 3.99 4.15 3.67
Return on stockholders' equity (1) 10.65 13.14 12.57 14.00 17.06
Return on stockholders' equity (2) 10.65 13.14 9.24 14.00 17.06
Return on assets (3) .81 .96 .93 1.03 0.78
Return on assets (4) .81 .96 .68 1.03 0.78
Average interest-earning assets to
average interest-bearing liabilities 102.79 103.90 104.69 104.12 101.34
Stockholders' equity to total assets at
end of period 7.59 7.43 7.35 7.69 6.97
Average stockholders' equity to average
total assets 7.65 7.33 7.51 7.36 4.57
Dividend payout 25.00 18.75 24.57 10.35 -
Nonperforming assets ratio (total
nonperforming assets divided by
total assets) at end of period (5) .28 .31 .46 1.68 1.87
General valuation allowance to net
loans outstanding at end of period 0.75 0.76 0.57 0.52 0.71
____________________
<F1> Net income before cumulative effect of change in accounting principle
divided by average stockholders' equity.
<F2> Net income divided by average stockholders' equity.
<F3> Net income before cumulative effect of change in accounting principle
divided by average total assets.
<F4> Net income divided by average total assets.
<F5> Nonperforming assets consist of nonaccruing loans, accruing loans which
are past due 90 days or more, real estate owned and property held
for future sale.
</TABLE>
Lending Activities
General. First Federal's primary lending activity is the origination
of permanent loans and construction loans secured by one-to-four family
homes located in First Federal's primary market area. Construction loans
and permanent loans secured by multifamily properties containing five units
or more and nonresidential properties are also offered by First Federal. In
addition to mortgage lending, First Federal makes automobile loans and other
consumer loans, including loans secured by deposit accounts, home equity
lines-of-credit, home improvement loans and unsecured loans. First
Federal's net loan portfolio was approximately $160.3 million at September
30, 1996, and constituted 87% of total assets.
Loan Portfolio Composition. The following table presents certain
information in respect of the composition of First Federal's loan portfolio
at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------
1996 1995 1994
---- ---- ----
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
Real Estate Loans
One-to-four family $ 99,496 59.57% $ 97,347 62.55% $ 90,092 62.96%
Multifamily (over 4 units) 9,176 5.49 8,265 5.31 9,179 6.41
Construction 6,582 3.94 3,601 2.31 5,485 3.83
Nonresidential real estate 8,505 5.09 7,285 4.68 5,699 3.98
Consumer Loans
Automobile 30,376 18.19 26,767 17.20 21,950 15.34
Home equity 3,767 2.25 4,136 2.66 3,466 2.42
Home improvement 662 .40 818 .52 713 .50
Deposit account 484 .29 298 .19 287 .20
Education - - 31 .02 1,061 .74
Other secured 5,799 3.47 5,210 3.35 4,280 2.99
Unsecured 515 .31 339 .22 252 .18
Commercial 1,663 1.00 1,544 .99 648 .45
-------- ------ -------- ------ -------- ------
Total loans $167,025 100.00% $155,641 100.00% $143,112 100.00%
Less:
Undisbursed loans in process 5,105 2,274 3,207
Net deferred origination fees
(costs) and amortized discounts 11 124 267
Allowance for loan losses 1,611 1,499 1,021
-------- -------- --------
Total loans - net $160,298 $151,744 $138,617
======== ======== ========
</TABLE>
Loan Maturity Schedule. The following table sets forth certain
information at September 30, 1996, regarding the net dollar amount of loans
maturing in First Federal's portfolio, based on contractual terms to
maturity:
<TABLE>
<CAPTION>
Due during the years ending September 30,
2001 to 2006 to 2011 and
1997 1998 1999 2000 2005 2010 thereafter Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-rate Loans:
One-to-four family
residential real estate $ 43 $ 57 $ 46 $ 177 $ 820 $ 1,365 $ 1,978 $ 4,486
Multifamily (over 4 units) - 39 - 39 261 507 - 846
Nonresidential real estate 516 277 158 236 1,738 306 - 3,231
Consumer and other 3,177 2,794 5,969 23,362 3,481 - - 38,783
------ ------ ------ ------- ------- ------- ------- --------
Total Fixed Rate $3,736 $3,167 $6,173 $23,814 $ 6,300 $ 2,178 $ 1,978 $ 47,346
====== ====== ====== ======= ======= ======= ======= ========
Adjustable-Rate Loans:
One-to-four family
residential real estate $2,573 $ 40 $ 59 $ 693 $ 7,091 $21,268 $69,868 $101,592
Multifamily (over 4 units) - - 75 - 271 1,969 6,015 8,330
Nonresidential real estate 3 5 99 79 1,012 1,480 2,596 5,274
Consumer and other 511 598 1,746 1,591 37 - - 4,483
------ ------ ------ ------- ------- ------- ------- --------
Total Adjustable-Rate $3,087 $ 643 $1,979 $ 2,363 $ 8,411 $24,717 $78,479 $119,679
====== ====== ====== ======= ======= ======= ======= ========
All Loans:
One-to-four family
residential real estate $2,616 $ 97 $ 105 $ 870 $ 7,911 $22,633 $71,846 $106,078
Multifamily (over 4 units) - 39 75 39 532 2,476 6,015 9,176
Nonresidential real estate 519 282 257 315 2,750 1,786 2,596 8,505
Consumer and other 3,688 3,392 7,715 24,953 3,518 - - 43,266
------ ------ ------ ------- ------- ------- ------- --------
Total All Loans $6,823 $3,810 $8,152 $26,177 $14,711 $26,895 $80,457 $167,025
====== ====== ====== ======= ======= ======= ======= ========
</TABLE>
One-to-Four Family Residential Real Estate Loans. The primary lending
activity of First Federal has been the origination of permanent and
construction loans secured by one-to-four family residences, primarily
single-family residences, located within First Federal's primary market
area. Each of such loans is secured by a mortgage on the underlying real
estate and improvements thereon, if any.
OTS regulations limit the amount which First Federal may lend in
relationship to the appraised value of the real estate and improvements at
the time of loan origination. In accordance with such regulations, First
Federal makes loans on one-to-four family residences up to 95% of the value
of the real estate and improvements (the "Loan-to-Value Ratio" or "LTV").
The principal amount of any loan which exceeds an 80% LTV at the time of
origination is usually covered by private mortgage insurance at the expense
of the borrower.
Adjustable-rate mortgage loans ("ARMs") are offered by First Federal
for terms of up to 30 years. The interest rate adjustment periods on the
residential ARMs are either one or three years. The maximum allowable
adjustment at each adjustment date is usually 2% with a maximum adjustment
of 6% over the term of the loan. The interest rate adjustments on one-year
and three-year residential ARMs presently originated by First Federal are
tied to changes in the weekly average yield on one- and three-year U.S.
Treasury securities, respectively. Rate adjustments are computed by adding
a stated margin, typically 275 to 300 basis points, to the index. From time
to time, First Federal originates residential ARMs which have an initial
interest rate that is lower than the sum of the specified index plus the
margin. Such loans are subject to increased risk of delinquency or default
due to increasing monthly payments as the interest rates on such loans
increase to the fully-indexed level. First Federal attempts to reduce such
risk by underwriting such loans at the fully-indexed rate. Most of the
loans in First Federal's portfolio that were written at reduced rates have
been through at least one adjustment cycle.
Virtually all of the fixed-rate mortgage loans originated by First
Federal, including loans insured by the Federal Housing Administration
("FHA") or guaranteed by the Veterans Administration ("VA"), are originated
for sale. A majority of the fixed-rate residential real estate loans in
First Federal's loan portfolio at September 30, 1996, were originated prior
to 1981. See "Loan Originations, Purchases and Sales."
First Federal's one-to-four family residential real estate loan
portfolio, including loans for the construction of one-to-four family
residences, was approximately $106.1 million at September 30, 1996, and
represented 63.51% of total loans. There were no construction loans
delinquent at September 30, 1996. See "Construction Loans."
Multifamily Residential Real Estate Loans. In addition to loans on
one-to-four family properties, First Federal makes adjustable-rate loans
secured by multifamily properties containing over four units. Multifamily
loans generally have terms of up to 25 years and a maximum loan-to-value
ratio of 75%. First Federal does originate multifamily loans for up to 30
years or with an LTV of up to 80% if the creditworthiness of the borrower
and the quality of the project justify such terms.
Multifamily lending is generally considered to involve a higher degree
of risk because the borrower typically depends upon income generated by the
project to cover operating expenses and debt service. The profitability of
a project can be affected by economic conditions, government policies and
other factors beyond the control of the borrower. First Federal attempts to
reduce the risk associated with multifamily lending by evaluating the
creditworthiness of the borrower and the projected income from the project
and by obtaining personal guarantees on loans made to corporations and
partnerships. First Federal requires that the borrower submit rent rolls
and financial statements annually to enable First Federal to monitor the
loan.
At September 30, 1996, loans secured by multifamily properties totaled
approximately $9.1 million, or 5.49% of total loans. There were no
multifamily real estate loans delinquent or included in classified assets at
September 30, 1996.
Construction Loans. First Federal offers loans to owner-occupants for
the construction of single-family homes. Such loans are offered with
adjustable-rates of interest and for terms of up to 30 years. The borrower
pays interest only for the first six months while the residence is being
constructed. At September 30, 1996, a total of $6.6 million, or
approximately 3.94%, of First Federal's total loans, consisted of
construction loans. First Federal currently has no multifamily,
construction loans in its portfolio. First Federal has nonresidential real
estate construction loans in its portfolio in the amount of $478,653.
Construction loans, particularly for multifamily and nonresidential
real estate projects, generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties. Loan funds
are advanced upon the security of the project under construction, which is
more difficult to value before the completion of construction. Moreover,
because of the uncertainties inherent in estimating construction costs, it
is relatively difficult to evaluate accurately the LTVs and the total loan
funds required to complete a project. In the event a default on a
construction loan occurs and foreclosure follows, First Federal would have
to take control of the project and attempt either to arrange for completion
of construction or dispose of the unfinished project. The principal amounts
of individual loans for the construction of single-family residences
typically do not exceed $200,000.
Nonresidential Real Estate Loans. First Federal also makes loans
secured by nonresidential real estate consisting of nursing homes, day care
centers, churches, office properties and various retail and other income-
producing properties. Such loans are typically made with adjustable-rates
of interest for terms of up to 25 years.
Nonresidential real estate lending is generally considered to involve
a higher degree of risk than residential lending due to the relatively
larger loan amounts and the effects of general economic conditions on the
successful operation of income-producing properties. First Federal has
endeavored to reduce such risk by carefully evaluating the credit history
and past performance of the borrower, the location of the real estate, the
quality of the management constructing and operating the property, the debt
service ratio, the quality and characteristics of the income stream
generated by the property and appraisals supporting the property's
valuation. See "Delinquent Loans, Nonperforming Assets and Classified
Assets."
Federal regulations limit the amount of nonresidential mortgage loans
which an association can make to 400% of total capital. First Federal's
nonresidential real estate loan portfolio at September 30, 1996, was equal
to 60.76% of total capital at such date.
At September 30, 1996, First Federal had a total of $8.5 million
invested in nonresidential real estate loans. There were no nonresidential
real estate loans delinquent at September 30, 1996. Such loans comprised
approximately 5.09% of First Federal's total loans.
Consumer Loans. First Federal makes various types of consumer loans,
including automobile loans, loans made to depositors on the security of
their deposit accounts, home improvement loans, home equity lines-of-credit,
other secured loans and unsecured personal loans. Consumer loans, except
home equity lines-of-credit, are generally made at fixed-rates of interest
for terms of up to five years. Home equity lines-of-credit generally have
interest rates which adjust monthly based on changes in the composite prime
rate of 75% of the thirty largest U.S. banks, as reported by The Wall
Street Journal.
Automobile loans are originated by First Federal directly and
indirectly in conjunction with automobile dealers in First Federal's primary
market area. During 1996, approximately 60% of the automobile loans
originated by First Federal were originated in conjunction with automobile
dealers. When loans are originated in such manner, the dealer takes the
loan application and receives a fee if the loan is approved by First
Federal. Automobile loans are secured by the automobile purchased with the
loan proceeds.
At September 30, 1996, automobile loans totaled approximately $30.4
million, or 18.19% of total loans. This is an increase from $26.8 million,
or 17.20% of total loans as of September 30, 1995. The change is due
primarily to the increase in consumer demand for new automobiles and the
loans associated therewith.
Home equity lines-of-credit are originated for terms of up to five
years. Such loans are secured by a first or second mortgage on the
borrowers' principle residence. First Federal originates home equity lines-
of-credit based on a combined LTV of not more than 80% for the first
mortgage, if any, and the line-of-credit. Home equity lines-of-credit
totaled $3.8 million, or 2.25% of First Federal's total loans, at such date.
Home improvement loans are made for terms of up to five years,
typically at fixed rates of interest. Such loans are usually secured by a
second mortgage on the property being improved.
When colleges were given the authority to make Guaranteed Student
Loans, First Federal decided to eliminate this product and sell its
education loans to the Student Loan Funding Corporation. In June of 1995,
the sale of the student loans for 100% of the outstanding principal, which
was $1.2 million, was completed and resulted in a gain on the sale of
$19,000.
Consumer loans, particularly consumer loans which are unsecured or
secured by rapidly depreciating assets such as automobiles, may entail
greater risk than do residential mortgage loans. Repossessed collateral for
a defaulted consumer loan may not provide an adequate source of repayment of
the outstanding loan balance. The cost of collecting a remaining deficiency
is often disproportionate to the amount of the deficiency. In addition,
consumer loan collections are dependent on the borrower's continuing
financial stability and are, therefore, more likely to be adversely affected
by job loss, divorce, illness or personal bankruptcy. The risk of default
on consumer loans increases during periods of recession, high unemployment
and other adverse economic conditions. Despite the increased risks
associated with consumer lending, consumer loans typically provide a higher
rate of return than real estate loans and have shorter terms to maturity,
thereby assisting First Federal in managing the interest rate sensitivity of
its assets and liabilities.
At September 30, 1996, First Federal had approximately $43.3 million,
or 25.91% of total loans, invested in consumer loans. Such amount complied
with federal regulations limiting the aggregate amount of consumer loans in
which a savings association can invest. There were consumer loans with
aggregate balances of $788,000 delinquent at September 30, 1996.
Commercial Loans. Commercial loans totaled $1.6 million. First
Federal has a new and used car floor-planning program for a local car dealer
with a balance of $1.3 million at September 30, 1996. The floor-plan loan
is secured by the title of the cars as well as the real estate. First
Federal currently has one other commercial loan in its portfolio. Such loan
is a secured line-of-credit with a maximum principal amount of $400,000.
First Federal intends to originate commercial loans on a very select basis
in the future.
Loan Solicitation and Processing. Loan originations are developed
from a number of sources, including continuing business with depositors,
other borrowers and real estate developers, solicitations by First Federal's
lending staff and walk-in customers. First Federal utilizes loan solicitors
for FHA and VA loans, which are originated for sale.
Conventional mortgage loan applications are taken by one of First
Federal's branch managers or loan personnel. First Federal obtains a credit
report, verification of employment and other documentation concerning the
creditworthiness of the borrower. An appraisal of the fair market value of
the real estate which will be given as security for the loan is prepared by
a staff appraiser or by a fee appraiser approved by the Board of Directors.
Upon the completion of the appraisal and the receipt of all necessary
information on the credit history of the borrower, the application for a
loan over $50,000 is submitted to the President and the principal lending
officer of First Federal for approval. Loans for more than $200,000 must be
approved by the Loan Committee of the Board of Directors.
If a mortgage loan application is approved, an attorney's opinion of
title is obtained on the real estate which will secure the mortgage loan.
Borrowers are required to carry satisfactory fire and casualty insurance and
flood insurance, if applicable, and to name First Federal as an insured
mortgagee.
The procedure for approval of construction loans is the same as for
residential mortgage loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs.
First Federal also evaluates the feasibility of the proposed construction
project and the experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to
repay the loan and the value of the collateral, if any.
Loan Originations, Purchases and Sales. During the past several
years, First Federal has been actively originating new fixed-rate and
adjustable-rate loans. Adjustable-rate loans originated by First Federal
are generally held in First Federal's loan portfolio. FHA and VA fixed-rate
loans are originated on behalf of First Federal by two loan origination
agents and are sold by First Federal through the Ohio Housing Authority or
to a mortgage company. First Federal receives a fee of 1.0% to 2.0% of the
principal amount of each FHA and VA loan originated. First Federal
generally does not retain servicing rights on FHA and VA loans sold.
Prior to 1992, virtually all conventional residential fixed-rate loans
made by First Federal were originated in conjunction with unaffiliated
mortgage companies. First Federal originated such loans pursuant to a
commitment from a mortgage company to fund the loan or to purchase the loan
after it was funded by First Federal. First Federal received a fee,
typically 1.50% of the principal amount of the loan. First Federal
originated fixed-rate loans in conjunction with mortgage companies because
the volume of such loans was not sufficient for First Federal to sell them
profitably directly in the secondary market. The volume of fixed-rate
mortgage loans originated recently by First Federal has increased to such a
level that in 1993 First Federal commenced originating such loans directly
and selling them in the secondary market. First Federal retains servicing
on loans sold in such manner, from which it derives servicing income. The
risk of loss associated with the sale of fixed-rate loans increases as a
result of the absence of a commitment for the purchase of a loan at the time
a loan is originated. First Federal sells loans on a per loan basis in an
attempt to minimize risk.
Prior to 1986, First Federal purchased whole loans and participation
interests in loans secured by real estate outside First Federal's primary
market area. At September 30, 1996, First Federal's loan portfolio included
participation interests in loans having an aggregate book value of $585,000.
Loan participations account for 6.34% of First Federal's aggregate
classified assets and nonperforming assets at such date. See "Delinquent
Loans, Nonaccruing Loans and Classified Assets."
The following table presents First Federal's mortgage loan
origination, purchase and sale activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans originated:
Adjustable-rate:
Real estate:
One-to-four family $30,729 $18,204 $26,619
Multifamily 748 274 90
Nonresidential 580 2,763 532
Consumer 9,358 7,557 3,045
------- ------- -------
Total adjustable-rate loans $41,415 $28,798 $30,286
------- ------- -------
Fixed-rate:
Real estate:
One-to-four family (1) $ 7,229 $ 3,471 $ 4,238
Multifamily - - -
Nonresidential 130 203 -
Consumer 24,071 22,215 19,931
------- ------- -------
Total fixed-rate loans $31,430 $25,889 $24,169
------- ------- -------
Total loans originated $72,845 $54,687 $54,455
------- ------- -------
Loans sold 6,763 4,306 4,442
------- ------- -------
Principal repayments (2) 54,698 37,852 37,018
------- ------- -------
Total reductions 61,461 42,158 41,460
------- ------- -------
Change in other items - net (3) (2,830) 598 (1,527)
------- ------- -------
Net increase $ 8,554 $13,127 $11,468
======= ======= =======
____________________
<F1> Includes construction loans.
<F2> Includes advances drawn, repayments on lines-of-credits and transfers
to real estate owned.
<F3> Consists of loans in process, net deferred origination costs and
unamortized discounts and allowance for loan losses.
</TABLE>
Federal regulations limit the amount of loans which an association can
make to any one borrower. Under OTS regulations, the aggregate amount of
loans which First Federal may make to any one borrower (including related
entities), with certain exceptions, is limited in general to 15% of First
Federal's total capital for risk-based capital purposes plus any additional
loan reserves not included in total capital (collectively "Lending Limit
Capital"). A savings association may lend to one borrower an additional
amount not to exceed 10% of the association's Lending Limit Capital if the
additional amount is fully secured by "readily marketable collateral." Real
estate is not "readily marketable collateral." In addition, the regulations
require that loans to certain related or affiliated borrowers be aggregated
for purposes of such limits.
Based on such limits, First Federal was able to lend approximately
$2.1 million to any one borrower at September 30, 1996. The largest amount
First Federal had outstanding to one borrower was $1.8 million. Such loan
was secured by commercial real estate and was current at September 30, 1996.
See "REGULATION - OTS Regulations -- Lending Limits."
Loan Origination and Other Fees. First Federal realizes loan
origination fee and other fee income from its lending activities and also
realizes income from late payment charges, application fees and fees for
other miscellaneous services. Loan origination fees, or "points", are paid
by borrowers for mortgage loans.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending and economic conditions. All
nonrefundable loan origination fees and certain direct loan origination
costs are deferred and recognized in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 91 as an adjustment to yield over the life
of the related loan.
Delinquent Loans, Nonaccruing Loans and Classified Assets. When a
borrower fails to make a required payment on a loan, First Federal attempts
to cause the deficiency to be cured by contacting the borrower. In most
cases, deficiencies are cured promptly.
For mortgage loans, a notice is mailed to the borrower after a payment
is 15 days past due and a late penalty is assessed against the borrower at
such time. After a payment is 30 days past due, First Federal's collections
department will contact the borrower by telephone or letter. After a
payment is 90 days past due, First Federal sends the borrower a demand
letter. In addition, when a loan becomes delinquent more than 90 days, an
appraisal of the security is performed by First Federal's staff appraiser.
If the appraisal indicates that the value is less than the book value of the
loan, a valuation allowance is established for such loan.
When deemed appropriate by management, First Federal institutes action
to foreclose on the real estate or to acquire the real estate by deed in
lieu of foreclosure. A decision as to whether and when to initiate
foreclosure proceedings is based on such factors as the amount of the
outstanding loan in relation to the original indebtedness, the extent of the
delinquency and the borrower's ability and willingness to cooperate in
curing delinquencies. If a foreclosure occurs, the real estate is sold at
public sale and may be purchased by First Federal.
Real estate acquired by First Federal as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned ("REO") until
it is sold. When property is so acquired, it is recorded by First Federal
at estimated fair value of the property less estimated costs to sell at the
date of acquisition, and any write-down resulting therefrom is charged to
the book balance of the property. Interest accrual, if any, ceases no later
than the date of acquisition of the real estate and all costs incurred from
such date in maintaining the property are expensed. Costs relating to the
development and improvement of the property are capitalized to the extent
they increase the fair value.
In the case of delinquencies on consumer loans, the borrower is
contacted after a payment is ten days past due and a late penalty is
assessed. When a consumer loan secured by an automobile or other collateral
becomes more than 90 days past due, an estimate is made of the value of the
collateral. If the estimate of value indicates that the value of the
collateral is less than the book value of the loan, a valuation allowance is
established.
The following table reflects the amount of loans in a delinquent or
nonperforming status as of the dates indicated:
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Percent of Percent of Percent of
Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans delinquent for:
30 to 59 days $1,831 1.10% $2,844 1.83% $2,679 1.87%
60 to 89 days 372 0.22 129 0.08 175 0.12
90 or more days 337 0.20 442 0.28 488 0.34
------ ---- ------ ---- ------ ----
Total delinquent real estate loans $2,540 1.52 $3,415 2.19 $3,342 2.33
------ ---- ------ ---- ------ ----
Consumer loans delinquent for:
30 to 59 days 386 0.23 208 0.13 121 0.08
60 to 89 days 188 0.11 121 0.08 28 0.01
90 or more days 214 0.13 96 0.06 112 0.08
------ ---- ------ ---- ------ ----
Total delinquent consumer loans 788 0.47 425 0.27 261 0.17
------ ---- ------ ---- ------ ----
Total delinquent loans $3,328 1.99% $3,840 2.46% $3,603 2.50%
====== ==== ====== ==== ====== ====
</TABLE>
Each consumer loan which is delinquent 90 days or more and each real
estate loan which is delinquent 120 days or more is reviewed by one of First
Federal's loan officers to assess the collectibility of the loan. If the
loan is deemed to be uncollectible, First Federal ceases to accrue interest
on the loan.
The following table sets forth information with respect to the accrual
and nonaccrual status of First Federal's loans which are 90 days or more
past due and other nonperforming assets as of the dates indicated:
<TABLE>
<CAPTION>
September 30,
----------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Real estate:
Residential $ 211 $ 264 $ 415
Nonresidential - - -
Consumer 175 96 152
----- ----- -----
Total nonaccrual loans $ 386 $ 360 $ 567
----- ----- -----
Accruing loans which are contractually
past due 90 days or more:
Real estate:
Residential $ 126 $ 178 $ 153
Nonresidential - - -
Consumer - - -
----- ----- -----
Total accruing loans which are 90 days
past due $ 126 $ 178 $ 153
----- ----- -----
Total nonaccrual loans and accruing
loans which are 90 days past due $ 512 $ 538 $ 720
===== ===== =====
Percentage of total loans 0.31% 0.35% 0.52%
===== ===== =====
Other nonperforming assets - net (1) $ 0 $ 0 $ 0
===== ===== =====
____________________
<F1> Consists of REO, property held for future sale and First Federal's
investment in a joint venture.
</TABLE>
During the year ended September 30, 1996, $42,784 of interest income
would have been recorded on nonaccruing loans had such loans been accruing
and $23,669 of interest income on those loans was included in net income for
the period. During the periods shown, First Federal had one restructured
loan within the meaning of SFAS No. 15. On April 28, 1994, new owners of a
health club in Central Ohio assumed mortgage loans which were contractually
delinquent and had balances of $496,958 and $5,957. An additional $26,500
was advanced to the new owners, increasing the first mortgage indebtedness
to $523,458, at a 9% interest rate, the purpose of which was to pay
outstanding obligations of the health club. A secured commercial line-of-
credit, at prime rate plus two percent, in the amount of $25,000 was also
made available at the time of the assumption to provide a contingency fund
for unexpected expenses associated with the continued operation of the
facility. All indebtedness is corporately guaranteed. The new owner owns
and/or operates several health clubs in the Central and Northern Ohio areas
and is believed to possess the necessary resources and expertise to make the
health club a profitable venture. There is also a limited guarantee of up
to $131,000 by the principals of the corporation.
Interest on the assumed debts began accruing as of the date of the
assumption with monthly principal and interest payments deferred until
October 1, 1994. The deferral was to allow the new owners a window of time
to make necessary improvements to the facility and its operations in order
to reverse the declining membership. The entire loan balance assumed,
including the additional advance and the line-of credit, totaling $535,228
is due in full on May 1, 1999.
There were no loans that are not currently classified as nonaccrual,
90 days past due or restructured but which may be so classified in the near
future because management has concerns as to the ability of the borrowers to
comply with repayment terms.
OTS regulations require that each thrift institution classify its own
assets on a regular basis. Problem assets are classified as "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined
weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. "Doubtful" assets have the same weaknesses as "substandard"
assets, with the additional characteristics that (i) the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable and (ii) there is a high possibility of
loss. An asset classified "loss" is considered uncollectible and of such
little value that its continuance as an asset of the institution is not
warranted. The regulations also contain a "special mention" category,
consisting of assets which do not currently expose an institution to a
sufficient degree of risk to warrant classification but which possess credit
deficiencies or potential weaknesses deserving management's close attention.
It is First Federal's policy to classify nonaccrual loans and accruing
loans which are 90 days or more delinquent. When a loan becomes 90 days or
more delinquent it is classified as "substandard" regardless of the value of
the collateral securing the loan. If the collateral value is less than the
book value, a specific valuation allowance is established for the
difference. When a "substandard" loan is brought current, it is placed in
the "special mention" category until the borrower has demonstrated to
management's satisfaction his ability to perform his obligation under the
loan. At such time, the loan is removed from "special mention." Other
assets, including REO and property held for future sale, are also classified
if they possess weaknesses that warrant the classification of such assets.
Federal examiners are authorized to classify an association's assets. If an
association does not agree with an examiner's classification of an asset, it
may appeal this determination to the District Director of the OTS.
The aggregate amounts of First Federal's classified assets at the
dates indicated were as follows:
<TABLE>
<CAPTION>
At September 30,
--------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Classified assets
Substandard $1,006 $1,702 $2,730
Doubtful - - -
Loss 414 345 232
------ ------ ------
Total classified assets $1,420 $2,047 $2,962
====== ====== ======
</TABLE>
Assets classified as substandard or doubtful require First Federal to
establish prudent general allowances for loan losses. If an asset, or
portion thereof, is classified as loss, First Federal must either establish
specific allowances for losses in the amount of 100% of the portion of the
asset classified loss, or charge off such amount. First Federal maintains
an allowance for loan losses with respect to loans that are classified and
an allowance for loss on property held for future sale for other classified
assets.
First Federal sets up a specific reserve for the entire balance of
repossessed cars at the time of repossession. That reserve is reversed at
the time of the sale of the car and the loss from the sale is recorded.
The Savings Bank maintains an allowance for losses on loans and on
real estate owned. The allowance for losses on loans and on real estate
owned was $1,611,000 at September 30, 1996, compared to $1,499,000 at
September 30, 1995. During the twelve-month period ended September 30,
1996, the Savings Bank recorded net charge-offs of $19,000 compared to net
recoveries of $418,000 during the same period of 1995. The recovery of
$431,000 during the March 31, 1995, six-month period was the result of a
$428,000 recovery from the sale of the Gates of Arlington property, which
was retained in the allowance for loan losses. The provisions for loan
losses during the twelve-month periods ended September 30, 1996, and 1995,
were $131,000 and $60,000 respectively.
The Savings Bank classified no loans meeting the definition of
impaired during the quarter ended September 30, 1996.
The following table sets forth an analysis of First Federal's
allowance for loan losses allocated by type of loan:
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Percent of loans Percent of loans Percent of loans
in category to in category to in category to
Amount total loan Amount total loans Amount total loans
------ ---------------- ------ ---------------- ------ ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans $ 521 74.05% $ 566 74.85% $ 518 77.18%
Consumer loans 640 25.95 498 25.15 421 22.82
Unallocated 450 - 435 - 82 -
------ ------ ------ ------ ------ ------
Total $1,611 100.00% $1,499 100.00% $1,021 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
The allocation of the allowance does not restrict the ability of First
Federal to utilize such allocated amounts for other types of loans.
The amount of the unallocated portion of First Federal's loan loss
allowance is based on its historical five-year average loss experience for
various types of mortgage and consumer loans which are not classified
assets, the level of classified assets, general economic conditions and
other variables. Unallocated reserves for assets classified "substandard"
are established as follows: (1) 5.0% for one-to-four family mortgage loans
classified substandard; and (2) 10% for all other assets classified
substandard. For assets for which a specific reserve has been established
for the portion of the asset classified "loss," general valuation allowances
are typically not established for the balance of the asset classified
"substandard." At September 30, 1996, First Federal had no assets
classified "doubtful." First Federal's loan loss allowance at September 30,
1996, is considered by management to be adequate.
Investment Activities
OTS regulations require that First Federal maintain a minimum amount
of liquid assets, which may be invested in United States Treasury
obligations, securities of various federal agencies, certificates of deposit
at insured banks, bankers' acceptances and federal funds. First Federal is
also permitted to make investments in certain commercial paper, corporate
debt securities rated in one of the four highest rating categories by one or
more nationally recognized statistical rating organizations, and mutual
funds, as well as other investments permitted by federal regulations. In
recent periods, First Federal has maintained liquid assets in an amount
between 5% and 8% of total assets.
The following table sets forth an analysis of First Federal's
investment portfolio at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Book Percent of Book Percent of Book Percent of
value total value total value total
----- ---------- ----- ---------- ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits
in other banks $3,175 100.00% $ 975 100.00% $ 550 100.00%
====== ====== ====== ====== ====== ======
Investment securities:
U.S. Government securities and
agency obligations $4,321 53.09% $4,621 55.07% $5,182 62.46%
Obligations of State and
political subdivisions 227 2.79 246 2.93 43 0.52
------ ------ ------ ------ ------ ------
Subtotal 4,548 55.88 4,867 58.00 5,225 62.98
------ ------ ------ ------ ------ ------
FHLB stock 1,930 23.71 1,635 19.49 1,008 12.15
Mortgage-backed securities:
FNMA certificates 680 8.35 748 8.91 794 9.57
FHLMC certificates 29 .36 37 .44 47 .56
GNMA certificates 952 11.70 1,104 13.16 1,222 14.74
------ ------ ------ ------ ------ ------
Subtotal 1,661 20.41 1,889 22.51 2,063 24.87
------ ------ ------ ------ ------ ------
Total $8,139 100.00% $8,391 100.00% $8,296 100.00%
====== ====== ====== ====== ====== ======
Average remaining life of
investment securities and
mortgage-backed securities 3.83 years 6.00 years 7.06 years
Adjusted weighted average
maturity of investment securities 1.7 months 4.7 months 11.3 months
</TABLE>
The composition and maturities of First Federal's investment
securities and mortgage-backed securities are indicated in the following
table:
<TABLE>
<CAPTION>
At September 30, 1996
-----------------------------------------------------------------------------
Less than 1 to 5 5 to 10 Over Total investment
1 year years years 10 years securities
---------- ---------- ---------- ---------- -------------------------
Book value Book value Book value Book value Book value Market value
---------- ---------- ---------- ---------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government securities
and agency obligations $3,223 $1,098 $ - $ - $4,321 $4,319
Obligation of State and
political subdivisions - - 188 39 227 227
Mortgage-backed securities - - 175 1,486 1,661 1,658
------ ------ ----- ------ ------ ------
Total investment securities $3,223 $1,098 $ 363 $1,525 $6,209 $6,204
====== ====== ===== ====== ====== ======
Weighted average yield 5.51% 5.65% 7.52% 7.01% 6.11% -
</TABLE>
Deposits and Borrowings
General. Deposits have traditionally been the primary source of First
Federal's funds for use in lending and other investment activities. In
addition to deposits, First Federal derives funds from interest payments and
principal repayments on loans and income on earning assets. Loan payments
are a relatively stable source of funds, while deposit inflows and outflows
fluctuate more in response to general interest rates and money market
conditions. Borrowings from the FHLB of Cincinnati have been used to
compensate for reductions in the availability of funds from other sources.
Deposits. Deposits are attracted principally from within First
Federal's primary market area through the offering of a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW")
accounts, money market deposit accounts, regular passbook and statement
savings accounts, term certificate accounts and retirement savings plans.
Interest rates paid, maturity terms, service fees and withdrawal penalties
for the various types of accounts are established periodically by management
of First Federal based on First Federal's liquidity requirements, growth
goals and interest rates paid by competitors. First Federal does not use
brokers to attract deposits.
First Federal's deposits were represented by the various types of
savings programs described in the following table, at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Percent of Percent of Percent of
Amount total deposits Amount total deposits Amount total deposits
------ -------------- ------ -------------- ------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts:
Noninterest bearing $ 3,978 3% $ 3,170 2% $ 4,197 3%
Money market 22,307 17 20,266 16 22,903 18
Passbook and statement savings accounts 28,330 22 29,589 23 32,525 25
-------- --- -------- --- -------- ---
Total transaction accounts 54,615 42 53,025 41 59,625 46
-------- --- -------- --- -------- ---
Certificates of deposit:
Negotiated rate certificates 5,466 4 5,385 4 1,175 1
Money market certificates:
3 to 6 months 7,141 5 8,408 7 13,565 11
12 to 23 months 8,793 7 3,943 3 6,930 5
2 to 2-1/2 years 9,078 7 11,338 9 19,793 15
3 to 3-1/2 years 38,766 30 41,544 32 23,562 18
4 to 4-1/2 years 210 - 289 - 340 -
5 years and greater 5,633 5 4,979 4 3,718 4
-------- --- -------- --- -------- ---
Total certificates of deposit 75,087 58 75,886 59 69,083 54
-------- --- -------- --- -------- ---
Christmas club and other
noninterest bearing accounts 370 - 356 - 305 -
-------- --- -------- --- -------- ---
Total deposits $130,072 100% $129,267 100% $129,013 100%
======== === ======== === ======== ===
</TABLE>
The following table presents the time deposits in First Federal classified
by rates as of the dates indicated:
<TABLE>
<CAPTION>
Year ended September 30
--------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Less than 6% $63,901 $50,422 $66,123
6 - 6.99% 9,719 23,695 691
7 - 7.99% 539 764 1,096
8 - 8.99% 581 678 856
Greater than 9% 347 327 317
------- ------- -------
$75,087 $75,886 $69,083
======= ======= =======
</TABLE>
The following table presents the amount and remaining maturities of
time deposits at September 30, 1996:
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------------------
Up to Over one year Over 3 years Over
Rate one year to 3 years to 5 years 5 years Total
---- -------- ------------- ------------ ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount maturing $46,176 $25,125 $3,601 $ 185 $75,087
Weighted average rate 5.22% 5.60% 6.61% 7.37% 5.42%
</TABLE>
The following table presents the amount of First Federal's
certificates of deposit of $100,000 or more by the time remaining until
maturity as of September 30, 1996, and September 30, 1995:
<TABLE>
<CAPTION>
Maturity At September 30, 1996 At September 30, 1995
-------- --------------------- ---------------------
(Dollars in thousands)
<S> <C> <C>
Three months or less $ 2,206 $ 1,953
Over 3 months to 6 months 3,200 3,181
Over 6 months to 12 months 2,409 2,798
Over twelve months 4,021 3,085
------- -------
Total $11,836 $11,017
======= =======
</TABLE>
The following table presents First Federal's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30
------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $ 129,267 $ 129,013 $ 130,331
Deposits 321,320 309,913 357,002
Withdrawals (324,469) (312,968) (361,503)
Interest credited 3,954 3,309 3,183
--------- --------- ---------
Ending balance 130,072 129,267 129,013
--------- --------- ---------
Net increase (decrease) in deposits $ 805 $ 254 $ (1,318)
========= ========= =========
Percent increase (decrease) in deposits .62% .20% (1.01)%
</TABLE>
Borrowings. The FHLB System functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. See "REGULATION - Federal Home Loan Banks." As a member in
good standing of the FHLB of Cincinnati, First Federal is authorized to
apply for advances from the FHLB of Cincinnati, provided certain standards
of creditworthiness have been met. Advances are made pursuant to several
different programs, each having its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances
are based either on a fixed percentage of an institution's regulatory
capital or on the FHLB's assessment of the institution's creditworthiness.
Under current regulations, an association must meet certain qualifications
to be eligible for FHLB advances. The extent to which an association is
eligible for such advances will depend upon whether it meets the Qualified
Thrift Lender Test (the "QTL Test"). See "REGULATION - Office of Thrift
Supervision -- Qualified Thrift Lender Test." If an association meets the
QTL Test, it will be eligible for 100% of the advances it would otherwise be
eligible to receive. If an association does not meet the QTL Test, it will
be eligible for such advances only to the extent it holds specified QTL Test
assets.
The following table presents the maximum amount of First Federal's
FHLB advances outstanding at September 30, 1996, 1995 and 1994, and the
average aggregate balances of FHLB advances outstanding during the years
ended September 30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
At or for the
year ended September 30
-------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of FHLB advances
outstanding during period $37,970 $32,132 $15,125
Average amount of FHLB advances
outstanding during period 30,334 27,143 4,851
Amount of FHLB advances outstanding
at end of period 37,970 27,600 14,625
Weighted average interest cost of
FHLB advances during period based
on month-end balances 5.88% 6.17% 2.54%
</TABLE>
First Federal had variable-rate advances with original maturities of
less than 90 days totaling $21,970 at 5.45% interest rate at September 30,
1996. Fixed-rate long-term advances with a 6.48% weighted average consisted
of the following by scheduled maturity:
<TABLE>
<CAPTION>
As of September 30, 1996
------------------------
Weighted
Amount Average Rate
------ ------------
<S> <C> <C>
One year or less $24,970 5.52%
More than one year through 3 years $ 3,000 6.41%
More than 3 years through 5 years $ 3,000 6.35%
More than 5 years through 10 years $ 7,000 6.75%
</TABLE>
Yields Earned and Rates Paid
The following table sets forth, for the periods and at the dates
indicated, the weighted average yields earned on First Federal's interest-
earning assets, the weighted average interest rates paid on interest-bearing
liabilities, the interest rate spread and the net interest yield on
interest-earning assets. Such yields and costs are derived by dividing
income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
month-end balances. Management does not believe that the use of month-end
balances instead of daily balances has caused any material difference in the
information presented.
<TABLE>
<CAPTION>
Year ended September 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on loan portfolio 8.58% 7.97% 7.49%
Weighted average yield on mortgage-backed securities 5.92 6.82 6.69
Weighted average yield on investments 5.62 5.39 4.01
Weighted average yield on all interest-earning assets 8.43 7.85 7.35
Weighted average rate paid on deposits 4.26 3.90 3.53
Weighted average rate paid on FHLB advances 5.55 6.17 2.54
Weighted average rate paid on all interest-bearing liabilities 4.51 4.31 3.49
Interest rate spread (spread between weighted average rate
on all interest-earning assets and all interest-bearing
liabilities) 3.92 3.54 3.84
Net interest yield (net interest income as a percentage of
average interest-earning assets) 4.04 3.70 3.99
</TABLE>
The following table sets forth certain information relating to First
Federal's average balance sheet information and reflects the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of interest-
earning assets or interest-bearing liabilities, respectively, for the
periods presented. Average balances are derived from month-end balances,
which include nonaccruing loans in the loan portfolio net of the allowance
for loss. Management does not believe that the use of month-end balances
instead of daily balances has caused any material difference in the
information presented.
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ------------------------------ -----------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
----------- -------- ------ ----------- -------- ------- ----------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable-net (1) $153,277 $13,153 8.58% $147,451 $11,746 7.97% $129,189 $ 9,671 7.49%
Mortgage-backed securities 1,773 105 5.92 1,965 134 6.82 2,196 147 6.69
Interest-bearing deposits
in FHLB 2,385 121 5.07 1,993 40 2.00 1,414 6 .42
Investment securities 4,248 252 5.93 4,037 285 7.06 4,402 228 5.18
-------- ------- -------- ------- -------- -------
Total interest-earning assets $161,683 $13,631 8.43 $155,446 $12,205 7.85 $137,201 $10,052 7.35
======== ======= ======== ======= ======== =======
Interest-bearing liabilities:
Certificates of deposit $ 76,379 $ 4,223 5.53 $ 70,316 $ 3,559 5.06 $ 70,076 $ 3,153 4.50
Passbook accounts 28,721 706 2.46 30,755 757 2.46 33,299 803 2.41
NOW accounts 21,857 485 2.22 21,392 460 2.15 22,830 496 2.17
FHLB advances 30,334 1,685 5.55 27,143 1,676 6.17 4,851 123 2.54
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities $157,291 $ 7,099 4.51 $149,606 $ 6,452 4.31 $131,056 $ 4,575 3.49
======== ======= ======== ======= ======== =======
Net interest income; interest
rate spread $ 6,532 3.92 $ 5,753 3.54 $ 5,477 3.84
======= ======= =======
Net interest yield (2) 4.04 3.70 3.99
Average interest-earning
assets to average interest-
bearing liabilities 102.79% 103.90% 104.69%
____________________
<F1> Includes nonaccrual loans.
<F2> Net interest yield is net interest income divided by average interest-
earning assets.
</TABLE>
First Federal's interest rate spread is the principal determinant of
income. The interest rate spread, and therefore net interest income, can
vary considerably over time because asset and liability repricing do not
coincide. Moreover, the long-term or cumulative effect of interest rate
changes can be substantial. Interest rate risk is defined as the
sensitivity of an institution's earnings and net asset values to changes in
interest rates. The management and Board of Directors of First Federal
attempt to manage First Federal's exposure to interest rate risk in a manner
to maintain the projected four-quarter percentage change in net interest
income and the projected change in the market value of portfolio equity
within the limits established by the Board of Directors, assuming a
permanent and instantaneous parallel shift in interest rates.
As a part of its effort to monitor its interest rate risk, First
Federal reviews the reports of the OTS which set forth the application of
the "net portfolio value" ("NPV") methodology adopted by the OTS as part of
its capital regulations to the assets and liabilities of First Federal.
Although First Federal is not currently subject to the NPV regulation
because such regulation does not apply to institutions with less than $300
million in assets and risk-based capital in excess of 12%, the application
of the NPV methodology may illustrate First Federal's interest rate risk.
Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning and other assets and
outgoing cash flows on interest-bearing liabilities. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
which would result from a theoretical 200 basis point (1 basis point equals
.01%) change in market interest rates. Both a 200 basis point increase in
market interest rates and a 200 basis point decrease in market interest
rates are considered. If the NPV would decrease more than 2% of the present
value of the institution's assets with either an increase or a decrease in
market rates, the institution must deduct 50% of the amount of the decrease
in excess of such 2% in the calculation of the institution's risk-based
capital. See "Liquidity and Capital Resources" in the Annual Report to
Shareholders.
Presented below, as of September 30, 1996, is an analysis of First
Federal's interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts of 100 basis points in market interest rates.
As illustrated in the table, NPV is moderately sensitive to both
rising and declining rates. Differences in sensitivity occur principally
because, as rates rise, borrowers do not prepay fixed-rate loans as quickly
as they do when interest rates are declining. Thus, in a rising interest
rate environment, the amount of interest First Federal would receive on its
loans would increase slowly as variable-rate loans are repriced upward and
as loans are slowly prepaid and new loans at higher rates are made.
Moreover, the interest First Federal would pay on its deposits would
increase because First Federal's deposits generally have shorter periods to
repricing. Assumptions used in calculating the amounts in this table are
OTS assumptions.
<TABLE>
<CAPTION>
September 30, 1996
----------------------
Change in Interest Rate $ Change % Change
(Basis Points) In NPV in NPV
- ----------------------- -------- --------
(Dollars in thousands)
<S> <C> <C>
+400 (3,701) (19)%
+300 (2,036) (11)
+200 (720) (4)
+100 4 0
0 0 0
-100 (596) (3)
-200 (1,405) (7)
-300 (1,488) (8)
-400 (1,170) (6)
</TABLE>
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the NPV approach. For example, although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in market interest
rates. Also, 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. Further, in
the event of a change in interest rates, expected rates of prepayment on
loans and mortgage-backed securities and early withdrawal levels from
certificates of deposit may deviate significantly from those assumed in
making the risk calculations.
In the event that interest rates rise from the recent low levels,
First Federal's net interest income could be expected to be positively
affected, although rising interest rates could negatively affect First
Federal's earnings due to diminished loan demand. In the event that
interest rates decline from recent levels, First Federal's net interest
income could be expected to be negatively affected.
The following table sets forth the average outstanding balances of
First Federal's noninterest-earning assets and liabilities for the periods
indicated:
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Noninterest-earning assets:
REO $ 16 $ - $ 733
Fixed assets 5,355 2,918 2,439
Other assets 2,533 2,166 1,554
------ ------ ------
Total noninterest-earning assets $7,904 $5,084 $4,726
====== ====== ======
Noninterest-bearing liabilities:
Noninterest-bearing NOW accounts $3,945 $2,893 $3,307
Other liabilities 2,561 2,078 2,000
------ ------ ------
Total noninterest-bearing liabilities $6,506 $4,971 $5,307
====== ====== ======
</TABLE>
The following table describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected First Federal's interest income and expense during
the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (change in volume multiplied by prior
year rate), (ii) changes in rate (change in rate multiplied by prior year
volume) and (iii) total changes in rate and volume. The combined effects of
changes in both volume and rate, which cannot be separately identified, have
been allocated proportionately to the change due to volume and the change
due to rate:
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
Increase (Decrease) Increase (Decrease) Increase (Decrease)
due to due to due to
Volume Rate Total Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Loans receivable $479 $928 $1,407 $1,428 $647 $2,075 $ 331 $ (971) $(640)
Mortgage-backed securities (12) (17) (29) (16) 3 (13) (31) (21) (52)
Investment securities 34 14 48 9 82 91 (50) (11) (61)
---- ---- ------ ------ ---- ------ ----- ------- -----
Total interest income $501 $925 $1,426 $1,421 $732 $2,153 $ 250 $(1,003) $(753)
==== ==== ====== ====== ==== ====== ===== ======= =====
Interest expense attributable to:
Deposits $181 $457 $ 638 $ (128) $452 $ 324 $(114) $ (637) $(751)
FHLB advances 62 (53) 9 1,185 368 1,553 125 (5) 120
---- ---- ------ ------ ---- ------ ----- ------- -----
Total interest expense $243 $404 $ 647 $1,057 $820 $1,877 $ 11 $ (642) $(631)
==== ==== ====== ====== ==== ====== ===== ======= =====
Increase in net interest
income $ 779 $ 276 $(122)
====== ====== =====
</TABLE>
Competition
First Federal competes for deposits with other savings associations,
savings banks, commercial banks and credit unions and with the issuers of
commercial paper and other securities, such as shares in money market mutual
funds. The primary factors in competing for deposits are interest rates and
convenience of office location. In making loans, First Federal competes
with other savings associations, savings banks, commercial banks, consumer
finance companies, credit unions, leasing companies and other lenders.
First Federal competes for loan originations primarily through the interest
rates and loan fees it charges and through the efficiency and quality of
services it provides to borrowers. Competition is affected by, among other
things, the general availability of lendable funds, general and local
economic conditions, current interest rate levels and other factors which
are not readily predictable.
There is only one other thrift institution which has its principal
offices in Muskingum County, Ohio, but several other savings associations
and commercial banks have offices in First Federal's primary market area.
Of the seven banks and thrifts which have offices in Muskingum County, First
Federal ranks approximately fourth in deposit share with 12.92% of the
savings market in the 1995 calendar year, and ranks first in residential
real estate originations for purchase of residential property with 20.00% of
the mortgage loan originations for the 1996 fiscal year.
The number and size of financial institutions competing with First
Federal is also likely to increase as a result of changes in statutes and
regulations eliminating various restrictions on interstate branching by
federal savings associations and national banks. Such increased competition
may have an adverse effect upon First Federal.
Personnel
As of September 30, 1996, First Federal had 65 full-time employees and
16 part-time employees. First Federal believes that relations with its
employees are excellent. First Federal offers health and life insurance
benefits. None of the employees of First Federal are represented by a
collective bargaining unit.
REGULATION
General
As a savings and loan holding company within the meaning of the Home
Owners Loan Act of 1933, as amended (the "HOLA"), Bancorp is subject to
regulation, examination and oversight by the OTS, and will be required to
submit periodic reports to the OTS. As a corporation organized under Ohio
law, Bancorp is subject to provisions of the Ohio Revised Code applicable to
corporations generally.
As a savings bank chartered under the laws of the United States, First
Federal, Bancorp's wholly-owned subsidiary, is subject to regulation,
examination and oversight by the OTS. First Federal must file with the OTS
periodic reports concerning its activities and financial condition. Because
First Federal's deposits are insured by the FDIC, First Federal is subject
to regulatory oversight by the FDIC. First Federal is also a member of the
FHLB of Cincinnati. The OTS periodically conducts examinations to determine
whether First Federal is in compliance with the various regulatory
requirements and is operating in a safe and sound manner.
Ohio Law
Merger Moratorium Statute. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which
have significant ties to Ohio. This statute prohibits, with some
exceptions, any merger, combination or consolidation and any of certain
other sales, leases, distributions, dividends, exchanges, mortgages or
transfers between such an Ohio corporation and any person who has the right
to exercise, alone or with others, 10% or more of the voting power of such
corporation (an "Interested Shareholder"), for three years following the
date on which such person first becomes an Interested Shareholder. Such a
business combination is permitted only if, prior to the time such person
first becomes an Interested Shareholder, the Board of Directors of the
issuing corporation has approved the purchase of shares which resulted in
such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (1) one of the specified exceptions applies, (2) the
holders of at least two-thirds of the voting shares, and of at least a
majority of the voting shares not beneficially owned by the Interested
Shareholder, approve the business combination at a meeting called for such
purpose, or (3) the business combination meets certain statutory criteria
designed to ensure that the issuing public corporation's remaining
shareholders receive fair consideration for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation.
However, the statute still prohibits for twelve months any business
combination that would have been prohibited but for the adoption of such an
opt-out amendment. The statute also provides that it will continue to apply
to any business combination between a person who became an Interested
Shareholder prior to the adoption of such an amendment as if the amendment
had not been adopted. The Articles of Incorporation of Bancorp do not opt
out of the protection afforded by Chapter 1704.
Control Share Acquisition. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that certain acquisitions
of voting securities which would result in the acquiring shareholder owning
20%, 33-1/3%, or 50% of the outstanding voting securities of Bancorp (a
"Control Share Acquisition") must be approved in advance by the holders of
at least a majority of the outstanding voting shares represented at a
meeting at which a quorum is present and a majority of the portion of the
outstanding voting shares represented at such a meeting, excluding the
voting shares owned by the acquiring shareholder. The Control Share
Acquisition Statute was intended, in part, to protect shareholders of Ohio
corporations from coercive tender offers. It is uncertain whether the
foregoing provisions of Ohio law will ultimately be upheld.
Takeover Bid Statute. Ohio law also contains a statute regulating
takeover bids for any Ohio corporation, including savings and loan
associations. Such statute provides that no offeror may make a takeover bid
unless (i) at least 20 days prior thereto the offeror announces publicly the
terms of the proposed takeover bid and files with the Ohio Division of
Securities (the "Securities Division") and the target company certain
information in respect of the offeror, his ownership of the company's shares
and his plans for the company, and (ii) within ten days following such
filing either (a) no hearing is required by the Securities Division, (b) a
hearing is requested by the target company within such time but the
Securities Division finds no cause for hearing exists, or (c) a hearing is
ordered and upon such hearing the Securities Division adjudicates that the
offeror proposes to make full, fair and effective disclosure to offerees of
all information material to a decision to accept or reject the offer.
The takeover bid statute also states that no offeror shall make a
takeover bid if he owns 5% or more of the issued and outstanding equity
securities of any class of the target company, any of which were purchased
within one year before the proposed takeover bid, and the offeror, before
making any such purchase, failed to announce his intention to gain control
of the target company, or otherwise failed to make full and fair disclosure
of such intention to the persons from whom he acquired such securities. The
United States District Court for the Southern District of Ohio has
determined that the Ohio takeover bid statute is preempted by federal
regulation.
Office of Thrift Supervision
General. The OTS is an office in the Department of the Treasury and
is responsible for the regulation and supervision of all federally chartered
savings associations and all other savings associations, the deposits of
which are insured by the FDIC in the SAIF. The OTS issues regulations
governing the operation of savings associations and regularly examines such
associations. It also promulgates regulations that prescribe the
permissible investments and activities of federally chartered savings
associations. This includes the type of lending that such associations may
engage in and the investments in real estate, subsidiaries and corporate or
government securities that such associations may make. The OTS has
authority over mergers and acquisitions of control of federally chartered
savings associations. The OTS also may initiate enforcement actions against
savings associations and certain persons affiliated with them for violations
of laws or regulations or for engaging in unsafe or unsound practices. If
the grounds provided by law exist, the OTS may appoint a conservator or
receiver for a savings association.
Federally chartered savings associations are subject to regulatory
oversight by the OTS under various consumer protection and fair lending
laws. These laws govern, among other things, truth-in-lending disclosure,
equal credit opportunity, fair credit reporting and community reinvestment.
Failure to abide by federal laws and regulations governing community
reinvestment could limit the ability of an association to open a new branch
or engage in a merger transaction. Community reinvestment regulations
evaluate how well and to what extent an institution lends and invests in its
designated service area, particularly in low-to-moderate income areas.
First Federal has received a "satisfactory" rating under those regulations.
Regulatory Capital Requirements. First Federal is required by OTS
regulations to meet certain minimum capital requirements. The following
table sets forth certain information regarding First Federal's compliance
with applicable regulatory capital requirements at September 30, 1996:
<TABLE>
<CAPTION>
At September 30, 1996
-----------------------
Percent
Amount of assets
------ ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital 12,494 6.77%
Tangible capital requirement 2,767 1.50
------ -----
Excess 9,727 5.27%
====== =====
Core capital 12,494 6.77%
Core capital requirement 5,534 3.00
------ -----
Excess 6,960 3.77%
====== =====
Total capital 13,718 11.49%
Risk-based capital requirement 9,553 8.00
------ -----
Excess 4,165 3.49%
====== =====
</TABLE>
Current capital requirements call for tangible capital of 1.5% of
adjusted total assets, core capital (which for First Federal consists of
tangible capital) of 3.0% of adjusted total assets and risk-based capital
(which for First Federal consists of core capital and general valuation
reserves) of 8.0% of risk-weighted assets (assets and certain off balance
sheet items are weighted at percentage levels ranging from 0% to 100%
depending on their relative risk). The OTS has proposed to amend the core
capital requirement so that those associations that do not have the highest
examination rating and an acceptable level of risk will be required to
maintain core capital of from 4% to 5%, depending on the association's
examination rating and overall risk. First Federal does not anticipate that
it will be adversely affected if the core capital requirement regulation is
amended as proposed.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, although the implementation of that component has been
delayed. Pursuant to that requirement, each savings association would
measure the impact of an immediate 200 basis point change in interest rates
on the value of its portfolio, as determined under the methodology
established by the OTS. If the measured interest rate risk is above the
level deemed normal under the regulation, the association would have to
deduct one-half of that excess exposure from its total capital when
determining its risk-based capital. In general, an association with less
than $300 million in assets and a risk-based capital ratio in excess of 12%
is not subject to this requirement. Pending implementation of the interest
rate risk component, the OTS has the authority to impose a higher
individualized capital requirement on any savings association it deems to
have excess interest rate risk. The OTS may also adjust the risk-based
capital requirement on an individualized basis to take into account risks
due to concentrations of credit and nontraditional activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. Certain regulatory actions are mandated or recommended for
savings associations that are deemed to be well-capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. At each successively lower capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility
in determining how to resolve the problems of the institution. In addition,
the OTS can downgrade an association's designation notwithstanding its
capital level, after notice and an opportunity for hearing, if the
association is deemed to be in an unsafe or unsound condition or to be
engaging in an unsafe or unsound practice, including a less than
satisfactory examination rating on matters other than capital. All
undercapitalized associations must submit a capital restoration plan to the
OTS within 45 days after becoming undercapitalized. Such associations will
be subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging
in new lines of business. Furthermore, critically undercapitalized
institutions must be placed in conservatorship or receivership within 90
days of reaching that capitalization level, except under limited
circumstances. These prompt corrective action regulations became effective
December 19, 1992. First Federal's capital at September 30, 1996, meets the
standards for the highest category, a "well-capitalized" association.
Federal law prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having
control of the association if, after such distribution or payment, the
association would be undercapitalized. In addition, each company
controlling an undercapitalized association must guarantee that the
association will comply with its capital plan until the association has been
adequately capitalized on an average during each of four consecutive
calendar quarters and must provide adequate assurances of performance. The
aggregate liability pursuant to such guarantee is limited to the lesser of
(a) an amount equal to 5% of the association's total assets at the time the
association became undercapitalized or (b) the amount that is necessary to
bring the association into compliance with all capital standards applicable
to such institution at the time the association fails to comply with its
capital restoration plan.
Qualified Thrift Lender Test. Savings associations are required to
meet the QTL Test. Prior to September 30, 1996, there was only one QTL
Test, which required savings associations to maintain a specified amount of
investments in assets that are designated as qualifying thrift investments
("QTI"). QTIs are generally related to domestic residential real estate and
manufactured housing and include stock issued by any FHLB, the FHLMC or the
FNMA. Under this test, 65% of an institution's "portfolio assets" (total
assets less goodwill and other intangibles, property used to conduct
business and 20% of liquid assets) must consist of QTI on a monthly average
basis in 9 out of every 12 months. Congress created a second QTL Test,
effective September 30, 1996, pursuant to which a savings association may
also meet the QTL Test under the Internal Revenue Code of 1986, as amended
(the "Code"), for thrift institution status. According to the test under
the Code, at least 60% of the institution's assets (on a tax basis) must
consist of specified assets (generally loans secured by residential real
estate or deposits, educational loans, cash and certain governmental
obligations). The OTS has not yet promulgated regulations for the new test.
The OTS may grant exceptions to the QTL Test under certain circumstances.
If a savings association fails to meet the QTL Test, the association and its
holding company become subject to certain operating and regulatory
restrictions. A savings association that fails to meet the QTL Test will
not be eligible for new FHLB advances. At September 30, 1996, First Federal
met the QTL Test.
Lending Limit. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower to an amount equal to
15% of the association's Lending Limit Capital. A savings association may
loan to one borrower an additional amount not to exceed 10% of the
association's Lending Limit Capital if the additional amount is fully
secured by certain forms of "readily marketable collateral." Real estate is
not considered "readily marketable collateral." Certain types of loans are
not subject to this limit. In applying this limit, the regulations require
that loans to certain related borrowers be aggregated. Notwithstanding the
specified limits, an association may lend to one borrower up to $500,000 for
any purpose. At September 30, 1996, First Federal was in compliance with
this lending limit. See "Lending Activities -- Loan Originations, Purchases
and Sales."
Transactions with Insiders and Affiliates. Loans to executive
officers, directors and principal shareholders and their related interests
must conform to limits on loans to one borrower, and the total of all such
loans to executive officers, directors, principal shareholders and their
related interests cannot exceed the association's total capital, (or 200% of
total capital for a qualifying institution with less than $100 million in
assets). Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the
"disinterested" members of board of directors of the association with any
"interested" director not participating. All loans to directors, executive
officers and principal shareholders must be made on terms substantially the
same as offered in comparable transactions with all employees, and loans to
executive officers are subject to additional limitations. First Federal was
in compliance with such restrictions at September 30, 1996.
Savings associations must comply with Sections 23A and 23B of the
Federal Reserve Act ("FRA"). An affiliate of a savings association is any
company or entity that controls, is controlled by or is under common control
with the savings association. Bancorp is an affiliate of First Federal.
Generally, Sections 23A and 23B of the FRA (i) limit the extent to which a
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's
capital stock and surplus, (ii) limit the aggregate of all such transactions
with all affiliates to an amount equal to 20% of such capital stock and
surplus, and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable to the association, as
those in transactions with a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee
and other similar types of transactions. First Federal was in compliance
with these requirements and restrictions at September 30, 1996.
Holding Company Regulation. Bancorp is a savings and loan holding
company within the meaning of the HOLA. The HOLA generally prohibits a
savings and loan holding company from controlling any other savings
association or savings and loan holding company, without prior approval of
the OTS, or from acquiring or retaining more than 5% of the voting shares of
a savings association or holding company thereof which is not a subsidiary.
Under certain circumstances a savings and loan holding company is permitted
to acquire, with the approval of the OTS, up to 15% of the previously
unissued voting shares of an undercapitalized savings association for cash
without such savings association being deemed to be controlled by the
holding company. Except with the prior approval of the OTS, no director or
officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock may
also acquire control of any savings institution, other than a subsidiary
institution, or any other savings and loan holding company.
Bancorp is a unitary savings and loan holding company. Under current
law, there are generally no restrictions on the activities of a unitary
savings and loan holding company. However, if the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the
OTS may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii)
any activities of the savings association that might create a serious risk
that the liabilities of the holding company and its affiliates may be
imposed on the savings association. Notwithstanding the foregoing rules as
to permissible business activities of a unitary savings and loan holding
company, if the savings association subsidiary of a holding company fails to
meet the QTL Test, then such unitary holding company would become subject to
the activities restrictions applicable to multiple holding companies. At
September 30, 1996, First Federal met the QTL Test.
If Bancorp were to acquire control of another savings institution,
other than through a merger or other business combination with First
Federal, Bancorp would thereupon become a multiple savings and loan holding
company. Unless such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and each subsidiary savings association meets
the QTL Test, the activities of Bancorp and any of its subsidiaries (other
than First Federal or other subsidiary savings associations) would
thereafter be subject to further restrictions. The HOLA provides that,
among other things, no multiple savings and loan holding company or
subsidiary thereof that is not a savings institution shall commence or shall
continue for more than a limited period of time after becoming a multiple
savings and loan holding company or subsidiary thereof, any business
activity other than (i) furnishing or performing management services for a
subsidiary savings institution, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing or liquidating assets owned by or
acquired from a subsidiary savings institution, (iv) holding or managing
properties used or occupied by a subsidiary savings institution, (v) acting
as trustee under deeds of trust, (vi) those activities previously directly
authorized by federal regulation as of March 5, 1987, to be engaged in by
multiple holding companies, or (vii) those activities authorized by the FRB
as permissible for bank holding companies, unless the OTS by regulation
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above must also be approved by the OTS
prior to being engaged in by a multiple holding company.
The OTS may also approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations
in more than one state, if the multiple savings and loan holding company
involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987,
or if the laws of the state in which the institution to be acquired is
located specifically permit institutions to be acquired by state-chartered
institutions or savings and loan holding companies located in the state
where the acquiring entity is located (or by a holding company that controls
such state-chartered savings institutions). As under prior law, the OTS may
approve an acquisition resulting in a multiple savings and loan holding
company controlling savings associations in more than one state in the case
of certain emergency thrift acquisitions.
Federal Regulation of Acquisitions of Control of Bancorp and First
Federal. In addition to Ohio law limitations on the merger and acquisition
of Bancorp previously discussed, federal limitations generally require
regulatory approval of acquisitions at specified levels. Under pertinent
federal law and regulations, no person, directly or indirectly, or acting in
concert with others, may acquire control of First Federal or Bancorp without
60 days prior notice to the OTS. "Control" is generally defined as having
more than 25% ownership or voting power; however, ownership or voting power
of more than 10% may be deemed "control" if certain factors are present. If
the acquisition of control is by a company, the acquirer must obtain
approval, rather than give notice, of the acquisition as a savings and loan
holding company. In addition, any merger of First Federal or of Bancorp in
which Bancorp is not the resulting company must be approved by the OTS.
Federal Deposit Insurance Corporation.
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally
insured banks and thrifts and safeguards the safety and soundness of the
banking and thrift industries. FIRREA established two separate insurance
funds, the Bank Insurance Fund ("BIF") for commercial banks and state
savings banks and the SAIF for savings associations, both to be maintained
and administered by the FDIC. Upon the enactment of FIRREA, First Federal
became a member of the SAIF and its deposit accounts became insured by the
FDIC, up to the prescribed limits. The FDIC has examination authority over
all insured savings associations if the FDIC does not believe the OTS has
taken appropriate action to safeguard safety and soundness and the deposit
insurance fund.
Depository institutions are generally prohibited from converting from
one insurance fund to the other until the SAIF meets a designated reserve
level, except with the prior approval of the FDIC in certain limited cases,
provided applicable exit and entrance fees are paid. The reserves of the
SAIF are currently below the level required by law. The insurance fund
conversion provisions do not prohibit a SAIF member from converting to a
bank charter or merging with a bank during the five-year moratorium, as long
as the resulting bank continues to pay the applicable insurance assessments
to the SAIF during that period and certain other conditions are met. First
Federal does not intend to convert to the BIF or to a bank charter.
The deposits of First Federal and other savings associations are
insured by the FDIC in the SAIF. The deposit accounts of commercial banks
are insured by the FDIC in the BIF, except to the extent such banks have
acquired SAIF deposits. Because a significant portion of the assessments
paid into the SAIF by savings associations are used to pay the cost of prior
thrift failures, the reserves of the SAIF are below the level required by
law. The BIF has, however, met its required reserve level.
Assessments paid by healthy savings associations exceeded those paid
by healthy commercial banks by approximately $.19 per $100 in deposits in
late 1995, and no BIF assessments have been required of healthy commercial
banks in 1996, except a $2,000 minimum fee. Such premium disparity could
have a negative competitive impact on First Federal and other institutions
with SAIF deposits.
Legislation to recapitalize the SAIF and to eliminate the significant
premium disparity between the BIF and the SAIF became effective September
30, 1996. The recapitalization plan provides for a special assessment equal
to $.657 per $100 of SAIF deposits held at March 31, 1995, in order to
increase the SAIF reserves to the level required by law. Certain BIF
institutions holding SAIF-insured deposits will pay a lower special
assessment. On the basis of its $121.8 million in deposits at March 31,
1995, First Federal paid, on November 27, 1996, an additional pre-tax
assessment of $800,100. Such payment was recorded as an expense and
accounted for by First Federal as of September 30, 1996. Earnings and
capital were, therefore, negatively affected for the quarter ended September
30, 1996, by an after-tax amount of approximately $528,000.
The recapitalization plan also provides that the cost of prior thrift
failures will be shared by both the SAIF and the BIF, which will increase
BIF assessments for healthy banks to approximately $.013 per $100 of
deposits in 1997. SAIF assessments for healthy savings associations in 1997
will be approximately $.064 per $100 in deposits and may never be reduced
below the level set for healthy BIF institutions.
The recapitalization plan also provides for the merger of the SAIF and
the BIF effective January 1, 1999, assuming there are no savings
associations under federal law. Under separate proposed legislation,
Congress is considering the elimination of the federal thrift charter and
the separate federal regulations of thrifts. As a result, First Federal
would have to convert to a different financial institution charter and would
be regulated under federal law as a bank, including being subject to the
more restrictive activity limitations imposed on national banks.
In addition, Bancorp might become subject to more restrictive holding
company requirements, including activity limits and capital requirements
similar to those imposed on First Federal. Bancorp cannot predict the
impact of the conversion of First Federal to, or regulation of First Federal
as, a bank until the legislation requiring such change is enacted.
FRB Regulations
Reserve Requirements. FRB regulations require savings associations to
maintain reserves against their transaction accounts (primarily NOW
accounts) and non-personal time deposits. Such regulations generally
require that reserves of 3% be maintained against deposits in transaction
accounts up to $52 million (subject to an exemption of up to $4.3 million),
and that an initial reserve of 10% be maintained against that portion of
total net transaction accounts in excess of $52 million. These percentages
are subject to adjustment by the FRB. At September 30, 1996, First Federal
was in compliance with its reserve requirements.
Federal Home Loan Banks
The FHLBs, under the regulatory oversight of the Federal Housing
Financing Board, provide credit to their members in the form of advances.
Federally chartered savings associations are required to be members of a
FHLB. First Federal is a member of the FHLB of Cincinnati and must maintain
an investment in the capital stock of that FHLB in an amount equal to the
greater of 1.0% of the aggregate outstanding principal amount of First
Federal's residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of its advances from the
FHLB. First Federal is in compliance with this requirement with an
investment in FHLB of Cincinnati stock of $1,930,000 at September 30, 1996.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed,
whole first mortgage loans on improved residential property or securities
representing a whole interest in such loans; securities issued, insured or
guaranteed by the United States government or an agency thereof; deposits in
any FHLB; or other real estate related collateral (up to 30% of the member
association's capital) acceptable to the applicable FHLB, if such collateral
has a readily ascertainable value and the FHLB can perfect its security
interest in the collateral.
Each FHLB is required to establish standards of community investment
or service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's
performance under the Community Reinvestment Act and its record of lending
to first-time home buyers. All long-term advances by each FHLB must be made
only to provide funds for residential housing finance.
TAXATION
Federal Taxation
Bancorp is subject to the federal tax laws and regulations which apply
to corporations generally. First Federal is also subject to the federal tax
laws and regulations which apply to corporations generally. However,
certain thrift institutions such as First Federal were, prior to the
enactment of the Small Business Jobs Protection Act, which was signed into
law on August 21, 1996, allowed deductions for bad debts under methods more
favorable to those granted to other taxpayers. Qualified thrift
institutions could compute deductions for bad debts using either the
specific charge-off method of Section 166 of the Code, or the reserve method
of Section 593 of the Code.
Under Section 593, a thrift institution annually could elect to deduct
bad debts under either (i) the "percentage of taxable income" method
applicable only to thrift institutions, or (ii) the "experience" method that
also was available to small banks. Under the "percentage of taxable income"
method, a thrift institution generally was allowed a deduction for an
addition to its bad debt reserve equal to 8% of its taxable income
(determined without regard to this deduction and with additional
adjustments). Under the "experience" method, a thrift institution was
generally allowed a deduction for an addition to its bad debt reserve equal
to the greater of (i) an amount based on its actual average experience for
losses in the current and five preceding taxable years, or (ii) an amount
necessary to restore the reserve to its balance as of the close of the base
year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the
"experience" method or the "percentage of taxable income" method. For tax
years 1995, 1994 and 1993, First Federal used the "percentage of taxable
income" method because such method provided a higher bad debt deduction than
the "experience" method.
Section 1616(a) of the Small Business Job Protection Act repealed the
Section 593 reserve method of accounting for bad debts by thrift
institutions, effective for taxable years beginning after 1995. Thrift
institutions that would be treated as small banks are allowed to utilize the
"experience" method applicable to such institutions, while thrift
institutions that are treated as large banks are required to use the
specific charge-off method. The "percentage of taxable income" method of
accounting for bad debts is no longer available for any financial
institution.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer, and having been made with the consent
of the Secretary of the Treasury. Any adjustments under Section 481(a) of
the Code required to be recaptured with respect to such change generally
will be determined solely with respect to the "applicable excess reserves"
of the taxpayer. The amount of the "applicable excess reserves" will be
taken into account ratably over a six-taxable-year period, beginning with
the first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that
becomes a large bank, the amount of the institution's applicable excess
reserves generally is the excess of (i) the balances of its reserve for
losses on qualifying real property loans (generally loans secured by
improved real estate) and its reserve for losses on nonqualifying loans (all
other types of loans) as of the close of its last taxable year beginning
before January 1, 1996, over (ii) the balances of such reserves as of the
close of its last taxable year beginning before January 1, 1988 (i.e., the
"pre-1988 reserves"). In the case of a thrift institution that becomes a
small bank, like First Federal, the amount of the institution's "applicable
excess reserves" generally is the excess of (i) the balances of its reserve
for loan losses on qualifying real property loans and its reserve for losses
on nonqualifying loans as of the close of its last taxable year beginning
before January 1, 1996, over (ii) the greater balance of (a) its "pre-1988
reserves" or (b) what the thrift's reserves would have been at the close of
its last year beginning before January 1, 1996, had the thrift always used
the "experience" method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a
tax year, the recapture of the "applicable excess reserves" otherwise
required to be taken into account as a Code Section 481(a) adjustment for
the year will be suspended. A thrift meets the residential loan requirement
if, for the tax year, the principal amount of residential loans made by the
thrift during the year is not less than its "base amount." The "base
amount" generally is the average of the principal amounts of the residential
loans made by the thrift during the six most recent tax years beginning
before January 1, 1996.
A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential real and church property and
certain mobile homes), but only to the extent that the loan is made to the
owner of the property to acquire, construct or improve the property.
The balance of the "pre-1988 reserves" is subject to the provisions of
Section 593(e) as modified by the Small Business Job Protection Act which
requires recapture in the case of certain excessive distributions to
shareholders. The "pre-1988 reserves" may not be utilized for payment of
cash dividends or other distributions to a shareholder (including
distributions in dissolution or liquidation) or for any other purpose
(except to absorb bad debt losses). Distribution of a cash dividend by a
thrift institution to a shareholder is treated as made: first, out of the
institution's post-1951 accumulated earnings and profits; second, out of the
"pre-1988 reserves"; and, third, out of such other accounts as may be
proper. To the extent a distribution by First Federal to Bancorp is deemed
paid out of its "pre-1988 reserves" under these rules, the "pre-1988
reserves" would be reduced and First Federal's gross income for tax purposes
would be increased by the amount which, when reduced by the income tax, if
any, attributable to the inclusion of such amount in its gross income,
equals the amount deemed paid out of the "pre-1988 reserves." As of
September 30, 1996, First Federal's "pre-1988 reserves" subject to potential
recapture for tax purposes totaled approximately $5.2 million. First
Federal believes it has approximately $6.3 million of accumulated earnings
and profits for tax purposes as of September 30, 1996, which would be
available for dividend distributions, provided regulatory restrictions
applicable to the payment of dividends are met. No representation can be
made as to whether First Federal will have current or accumulated earnings
and profits in subsequent years.
In addition to the regular income tax, Bancorp and First Federal are
subject to a minimum tax. An alternative minimum tax is imposed at a
minimum tax rate of 20% on "alternative minimum taxable income" (which is
the sum of a corporation's regular taxable income, with certain adjustments,
and tax preference items), less any available exemption. Such tax
preference items include interest on certain tax-exempt bonds issued after
August 7, 1986. In addition, 75% of the amount by which a corporation's
"adjusted current earnings" exceeds its "alternative minimum taxable income"
computed without regard to this preference item and prior to reduction by
net operating losses, is included in "alternative minimum taxable income."
Net operating losses can offset no more than 90% of "alternative minimum
taxable income." The alternative minimum tax is imposed to the extent it
exceeds the corporation's regular income tax. Payments of alternative
minimum tax may be used as credits against regular tax liabilities in future
years. In addition, for taxable years after 1986 and before 1996, Bancorp
and First Federal are also subject to an environmental tax equal to 0.12% of
the excess of "alternative minimum taxable income" for the taxable year
(determined without regard to net operating losses and the deduction for the
environmental tax) over $2.0 million.
The federal income tax provision decreased by $56,900 from fiscal 1995
to fiscal 1996. The effective tax rate for fiscal 1996 was 34.2% compared
to 33.4% for fiscal year 1995.
The tax returns of First Federal have been audited or closed without
audit through 1992. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of First Federal.
On November 10, 1993, Bancorp's Board of Directors approved changing
its tax year from December 31, to September 30, to coincide with its fiscal
year end.
FASB Statement on Accounting for Income Taxes
In February 1992, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 109 which requires an asset and liability approach for
financial accounting and reporting for income taxes and is effective for
fiscal years beginning after December 15, 1992. Under SFAS No. 109, a
deferred tax liability or an asset is recognized for the estimated future
tax effects attributable to temporary differences and carryforwards based
upon provisions of the enacted tax law. If necessary, recorded deferred tax
assets are reduced by the amount of any tax benefits that, based on
available evidence, are not expected to be realized. Management recognized
a $360,000 reduction of income in the quarter ended December 31, 1993, as a
result of the cumulative effect of adopting FAS 109.
Ohio Taxation
Bancorp is subject to the Ohio corporation franchise tax, which, as
applied to Bancorp, is a tax measured by both net income 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
or (ii) .582% times taxable net worth.
In computing its tax under the net worth method, Bancorp may exclude
100% of its investment in the capital stock of First Federal after the
Conversion, as reflected on the balance sheet of Bancorp, in computing its
taxable net worth as long as it owns at least 25% of the issued and
outstanding capital stock of First Federal. The calculation of the
exclusion from net worth is based on the ratio of the excludable investment
(net of any appreciation or goodwill included in such investment) to total
assets multiplied by the net value of the stock. As a holding company,
Bancorp may be entitled to various other deductions in computing taxable net
worth that are not generally available to operating companies.
A special litter tax is also applicable to all corporations, including
Bancorp, 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.
First Federal is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of
First Federal's book net worth determined in accordance with generally
accepted accounting principles. As a "financial institution," First Federal
is not subject to any tax based upon net income or net profits imposed by
the State of Ohio.
Item 2. Description of Property.
The following table sets forth certain information at September 30,
1996, regarding the properties on which the main office and each branch
office of First Federal is located and other office properties owned by
First Federal:
<TABLE>
<CAPTION>
Location Owned or leased Date acquired Square footage Net book value (1)
- -------- --------------- ------------- -------------- ------------------
<S> <C> <C> <C> <C>
Main Office:
Fifth and Market Streets (2)
Zanesville, Ohio 43701 Owned 1961 23,600 $4,189,001
Branch Offices:
990 Military Road
Zanesville, Ohio 43701 Owned 1975 5,000 428,996
2810 Maysville Pike
South Zanesville, Ohio 43701 Owned 1994 2,050 473,706
55 East Main Street
Roseville, Ohio 43777 Owned 1990 2,394 130,476
639 Main Street
Coshocton, Ohio 43812 Owned 1982 4,310 127,822
123 Main Street
Newcomerstown, Ohio 43832 Owned 1984 2,128 4,843
Other Offices:
FHA-VA Lending Office
995 Beverly Avenue
Zanesville, Ohio 43701 Owned 1975 1,000 4,500
Other Properties:
1003 Beverly Avenue
Zanesville, Ohio 43701 Owned 1994 1,284 62,375
____________________
<F1> Net book value amounts are for land, buildings and improvements.
<F2> In June of 1995, First Federal entered into contracts for the expansion
and renovation of the Main Office facility at 505 Market Street.
The construction began in August 1995, and it is anticipated to be
complete in November 1996 with an estimated cost of $4.0 million
dollars, which will be funded from current cash flow.
</TABLE>
First Federal also owns furniture, fixtures and various bookkeeping
and accounting equipment. The net book value of First Federal's investment
in office premises and equipment totaled $6.6 million at September 30, 1996.
First Federal believes such properties are adequately insured. See Notes to
Consolidated Financial Statements in the Annual Report for additional
information.
Item 3. Legal Proceedings.
Neither Bancorp nor First Federal is presently involved in any legal
proceedings of a material nature. From time to time, First Federal is a
party to legal proceedings incidental to its business to enforce its
security interest in collateral pledged to secure loans made by First
Federal.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Bancorp issued its common shares in July 1992, in connection with its
acquisition of the stock of First Federal issued in the Conversion. On each
of October 26, 1994, and November 6, 1996, the Board of Directors declared a
stock dividend in the nature of a 2-for-1 stock split. All earnings and
dividends per share disclosures have been restated to reflect these stock
dividends. At November 30, 1996, after the repurchase of 81,584 shares and
the stock dividends, Bancorp had 1,570,116 common shares outstanding and
held of record by approximately 513 shareholders. Bancorp's common shares
are traded in the over-the-counter market. Price information with respect
to Bancorp's common shares is listed on The Nasdaq SmallCap Market
("Nasdaq") under the symbol of FFBZ.
The following table sets forth the range of high and low bid
information for the common shares of Bancorp, as quoted by Nasdaq, together
with the dividends declared per common share for each quarter during the
fiscal year ended September 30, 1996.
<TABLE>
<CAPTION>
09/96 06/96 03/96 12/95 09/95 06/95 03/95 12/94
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend Declared $ 0.055 $ 0.055 $ 0.050 $ 0.050 $0.045 $0.045 $0.045 $0.045
High Bid During Quarter 13.750 12.250 11.875 10.125 8.750 7.250 6.500 6.500
Low Bid During Quarter 11.750 11.125 10.125 9.750 7.250 6.375 6.250 6.000
Last Bid Of Quarter 13.750 11.750 11.125 10.125 8.750 7.250 6.500 6.250
</TABLE>
The income of Bancorp consists primarily of dividends from First
Federal. In addition to certain federal income tax considerations, OTS
regulations impose limitations on the payment of dividends and other capital
distributions by savings banks. Under OTS regulations applicable to
converted savings banks, First Federal is not permitted to pay a cash
dividend on its capital stock if First Federal's regulatory capital would,
as a result of the payment of such dividend, be reduced below the amount
established for the purpose of granting a limited priority claim on the
assets of First Federal in the event of a complete liquidation to those
members of First Federal before the Conversion who maintain a savings
account at First Federal after the Conversion or applicable regulatory
capital requirements prescribed by the OTS.
In addition, OTS regulations provide that a savings association which
immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution (including a dividend), has total capital (as
defined by OTS regulations) that is equal to or greater than the amount of
its fully phased-in capital requirements is generally permitted without OTS
approval (but subsequent to 30 days prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not
to exceed the greater of (1) 100% of its net earnings to date during the
year, plus an amount equal to one-half the amount by which its total capital
to assets ratio exceeded its required fully phased-in capital to assets
ratio at the beginning of the year, or (2) 75% of its net earnings during
the most recent four-quarter period. Savings associations with total
capital in excess of the fully phased-in capital requirements that have been
notified by the OTS that they are in need of more than normal supervision
and associations whose capital does not exceed their fully phased-in capital
requirements are subject to restrictions on dividends.
Item 6. Management's Discussion and Analysis or Plan of Operations.
General
First Federal is primarily engaged in the business of attracting
savings deposits from the general public and investing such funds in loans
secured by one-to-four family residential real estate located primarily in
eastern Ohio. In recent years, First Federal has increased its origination
of consumer loans, primarily direct and indirect loans for the purchase of
automobiles. First Federal also originates loans secured by multifamily
real estate (over four units) and nonresidential real estate and other types
of consumer loans, including home equity, home improvement loans, and
secured and unsecured lines-of-credit. Prior to 1986, First Federal
purchased participation interests in various loans secured by multifamily
and nonresidential real estate located outside of First Federal's primary
market area. First Federal also invests in U.S. government and agency
obligations, interest-bearing deposits in other banks, mortgage-backed
securities and other investments permitted by applicable law.
First Federal's profitability is primarily dependent upon its net
interest income, which is the difference between interest income on its loan
and investment portfolios and interest paid on deposits and other borrowed
funds. Net interest income is directly affected by the relative amounts of
interest-earning assets and interest-bearing liabilities and the interest
rates earned or paid on such amounts. First Federal's profitability is also
affected by the provision for loan losses and the level of other income and
other expenses. Other income consists primarily of service charges, other
fees on deposits, dividends on FHLB stock and gain on sale of loans. The
gain on sale of loans is the result of First Federal's origination and sale
of fixed-rate mortgage loans in the secondary market. Other expenses
include salaries and employee benefits, occupancy of premises, federal
deposit insurance premiums, data processing, advertising, state franchise
tax and other operating expenses.
The operating results of First Federal are also affected by general
economic conditions, the monetary and fiscal policies of federal agencies
and the regulatory policies of agencies that regulate financial
institutions. First Federal's cost of funds is influenced by interest rates
on competing investments and general market rates of interest. Lending
activities are influenced by the demand for real estate loans and other
types of loans, which is in turn affected by the interest rates at which
such loans are made, general economic conditions affecting loan demand and
the availability of funds for lending activities.
Note Regarding Forward-Looking Statements
- -----------------------------------------
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, First Federal's operations and First
Federal's actual results could differ significantly from those discussed in
the forward-looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein but also include changes
in the economy and interest rates in the nation and First Federal's market
area generally.
Some of the forward-looking statements included herein are the
statements regarding the following:
1. Management's determination of the amount of loan loss allowance;
2. Management's belief that deposits will grow slightly during fiscal
year 1997;
3. Management's anticipation that loan demand will remain steady;
4. Management's anticipation that additional advances from the FHLB
will be necessary to fund loan originations;
5. Management's anticipation that adjustable-rate loans will reprice
higher in fiscal year 1997 if interest rates remain relatively
stable;
6. Management's anticipation that depreciation for building,
furniture and fixtures will increase;
7. Changes in deposit insurance assessments;
8. Legislative changes with respect to the federal thrift charter;
9. Management's expectation that the amount of its consumer loans
will increase; and
10. Management's expectation that a significant portion of the
certificates of deposit at First Federal maturing in fiscal year
1997 will remain on deposit with First Federal.
Selected Consolidated Financial Data
The following table sets forth certain information concerning the
consolidated financial condition and results of operations of First Federal
as of and for the periods indicated:
<TABLE>
<CAPTION>
Selected financial information At or for the year ended September 30,
and other data 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $ 184,467 $ 171,624 $ 156,305 $ 146,048 $ 143,635
Mortgage-backed securities 1,661 1,889 2,063 2,395 2,976
Loans receivable - net 160,298 151,744 138,618 127,149 122,725
Federal funds sold and
other short-term investments 3,175 975 550 - 824
Investment securities and FHLB stock 6,478 6,502 6,233 5,638 7,215
Deposits 130,072 129,267 129,013 130,331 132,007
Borrowed funds 37,970 27,600 14,625 3,225 -
Stockholders' equity 13,998 12,745 11,484 11,231 10,005
Number of:
Real estate loans outstanding 3,008 2,675 2,655 2,642 2,620
Consumer loans outstanding 5,189 4,938 4,735 4,483 4,430
Deposit accounts 20,312 20,750 20,237 20,516 21,088
Full service offices 6 6 6 6 6
Summary of operations 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Total interest income $ 13,630 $ 12,205 $ 10,052 $ 10,805 $ 12,365
Total interest expense 7,099 6,452 4,575 5,206 7,003
--------- --------- --------- --------- ---------
Net interest income 6,531 5,753 5,477 5,599 5,362
Provision for loan losses 131 60 192 281 351
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 6,400 5,693 5,285 5,318 5,011
Noninterest income 871 766 731 765 750
Noninterest expense 5,092 4,062 4,084 3,909 3,954
Provision for loss on property
held for sale - - - - 548
--------- --------- --------- --------- ---------
Income before federal income tax and
cumulative effect of a change in
accounting method 2,179 2,397 1,932 2,174 1,259
Provision for federal income taxes 745 802 573 677 119
--------- --------- --------- --------- ---------
Income before cumulative effect of a
change in accounting method 1,434 1,595 1,359 1,497 1,140
Cumulative effect of change in
accounting for income taxes - - (360) - -
--------- --------- --------- --------- ---------
Net income $ 1,434 $ 1,595 $ 999 $ 1,497 $ 1,140
========= ========= ========= ========= =========
Primary earnings per share before
cumulative effect of a change in
accounting method (1) $ .84 $ .97 $ .80 $ .88 $ .69
Change in accounting method - - (.21) - -
--------- --------- --------- --------- ---------
Primary earnings per share $ .84 $ .97 $ .59 $ .88 $ .69
========= ========= ========= ========= =========
Fully diluted earnings per share
before cumulative effect of a change
in accounting method (1) $ .84 $ .96 $ .79 $ .87 $ .69
Change in accounting method - - (.21) - -
--------- --------- --------- --------- ---------
Fully diluted earnings per share $ .84 $ .96 $ .58 $ .87 $ .69
========= ========= ========= ========= =========
Cash dividend declared per share (1) $ 0.21 $ 0.18 $ 0.14 $ 0.09 -
Weighted average common and
common equivalent shares (2)
Primary 1,697,094 1,640,194 1,695,948 1,706,096 1,651,700
Fully diluted 1,716,515 1,660,670 1,702,556 1,710,692 1,651,700
____________________
<F1> Information is not applicable to periods prior to July 14, 1992, the
effective date of First Federal's conversion from mutual to stock
form.
<F2> On each of October 26, 1994, and November 6, 1996, the Board of
Directors declared a stock dividend in the nature of a 2-for-1 stock
split. All earnings and dividends per share disclosures have been
restated to reflect these stock dividends.
</TABLE>
<TABLE>
<CAPTION>
At or for the
year ended September 30,
---------------------------------------------
Key Operating Ratios 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest rate spread (spread between
weighted average rate on all
interest-earning assets and all
interest-bearing liabilities) at end
of period 3.71% 3.48% 3.73% 3.87% 4.14%
Average interest rate spread 3.92 3.54 3.84 3.99 3.91
Net interest yield (net interest
income divided by average interest-
earning assets) 4.04 3.70 3.99 4.15 3.67
Return on stockholders' equity (1) 10.65 13.14 12.57 14.00 17.06
Return on stockholders' equity (2) 10.65 13.14 9.24 14.00 17.06
Return on assets (3) .81 .96 .93 1.03 0.78
Return on assets (4) .81 .96 .68 1.03 0.78
Average interest-earning assets to
average interest-bearing liabilities 102.79 103.90 104.69 104.12 101.34
Stockholders' equity to total assets at
end of period 7.59 7.43 7.35 7.69 6.97
Average stockholders' equity to average
total assets 7.65 7.33 7.51 7.36 4.57
Dividend payout 25.00 18.75 24.57 10.35 -
Nonperforming assets ratio (total
nonperforming assets divided by
total assets) at end of period (5) .28 .31 .46 1.68 1.87
General valuation allowance to net
loans outstanding at end of period 0.75 0.76 0.57 0.52 0.71
____________________
<F1> Net income before cumulative effect of change in accounting principle
divided by average stockholders' equity.
<F2> Net income divided by average stockholders' equity.
<F3> Net income before cumulative effect of change in accounting principle
divided by average total assets.
<F4> Net income divided by average total assets.
<F5> Nonperforming assets consist of nonaccruing loans, accruing loans which
are past due 90 days or more, real estate owned and property held
for future sale.
</TABLE>
Financial Condition Data
Total assets of First Federal increased to $184.5 million at September
30, 1996, from $171.6 million at September 30, 1995. The increase in assets
is the result primarily of an increase in net loans receivable of $8.6
million, or 5.64%, from $151.7 million at September 30, 1995, to $160.3
million at September 30, 1996, and an increase in premises and equipment
from $3.7 million to $6.6 million. The increase in loans receivable was
primarily due to an increase in residential real estate loans of $6.0
million, a $3.6 million increase in consumer automobile loans, a $1.2
million increase in other real estate loans, a $119,000 increase in
commercial loans and a $400,000 increase in other consumer loans. The
increase in residential loans was due to new loan originations and
refinancing of loans from other institutions.
Cash and cash equivalents increased $1.8 million to $8.2 million at
September 30, 1996. Investment securities decreased $319,000 due to the use
of the funds from maturing securities for loan originations. See "Liquidity
and Capital Resources." Mortgage-backed securities decreased by $228,000,
or 12.1%, during the 1996 fiscal year due to principal repayments on the
mortgage-backed securities portfolio and the use of such funds for
operations and loan originations. Accrued interest receivable and other
assets increased $145,000 to $3.2 million at September 30, 1996. Premises
and equipment increased $2.9 million due to the renovation of the Main
Office, which cost $4.0 million. FHLB stock increased $295,000, which is
included in accrued interest receivable and other assets.
The allowance for loan losses increased by $112,000 from $1,499,000 at
September 30, 1995, to $1,611,000 at September 30, 1996. Management
determined to increase the general valuations as the loan portfolio grew.
First Federal reviews on a monthly basis the allowance for loan losses as it
relates to a number of relevant factors, including but not limited to,
trends in the level of nonperforming assets and classified loans, current
and anticipated economic conditions in the primary lending area, past loss
experience and possible losses arising from specific problem assets. To a
lesser extent, management also considers loan concentrations to single
borrowers and changes in the composition of the loan portfolio. While
management believes that it uses the best information available to determine
the allowance for loan losses, unforeseen market conditions could result in
adjustments, and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the
final determination.
Loans not secured by one- to four-family residential real estate are
generally considered to involve greater risk of loss than loans secured by
one- to four-family residential real estate due, in part, to the effects of
general economic conditions. The repayment of multifamily residential and
nonresidential real estate loans generally depends upon the cash flow from
the operation of the property, which may be negatively affected by national
and local economic conditions that cause leases not to be renewed or that
negatively affect the operations of a commercial borrower. Construction
loans may also be negatively affected by such economic conditions,
particularly loans made to developers who do not have a buyer for a property
before the loan is made. The risk of default on consumer loans increases
during periods of recession, high unemployment and other adverse economic
conditions. When consumers have trouble paying their bills, they are more
likely to pay mortgage loans than consumer loans, and the collateral
securing such loans, if any, may decrease in value more rapidly than the
outstanding balance of the loan.
Deposits increased by $805,000, or .62%, from $129.3 million at
September 30, 1995, to $130.1 million at September 30, 1996. The increase
is primarily due to the growth in noninterest-bearing accounts at September
30, 1996. The balance of such deposits increased $823,000 to $4.3 million
at September 30, 1996, from $3.5 million at September 30, 1995. At
September 30, 1996, FHLB advances totaled $38 million, an increase of $10.4
million over the $27.6 million of advances outstanding at September 30,
1995. Management believes that deposits will grow slightly during early
fiscal year 1997 and that it will be necessary to fund the anticipated
steady loan demand with further advances from the FHLB, whose rates are less
expensive than current market savings rates and their SAIF premiums. No
assurance can be provided, however, that deposits will grow slightly and
that loan demand will remain steady. Deposit levels and loan demand are
affected by national, as well as local, interest rates and other national
and local economic circumstances.
Stockholders' equity was $14 million, or 7.59% of total assets, at
September 30, 1996, compared to $12.7 million, or 7.4% of total assets, at
September 30, 1995. The increase was attributable to $1.4 million in net
income for the 1996 fiscal year, a decrease of $143,000 in the pension
liability that had been required to fund an actuarial deficiency and
$330,000 in dividends declared.
Comparison of the Years Ended
September 30, 1996 and 1995
First Federal reported net income for the 1996 fiscal year of
approximately $1.4 million compared to $1.6 million in fiscal year 1995.
The most significant changes from 1995 to 1996 were the increase in net
interest income of $778,000 and the increase in noninterest expense of $1.0
million due primarily to a special deposit insurance assessment by the
Savings Association Insurance Fund ("the SAIF") of the FDIC.
Net interest income increased by $778,000 in fiscal year 1996 compared
to fiscal year 1995. Interest income increased to $13.6 million during
fiscal year 1996 from $12.2 million during fiscal year 1995. This increase
was a result of average loans increasing $5.8 million during 1996 compared
to 1995 and the highly competitive mortgage loan market in which 1995's
first-year rates on adjustable-rate mortgages were set at rates lower than
the fully indexed rates and adjusted to higher rates in 1996. Only 3.19%,
or $5.3 million, of First Federal's total loan portfolio of $167.0 million
consists of fixed-rate residential real estate loans. If interest rates
remain relatively stable during fiscal year 1997, the adjustable-rate
mortgage loan portfolio will reprice at slightly higher rates as most loans
originated during fiscal year 1996 were not initially priced at the fully
indexed interest rate. These loans will be repricing upward at their first
adjustment in 1997 while the balance of the adjustable-rate mortgage loan
portfolio will not reprice substantially lower during 1997. No assurance
can be provided, however, that interest rates will remain stable. Interest
rates are affected by general, local and national economic conditions, the
policies of various regulatory authorities and other factors beyond the
control of First Federal. Interest expense for fiscal year 1996 increased
to $7.1 million from $6.5 million during fiscal year 1995. Included in
interest expense for 1996 is approximately $1.7 million of interest on
borrowed funds. The increase in interest expense on deposits is the result
of higher interest rates on certificates of deposit and a shift from
transaction accounts to certificates of deposit. It is expected that the
amount of interest paid on borrowed funds will increase during fiscal year
1997 as First Federal relies on additional advances from the FHLB to fund
loan demand.
First Federal's average interest rate spread increased from 3.54% in
fiscal 1995 to 3.92% in fiscal 1996 as a result of First Federal's interest-
earning assets repricing at a faster pace than its interest-bearing
liabilities.
The provision for loan losses was $131,000 in the 1996 fiscal year, an
increase of $70,000 from the 1995 fiscal year. Management increased the
provision for loan losses as a result of the increase in the loan portfolio.
Noninterest income increased for fiscal year 1996 by $104,000 from
fiscal 1995. This is a result of the increase in dividends paid on FHLB
stock of $27,000, an increase of $60,000 on fees collected on checking
accounts and other miscellaneous services and an increase of $10,000 on the
gain on loans sold.
Noninterest expenses increased by approximately $1.0 million from
fiscal 1995 to fiscal 1996. The increase is primarily attributable to a
special deposit insurance assessment of $800,100. In addition, salaries and
benefits increased $168,000, mainly due to an increase in staff and normal
pay increases. Occupancy expense increased $59,000 mainly due to increased
depreciation for the new loan system and savings system software purchased
in fiscal 1996. It is anticipated that depreciation for building and
furniture and fixtures will increase approximately $175,000 for fiscal 1997
as a result of the renovation of the Main Office at an approximate cost of
$4.0 million.
The deposits of First Federal and other savings associations are
insured by the FDIC in the SAIF. The deposit accounts of commercial banks
are insured by the FDIC in the Bank Insurance Fund (the "BIF"), except to
the extent such banks have acquired SAIF deposits. Because a significant
portion of the assessments paid into the SAIF by savings associations are
used to pay the cost of prior thrift failures, the reserves of the SAIF are
below the level required by law. The BIF has, however, met its required
reserve level.
Assessments paid by healthy savings associations exceeded those paid
by healthy commercial banks by approximately $.19 per $100 in deposits in
late 1995, and no BIF assessments have been required of healthy commercial
banks in 1996, except a $2,000 minimum fee. Such premium disparity could
have a negative competitive impact on First Federal and other institutions
with SAIF deposits.
Legislation to recapitalize the SAIF and to eliminate the significant
premium disparity between the BIF and the SAIF became effective September
30, 1996. The recapitalization plan provides for a special assessment equal
to $.657 per $100 of SAIF deposits held at March 31, 1995, in order to
increase the SAIF reserves to the level required by law. Certain BIF
institutions holding SAIF-insured deposits will pay a lower special
assessment. On the basis of its $121.8 million in deposits at March 31,
1995, First Federal paid, on November 27, 1996, an additional pre-tax
assessment of $800,100. Such payment was recorded as an expense and
accounted for by First Federal as of September 30, 1996. Earnings and
capital were, therefore, negatively affected for the quarter ended September
30, 1996, by an after-tax amount of approximately $528,000.
The recapitalization plan also provides that the cost of prior thrift
failures will be shared by both the SAIF and the BIF, which will increase
BIF assessments for healthy banks to approximately $.013 per $100 of
deposits in 1997. SAIF assessments for healthy savings associations in 1997
will be approximately $.064 per $100 in deposits and may never be reduced
below the level set for healthy BIF institutions.
The recapitalization plan also provides for the merger of the SAIF and
the BIF effective January 1, 1999, assuming there are no savings
associations under federal law. Under separate proposed legislation,
Congress is considering the elimination of the federal thrift charter and
the separate federal regulations of thrifts. As a result, First Federal
would have to convert to a different financial institution charter and would
be regulated under federal law as a bank, including being subject to the
more restrictive activity limitations imposed on national banks.
In addition, Bancorp might become subject to more restrictive holding
company requirements, including activity limits and capital requirements
similar to those imposed on First Federal. Bancorp cannot predict the
impact of the conversion of First Federal to, or regulation of First Federal
as, a bank until the legislation requiring such change is enacted.
In August 1996, Congress passed legislation repealing the reserve
method of accounting used by many thrifts to calculate their bad debt
reserve for federal income tax purposes and requiring any bad debt reserves
taken after 1987, using the percentage of taxable income method, be included
in future taxable income of the association over a six-year period, although
a two-year delay is permitted for institutions meeting a residential
mortgage loan origination test. At September 30, 1996, First Federal has
approximately $1.1 million in bad debt reserves subject to recapture for
federal income tax purposes. The deferred tax liability related to the
recapture was established in prior years, so First Federal's net income will
not be negatively affected by this legislation.
The federal income tax provision decreased by $57,000 from fiscal 1995
to fiscal 1996. The effective tax rate for fiscal 1996 was 34.2% compared
to 33.4% for fiscal year 1995.
Comparison of the Years Ended
September 30, 1995 and 1994
First Federal reported net income for the 1995 fiscal year of
approximately $1.6 million compared to $999,000 in fiscal year 1994. The
significant changes from 1995 to 1994 were the increase in net interest
income of $277,000, the decrease in provision for loan losses of $132,000,
the increase in federal income tax provision of $228,000, and the absence of
the cumulative effect of a one time change in accounting principle of
$360,000 that was booked as a result of adopting Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes." The
statement required, among other things, a change from the deferred method to
the liability method of accounting for deferred income taxes.
Net interest income increased by $277,000 in 1995. Interest income
increased to $12.2 million during fiscal year 1995 from $10.1 million during
fiscal year 1994. This increase was a result of average loans increasing
$18.3 million during 1995 compared to 1994 and the direct result of the
highly competitive mortgage loan market in which 1994's first-year rates on
adjustable-rate mortgages were set at rates lower than the normal rate and
rolled to higher rates in 1995. Only 3.79%, or $5.9 million, of First
Federal's total loan portfolio of $155.6 million consists of fixed-rate
residential real estate loans. Interest expense for fiscal year 1995
increased to $6.5 million from $4.6 million during fiscal year 1994.
Included in interest expense for 1995 is approximately $1.7 million interest
on borrowed funds. The increase in interest expense is the result of higher
interest rates on certificates as offered and as they matured from lower
rates and a shift from transaction accounts to certificates.
First Federal's average interest rate spread decreased from 3.84% in
fiscal 1994 to 3.54% in fiscal 1995 as a result of First Federal's interest-
bearing liabilities repricing at a faster pace than its interest-earning
assets.
The provision for loan losses was $60,000 in the 1995 fiscal year, a
decrease of $132,000 from the 1994 fiscal year. Management reduced the
provision for loan losses as a result of total nonperforming assets
declining from $720,000 at September 30, 1994, to $538,000 at September 30,
1995. Also, a $428,000 recovery was received on the Gates of Arlington
property in 1995, which significantly increased the allowance for loan loss
balance.
Noninterest income increased for fiscal year 1995 by $36,000 from
1994. This is a result of the increased dividends on FHLB stock, which is
due to the increased balance of FHLB stock owned and the increased dividend
paid on the stock.
Noninterest expenses decreased by approximately $20,000 from fiscal
1994 to fiscal 1995. The decrease is primarily attributable to a decrease
in FDIC insurance premiums of $36,000, due to the decline of average
deposits throughout the year, and a decrease in data processing costs of
$20,000, due to renegotiating the cost of the third-party provider. These
decreases were offset by an increase in occupancy expense of $41,000, due to
increased depreciation of $8,800, increased repairs and maintenance of
$19,000, and an increase in furniture and fixtures of $10,000. The
increases in repairs and maintenance and furniture and fixtures were due to
repairs on branch offices and temporarily relocating utilities and offices
in preparation for the renovation and construction at the Main Office.
The federal income tax provision increased by $229,000 from fiscal
1994 to fiscal 1995. The effective tax rate for fiscal 1995 was 33.4%
compared to 29.7% for fiscal year 1994.
Asset and Liability Management
First Federal's Board of Directors has formulated an asset and
liability management policy designed to accomplish First Federal's principal
financial objective of enhancing long-term profitability while reducing its
interest rate risk. The principal elements of such policy are to: (i)
originate long-term, fixed-rate mortgage loans for sale; (ii) emphasize the
origination of adjustable-rate loans; (iii) originate high quality, short-
term consumer loans; (iv) maintain excess liquidity in relatively short-
term, interest-bearing instruments; and (v) lengthen the maturity of its
liabilities by seeking longer-term deposits. First Federal's asset and
liability management policy is designed to reduce the impact of changes in
interest rates on its net interest income by achieving a more favorable
match between the maturity or repricing dates of its interest-earning assets
and interest-bearing liabilities.
First Federal presently originates one-year and three-year adjustable-
rate mortgage loans for its own portfolio. The origination of adjustable-
rate mortgage loans in a low or decreasing interest rate environment is
negatively affected by the increased consumer demand for fixed-rate mortgage
loans. Virtually all fixed-rate mortgage loans originated by First Federal
in recent years have been originated for sale.
In recent years, First Federal has stressed short-term consumer
lending, primarily the origination of automobile loans. In fiscal year
1996, the automobile loans increased to $30.4 million from $26.8 million in
fiscal year 1995. The increase was due to a general fiscal year improvement
in automobile sales. First Federal intends to continue to maintain consumer
loans at current levels or increase such amounts, depending upon the demand
for such loans. Consumer loans may decrease, however, due to decreased
demand or increased competition. For the past seven years, First Federal
has been the leader in originating loans for the purchase of residential
properties in Muskingum County, in terms of both number and aggregate dollar
amount of loans.
First Federal's interest rate spread is the principal determinant of
income. The interest rate spread, and therefore net interest income, can
vary considerably over time, because asset and liability repricing do not
coincide. Moreover, the long-term or cumulative effect of interest rate
changes can be substantial. Interest rate risk is defined as the
sensitivity of an institution's earnings and net asset value to changes in
interest rates. The management and Board of Directors of First Federal
carefully manage First Federal's exposure to interest rate risk in a manner
designed to maintain the projected four-quarter percentage change in net
interest income and the projected change in the market value of portfolio
equity within the limits established by the Board of Directors assuming a
permanent and instantaneous parallel shift in interest rates. The Board has
established the maximum possible change in net interest income and market
value of portfolio equity at +/- 200 basis points at (25%) and (40%). First
Federal's projected change is (3)% and (7%) at September 30, 1996.
Liquidity and Capital Resources
First Federal's principal sources of funds are deposits, repayments on
loans and mortgage-backed securities, maturities of investment securities,
FHLB advances, and funds provided by operations. While scheduled loan and
mortgage-backed securities amortization and maturing interest-bearing
deposits and investment securities are relatively predictable sources of
funds, deposit flows and loan and mortgage-backed securities prepayments are
greatly influenced by economic conditions, the general level of interest
rates and competition. The particular sources of funds utilized by First
Federal from time to time are selected based on comparative costs and
availability. First Federal generally manages the pricing of its deposits
to maintain a steady deposit balance. From time to time, First Federal has
decided not to pay rates on deposits as high as the rates paid by its
competitors. First Federal has, when necessary, supplemented deposits with
longer term or less expensive alternative sources of funds, such as advances
from the FHLB.
The OTS requires savings associations to maintain a minimum level of
investments in specified types of liquid assets. OTS regulations presently
require First Federal to maintain an average daily balance of investments in
United States Treasury obligations, federal agency obligations and other
investments having maturities of five years or less. Such minimum
requirement is an amount equal to 5% of the sum of First Federal's average
daily balance of net withdrawable deposit accounts and borrowings payable in
one year or less. The liquidity requirement, which may be changed from time
to time by the OTS to reflect changing economic conditions, is intended to
provide a source of relatively liquid funds upon which First Federal may
rely if necessary to fund deposit withdrawals and other short-term funding
needs. First Federal's regulatory liquidity was 5.73% at September 30,
1996.
During the fiscal year ended September 30, 1996, cash provided by
operating activities, mortgage-backed securities repayments, loan repayments
and borrowings were used to fund deposit maturities, withdrawals and loan
originations.
Liquidity management is both a daily and long-term responsibility of
management. First Federal adjusts its investments in cash and cash
equivalents based upon management's assessment of (i) expected loan demand,
(ii) projected mortgage-backed and investment security maturities, (iii)
expected deposit flows, (iv) yields available on interest-bearing deposits,
and (v) the objectives of its asset/liability management program. Excess
liquidity is invested generally in federal funds sold, mortgage-backed
securities, interest-bearing deposits and floating-rate corporate debt
securities. If First Federal requires funds beyond its ability to generate
them internally, it has additional borrowing capacity with the FHLB of
Cincinnati and collateral eligible for reverse repurchase agreements.
First Federal anticipates that it will not have sufficient funds
available in 1997 from loan and mortgage-backed securities repayments and
investment security maturities to meet expected loan demand. It anticipates
it will be necessary to borrow an additional amount from the FHLB, although
such borrowings may not occur if loan demand weakens or deposits increase
sufficiently. At September 30, 1996, First Federal had outstanding
commitments to originate loans of $1.8 million, unfunded lines-of-credit
totaling $3.8 million (a significant portion of which normally remains
unfunded) and $197,000 in commitments to sell loans. There were no
commitments to purchase loans at such date. Certificates of deposit
scheduled to mature in one year or less at September 30, 1996, totaled $46.2
million. Management believes that a significant portion of the amounts
maturing during 1997 will remain on deposit with First Federal because they
are mostly from within First Federal's primary market area and are not
negotiated rate deposits. Deposits may not remain, however, due to changes
in the economy, changes in interest rates that may make alternative
investments more attractive, or increased competition among financial
institutions.
First Federal's liquidity is a product of its operating, investing and
financing activities. These activities for the periods presented are
summarized in the following table:
<TABLE>
<CAPTION>
Years ended September 30,
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net cash provided by operating activities $ 1,888 $ 2,086 $ 1,739
Net cash used in investing (11,157) (14,442) (10,948)
Net cash provided by financing activities 11,095 13,099 9,177
-------- -------- --------
(Decrease) Increase in cash and cash equivalents 1,826 743 (32)
Cash and cash equivalents at beginning of year 6,336 5,593 5,625
-------- -------- -------
Cash and cash equivalents at end of year $ 8,162 $ 6,336 $ 5,593
======== ======== =======
</TABLE>
First Federal is required by OTS regulations to meet certain minimum
capital requirements. The following table sets forth certain information
regarding First Federal's compliance with applicable regulatory capital
requirements at September 30, 1996.
<TABLE>
<CAPTION>
Percent
Amount of assets
------ ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital $12,494 6.77%
Tangible capital requirement 2,767 1.50
------- -----
Excess $ 9,727 5.27%
======= =====
Core capital $12,494 6.77%
Core capital requirement 5,534 3.00
------- -----
Excess $ 6,960 3.77%
======= =====
Total risk-based capital $13,718 11.49%
Risk-based capital requirement 9,553 8.00
------- -----
Excess $ 4,165 3.49%
======= =====
</TABLE>
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles
("GAAP"), which require the measurement of financial position and results of
operations in terms of historical dollars without considering changes in
relative purchasing power of money over time because of inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of First Federal are monetary in nature. As a result, interest
rates have a more significant impact on First Federal's performance than the
effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods
and services.
Effect of Accounting Changes
Effective October 1, 1993, SFAS No. 109, "Accounting For Income
Taxes," was adopted. The statement requires that First Federal follow the
liability method in accounting for income taxes. The liability method
provides that deferred tax assets and liabilities are recorded based on the
difference between the tax basis of assets and liabilities and their
carrying amounts for financial reporting purposes. The effect of the
adoption of SFAS No. 109 as of October 1, 1993, is shown as a cumulative
effect of an accounting principle change on the 1994 Consolidated Statement
of Income in the amount of $360,000.
Effective October 1, 1994, the First Federal adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS
No. 115 requires corporations to classify certain debt and equity securities
as held to maturity, trading or available for sale. The initial adoption of
SFAS No. 115 on October 1, 1994, had no effect on stockholders' equity as
management classified all investments as held to maturity.
In May 1993, SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," was issued. SFAS No. 114 specifies that allowances for loan losses
on impaired loans should be determined using the present value of estimated
future cash flows of the loan, discounted at the loan's effective interest
rate. A loan is impaired when it is probable that all principal and
interest amounts will not be collected according to the loan contract. In
October 1994, SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," was issued. SFAS No. 118 amends
SFAS No. 114 to allow a creditor to use existing methods for recognizing
interest income on an impaired loan. SFAS No. 114 and SFAS No. 118 became
effective for First Federal October 1, 1995. The adoption of these
pronouncements did not have a material impact on financial performance.
In May 1995, the FASB issued its SFAS No. 122, "Accounting for
Mortgage Servicing Rights," which requires companies that engage in mortgage
banking activities to recognize as separate assets rights to service
mortgage loans for others. This Statement is required to be adopted by
First Federal by October 1, 1996, and will be applied prospectively to
rights arising from loans sold by First Federal after adoption of the
Statement. The adoption of this pronouncement is not expected to have a
material impact on financial performance.
On October 1, 1996, First Federal is required to adopt SFAS No. 123
"Accounting for Stock-Based Compensation." SFAS No. 123 encourages but does
not require entities to use a fair value based method to account for stock-
based compensation plans such as the First Federal stock option plans. If
the fair value accounting encouraged by SFAS No. 123 is not adopted,
entities must disclose the pro forma effect on net income and earnings per
share had the accounting been adopted. Fair value of a stock option is to
be estimated using an option-pricing model that considers exercise price,
expected life of the option, current price of the stock, expected price
volatility, expected dividends on the stock, and the risk-free interest
rate. First Federal will disclose the pro forma impact of this
pronouncement in 1997.
Item 7. Financial Statements.
FIRST FEDERAL BANCORP, INC.
Zanesville, Ohio
September 30, 1996
CONTENTS
REPORT OF INDEPENDENT AUDITORS.................................. 1
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION............ 2
CONSOLIDATED STATEMENTS OF INCOME......................... 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY........... 5
CONSOLIDATED STATEMENTS OF CASH FLOWS..................... 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................ 8
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
First Federal Bancorp, Inc.
Zanesville, Ohio
We have audited the accompanying consolidated statements of financial
condition of First Federal Bancorp, Inc. as of September 30, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended September 30,
1996. 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.
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
Federal Bancorp, Inc. as of September 30, 1996 and 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for impaired loans in 1996, certain
investment securities in 1995 and income taxes in 1994.
Crowe, Chizek and Company LLP
Columbus, Ohio
October 31, 1996, except for Note 1 (Earnings and
Dividends per Common Share) as to which
the date is November 6, 1996
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1996 and 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions (Note 8) $ 4,986,988 $ 5,360,583
Overnight deposits 3,175,000 975,000
------------ ------------
Cash and cash equivalents 8,161,988 6,335,583
Investment securities held to maturity (Fair value -
$4,546,000 in 1996 and $4,869,000 in 1995) (Note 2) 4,548,069 4,867,174
Mortgage-backed securities held to maturity (Fair
value - $1,658,000 in 1996 and $1,892,000 in 1995)
(Note 2) 1,661,018 1,889,418
Loans receivable, net (Notes 3 and 6) 160,297,702 151,744,328
Premises and equipment, net (Note 4) 6,553,874 3,687,681
Accrued interest receivable and other assets 3,244,605 3,100,022
------------ ------------
Total assets $184,467,256 $171,624,206
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 5) $130,071,616 $129,266,615
Borrowed funds (Note 6) 37,970,000 27,600,000
Advances from borrowers for taxes and insurance 540,734 311,685
Accrued expenses and other liabilities 1,887,057 1,700,869
------------ ------------
Total liabilities 170,469,407 158,879,169
------------ ------------
Commitments and contingencies (Note 8)
Stockholders' equity (Note 9)
Preferred stock, $100 par value, 1,000,000 shares
authorized, no shares issued and outstanding
Common stock, no par value, 4,000,000 shares
authorized, 1,651,700 and 825,850 shares issued
at September 30, 1996 and 1995 3,656,323 3,656,323
Retained earnings 10,876,921 9,773,827
Minimum additional pension liability (Note 10) (143,155)
Treasury shares, 81,584 and 41,292 shares
at September 30, 1996 and 1995 (535,395) (541,958)
------------ ------------
Total stockholders' equity 13,997,849 12,745,037
------------ ------------
Total liabilities and stockholders' equity $184,467,256 $171,624,206
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income
Interest and fees on loans $13,152,751 $11,746,698 $ 9,671,077
Interest on mortgage-backed securities 104,858 133,586 147,094
Interest on investment securities 252,063 284,788 227,382
Interest on other interest earning
investments 120,957 39,967 6,239
----------- ----------- -----------
Total interest income 13,630,629 12,205,039 10,051,792
----------- ----------- -----------
Interest expense
Interest on deposits 5,414,339 4,776,004 4,451,518
Interest on borrowed funds 1,685,085 1,675,527 123,321
----------- ----------- -----------
Total interest expense (Note 5) 7,099,424 6,451,531 4,574,839
----------- ----------- -----------
Net interest income 6,531,205 5,753,508 5,476,953
Provision for loan losses (Note 3) 130,823 60,340 191,925
----------- ----------- -----------
Net interest income after provision for
loan losses 6,400,382 5,693,168 5,285,028
----------- ----------- -----------
Noninterest income
Service charges on deposit accounts 316,480 292,814 289,575
Gain on sale of loans 47,652 37,208 58,575
Dividends on Federal Home Loan
Bank stock 118,870 91,469 51,234
Other operating income 387,923 344,944 331,271
----------- ----------- -----------
Total noninterest income 870,925 766,435 730,655
----------- ----------- -----------
Noninterest expense
Salaries and employee benefits (Note 10) 1,998,265 1,830,241 1,814,517
Occupancy and equipment expense 508,015 449,454 407,946
Deposit insurance expense (Note 14) 1,148,468 336,744 373,073
Data processing expense 299,849 299,848 320,277
Advertising 186,986 166,041 167,231
Ohio franchise taxes 179,342 167,207 164,284
Other operating expenses 771,657 812,970 835,682
----------- ----------- -----------
Total noninterest expense 5,092,582 4,062,505 4,083,010
----------- ----------- -----------
Income before income taxes and
cumulative effect of a change in
accounting method 2,178,725 2,397,098 1,932,673
Provision for income taxes (Note 7) 744,899 801,821 573,237
----------- ----------- -----------
Income before cumulative effect of a
change in accounting method $ 1,433,826 $ 1,595,277 $ 1,359,436
Cumulative effect of change in
accounting for income taxes (Note 1) (360,000)
----------- ----------- -----------
Net income $ 1,433,826 $ 1,595,277 $ 999,436
=========== =========== ===========
Primary earnings per share before
cumulative effect of a change in
accounting method (Note 1) $ .84 $ .97 $ .80
Change in accounting method (.21)
----------- ----------- -----------
Primary earnings per share $ .84 $ .97 $ .59
=========== =========== ===========
Fully diluted earnings per share before
cumulative effect of a change in
accounting method (Note 1) $ .84 $ .96 $ .79
Change in accounting method (.21)
----------- ----------- -----------
Fully diluted earnings per share $ .84 $ .96 $ .58
=========== =========== ===========
</TABLE>
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Minimum
Additional Total
Common Retained Treasury Pension Stockholders'
Stock Earnings Stock Liability Equity
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1993 $3,656,323 $ 7,695,890 $(121,708) $11,230,505
Dividends declared, $.14 per share (234,335) (234,335)
Net income for the year ended
September 30, 1994 999,436 999,436
Purchase of treasury shares $(541,958) (541,958)
Change in minimum
additional pension liability 30,782 30,782
---------- ----------- --------- --------- -----------
Balance, September 30, 1994 3,656,323 8,460,991 (541,958) (90,926) 11,484,430
Dividends declared, $.18 per share (282,441) (282,441)
Net income for the year ended
September 30, 1995 1,595,277 1,595,277
Change in minimum
additional pension liability (52,229) (52,229)
---------- ----------- --------- --------- -----------
Balance, September 30, 1995 3,656,323 9,773,827 (541,958) (143,155) 12,745,037
Dividends declared,
$.21 per share (329,569) (329,569)
Net income for the year ended
September 30, 1996 1,433,826 1,433,826
Sale of treasury stock from
exercise of options (1,163) 6,563 5,400
Change in minimum
additional pension liability 143,155 143,155
---------- ----------- --------- --------- -----------
Balance, September 30, 1996 $3,656,323 $10,876,921 $(535,395) $ 0 $13,997,849
========== =========== ========= ========= ===========
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,433,826 $ 1,595,277 $ 999,436
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation and intangible amortization 253,549 219,628 210,805
Net amortization/(accretion) on
investment securities (17,356) 73,180 123,890
Provision for loan losses 130,823 60,340 191,925
Net amortization of deferred fees (112,329) (142,268) 34,825
Deferred taxes (244,484) 36,491 (39,016)
Cumulative effect of accounting change 360,000
Mortgage loans originated for sale (6,903,822) (2,925,247) (4,238,226)
Proceeds from sale of mortgage loans 6,763,321 3,027,571 4,442,365
Gain on sale of real estate (26,398)
FHLB stock dividend (118,600) (91,200) (51,100)
Changes in other assets and other
liabilities 703,320 231,980 (269,564)
------------ ------------ ------------
Net cash provided by
operating activities 1,888,248 2,085,752 1,738,942
------------ ------------ ------------
Cash flows from investing activities
Purchases of FHLB stock (176,800) (535,600)
Purchase of investment securities (5,455,986) (1,730,914) (2,092,612)
Proceeds from maturities
of investment securities 5,792,447 2,016,655 1,425,000
Principal collected on mortgage-
backed securities 228,400 173,189 332,041
Loans made to customers, net of principal
repayments (8,431,367) (14,424,893) (11,014,928)
Proceeds from sales and payments
received on real estate owned 918,841
Proceeds from sale of student loans 1,277,831
Purchases of premises and equipment (3,114,164) (1,218,427) (516,686)
------------ ------------ ------------
Net cash used for investing
activities (11,157,470) (14,442,159) (10,948,344)
------------ ------------ ------------
Cash flows from financing activities
Net change in deposit accounts 805,001 374,269 (1,317,732)
Net change in borrowed funds with original
maturities of less than three months 10,370,000 12,975,000 11,400,000
Net change in advance payments by
borrowers for taxes and insurance 229,049 32,131 (128,893)
Dividends paid (313,823) (282,441) (234,335)
Proceeds from exercise of options 5,400
Purchase of treasury shares (541,958)
------------ ------------ ------------
Net cash provided by
financing activities 11,095,627 13,098,959 9,177,082
------------ ------------ ------------
Net change in cash and cash equivalents 1,826,405 742,552 (32,320)
Cash and cash equivalents at beginning
of year 6,335,583 5,593,031 5,625,351
------------ ------------ ------------
Cash and cash equivalents at end of year $ 8,161,988 $ 6,335,583 $ 5,593,031
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the year:
Interest on deposits and borrowings $ 7,116,809 $ 6,291,521 $ 4,592,938
Income taxes 1,015,000 663,000 740,000
Noncash transactions:
Transfer of real estate owned balance
to loans 884,410
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
FIRST FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of First Federal Bancorp, Inc. (the "Company") and its wholly-
owned subsidiary First Federal Savings Bank of Eastern Ohio (the "Bank").
All significant intercompany accounts and transactions have been eliminated.
Industry Segment Information: The Company grants residential, consumer and
commercial loans to customers located primarily in east central Ohio. These
loans account for substantially all of the Company's revenues. Mortgage
loans make up approximately 61.5% of the Company's loan portfolio, 18.7% is
made up of automobile loans, 15.0% is made up of multi-family,
nonresidential and construction mortgage loans, and the remaining 4.8% is
made up of consumer and commercial loans.
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Areas involving the use of management's
estimates and assumptions include the allowance for loan losses, the
realization of deferred tax assets, the determination and carrying value of
impaired loans, depreciation of premises and equipment, the net accrued
pension liability, the carrying value of other real estate and loans held
for sale recognized in the Company's financial statements. Actual results
could differ from those estimates.
Investments and Mortgage-backed Securities: Effective October 1, 1994, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS
No. 115 requires corporations to classify certain debt and equity securities
as held to maturity, trading or available for sale.
Securities classified as held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts using the interest
method. Securities classified as held to maturity are those management has
positive intent and ability to hold to maturity. Trading securities are
those purchased principally to sell in the near term and carried at fair
value, with unrealized gains and losses reflected in earnings. The Company
has no trading securities.
Securities classified as available for sale are carried at fair value. Net
unrealized gains and losses are reflected as a separate component of
stockholders' equity, net of tax effects. Securities classified as
available for sale are those that management intends to sell or that could
be sold for liquidity, investment management, or similar reasons, even if
management does not presently intend such a sale. The adoption of SFAS No.
115 had no effect on stockholders' equity as management classified all
investments as held to maturity.
Realized gains and losses on disposition are based on net proceeds and the
amortized cost of the security sold, using the specific identification
method.
Loans Held for Sale: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value
in aggregate. Net unrealized losses are recognized in a valuation allowance
by charges to income.
Allowance for Losses on Loans: Because some loans may not be repaid in
full, an allowance for loan losses is recorded. Increases to the allowance
are recorded by a provision for loan losses charged to expense. Estimating
the risk of 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 possible 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 by management as a loss when deemed uncollectible, although
collection efforts continue and future recoveries may occur.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended
by SFAS No. 118, became effective October 1, 1995 and requires recognition
of loan impairment. Loans are considered impaired if full principal or
interest payments are not anticipated. 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. A portion of the allowance for loan losses is
allocated to impaired loans.
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 mortgage loans. 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. Loans are
generally moved to nonaccrual status when 90 days or more past due. 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 nonperforming and past-due asset
disclosures.
Real Estate Owned: Real estate owned, other than that used in the normal
course of business, is initially recorded at fair market value less
estimated costs to sell the property. Any reduction to fair market value at
the time of acquisition is accounted for as a loan charge off. Additional
provisions for losses are made when the net realizable value of the property
is determined to be less than the recorded value. Costs relating to
development and improvement of real estate are capitalized whereas costs of
holding such real estate are expensed as incurred. Also, gains or losses
are recorded when the property is sold and are reflected in the Consolidated
Statement of Income.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Premises are depreciated using the straight-line
method over a 25 to 50 year period. Equipment is depreciated using the
straight-line method, with lives ranging primarily from 3 to 20 years.
Maintenance and repairs are expensed and major improvements are capitalized.
Interest Income on Loans: Interest on loans is accrued over the term of the
loans based upon the principal outstanding. Management reviews loans
delinquent 90 days or more to determine if the interest accrual should be
discontinued. The carrying value of impaired loans reflects 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 and Costs: The Company defers loan origination fees, net of
direct loan origination costs and recognizes them over the life of the loan
as a yield adjustment. The net amount deferred is reported as a reduction
of loans.
Income Taxes: Effective October 1, 1993, the Company adopted SFAS No. 109
"Accounting for Income Taxes," which requires that the Company follow the
liability method in accounting for income taxes. The liability method
provides that deferred tax assets and liabilities are recorded based on the
difference between the tax basis of assets and liabilities and their
carrying amounts for financial reporting purposes. The effect of the
adoption of SFAS No. 109 as of October 1, 1993, is shown as a cumulative
effect of an accounting principle change in the 1994 Consolidated Statement
of Income.
Statement of Cash Flows: For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks, and interest-
bearing time deposits in financial institutions with initial maturities of
90 days or less. The Company reports net cash flows for customer loan and
deposit transactions and borrowed funds with maturities of less than three
months.
Earnings and Dividends per Common Share: Earnings per share (EPS) is based
upon the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. The common stock equivalents
that result from the outstanding stock options granted are based on the
average market price of the Company's stock for primary EPS and on the
ending market price for the fully diluted EPS. On November 6, 1996, and on
October 26, 1994, the Board of Directors declared two-for-one stock splits
in the form of 100% stock dividends. All earnings and dividends per share
disclosures have been restated to reflect these stock splits. The weighted
average number of common stock and common stock equivalents during each year
ended September 30 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Primary earnings per share 1,697,094 1,640,194 1,695,948
Fully diluted earnings per share 1,716,515 1,660,670 1,702,556
</TABLE>
Reclassifications: Certain reclassifications have been made to the 1995 and
1994 financial statements to be comparable to the 1996 presentation.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities held to
maturity are as follows at September 30:
<TABLE>
<CAPTION>
1996
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government Treasury
and agency securities $4,320,760 $ (1,760) $4,319,000
Other debt securities 227,309 (309) 227,000
---------- -------- ----------
Total investment securities 4,548,069 (2,069) 4,546,000
Mortgage-backed securities 1,661,018 $ 7,826 (10,844) 1,658,000
---------- ------- -------- ----------
$6,209,087 $ 7,826 $(12,913) $6,204,000
========== ======= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government Treasury
and agency securities $4,620,716 $ 6,584 $ (4,300) $4,623,000
Other debt securities 246,458 (458) 246,000
---------- ------- -------- ----------
Total investment securities 4,867,174 6,584 (4,758) 4,869,000
Mortgage-backed securities 1,889,418 28,953 (26,371) 1,892,000
---------- ------- -------- ----------
$6,756,592 $35,537 $(31,129) $6,761,000
========== ======= ======== ==========
</TABLE>
The amortized cost and estimated fair value of debt securities held to
maturity at September 30, 1996, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Due in one year or less $3,222,654 $3,223,000
Due after one year through five years 1,098,106 1,096,000
Due after five through ten years 188,080 188,000
Due after ten years 39,229 39,000
---------- ----------
4,548,069 4,546,000
Mortgage-backed securities 1,661,018 1,658,000
---------- ----------
$6,209,087 $6,204,000
========== ==========
</TABLE>
No debt securities were sold for fiscal years ending September 30, 1996,
1995 or 1994.
At September 30, 1996 and 1995, $3,585,000 and $2,885,000 of investment
securities were pledged to collateralize public funds deposited in the Bank,
respectively.
NOTE 3 - LOANS RECEIVABLE
The loan portfolio at September 30, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Real estate loans
One- to four-family residences $ 99,495,953 $ 97,346,561
Multifamily 9,176,379 8,264,793
Nonresidential 8,504,671 7,285,499
Construction loans 6,581,920 3,601,340
------------ ------------
123,758,923 116,498,193
Less
Undisbursed portion of loans in process 5,104,813 2,273,775
Net deferred loan origination fees 559,731 576,209
------------ ------------
Total real estate loans 118,094,379 113,648,209
------------ ------------
Consumer and other loans
Automobile 30,375,556 26,766,717
Loans on deposit accounts 484,244 298,364
Home equity, education and other 10,743,261 10,534,177
Commercial loans 1,663,436 1,544,330
------------ ------------
43,266,497 39,143,588
Net deferred loan origination costs 547,826 451,975
------------ ------------
Total consumer and other loans 43,814,323 39,595,563
------------ ------------
Total loans 161,908,702 153,243,772
Less allowance for loan losses 1,611,000 1,499,444
------------ ------------
$160,297,702 $151,744,328
============ ============
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $1,499,444 $1,021,209 $ 821,330
Provision charged to income 130,823 60,340 191,925
Charge-offs (28,017) (31,545) (96,582)
Recoveries 8,750 449,440 104,536
---------- ---------- ----------
Balance at end of year $1,611,000 $1,499,444 $1,021,209
========== ========== ==========
</TABLE>
The Bank classified no loans as impaired under SFAS No. 114 at September 30,
1996 or during the year then ended.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal
balances of these loans at September 30, 1996 and 1995 were approximately
$12,854,000 and $9,888,000, respectively.
In the ordinary course of business the Bank has granted loans to certain
officers, directors and their related interests. Related party loans are
made substantially on the same terms as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. Related party loan activity, for loans
aggregating $60,000 or more to any one related party, is summarized as
follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at September 30, 1995 $223,297
Additions 339,500
Repayments (30,863)
--------
Balance at September 30, 1996 $531,934
========
</TABLE>
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment consists of the following at September 30:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land and improvements $ 759,449 $ 759,449
Office buildings and leasehold improvements 2,263,921 2,263,921
Furniture, fixtures and equipment 2,381,161 2,405,295
Construction in progress 3,422,175 685,310
---------- ----------
Total 8,826,706 6,113,975
Accumulated depreciation 2,272,832 2,426,294
---------- ----------
$6,553,874 $3,687,681
========== ==========
</TABLE>
Depreciation expense was $247,971, $189,050 and $180,227 for the years ended
September 30, 1996, 1995 and 1994, respectively.
NOTE 5 - DEPOSITS
Deposits at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Noninterest-bearing checking $ 3,978,251 $ 3,169,803
Christmas club and other noninterest-bearing 369,976 355,520
------------ ------------
Total noninterest-bearing 4,348,227 3,525,323
------------ ------------
Money market checking 22,306,521 20,266,154
Passbook and statement savings 28,329,780 29,589,361
Negotiated-rate certificates of deposit 5,465,772 5,385,248
Fixed-rate certificates of deposit 69,621,316 70,500,529
------------ ------------
Total interest-bearing 125,723,389 125,741,292
------------ ------------
Total deposits $130,071,616 $129,266,615
============ ============
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $11,836,000 and $11,017,000 at September 30,
1996 and 1995, respectively. Deposits greater than $100,000 are not insured
by the Federal Deposit Insurance Corporation (FDIC).
At September 30, 1996, scheduled maturities of certificates of deposit are
as follows for the year ending September 30:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
1997 $46,175,398
1998 21,664,541
1999 3,460,781
2000 2,282,515
2001 1,318,905
Thereafter 184,948
-----------
$75,087,088
===========
</TABLE>
In conjunction with the renovation of the Company's main office, $96,862 of
interest expense was capitalized into the cost of the construction in
progress during the year ended September 30, 1996. Total interest expense
for 1996 would have been $7,196,286 if the construction period interest were
not capitalized.
NOTE 6 - BORROWED FUNDS
Borrowed funds consist solely of Federal Home Loan Bank (FHLB) advances.
The Company had advances with original maturities of less than three months
totaling $21,970,000 with variable rates of 6.10%. Fixed-rate long-term
advances (6.51% average rate) consist of the following at September 30,
1996, by scheduled maturity:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
1997 $ 3,000,000
1998 2,000,000
1999 1,000,000
2000 2,000,000
2001 1,000,000
Thereafter 7,000,000
-----------
$16,000,000
===========
</TABLE>
At September 30, 1995, the Company had $11,600,000 (6.90% interest rate) of
variable-rate advances and $16,000,000 (6.48% average interest rate) of
fixed-rate advances.
At September 30, 1996, $1,930,100 of FHLB stock and $56,955,000 of one- to
four-family residential loans were pledged to collateralize advances from
the FHLB. Based on the Company's FHLB stock investment at September 30,
1996, the Company could borrow up to $38,602,000.
NOTE 7 - FEDERAL INCOME TAXES
The provision for federal income taxes for the years ended September 30
consists of the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current federal income taxes $ 989,383 $765,330 $612,253
Deferred federal income
tax expense (benefit) (244,484) 36,491 (39,016)
--------- -------- --------
$ 744,899 $801,821 $573,237
========= ======== ========
</TABLE>
The reconciled difference between the financial statement provision and
amounts computed by using the statutory rate is as follows for the years
ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Income tax computed at
the statutory rate $740,767 34.0% $815,013 34.0% $657,109 34.0%
Tax effect of
miscellaneous items 4,132 .2 (13,192) (.6) (83,872) (4.3)
-------- ---- -------- ---- -------- ----
$744,899 34.2% $801,821 33.4% $573,237 29.7%
======== ==== ======== ==== ======== ====
</TABLE>
The following are sources of gross deferred tax assets and liabilities as of
September 30:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Items giving rise to deferred tax assets:
Allowance for loan losses in excess
of tax reserve $ 174,256 $ 218,518 $ 264,785
Deferred compensation 3,628 46,951 28,856
Pension expense 17,516 7,300 6,716
Accrued vacation and sick pay 33,320 5,745 5,285
Gain on sale of real estate owned 18,614 9,185
Savings Association Insurance Fund
capitalization assessment 272,030
Organizational costs 10,625 10,625 9,775
Other 9,813 8,190 14,458
--------- --------- ---------
Gross deferred tax asset 539,802 306,514 329,875
--------- --------- ---------
Items giving rise to deferred tax liabilities
Deferred loan fees (192,727) (283,867) (344,311)
FHLB stock dividends (266,703) (226,345) (179,710)
Depreciation (190,844) (164,926) (140,314)
Amortization of certificate of
deposit premium (16,331) (18,583) (19,169)
Investment accretion (8,925) (3,019) (106)
Other (10,014)
--------- --------- ---------
Gross deferred tax liability (685,544) (696,740) (683,610)
--------- --------- ---------
Net deferred tax liability $(145,742) $(390,226) $(353,735)
========= ========= =========
</TABLE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company can be a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet financing needs of its
customers. These financial instruments include commitments to make loans.
The Company's exposure to credit loss in the event 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 September 30, 1996,
the Company had commitments to make loans and unfunded lines of credit (at
market rates) of approximately $5,923,000, excluding loans in process.
$5,169,000 were variable-rate and $754,000 were fixed-rate commitments. The
Company also had commitments to sell $197,000 of fixed-rate mortgage loans
at September 30, 1996.
At September 30, 1996 and 1995, the Company was required to have $832,000
and $702,000, respectively, on deposit with the Federal Reserve Bank or as
cash on hand. These reserves do not earn interest.
The Bank entered into a commitment to renovate its main office. Management
has estimated the total renovation costs to be $4,000,000. As of September
30, 1996, approximately $3,400,000 of renovation costs had been incurred.
NOTE 9 - RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL
REQUIREMENTS
Retained earnings at September 30, 1996 and 1995 include approximately
$1,615,000 for which no deferred federal income tax liability has been
recorded. This amount represents an allocation of income to bad debt
deductions for tax purposes alone. Reduction of amounts so allocated for
purposes other than tax bad-debt losses or adjustments from carryback of net
operating losses would create income for tax purposes only, which would be
subject to current tax. The unrecorded deferred tax liability on the above
amount at September 30, 1996 and 1995 was approximately $549,000.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, actions that, if undertaken,
could have a direct material effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings
and other factors. At September 30, 1996, management believes the Company
and the Bank are in compliance with all regulatory capital requirements.
Based on the Bank's computed regulatory capital ratios, the Bank is
considered well capitalized under Section 38 of the Federal Deposit
Insurance Act at September 30, 1996. To be well capitalized, the Bank must
maintain minimum tangible, core and risk-based capital ratios of 5%, 6% and
10%, respectively. The Bank's actual capital amounts and ratios for capital
adequacy purposes are as follows at September 30, 1996:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
-------- ------- ----------
<S> <C> <C> <C>
Regulatory capital - computed $ 12,494,000 $ 12,494,000 $ 13,718,000
Minimum capital requirement 2,767,000 5,534,000 9,553,000
------------ ------------ ------------
Regulatory capital - excess $ 9,727,000 $ 6,960,000 $ 4,165,000
============ ============ ============
Regulatory capital - computed 6.77% 6.77% 11.49%
Minimum capital requirement 1.50 3.00 8.00
------------ ------------ ------------
Excess 5.27% 3.77% 3.49%
============ ============ ============
Regulatory asset base $184,477,000 $184,477,000 $119,409,000
============ ============ ============
</TABLE>
NOTE 10 - PENSION PLAN
The Bank has a noncontributory defined benefit pension plan providing
retirement and death benefits for all of its eligible employees. The
Plan's benefit formula is the projected unit credit formula which
encompasses future salary levels and participants' years of service and cash
surrender value of insurance policies. Net pension cost for the years ended
September 30 includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during year $107,029 $ 77,174 $101,554
Interest cost on projected benefit obligation 78,113 61,115 61,773
Actual return on plan assets 8,571 (31,435) 13,037
Net amortization and deferral (10,722) 25,473 3,106
-------- -------- --------
Net pension cost $182,991 $132,327 $179,470
======== ======== ========
</TABLE>
The following table sets forth the funded status and amounts recognized in
the statements of financial condition at September 30, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation $ 598,783 $ 842,987
========== ==========
Accumulated benefit obligation $ 612,254 $ 873,683
========== ==========
Plan assets at fair value $ 774,606 $ 713,297
Actuarial present value of projected benefit
obligation for services rendered to date 1,042,402 1,562,260
---------- ----------
Unfunded projected benefit obligation (267,796) (848,963)
Unrecognized net loss 200,373 831,732
Unrecognized transition liability, net of
amortization 15,043 16,311
Minimum additional pension liability (159,466)
---------- ----------
Net accrued pension liability $ (52,380) $ (160,386)
========== ==========
</TABLE>
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Assumptions for the plan valuations include:
Weighted average discount rate 7.71% 5.00%
Annual rate of increase in compensation levels 4.00% 4.00%
Expected long-term rate of return on assets 5.00% 5.00%
</TABLE>
The unrecognized transition liability is being amortized straight-line as a
component of pension cost over a 19-year period.
Plan assets are invested in Bank certificates of deposit and money market
funds held by the Bank and cash surrender value of insurance policies.
For financial reporting purposes, an additional liability is recognized for
the amount by which the accumulated benefit obligation exceeds plan assets.
An intangible asset is recorded up to the sum of the unrecognized prior
service costs and transition obligation, and stockholders' equity is reduced
for the excess.
NOTE 11 - PARENT COMPANY
Condensed financial information of First Federal Bancorp, Inc. as of
September 30 is as follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Deposits with subsidiary $ 884,328 $ 650,539
Commercial loans 262,799 69,686
Other assets 13,218 132,720
Investment securities held to maturity
(Fair value - $249,145 in 1996
and $498,000 in 1995) 249,408 498,113
Investment in subsidiary, at equity in
underlying value of net assets 12,679,951 11,478,922
----------- -----------
Total assets $14,089,704 $12,829,980
=========== ===========
LIABILITIES
Other liabilities $ 91,855 $ 84,943
STOCKHOLDERS' EQUITY 13,997,849 12,745,037
----------- -----------
Total liabilities and stockholders'
equity $14,089,704 $12,829,980
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Dividend income $ 400,000 $ 500,000 $1,850,000
Equity in undistributed income
of subsidiary and net earnings 1,057,871 1,123,989 (754,127)
Interest income 65,571 87,556 17,923
---------- ---------- ----------
Total income 1,523,442 1,711,545 1,113,796
Other expenses 89,616 116,268 114,360
---------- ---------- ----------
Net income $1,433,826 $1,595,277 $ 999,436
========== ========== ==========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income $ 1,433,826 $ 1,595,277 $ 999,436
Amortization/(accretion)
of investment securities (1,812) 25 846
Equity in undistributed income of
subsidiary (1,057,871) (1,123,989) 754,127
Net change in other assets
and liabilities 110,665 (109,996) 629
----------- ----------- ----------
Net cash provided by operating
activities 484,808 361,317 1,755,038
----------- ----------- ----------
Investing activities
Purchase of investment securities (499,483) (998,984)
Proceeds from maturities of
investment securities 750,000 500,000
Loans made to customers, net
of principal repayments (193,113) (69,686)
----------- ----------- ----------
Net cash provided/(used) by
investing activities 57,404 430,314 (998,984)
----------- ----------- ----------
Financing activities
Purchase of treasury stock (541,958)
Proceeds from exercise of options 5,400
Dividends paid (313,823) (282,441) (234,335)
----------- ----------- ----------
Net cash used by
financing activities (308,423) (282,441) (776,293)
----------- ----------- ----------
Net change in cash and cash
equivalents 233,789 509,190 (20,239)
Cash and cash equivalents at
beginning of year 650,539 141,349 161,588
----------- ----------- ----------
Cash and cash equivalents at
end of year $ 884,328 $ 650,539 $ 141,349
=========== =========== ==========
</TABLE>
NOTE 12 - STOCK OPTION PLANS
The Company has four stock option plans, two Incentive Stock Option Plans
for Officers and Key Employees and two Stock Option Plans for Nonemployee
Directors, that were approved by the Board of Directors and were ratified by
the Company's shareholders at the annual meetings in February 1993 and
February 1995. Reserved shares and options granted under the plans at
September 30 are as follows, stated to reflect the stock dividend in the
nature of a two-for-one stock split approved by the Board of Directors on
November 6, 1996:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Shares reserved for issuance under the Incentive Stock
Option Plan for Officers and Key Employees 208,270 208,270
Options granted: $ 2.50 per share 72,880 72,880
5.00 per share 2,000 2,000
5.25 per share 2,000 2,000
6.50 per share 6,600 6,600
6.75 per share 64,000 64,000
10.75 per share 4,400
------- -------
151,880 147,480
------- -------
Shares available 56,390 60,790
======= =======
Options exercised: $ 5.00 per share 400
5.25 per share 400
6.50 per share 200
-------
1,000
=======
<CAPTION>
1996 1995
---- ----
Shares reserved for issuance under the
Stock Option Plan for Nonemployee Directors 113,812 113,812
Options granted: $ 2.50 per share 34,960 34,960
$ 6.81 per share 32,000 32,000
$ 9.88 per share 16,740
------- -------
83,700 66,960
------- -------
Shares available 30,112 46,852
======= =======
</TABLE>
NOTE 13 - DIVIDENDS
By regulation, limitations have been imposed on all capital distributions by
savings institutions, 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 Office of Thrift Supervision (OTS).
For example, a thrift which is given one of the two highest examination
ratings and has capital, as defined, equal to its fully phased-in regulatory
capital requirements could, after prior notice but without the prior
approval of the OTS, make capital distributions in any year that would
reduce by one-half the amount of its capital which exceeds its fully phased-
in capital requirement, as adjusted to reflect net income to date during the
year. Other thrifts would be subject to more stringent procedural and
substantive requirements, the most restrictive being prior OTS approval of
any capital distribution. At September 30, 1996, these limitations would
not restrict the Company from paying normal dividends.
NOTE 14 - SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT
On September 30, 1996, legislation was passed to recapitalize the Savings
Association Insurance Fund (SAIF). As a result, all savings and loan
institutions will pay a one time assessment of $.657 per $100 of deposits
held as of March 31, 1995. Consequently, the Company recognized an $800,100
expense in the 1996 Consolidated Statement of Income.
NOTE 15 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table shows carrying value and the related estimated fair
values of financial instruments at September 30, 1996. Items that are not
financial instruments are not included.
<TABLE>
<CAPTION>
Carrying Estimated
Amounts Fair Value
-------- ----------
<S> <C> <C>
Financial assets
Cash and cash equivalents $ 8,161,988 $ 8,162,000
Investment securities held to maturity 4,548,069 4,546,000
Mortgage-backed securities 1,661,018 1,658,000
FHLB stock 1,930,100 1,930,100
Loans, net of allowance for loan losses 160,297,702 160,123,000
Accrued interest receivable 956,418 956,000
Financial liabilities
Demand and savings deposits (54,984,528) (54,985,000)
Certificates of deposit (75,087,088) (75,333,000)
Borrowed funds (37,970,000) (38,099,000)
Advances from borrowers for taxes
and insurance (540,734) (541,000)
Accrued interest payable (433,648) (434,000)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of September 30, 1996. The estimated fair values
for cash and cash equivalents, FHLB stock, accrued interest receivable,
demand and savings deposits, variable-rate borrowed funds, advances from
borrowers for taxes and insurance and accrued interest payable are
considered to approximate cost. The estimated fair value for securities is
based on quoted market values for the individual securities or for
equivalent securities. The estimated fair value for variable-rate loans
which reprice in less than six months is considered to approximate cost.
The estimated fair value for fixed-rate loans is based on estimates of the
rates the Company would charge for similar loans at September 30, 1996,
applied over estimated payment periods. The estimated fair values for
certificates of deposit and fixed-rate borrowings are based on estimates of
the rates the Company would pay on such deposits and borrowings at September
30, 1996, applied for the time period until maturity. The estimated fair
value of commitments is not material.
While these estimates of fair values are based on management's judgment of
appropriate factors, there is no assurance that, were the Company to have
disposed of such items at September 30, 1996, the estimated fair values
would necessarily have been achieved at that date, since fair values may
differ depending on various circumstances. The estimated fair values at
September 30, 1996 should not necessarily be considered to apply at
subsequent dates.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
compliance with section 16(a) of the Exchange Act.
The information contained in the definitive Proxy Statement for the
1997 Annual Meeting of Shareholders of First Federal Bancorp, Inc. (the
"Proxy Statement"), under the captions "Proposal One: Election of
Directors" and "Voting Securities and Ownership of Certain Beneficial Owners
and Management" is incorporated herein by reference.
The following table presents certain information in respect of the
executive officers of Bancorp:
<TABLE>
<CAPTION>
Name(1) Age(2) Position
------- ------ --------
<S> <C> <C>
Ward D. Coffman, III 43 Secretary
Connie Ayres LaPlante 40 Treasurer
John C. Matesich, III 53 Chairman of the Board
J. William Plummer 51 President
</TABLE>
The following table presents certain information in respect of the
executive officers of First Federal:
<TABLE>
<CAPTION>
Name(1) Age(2) Position
------- ------ --------
<S> <C> <C>
Connie Ayres LaPlante 40 Treasurer and Senior Vice President
John C. Matesich, III 53 Chairman of the Board
J. William Plummer 51 President and Chief Executive Officer
Larry W. Snode 47 Secretary and
Senior Vice President - Operations
Thomas N. Sulens 45 Senior Vice President - Lending
____________________________
<F1> There are no family relationships among the executive officers of
Bancorp or First Federal.
<F2> As of December 15, 1996.
</TABLE>
Ward D. Coffman, III, the Secretary of Bancorp, is an attorney who has
been engaged in private practice in the Zanesville area for more than five
years. Mr. Coffman also serves as a director of both Bancorp and First
Federal.
Connie Ayres LaPlante is the Treasurer of both Bancorp and First
Federal and is also a Senior Vice President of First Federal. Ms. LaPlante
began employment with First Federal in 1978. Ms. LaPlante is a member of
the Board of Directors of both Bancorp and First Federal.
John C. Matesich, III, the Chairman of the Board of both Bancorp and
First Federal, is the President of Matesich Distributing Co., a beer and
wine distributor in Southeastern Ohio. Mr. Matesich has been the President
of Matesich Distributing Co. since 1990 and has been employed by Matesich
Distributing for more than five years.
J. William Plummer has been the President and Chief Executive Officer
of First Federal since 1979 and has been the President of Bancorp since its
incorporation in January 1992. Mr. Plummer also serves as a director of
both Bancorp and First Federal.
Larry W. Snode is First Federal's Secretary and Senior Vice President
in charge of Operations. Mr. Snode began employment with First Federal in
1977.
Thomas N. Sulens is the Senior Vice President in charge of Lending for
First Federal. Mr. Sulens commenced employment with First Federal in 1973.
Item 10. Executive Compensation.
The information contained in the Proxy Statement under the captions
"Compensation of Executive Officers and Directors" and "Proposal Two:
Approval of the Performance Plan" are incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners
The information contained in the Proxy Statement under the caption
"Voting Securities and Ownership of Certain Beneficial Owners and
Management" is incorporated herein by reference.
(b) Security Ownership of Management
The information contained in the Proxy Statement under the caption
"Voting Securities and Ownership of Certain Beneficial Owners and
Management" is incorporated herein by reference.
(c) Changes in Control
Not applicable.
Item 12. Certain Relationships and Related Transactions.
The information contained in the Proxy Statement under the caption
"Compensation of Executive Officers and Directors -- Certain Transactions
with First Federal" is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
(a)(1) The following consolidated financial statements
are filed as a part of this Report:
(A) Consolidated Statements of Financial Condition at
September 30, 1996 and 1995.
(B) Consolidated Statements of Income for each of the
years ended September 30, 1996, 1995 and 1994.
(C) Consolidated Statements of Shareholders' Equity for
each of the years ended September 30, 1996, 1995 and 1994.
(D) Consolidated Statements of Cash Flows for each of
the years ended September 30, 1996, 1995 and 1994.
(E) Notes to Consolidated Financial Statements.
(a)(2) All schedules have been omitted because the
information contained in such schedules is either
inapplicable or is included in the Notes to Consolidated
Financial Statements.
(a)(3) Exhibits
Item 3. Articles of Incorporation, Amendment to
Articles of Incorporation, Code of Regulations, and
Amendment to Code of Regulations.
Item 10. Material contracts.
Employment Agreement - J. William Plummer
Employment Agreement - Connie Ayres LaPlante
Item 21. Subsidiaries of the Registrant.
Item 23. Consent of Auditors
Item 27. Financial Data Schedule
Item 99.1 Proxy Statement
Item 99.2 Safe Harbor Under the Private Securities
Litigation Reform Act of 1995
SIGNATURES
Pursuant to the requirements of Section 13 or 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.
First Federal Bancorp, Inc.
By /s/ J. William Plummer
J. William Plummer
President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been duly signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
By /s/ Connie Ayres LaPlante By /s/ Don R. Parkhill
Connie Ayres LaPlante Don R. Parkhill
Treasurer and a Director Director
(Principal Accounting Officer)
Date December 18, 1996 Date December 18, 1996
By /s/ Ward D. Coffman, III By /s/ John C. Matesich, III
Ward D. Coffman, III John C. Matesich, III
Secretary and a Director Chairman of the Board
Date December 18, 1996 Date December 18, 1996
By /s/ Robert D. Goodrich, II By /s/ J. William Plummer
Robert D. Goodrich, II J. William Plummer
Director President and a Director
Date December 18, 1996 Date December 18, 1996
By /s/ Patrick L. Hennessey
Patrick L. Hennessey
Director
Date December 18, 1996
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
-------- ----------- -----------
<C> <S> <S>
3.1 Articles of Incorporation of First The Articles of Incorporation of First Federal Bancorp,
Federal Bancorp, Inc. Inc. ("Bancorp"), filed as Exhibit 3.1 to Bancorp's
Registration Statement on Form S-1 ("S-1") filed with
the Securities and Exchange Commission ("SEC") on March
16, 1992, are incorporated herein by reference.
3.2 Amendment to the Articles of The Amendment to the Articles of Incorporation of Bancorp
Incorporation of First Federal filed as Exhibit 3.2 to Bancorp's 10-K for the fiscal
Bancorp, Inc. year ended September 30, 1992, filed with the SEC on
December 29, 1992 (the "1992 10-K")
is incorporated herein by reference.
3.3 Code of Regulations of First Federal The Code of Regulations of Bancorp filed as Exhibit 3.2
Bancorp, Inc. to Bancorp's S-1 filed with the SEC on March 16, 1992,
is incorporated herein by reference.
3.4 Amendment to the Code of Regulations The Amendment to the code of Regulations of Bancorp filed
of First Federal Bancorp, Inc. as Exhibit 3.4 to the 1992 10-K is incorporated herein
by reference.
10.1 Amended Management Recognition Plan The Amended Management Recognition Plan and Trust
and Trust Agreement of First Federal Agreement of First Federal Savings Bank of Eastern Ohio
Savings Bank of Eastern Ohio included as Exhibit A to Bancorp's Proxy Statement filed
as Exhibit 28 to the 1992 10-K is incorporated herein
by reference.
10.2 First Federal Bancorp, Inc. 1992 The First Federal Bancorp, Inc. 1992 Stock Option Plan
Stock Option Plan for Officers and for Officers and Key Employees included as Exhibit B to
Key Employees Bancorp's Proxy Statement filed as Exhibit 28 to the 1992
10-K is incorporated herein by reference.
10.3 First Federal Bancorp, Inc. 1992 Stock The First Federal Bancorp, Inc. 1992 Stock Option Plan
Option Plan for Non-Employee Directors for Non-Employee Directors included as Exhibit C to
Bancorp's Proxy Statement filed as Exhibit 28 to the 1992
10-K is incorporated herein by reference.
10.4 Employment Agreement between First ----------
Federal Savings Bank of Eastern Ohio
and J. William Plummer
10.5 Employment Agreement between First ----------
Federal Savings Bank of Eastern Ohio
and Connie Ayres LaPlante
10.6 Tax Sharing Agreement between First The tax sharing agreement between First Federal Bancorp
Federal Savings Bank of Eastern Ohio and First Federal filed as exhibit 10.6 in the 1993
and First Federal Bancorp, Inc. 10-KSB is incorporated herein by reference.
10.7 First Federal Bancorp, Inc. 1994 Stock The First Federal Bancorp, Inc. 1994 Stock Option Plan
Option Plan for Officers and Key for Officers and Key Employees included as Exhibit A
Employees to Bancorp's Proxy Statement filed as Exhibit 28 to the
1994 10-KSB is incorporated herein by reference.
10.8 First Federal Bancorp, Inc. 1994 Stock The First Federal Bancorp, Inc. 1994 Stock Option Plan
Option Plan for Non-Employee Directors for Non-Employee Directors included as Exhibit B to
Bancorp's Proxy Statement filed as Exhibit 28 to the
1994 10-KSB is incorporated herein by reference.
21 Subsidiaries of First Federal Bancorp, The list of the subsidiary of Bancorp filed as
Inc. Exhibit 22 to the 1992 10-K is incorporated herein by
reference.
23 Consent of Auditors ----------
27 Financial Data Schedule ----------
99.1 Proxy Statement for the 1997 Annual ----------
Meeting of Shareholders of First
Federal Bancorp, Inc.
99.2 Safe Harbor Under the Private ----------
Securities Litigation Reform Act
of 1995
</TABLE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this "AGREEMENT"),
entered into this 6th day of November, 1996, by and between First Federal
Bancorp, Inc., a savings and loan holding company incorporated under Ohio law
(hereinafter referred to as "Bancorp"), First Federal Savings Bank of Eastern
Ohio, a savings bank chartered under the laws of the United States and a
wholly-owned subsidiary of Bancorp (hereinafter referred to as "First Federal"),
and J. William Plummer, an individual (hereinafter referred to as the
"EMPLOYEE");
WITNESSETH:
WHEREAS, the EMPLOYEE is an employee of Bancorp and First Federal
(hereinafter collectively referred to as the "EMPLOYERS");
WHEREAS, as a result of the skill, knowledge and experience of the
EMPLOYEE, the Boards of Directors of the EMPLOYERS desire to retain the services
of the EMPLOYEE as the President and Chief Executive Officer of each of the
EMPLOYERS;
WHEREAS, the EMPLOYEE desires to continue to serve as the President and
Chief Executive Officer of each of the EMPLOYERS; and
WHEREAS, the EMPLOYEE and the EMPLOYERS desire to enter into this
Agreement to set forth the terms and conditions of the employment relationship
between the EMPLOYERS and the EMPLOYEE;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the EMPLOYERS and the EMPLOYEE hereby agree as follows:
1. Employment and Term. Upon the terms and subject to the conditions of this
AGREEMENT, the EMPLOYERS hereby employ the EMPLOYEE, and the EMPLOYEE hereby
accepts employment, as the President and Chief Executive Officer of each of the
EMPLOYERS. The term of this AGREEMENT shall commence on the date hereof and
shall end on November 5th, 1999 (hereinafter referred to as the "TERM"). In
January of each year, the Boards of Directors of the EMPLOYERS shall review the
EMPLOYEE's performance and record the results of such review in the minutes of
the Board of Directors.
2. Duties of EMPLOYEE.
(a) General Duties and Responsibilities. As the President and Chief
Executive Officer of each of the EMPLOYERS, the EMPLOYEE shall perform the
duties and responsibilities customary for such offices to the best of his
ability and in accordance with the policies established by the Boards of
Directors of the EMPLOYERS and all applicable laws and regulations. The
EMPLOYEE shall perform such other duties not inconsistent with his
position as may be assigned to him from time to time by the Boards of
Directors of the EMPLOYERS; provided, however, that the EMPLOYERS shall
employ the EMPLOYEE during the TERM in a senior executive capacity without
diminishment of the importance or prestige of his position.
(b) Devotion of Entire Time to the Business of the EMPLOYERS. The EMPLOYEE
shall devote his entire productive time, ability and attention during
normal business hours throughout the TERM to the faithful performance of
his duties under this AGREEMENT. The EMPLOYEE shall not directly or
indirectly render any services of a business, commercial or professional
nature to any person or organization without the prior written consent of
the Boards of Directors of the EMPLOYERS; provided, however, that the
EMPLOYEE shall not be precluded from (i) vacations and other leave time in
accordance with Section (e) hereof; (ii) reasonable participation in
community, civic, charitable or similar organizations; or (iii) the
pursuit of personal investments which do not interfere or conflict with
the performance of the EMPLOYEE's duties to the EMPLOYERS.
3. Compensation, Benefits and Reimbursements.
(a) Salary. The EMPLOYEE shall receive during the TERM an annual salary
payable in equal installments not less often than monthly. The amount of
such annual salary shall be $121,437 until changed by the Boards of
Directors of the EMPLOYERS in accordance with Section 3(b) of this
AGREEMENT.
(b) Annual Salary Review. In January of each year throughout the TERM,
the annual salary of the EMPLOYEE shall be reviewed by the Boards of
Directors of the EMPLOYERS and shall be set, effective January 1, at an
amount not less than $121,437, based upon the EMPLOYEE's individual
performance and the overall profitability and financial condition of the
EMPLOYERS (hereinafter referred to as the "ANNUAL REVIEW"). The results of
the ANNUAL REVIEW shall be reflected in the minutes of the Boards of
Directors of the EMPLOYERS.
(c) Expenses. In addition to any compensation received under Section
3(a) or (b) of this AGREEMENT, the EMPLOYERS shall pay or reimburse the
EMPLOYEE for all reasonable travel, entertainment and miscellaneous
expenses incurred in connection with the performance of his duties under
this AGREEMENT. Such reimbursement shall be made in accordance with the
existing policies and procedures of the EMPLOYERS pertaining to
reimbursement of expenses to senior management officials.
(d) Employee Benefit Program.
(i) During the TERM, the EMPLOYEE shall be entitled to participate
in all formally established employee benefit, bonus, pension and
profit-sharing plans and similar programs that are maintained by the
EMPLOYERS from time to time, including programs in respect of group
health, disability or life insurance, reimbursement of membership
fees in civic, social and professional organizations and all
employee benefit plans or programs hereafter adopted in writing by
the Boards of Directors of the EMPLOYERS, for which senior
management personnel are eligible, including any employee stock
ownership plan, stock option plan or other stock benefit plan
(hereinafter collectively referred to as the "BENEFIT PLANS").
Notwithstanding the foregoing sentence, the EMPLOYERS may
discontinue or terminate at any time any such BENEFIT PLANS, now
existing or hereafter adopted, to the extent permitted by the terms
of such plans and shall not be required to compensate the EMPLOYEE
for such discontinuance or termination.
(ii) After the expiration of the TERM or the termination of the
employment of the employee for any reason other than JUST CAUSE (as
defined hereinafter), the EMPLOYERS shall provide a group health
insurance program in which the EMPLOYEE and his spouse will be
eligible to participate and which shall provide substantially the
same benefits as are available to retired employees of the EMPLOYERS
on the date of this AGREEMENT until both the EMPLOYEE and his spouse
become 65 years of age; provided, however that all premiums for such
program shall be paid equally by the EMPLOYERS and the EMPLOYEE
and/or his spouse after the EMPLOYEE's retirement; provided further,
however, that the EMPLOYEE may only participate in such program for
as long as the EMPLOYERS elect in their sole discretion to make
available an employee group health insurance program which permits
the EMPLOYERS to make coverage available for retirees.
(e) Vacation and Sick Leave. The EMPLOYEE shall be entitled, without
loss of pay, to be absent voluntarily from the performance of his duties
under this AGREEMENT, subject to the following conditions:
(i) The EMPLOYEE shall be entitled to an annual vacation in
accordance with the policies periodically established by the Boards
of Directors of the EMPLOYERS for senior management officials of the
EMPLOYERS;
(ii) Vacation time shall be scheduled by the EMPLOYEE in a
reasonable manner. The EMPLOYEE shall not be entitled to receive any
additional compensation from the EMPLOYERS in the event of his
failure to take the full allotment of vacation time during any one
year. Vacation time accrued in any one year may not be carried over
into any succeeding year; and
(iii) The EMPLOYEE shall be entitled to annual sick leave as
established by the Boards of Directors of the EMPLOYERS for senior
management officials of the EMPLOYERS. In the event that any sick
leave time shall not have been used during any calendar year, such
leave shall accrue to subsequent calendar years; provided, however,
that the number of accrued days of sick leave shall not exceed 35
days.
4. Termination of Employment.
(a) General. In addition to the termination of the employment of the
EMPLOYEE upon the expiration of the TERM, the employment of the EMPLOYEE
shall terminate at any other time during the TERM upon the delivery by the
EMPLOYERS of written notice of employment termination to the EMPLOYEE.
Without limiting the generality of the foregoing sentence, the following
subparagraphs (i), (ii) and (iii) of this Section 4(a) shall govern the
obligations of the EMPLOYERS to the EMPLOYEE upon the occurrence of the
events described in such subparagraphs:
(i) Termination for JUST CAUSE. In the event that the EMPLOYERS
terminate the employment of the EMPLOYEE during the TERM because of
the EMPLOYEE's failure to comply with the Human Resources Policies
of the EMPLOYERS or because of the EMPLOYEE's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure or refusal to perform the
duties and responsibilities assigned in this AGREEMENT, willful
violation of any law, rule, regulation or final cease-and-desist
order (other than traffic violations or similar offenses),
conviction of a felony or for fraud or embezzlement, or material
breach of any provision of this AGREEMENT (hereinafter collectively
referred to as "JUST CAUSE"), the EMPLOYEE shall not receive, and
shall have no right to receive, any compensation or other benefits
for any period after such termination.
(ii) Termination after CHANGE OF CONTROL. In the event that, before
the expiration of the TERM and in connection with or within one year
of a CHANGE OF CONTROL (as defined hereinafter) of either one of the
EMPLOYERS, (A) the employment of the EMPLOYEE is terminated for any
reason other than JUST CAUSE before the expiration of the TERM, (B)
the present capacity or circumstances in which the EMPLOYEE is
employed is changed before the expiration of the TERM, or (C) the
EMPLOYEE's responsibilities, authority, compensation or other
benefits provided under this AGREEMENT are materially reduced, then
the following shall occur:
(I) The EMPLOYERS shall promptly pay to the EMPLOYEE or to
his beneficiaries, dependents or estate an amount equal to the
sum of (1) the amount of compensation to which the EMPLOYEE
would be entitled for the remainder of the TERM under this
AGREEMENT, plus (2) the difference between (x) the product of
three, multiplied by the total compensation paid to the
EMPLOYEE for the immediately preceding calendar year as set
forth on the Form W-2 of the EMPLOYEE, less (xx) the amount
paid to the EMPLOYEE pursuant to clause (1) of this
subparagraph (I);
(II) The EMPLOYEE, his dependents, beneficiaries and estate
shall continue to be covered under all BENEFIT PLANS of the
EMPLOYERS at the EMPLOYERS' expense as if the EMPLOYEE were
still employed under this AGREEMENT until the earliest of the
expiration of the TERM or the date on which the EMPLOYEE is
included in another employer's benefit plans as a full-time
employee; and
(III) The EMPLOYEE shall not be required to mitigate the
amount of any payment provided for in this AGREEMENT by
seeking other employment or otherwise, nor shall any amounts
received from other employment or otherwise by the EMPLOYEE
offset in any manner the obligations of the EMPLOYERS
thereunder, except as specifically stated in subparagraph
(II).
In the event that payments pursuant to this subsection (ii) would
result in the imposition of a penalty tax pursuant to Section
280G(b)(3) of the Internal Revenue Code of 1986, as amended, and the
regulations promulgated thereunder (hereinafter collectively
referred to as "SECTION 280G"), such payments shall be reduced to
the maximum amount which may be paid under SECTION 280G without
exceeding such limits.
(iii) Termination Without CHANGE OF CONTROL. In the event that the
employment of the EMPLOYEE is terminated before the expiration of
the TERM for any reason other than JUST CAUSE or in connection with
or within one year of a CHANGE OF CONTROL, the EMPLOYERS shall be
obligated to continue (A) to pay on a monthly basis to the EMPLOYEE,
his designated beneficiaries or his estate, his annual salary
provided pursuant to Section 3(a) or (b) of this AGREEMENT until the
expiration of the TERM and (B) to provide to the EMPLOYEE at the
EMPLOYERS' expense, health, life, disability, and other benefits
substantially equal to those being provided to the EMPLOYEE at the
date of termination of his employment until the earliest to occur of
the expiration of the TERM or the date the EMPLOYEE becomes employed
full-time by another employer. In the event that payments pursuant
to this subsection (iii) would result in the imposition of a penalty
tax pursuant to SECTION 280G, such payments shall be reduced to the
maximum amount which may be paid under SECTION 280G without
exceeding those limits.
(b) Death of the EMPLOYEE. The TERM automatically terminates upon the
death of the EMPLOYEE. In the event of such death, the EMPLOYEE's estate
shall be entitled to receive the compensation due the EMPLOYEE through the
last day of the calendar month in which the death occurred, except as
otherwise specified herein.
(c) "Golden Parachute" Provision. Any payments made to the EMPLOYEE
pursuant to this AGREEMENT or otherwise are subject to and conditioned
upon their compliance with 12 U.S.C. [SECTION] 1828(k) and any regulations
promulgated thereunder.
(d) Definition of "CHANGE OF CONTROL". A "CHANGE OF CONTROL" shall be
deemed to have occurred in the event that, at any time during the TERM,
either any person or entity obtains "conclusive control" of the EMPLOYERS
within the meaning of 12 C.F.R. [SECTION] 574.4(a), or any person or
entity obtains "rebuttable control" within the meaning of 12 C.F.R.
[SECTION] 574.4(b) and has not rebutted control in accordance with 12
C.F.R. [SECTION] 574.4(c).
5. Special Regulatory Events. Notwithstanding Section 4 of this AGREEMENT,
the obligations of the EMPLOYERS to the EMPLOYEE shall be as follows in the
event of the following circumstances:
(a) If the EMPLOYEE is suspended and/or temporarily prohibited from
participating in the conduct of the EMPLOYERS' affairs by a notice served
under section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
(hereinafter referred to as the "FDIA"), the EMPLOYERS' obligations under
this AGREEMENT shall be suspended as of the date of service of such
notice, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the EMPLOYERS may, in their discretion, pay the
EMPLOYEE all or part of the compensation withheld while the obligations in
this AGREEMENT were suspended and reinstate, in whole or in part, any of
the obligations that were suspended.
(b) If the EMPLOYEE is removed and/or permanently prohibited from
participating in the conduct of the EMPLOYERS' affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA, all obligations of the
EMPLOYERS under this AGREEMENT shall terminate as of the effective date of
such order; provided, however, that vested rights of the EMPLOYEE shall
not be affected by such termination.
(c) If the EMPLOYERS are in default, as defined in section 3(x)(1) of
the FDIA, all obligations under this AGREEMENT shall terminate as of the
date of default; provided, however, that vested rights of the EMPLOYEE
shall not be affected.
(d) All obligations under this AGREEMENT shall be terminated, except to
the extent of a determination that the continuation of this AGREEMENT is
necessary for the continued operation of the EMPLOYERS, (i) by the
Director of the Office of Thrift Supervision (hereinafter referred to as
the "OTS"), or his or her designee at the time that the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the EMPLOYERS under the
authority contained in Section 13(c) of the FDIA or (ii) by the Director
of the OTS, or his or her designee, at any time the Director of the OTS,
or his or her designee, approves a supervisory merger to resolve problems
related to the operation of the EMPLOYERS or when the EMPLOYERS are
determined by the Director of the OTS to be in an unsafe or unsound
condition. No vested rights of the EMPLOYEE shall be affected by any such
action.
6. Consolidation, Merger or Sale of Assets. Nothing in this AGREEMENT shall
preclude the EMPLOYERS from consolidating with, merging into, or transferring
all, or substantially all, of their assets to another corporation that assumes
all of the EMPLOYERS' obligations and undertakings hereunder. Upon such a
consolidation, merger or transfer of assets, the term "EMPLOYERS," as used
herein, shall mean such other corporation or entity, and this AGREEMENT shall
continue in full force and effect.
7. Confidential Information. The EMPLOYEE acknowledges that during his
employment he will learn and have access to confidential information regarding
the EMPLOYERS and their customers and businesses. The EMPLOYEE agrees and
covenants not to disclose or use for his own benefit, or the benefit of any
other person or entity, any confidential information, unless or until the
EMPLOYERS consent to such disclosure or use or such information becomes common
knowledge in the industry or is otherwise legally in the public domain. The
EMPLOYEE shall not knowingly disclose or reveal to any unauthorized person any
confidential information relating to the EMPLOYERS, their subsidiaries or
affiliates, or to any of the businesses operated by them, and the EMPLOYEE
confirms that such information constitutes the exclusive property of the
EMPLOYERS. The EMPLOYEE shall not otherwise knowingly act or conduct himself (a)
to the material detriment of the EMPLOYERS, their subsidiaries, or affiliates,
or (b) in a manner which is inimical or contrary to the interests of the
EMPLOYERS.
8. Nonassignability. Neither this AGREEMENT nor any right or interest
hereunder shall be assignable by the EMPLOYEE, his beneficiaries, or legal
representatives without the EMPLOYERS' prior written consent; provided, however,
that nothing in this Section 8 shall preclude (a) the EMPLOYEE from designating
a beneficiary to receive any benefits payable hereunder upon his death, or (b)
the executors, administrators, or other legal representatives of the EMPLOYEE or
his estate from assigning any rights hereunder to the person or persons entitled
thereto.
9. No Attachment. Except as required by law, no right to receive payment
under this AGREEMENT shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge or hypothecation or to execution,
attachment, levy, or similar process of assignment by operation of law, and any
attempt, voluntary or involuntary, to effect any such action shall be null, void
and of no effect.
10. Binding Agreement. This AGREEMENT shall be binding upon, and inure to the
benefit of, the EMPLOYEE and the EMPLOYERS and their respective permitted
successors and assigns.
11. Amendment of AGREEMENT. This AGREEMENT may not be modified or amended,
except by an instrument in writing signed by the parties hereto.
12. Waiver. No term or condition of this AGREEMENT shall be deemed to have
been waived, nor shall there be an estoppel against the enforcement of any
provision of this AGREEMENT, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver, unless specifically stated therein, and each waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than the act specifically waived.
13. Severability. If, for any reason, any provision of this AGREEMENT is held
invalid, such invalidity shall not affect the other provisions of this AGREEMENT
not held so invalid, and each such other provision shall, to the full extent
consistent with applicable law, continue in full force and effect. If this
AGREEMENT is held invalid or cannot be enforced, then any prior AGREEMENT
between the EMPLOYERS (or any predecessor thereof) and the EMPLOYEE shall be
deemed reinstated to the full extent permitted by law, as if this AGREEMENT had
not been executed.
14. Headings. The headings of the paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this AGREEMENT.
15. Governing Law. This AGREEMENT has been executed and delivered in the State
of Ohio and its validity, interpretation, performance, and enforcement shall be
governed by the laws of this State of Ohio, except to the extent that federal
law is governing.
16. Effect of Prior Agreements. This AGREEMENT contains the entire
understanding between the parties hereto and supersedes any prior employment
agreement between the EMPLOYERS or any predecessor of the EMPLOYERS and the
EMPLOYEE.
17. Notices. Any notice or other communication required or permitted pursuant
to this AGREEMENT shall be deemed delivered if such notice or communication is
in writing and is delivered personally or by facsimile transmission or is
deposited in the United States mail, postage prepaid, addressed as follows:
If to Bancorp and/or First Federal:
First Federal Savings Bank of Eastern Ohio
Fifth & Market Streets
Zanesville, Ohio 43701
With copies to:
John C. Vorys, Esq.
Vorys, Sater, Seymour and Pease
Atrium Two, Suite 2100
221 East Fourth Street
Cincinnati, Ohio 45201-0236
If to the EMPLOYEE:
Mr. J. William Plummer
366 Broadview Avenue
Zanesville, Ohio 43701
IN WITNESS WHEREOF, each of the EMPLOYERS has caused this AGREEMENT to be
executed by its duly authorized officer, and the EMPLOYEE has signed this
AGREEMENT, each as of the day and year first above written.
Attest: FIRST FEDERAL BANCORP, INC.
/s/ Naomi B. Bankes By /s/ John C. Matesich, III
- ------------------------------- ----------------------------------------
John C. Matesich, III
its Chairman
Attest: FIRST FEDERAL SAVINGS BANK OF EASTERN OHIO
/s/ Naomi B. Bankes By /s/ John C. Matesich, III
- ------------------------------- ----------------------------------------
John C. Matesich, III
its Chairman
Attest:
/s/ Naomi B. Bankes /s/ J. William Plummer
- ------------------------------- ----------------------------------------
J. William Plummer
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this "AGREEMENT"),
entered into this 6th day of November, 1996, by and between First Federal
Bancorp, Inc., a savings and loan holding company incorporated under Ohio law
(hereinafter referred to as "Bancorp"), First Federal Savings Bank of Eastern
Ohio, a savings bank chartered under the laws of the United States and a
wholly-owned subsidiary of Bancorp (hereinafter referred to as "First Federal"),
and Connie Ayres LaPlante, an individual (hereinafter referred to as the
"EMPLOYEE");
WITNESSETH:
WHEREAS, the EMPLOYEE is an employee of Bancorp and First Federal
(hereinafter collectively referred to as the "EMPLOYERS");
WHEREAS, as a result of the skill, knowledge and experience of the
EMPLOYEE, the Board of Directors of First Federal desires to retain the services
of the EMPLOYEE as the Senior Vice President and Treasurer of First Federal and
the Board of Directors of Bancorp desires to retain the services of the Employee
as Treasurer of Bancorp;
WHEREAS, the EMPLOYEE desires to continue to serve as the Senior Vice
President and Treasurer of First Federal and as the Treasurer of Bancorp; and
WHEREAS, the EMPLOYEE and the EMPLOYERS desire to enter into this
Agreement to set forth the terms and conditions of the employment relationship
between the EMPLOYERS and the EMPLOYEE;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the EMPLOYERS and the EMPLOYEE hereby agree as follows:
1. Employment and Term. Upon the terms and subject to the conditions of this
AGREEMENT, First Federal hereby employs the EMPLOYEE, and the EMPLOYEE hereby
accepts employment, as the Senior Vice President and Treasurer of First Federal,
and Bancorp hereby employs the EMPLOYEE, and the Employer hereby accepts
employment, as Treasurer of Bancorp. The term of this AGREEMENT shall commence
on the date hereof and shall end on November 5th, 1999 (hereinafter referred to
as the "TERM"). In January of each year, the Boards of Directors of the
EMPLOYERS shall review the EMPLOYEE's performance and record the results of such
review in the minutes of the Boards of Directors.
2. Duties of EMPLOYEE.
(a) General Duties and Responsibilities. As the Senior Vice President
and Treasurer of First Federal and as Treasurer of Bancorp, the EMPLOYEE
shall perform the duties and responsibilities customary for such offices
to the best of her ability and in accordance with the policies established
by the Boards of Directors of the EMPLOYERS and all applicable laws and
regulations. The EMPLOYEE shall perform such other duties not inconsistent
with her positions as may be assigned to her from time to time by the
Boards of Directors of the EMPLOYERS; provided, however, that the
EMPLOYERS shall employ the EMPLOYEE during the TERM in a senior executive
capacity without diminishment of the importance or prestige of her
position.
(b) Devotion of Entire Time to the Business of the EMPLOYERS. The
EMPLOYEE shall devote her entire productive time, ability and attention
during normal business hours throughout the TERM to the faithful
performance of her duties under this AGREEMENT. The EMPLOYEE shall not
directly or indirectly render any services of a business, commercial or
professional nature to any person or organization without the prior
written consent of the Boards of Directors of the EMPLOYERS; provided,
however, that the EMPLOYEE shall not be precluded from (i) vacations and
other leave time in accordance with Section 3(e) hereof; (ii) reasonable
participation in community, civic, charitable or similar organizations; or
(iii) the pursuit of personal investments which do not interfere or
conflict with the performance of the EMPLOYEE's duties to the EMPLOYERS.
3. Compensation, Benefits and Reimbursements.
(a) Salary. The EMPLOYEE shall receive during the TERM an annual salary
payable in equal installments not less often than monthly. The amount of
such annual salary shall be $80,752 until changed by the Boards of
Directors of the EMPLOYERS in accordance with Section 3(b) of this
AGREEMENT.
(b) Annual Salary Review. In January of each year throughout the TERM,
the annual salary of the EMPLOYEE shall be reviewed by the Boards of
Directors of the EMPLOYERS and shall be set, effective January 1, at an
amount not less than $80,752, based upon the EMPLOYEE's individual
performance and the overall profitability and financial condition of the
EMPLOYERS (hereinafter referred to as the "ANNUAL REVIEW"). The results of
the ANNUAL REVIEW shall be reflected in the minutes of the Boards of
Directors of the EMPLOYERS.
(c) Expenses. In addition to any compensation received under Section
3(a) or (b) of this AGREEMENT, the EMPLOYERS shall pay or reimburse the
EMPLOYEE for all reasonable travel, entertainment and miscellaneous
expenses incurred in connection with the performance of her duties under
this AGREEMENT. Such reimbursement shall be made in accordance with the
existing policies and procedures of the EMPLOYERS pertaining to
reimbursement of expenses to senior management officials.
(d) Employee Benefit Program.
(i) During the TERM, the EMPLOYEE shall be entitled to participate
in all formally established employee benefit, bonus, pension and
profit-sharing plans and similar programs that are maintained by the
EMPLOYERS from time to time, including programs in respect of group
health, disability or life insurance, reimbursement of membership
fees in civic, social and professional organizations and all
employee benefit plans or programs hereafter adopted in writing by
the Boards of Directors of the EMPLOYERS, for which senior
management personnel are eligible, including any employee stock
ownership plan, stock option plan or other stock benefit plan
(hereinafter collectively referred to as the "BENEFIT PLANS").
Notwithstanding the foregoing sentence, the EMPLOYERS may
discontinue or terminate at any time any such BENEFIT PLANS, now
existing or hereafter adopted, to the extent permitted by the terms
of such plans and shall not be required to compensate the EMPLOYEE
for such discontinuance or termination.
(ii) After the expiration of the TERM or the termination of the
employment of the employee for any reason other than JUST CAUSE (as
defined hereinafter), the EMPLOYERS shall provide a group health
insurance program in which the EMPLOYEE and her spouse will be
eligible to participate and which shall provide substantially the
same benefits as are available to retired employees of the EMPLOYERS
on the date of this AGREEMENT until both the EMPLOYEE and her spouse
become 65 years of age; provided, however that all premiums for such
program shall be paid equally by the EMPLOYERS and the EMPLOYEE
and/or her spouse after the EMPLOYEE's retirement; provided further,
however, that the EMPLOYEE may only participate in such program for
as long as the EMPLOYERS elect in their sole discretion to make
available an employee group health insurance program which permits
the EMPLOYERS to make coverage available for retirees.
(e) Vacation and Sick Leave. The EMPLOYEE shall be entitled, without
loss of pay, to be absent voluntarily from the performance of her duties
under this AGREEMENT, subject to the following conditions:
(i) The EMPLOYEE shall be entitled to an annual vacation in
accordance with the policies periodically established by the Boards
of Directors of the EMPLOYERS for senior management officials of the
EMPLOYERS;
(ii) Vacation time shall be scheduled by the EMPLOYEE in a
reasonable manner. The EMPLOYEE shall not be entitled to receive any
additional compensation from the EMPLOYERS in the event of her
failure to take the full allotment of vacation time during any one
year. Vacation time accrued in any one year may not be carried over
into any succeeding year; and
(iii) The EMPLOYEE shall be entitled to annual sick leave as
established by the Boards of Directors of the EMPLOYERS for senior
management officials of the EMPLOYERS. In the event that any sick
leave time shall not have been used during any calendar year, such
leave shall accrue to subsequent calendar years; provided, however,
that the number of accrued days of sick leave shall not exceed 35
days.
4. Termination of Employment.
(a) General. In addition to the termination of the employment of the
EMPLOYEE upon the expiration of the TERM, the employment of the EMPLOYEE
shall terminate at any other time during the TERM upon the delivery by the
EMPLOYERS of written notice of employment termination to the EMPLOYEE.
Without limiting the generality of the foregoing sentence, the following
subparagraphs (i), (ii) and (iii) of this Section 4(a) shall govern the
obligations of the EMPLOYERS to the EMPLOYEE upon the occurrence of the
events described in such subparagraphs:
(i) Termination for JUST CAUSE. In the event that the EMPLOYERS
terminate the employment of the EMPLOYEE during the TERM because of
the EMPLOYEE's failure to comply with the Human Resources Policies
of the EMPLOYERS or because of the EMPLOYEE's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure or refusal to perform the
duties and responsibilities assigned in this AGREEMENT, willful
violation of any law, rule, regulation or final cease-and-desist
order (other than traffic violations or similar offenses),
conviction of a felony or for fraud or embezzlement, or material
breach of any provision of this AGREEMENT (hereinafter collectively
referred to as "JUST CAUSE"), the EMPLOYEE shall not receive, and
shall have no right to receive, any compensation or other benefits
for any period after such termination.
(ii) Termination after CHANGE OF CONTROL. In the event that, before
the expiration of the TERM and in connection with or within one year
of a CHANGE OF CONTROL (as defined hereinafter) of either one of the
EMPLOYERS, (A) the employment of the EMPLOYEE is terminated for any
reason other than JUST CAUSE before the expiration of the TERM, (B)
the present capacity or circumstances in which the EMPLOYEE is
employed is changed before the expiration of the TERM, or (C) the
EMPLOYEE's responsibilities, authority, compensation or other
benefits provided under this AGREEMENT are materially reduced, then
the following shall occur:
(I) The EMPLOYERS shall promptly pay to the EMPLOYEE or to
her beneficiaries, dependents or estate an amount equal to the
sum of (1) the amount of compensation to which the EMPLOYEE
would be entitled for the remainder of the TERM under this
AGREEMENT, plus (2) the difference between (x) the product of
three, multiplied by the total compensation paid to the
EMPLOYEE for the immediately preceding calendar year as set
forth on the Form W-2 of the EMPLOYEE, less (xx) the amount
paid to the EMPLOYEE pursuant to clause (1) of this
subparagraph (I);
(II) The EMPLOYEE, her dependents, beneficiaries and estate
shall continue to be covered under all BENEFIT PLANS of the
EMPLOYERS at the EMPLOYERS' expense as if the EMPLOYEE were
still employed under this AGREEMENT until the earliest of the
expiration of the TERM or the date on which the EMPLOYEE is
included in another employer's benefit plans as a full-time
employee; and
(III) The EMPLOYEE shall not be required to mitigate the
amount of any payment provided for in this AGREEMENT by
seeking other employment or otherwise, nor shall any amounts
received from other employment or otherwise by the EMPLOYEE
offset in any manner the obligations of the EMPLOYERS
hereunder, except as specifically stated in subparagraph (II).
In the event that payments pursuant to this subsection (ii) would
result in the imposition of a penalty tax pursuant to Section
280G(b)(3) of the Internal Revenue Code of 1986, as amended, and the
regulations promulgated thereunder (hereinafter collectively
referred to as "SECTION 280G"), such payments shall be reduced to
the maximum amount which may be paid under SECTION 280G without
exceeding such limits.
(iii) Termination Without CHANGE OF CONTROL. In the event that the
employment of the EMPLOYEE is terminated before the expiration of
the TERM for any reason other than JUST CAUSE or in connection with
or within one year of a CHANGE OF CONTROL, the EMPLOYERS shall be
obligated to continue (A) to pay on a monthly basis to the EMPLOYEE,
her designated beneficiaries or her estate, her annual salary
provided pursuant to Section 3(a) or (b) of this AGREEMENT until the
expiration of the TERM and (B) to provide to the EMPLOYEE at the
EMPLOYERS' expense, health, life, disability, and other benefits
substantially equal to those being provided to the EMPLOYEE at the
date of termination of her employment until the earliest to occur of
the expiration of the TERM or the date the EMPLOYEE becomes employed
full-time by another employer. In the event that payments pursuant
to this subsection (iii) would result in the imposition of a penalty
tax pursuant to SECTION 280G, such payments shall be reduced to the
maximum amount which may be paid under SECTION 280G without
exceeding those limits.
(b) Death of the EMPLOYEE. The TERM automatically terminates upon the
death of the EMPLOYEE. In the event of such death, the EMPLOYEE's estate
shall be entitled to receive the compensation due the EMPLOYEE through the
last day of the calendar month in which the death occurred, except as
otherwise specified herein.
(c) "Golden Parachute" Provision. Any payments made to the EMPLOYEE
pursuant to this AGREEMENT or otherwise are subject to and conditioned
upon their compliance with 12 U.S.C. [SECTION] 1828(k) and any regulations
promulgated thereunder.
(d) Definition of "CHANGE OF CONTROL". A "CHANGE OF CONTROL" shall be
deemed to have occurred in the event that, at any time during the TERM,
either any person or entity obtains "conclusive control" of the EMPLOYERS
within the meaning of 12 C.F.R. [SECTION] 574.4(a), or any person or
entity obtains "rebuttable control" within the meaning of 12 C.F.R.
[SECTION] 574.4(b) and has not rebutted control in accordance with 12
C.F.R. [SECTION] 574.4(c).
5. Special Regulatory Events. Notwithstanding Section 4 of this AGREEMENT,
the obligations of the EMPLOYERS to the EMPLOYEE shall be as follows in the
event of the following circumstances:
(a) If the EMPLOYEE is suspended and/or temporarily prohibited from
participating in the conduct of the EMPLOYERS' affairs by a notice served
under section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
(hereinafter referred to as the "FDIA"), the EMPLOYERS' obligations under
this AGREEMENT shall be suspended as of the date of service of such
notice, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the EMPLOYERS may, in their discretion, pay the
EMPLOYEE all or part of the compensation withheld while the obligations in
this AGREEMENT were suspended and reinstate, in whole or in part, any of
the obligations that were suspended.
(b) If the EMPLOYEE is removed and/or permanently prohibited from
participating in the conduct of the EMPLOYERS' affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA, all obligations of the
EMPLOYERS under this AGREEMENT shall terminate as of the effective date of
such order; provided, however, that vested rights of the EMPLOYEE shall
not be affected by such termination.
(c) If the EMPLOYERS are in default, as defined in section 3(x)(1) of
the FDIA, all obligations under this AGREEMENT shall terminate as of the
date of default; provided, however, that vested rights of the EMPLOYEE
shall not be affected.
(d) All obligations under this AGREEMENT shall be terminated, except to
the extent of a determination that the continuation of this AGREEMENT is
necessary for the continued operation of the EMPLOYERS, (i) by the
Director of the Office of Thrift Supervision (hereinafter referred to as
the "OTS"), or his or her designee at the time that the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the EMPLOYERS under the
authority contained in Section 13(c) of the FDIA or (ii) by the Director
of the OTS, or his or her designee, at any time the Director of the OTS,
or his or her designee, approves a supervisory merger to resolve problems
related to the operation of the EMPLOYERS or when the EMPLOYERS are
determined by the Director of the OTS to be in an unsafe or unsound
condition. No vested rights of the EMPLOYEE shall be affected by any such
action.
6. Consolidation, Merger or Sale of Assets. Nothing in this AGREEMENT shall
preclude the EMPLOYERS from consolidating with, merging into, or transferring
all, or substantially all, of their assets to another corporation that assumes
all of the EMPLOYERS' obligations and undertakings hereunder. Upon such a
consolidation, merger or transfer of assets, the term "EMPLOYERS," as used
herein, shall mean such other corporation or entity, and this AGREEMENT shall
continue in full force and effect.
7. Confidential Information. The EMPLOYEE acknowledges that during her
employment she will learn and have access to confidential information regarding
the EMPLOYERS and their customers and businesses. The EMPLOYEE agrees and
covenants not to disclose or use for her own benefit, or the benefit of any
other person or entity, any confidential information, unless or until the
EMPLOYERS consent to such disclosure or use or such information becomes common
knowledge in the industry or is otherwise legally in the public domain. The
EMPLOYEE shall not knowingly disclose or reveal to any unauthorized person any
confidential information relating to the EMPLOYERS, their subsidiaries or
affiliates, or to any of the businesses operated by them, and the EMPLOYEE
confirms that such information constitutes the exclusive property of the
EMPLOYERS. The EMPLOYEE shall not otherwise knowingly act or conduct herself (a)
to the material detriment of the EMPLOYERS, their subsidiaries, or affiliates,
or (b) in a manner which is inimical or contrary to the interests of the
EMPLOYERS.
8. Nonassignability. Neither this AGREEMENT nor any right or interest
hereunder shall be assignable by the EMPLOYEE, her beneficiaries, or legal
representatives without the EMPLOYERS' prior written consent; provided, however,
that nothing in this Section 8 shall preclude (a) the EMPLOYEE from designating
a beneficiary to receive any benefits payable hereunder upon her death, or (b)
the executors, administrators, or other legal representatives of the EMPLOYEE or
her estate from assigning any rights hereunder to the person or persons entitled
thereto.
9. No Attachment. Except as required by law, no right to receive payment
under this AGREEMENT shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge or hypothecation or to execution,
attachment, levy, or similar process of assignment by operation of law, and any
attempt, voluntary or involuntary, to effect any such action shall be null, void
and of no effect.
10. Binding Agreement. This AGREEMENT shall be binding upon, and inure to the
benefit of, the EMPLOYEE and the EMPLOYERS and their respective permitted
successors and assigns.
11. Amendment of AGREEMENT. This AGREEMENT may not be modified or amended,
except by an instrument in writing signed by the parties hereto.
12. Waiver. No term or condition of this AGREEMENT shall be deemed to have
been waived, nor shall there be an estoppel against the enforcement of any
provision of this AGREEMENT, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver, unless specifically stated therein, and each waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than the act specifically waived.
13. Severability. If, for any reason, any provision of this AGREEMENT is held
invalid, such invalidity shall not affect the other provisions of this AGREEMENT
not held so invalid, and each such other provision shall, to the full extent
consistent with applicable law, continue in full force and effect. If this
AGREEMENT is held invalid or cannot be enforced, then any prior AGREEMENT
between the EMPLOYERS (or any predecessor thereof) and the EMPLOYEE shall be
deemed reinstated to the full extent permitted by law, as if this AGREEMENT had
not been executed.
14. Headings. The headings of the paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this AGREEMENT.
15. Governing Law. This AGREEMENT has been executed and delivered in the State
of Ohio and its validity, interpretation, performance, and enforcement shall be
governed by the laws of this State of Ohio, except to the extent that federal
law is governing.
16. Effect of Prior Agreements. This AGREEMENT contains the entire
understanding between the parties hereto and supersedes any prior employment
agreement between the EMPLOYERS or any predecessor of the EMPLOYERS and the
EMPLOYEE.
17. Notices. Any notice or other communication required or permitted pursuant
to this AGREEMENT shall be deemed delivered if such notice or communication is
in writing and is delivered personally or by facsimile transmission or is
deposited in the United States mail, postage prepaid, addressed as follows:
If to Bancorp and/or First Federal:
First Federal Savings Bank of Eastern Ohio
Fifth & Market Streets
Zanesville, Ohio 43701
With copies to:
John C. Vorys, Esq.
Vorys, Sater, Seymour and Pease
Atrium Two, Suite 2100
221 East Fourth Street
Cincinnati, Ohio 45201-0236
If to the EMPLOYEE:
Ms. Connie Ayres LaPlante
_________________________
_________________________
IN WITNESS WHEREOF, each of the EMPLOYERS has caused this AGREEMENT to be
executed by its duly authorized officer, and the EMPLOYEE has signed this
AGREEMENT, each as of the day and year first above written.
Attest: FIRST FEDERAL BANCORP, INC.
/s/ Naomi B. Bankes By /s/ J. William Plummer
- ------------------------------ -----------------------------------------
J. William Plummer
its President/CEO
Attest: FIRST FEDERAL SAVINGS BANK OF EASTERN OHIO
/s/ Naomi B. Bankes By /s/ J. William Plummer
- ------------------------------ -----------------------------------------
J. William Plummer
its President/CEO
Attest:
/s/ Naomi B. Bankes By /s/ Connie Ayres LaPlante
- ------------------------------ -----------------------------------------
Connie Ayres LaPlante
EXHIBIT 23
CROWE CHIZEK
CONSENT OF INDEPENDENT AUDITORS
As independent certified public accountants, we hereby consent to the
incorporation by reference of our opinion dated October 31, 1996, except for
Note 1 (Earnings and Dividends per Common Share) as to which the date is
November 6, 1996, accompanying the consolidated financial statements of First
Federal Bancorp, Inc., as contained in the Annual Report on Form 10-KSB for the
fiscal year ended September 30, 1996, in the Registration Statements on Form S-8
previously filed by First Federal Bancorp, Inc., with the Securities and
Exchange Commission on July 17, 1995, and on February 1, 1994.
/s/ Crowe, Chizek and Company LLP
---------------------------------------
Crowe, Chizek and Company LLP
December 19, 1996
Columbus, Ohio
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 4,987
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,175
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 6,209
<INVESTMENTS-MARKET> 6,204
<LOANS> 160,298
<ALLOWANCE> 1,611
<TOTAL-ASSETS> 184,467
<DEPOSITS> 130,072
<SHORT-TERM> 24,970
<LIABILITIES-OTHER> 2,428
<LONG-TERM> 13,000
0
0
<COMMON> 3,656
<OTHER-SE> 10,342
<TOTAL-LIABILITIES-AND-EQUITY> 184,467
<INTEREST-LOAN> 13,153
<INTEREST-INVEST> 357
<INTEREST-OTHER> 121
<INTEREST-TOTAL> 13,631
<INTEREST-DEPOSIT> 5,414
<INTEREST-EXPENSE> 7,099
<INTEREST-INCOME-NET> 6,532
<LOAN-LOSSES> 131
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,093
<INCOME-PRETAX> 2,179
<INCOME-PRE-EXTRAORDINARY> 1,434
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,434
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
<YIELD-ACTUAL> 4.04
<LOANS-NON> 386
<LOANS-PAST> 126
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,499
<CHARGE-OFFS> 28
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 1,161
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 450
</TABLE>
FIRST FEDERAL BANCORP, INC.
505 Market Street
Zanesville, Ohio 43701
(614) 453-0606
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the 1997 Annual Meeting of Shareholders of
First Federal Bancorp, Inc. ("Bancorp"), will be held at the Holiday Inn, 4645
East Pike, Zanesville, Ohio, on February 19, 1997, at 2:00 p.m., Eastern
Standard Time (the "Annual Meeting"), for the following purposes, all of which
are more completely set forth in the accompanying Proxy Statement:
1. To re-elect Ward D. Coffman, III, Robert D. Goodrich, II, Patrick L.
Hennessey and Connie Ayres LaPlante as directors of Bancorp for
terms expiring in 1999;
2. To approve the First Federal Bancorp, Inc., 1997 Performance Stock
Option Plan for Senior Executive Officers and Outside Directors; and
3. To ratify the selection of Crowe, Chizek and Company as the auditors
of Bancorp for the current fiscal year;
4. To transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.
Only shareholders of Bancorp of record at the close of business on
December 24, 1996, will be entitled to receive notice of and to vote at the
Annual Meeting. Whether or not you expect to attend the Annual Meeting, we urge
you to consider the accompanying Proxy Statement carefully and to SIGN, DATE AND
PROMPTLY RETURN THE ENCLOSED PROXY SO THAT YOUR SHARES MAY BE VOTED IN
ACCORDANCE WITH YOUR WISHES AND THE PRESENCE OF A QUORUM MAY BE ASSURED. The
giving of a Proxy does not affect your right to vote in person in the event you
attend the Annual Meeting.
Zanesville, Ohio J. William Plummer, President and
January 10, 1997 Chief Executive Officer
Ward D. Coffman, III, Secretary
FIRST FEDERAL BANCORP, INC.
505 Market Street
Zanesville, Ohio 43701
(614) 453-0606
PROXY STATEMENT
PROXIES
The enclosed Proxy is being solicited by the Board of Directors of First
Federal Bancorp, Inc. ("Bancorp"), for use at the 1997 Annual Meeting of
Shareholders of Bancorp to be held at the Holiday Inn, 4645 East Pike,
Zanesville, Ohio, on February 19, 1997, at 2:00 p.m., Eastern Standard Time, and
at any adjournments thereof (the "Annual Meeting"). Without affecting any vote
previously taken, the Proxy may be revoked by a shareholder before exercise by
giving notice of revocation to Bancorp in writing or in open meeting. Attendance
at the Annual Meeting will not, of itself, revoke a Proxy.
Each properly executed Proxy received prior to the Annual Meeting and not
revoked will be voted as specified thereon or, in the absence of specific
instructions to the contrary, will be voted:
FOR the re-election of Ward D. Coffman, III, Robert D. Goodrich, II,
Patrick L. Hennessey and Connie Ayres LaPlante as directors of Bancorp for
terms expiring in 1999;
FOR the approval of the First Federal Bancorp, Inc., 1997 Performance
Stock Option Plan for Senior Executive Officers and Outside Directors (the
"Performance Plan"); and
FOR the ratification of the selection of Crowe, Chizek and Company ("Crowe
Chizek") as the auditors of Bancorp for the current fiscal year.
Proxies may be solicited by the directors, officers and other employees of
Bancorp in person or by telephone, telegraph or mail, only for use at the Annual
Meeting and will not be used for any other meeting. The cost of soliciting
Proxies will be borne by Bancorp.
Only shareholders of record as of the close of business on December 24,
1996 (the "Voting Record Date"), are eligible to vote at the Annual Meeting.
Bancorp's records disclose that, as of the Voting Record Date, there were
1,571,716 common shares of Bancorp (the "Shares") outstanding. All numbers of
Shares contained in this Proxy Statement reflect a stock dividend in the nature
of a 2-for-1 stock split that was effective in November 1996. On all matters,
shareholders are entitled to one vote for each Share held.
This Proxy Statement is first being mailed to the shareholders of Bancorp
on or about January 10, 1997.
VOTE REQUIRED
Election of Directors
Under Ohio law and Bancorp's Code of Regulations (the "Regulations"), the
four nominees receiving the greatest number of votes will be elected as
directors. Shares as to which the authority to vote is withheld are not counted
toward the election of directors or toward the election of the individual
nominees specified on the Proxy.
Approval of the Performance Stock Option Plan
The affirmative vote of the holders of at least a majority of the Common
Shares represented in person or by proxy at the Annual Meeting is necessary to
approve the Performance Plan. Generally, shares that are held by a nominee for a
beneficial owner and that are represented in person or by proxy at the Annual
Meeting but not voted with respect to such proposal ("Non-votes") will have the
same effect as a vote against the approval of the Performance Plan. If, however,
a shareholder has signed and dated a proxy in the form of the enclosed Proxy,
but has not voted on the approval of the Performance Plan by marking the
appropriate box on the Proxy, such person's Shares will be voted FOR the
approval of the Performance Plan and will not be considered Non-votes.
Ratification of Selection of Auditors
The affirmative vote of the holders of a majority of the Shares
represented in person or by proxy at the Annual Meeting is necessary to ratify
the selection of Crowe Chizek as the auditors of Bancorp for the current fiscal
year. The effect of an abstention is the same as an "against" vote. If, however,
a shareholder has signed and dated a proxy in the form of the enclosed Proxy,
but has not voted on the ratification of the selection of Crowe Chizek as the
auditors by marking the appropriate box on the Proxy, such person's Shares will
be voted FOR the ratification of the selection of Crowe Chizek as the auditors.
VOTING SECURITIES AND OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
only persons known to Bancorp to own beneficially more than five percent (5%) of
the outstanding Shares as of December 15, 1996:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address (1) Beneficial Ownership (2) Shares Outstanding
- -------------------- ------------------------ ------------------
<S> <C> <C>
Ward D. Coffman, III 92,160 (3) 5.81%
Connie Ayres LaPlante 104,244 (4) 6.50
J. William Plummer 108,960 (5) 6.79
<FN>
- --------------------
<F1> Each of the individuals listed in this table may be contacted at the
address of Bancorp, 505 Market Street, Zanesville, Ohio 43701.
<F2> All Shares are held with sole voting and dispositive power unless
otherwise indicated.
<F3> Includes 16,740 Shares subject to currently exercisable options granted
under the First Federal Bancorp, Inc., 1992 Stock Option Plan for
Non-Employee Directors (the "1992 Non-qualified Plan") and the First
Federal Bancorp, Inc., 1994 Stock Option Plan for Non-Employee Directors
(the "1994 Non-qualified Plan"); and 7,000 Shares held by the First
Federal Savings Bank of Eastern Ohio Defined Benefit Pension Plan (the
"Pension Plan"), with respect to which Mr. Coffman shares voting and
dispositive power as a co-trustee.
<F4> Consists of 70,024 Shares held jointly with Mrs. LaPlante's husband and
34,220 Shares subject to currently exercisable options granted under the
First Federal Bancorp, Inc., 1992 Incentive Stock Option Plan for Officers
and Key Employees (the "1992 ISO Plan") and the First Federal Bancorp,
Inc., 1994 Stock Option Plan for Officers and Key Employees (the "1994 ISO
Plan").
<F5> Includes 34,220 Shares subject to currently exercisable options granted
under the 1992 ISO Plan and the 1994 ISO Plan; and 7,000 Shares held by
the Pension Plan, with respect to which Mr. Plummer shares voting and
dispositive power as a co-trustee.
</FN>
</TABLE>
The following table sets forth certain information with respect to the
number of Shares beneficially owned by each director of Bancorp and by all
directors and executive officers of Bancorp as a group as of December 15, 1996:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address(1) Beneficial Ownership (2) Shares Outstanding
- ------------------- ------------------------ ------------------
<S> <C> <C>
Ward D. Coffman, III 92,160 (3) 5.81%
Robert D. Goodrich, II 36,940 (4) 2.33
Patrick L. Hennessey 69,740 (5) 4.39
Connie Ayres LaPlante 104,244 (6) 6.50
John C. Matesich, III 44,365 (7) 2.80
Don R. Parkhill 24,725 (8) 1.56
J. William Plummer 108,960 (9) 6.79
All directors and executive officers
of Bancorp as a group (7 people) 460,134 26.72%
<FN>
- --------------------
<F1> Each of the individuals listed in this table may be contacted at the
address of Bancorp, 505 Market Street, Zanesville, Ohio 43701.
<F2> All Shares are held with sole voting and dispositive power unless
otherwise indicated.
<F3> See footnote 3 to the preceding table for a description of Mr. Coffman's
beneficial ownership.
<F4> Includes 400 Shares held of record by Mr. Goodrich as custodian for his
daughter; 2,400 Shares held of record by Mr. Goodrich as custodian for his
minor son; and 16,740 Shares subject to currently exercisable options
granted under the 1992 Non-qualified Plan and the 1994 Non-qualified Plan.
<F5> Includes 16,740 Shares subject to currently exercisable options granted
under the 1992 Non-qualified Plan and the 1994 Non-qualified Plan and
7,000 Shares held by the Pension Plan, with respect to which Mr. Hennessey
shares voting and dispositive power as a co-trustee.
<F6> See footnote 4 to the preceding table for a description of Ms. LaPlante's
beneficial ownership.
<F7> Includes 625 Shares held by Mr. Matesich's daughter; 16,740 Shares subject
to currently exercisable options granted under the 1992 Non-qualified Plan
and the 1994 Non-qualified Plan; and 7,000 Shares held by the Pension
Plan, with respect to which Mr. Matesich shares voting and dispositive
power as a co-trustee.
<F8> Includes 1,500 Shares held by Mr. Parkhill's wife and 16,740 Shares
subject to currently exercisable options granted under the 1992
Non-qualified Plan and the 1994 Non-qualified Plan.
<F9> See footnote 5 to the preceding table for a description of Mr. Plummer's
beneficial ownership.
</FN>
</TABLE>
PROPOSAL ONE: ELECTION OF DIRECTORS
In accordance with Article Two of the Code of Regulations of Bancorp (the
"Regulations"), four directors are to be elected at the Annual Meeting, each for
a term of two years and until their successors are elected. Each holder of
Shares is entitled to one vote for each director position for each Share held.
No shareholder may cumulate votes in the election of directors.
In accordance with Section 2.03 of the Regulations, nominees for election
as a director may be proposed only by the directors or by a shareholder entitled
to vote for directors. The directors will consider shareholder nominations in
selecting nominees. A shareholder who wishes to make a nomination must follow
the procedures set forth in the Regulations. Such procedures require the
submission of a written nomination by the shareholder to the Secretary of
Bancorp by the later of the November 15th immediately preceding the annual
meeting of shareholders or the sixtieth day before the first anniversary of the
most recent annual meeting of shareholders held for the election of directors.
Each such written nomination must state the name, age, business or residence
address of the nominee, the principal occupation or employment of the nominee,
the number of Shares owned either beneficially or of record by each such nominee
and the length of time such Shares have been so owned.
Unless otherwise directed, Proxies received pursuant to this solicitation
will be voted for the nominees listed below, each of whom has been designated by
the directors. In the event that any nominee listed below fails to stand for
election at the Annual Meeting, Proxies will be voted for such other person as
may be designated by the directors. Management does not anticipate that any of
the nominees listed below will fail to stand for election at the Annual Meeting.
The Board of Directors proposes the re-election of the following persons
to terms which will expire in 1999:
<TABLE>
<CAPTION>
Director
Name (1) Age (2) Position(s) Held Since (3)
- -------- ------- ---------------- ---------
<S> <C> <S> <C>
Ward D. Coffman, III 43 Secretary and Director 1992
Robert D. Goodrich, II 50 Director 1992
Patrick L. Hennessey 46 Director 1992
Connie Ayres LaPlante 40 Treasurer and Director 1992
<FN>
- --------------------
<F1> There are no family relationships among the directors or executive
officers of Bancorp.
<F2> As of December 15, 1996.
<F3> Each director nominee became a director of Bancorp in connection with the
1992 conversion of First Federal Savings Bank of Eastern Ohio, Inc.
("First Federal"), from mutual to stock form (the "Conversion") and the
formation of Bancorp as the holding company of First Federal. Each
director nominee also serves as a director of First Federal.
</FN>
</TABLE>
The following directors will continue to serve after the Annual Meeting
for the terms indicated:
<TABLE>
<CAPTION>
Term
Name (1) Age (2) Position(s) Held Director Since (3) Expires
- -------- ------- ---------------- ----------------- -------
<S> <C> <S> <C> <C>
John C. Matesich, III 53 Chairman and Director 1992 1998
Don R. Parkhill 38 Director 1995 1998
J. William Plummer 51 President, Chief Executive 1992 1998
Officer and Director
<FN>
- --------------------
<F1> There are no family relationships among the directors or executive
officers of Bancorp.
<F2> As of December 15, 1996.
<F3> Each director, except Mr. Parkhill, became a director of Bancorp in
connection with the Conversion and the formation of Bancorp as the holding
company of First Federal. Each director also serves as a director of First
Federal.
</FN>
</TABLE>
Ward D. Coffman, III, is an attorney who has been engaged in private
practice in the Zanesville area for more than five years.
Robert D. Goodrich, II, is the Chairman of the Board and Chief Executive
Officer of Wendy's Management Group, Inc., a position he has held since 1986.
Patrick L. Hennessey is currently the President of P & D Transportation.
Mr. Hennessey has been employed by P & D Transportation since 1985.
Connie Ayres LaPlante is a Senior Vice President and the Treasurer of
First Federal. Ms. LaPlante commenced employment with First Federal in 1978.
John C. Matesich, III, is the President of Matesich Distributing Co., a
beer and wine distributor in Southeastern Ohio. Mr. Matesich has been the
President of Matesich Distributing Co. since 1990 and has been employed by
Matesich Distributing Co. for more than five years.
Don R. Parkhill was appointed to the Board of Directors effective October
1, 1995, to fill the vacancy created by the death of D. Bruce Huffman. Mr.
Parkhill has been the President of Blackson-Parkhill Agency, Inc., doing
business as Parkhill Sedanko Insurance Agency, Inc., in Coshocton, Ohio, since
1987. Mr. Parkhill is also the owner of Parkhill Business and Estate Planning,
which has sold life insurance and assisted with other financial planning needs
since 1987.
J. William Plummer is currently the President and Chief Executive Officer
of First Federal. Mr. Plummer has been employed by First Federal since 1970 and
has served as the President and the Chief Executive Officer since 1979.
Meetings of Directors
The Board of Directors of Bancorp met 14 times for regularly scheduled and
special meetings during the fiscal year ended September 30, 1996. Each director
attended at least 75% of the aggregate of such meetings and all meetings of the
committees of the Board of Directors of which such director is a member.
The Board of Directors of First Federal met 24 times for regularly
scheduled and special meetings during the fiscal year ended September 30, 1996.
Committees of Directors
The Board of Directors of Bancorp has a Stock Option Committee formed to
administer the 1992 ISO Plan, the 1994 ISO Plan, the 1992 Non-qualified Plan and
the 1994 Non-qualified Plan. The Stock Option Committee is comprised of Messrs.
Coffman, Hennessey and Matesich. The Stock Option Committee met one time during
the fiscal year ended September 30, 1996.
The Board of Directors of Bancorp does not have a Nominating Committee.
Nominations for election to the Board of Directors of Bancorp are determined by
the entire Board of Directors of Bancorp. In addition, the Regulations provide a
procedure for shareholders to nominate persons for election to the Board of
Directors of Bancorp. See "Election of Directors."
The Audit Committee and the Compensation Committee of the Board of
Directors of Bancorp meet in conjunction with the Audit Committee and the
Compensation Committee of the Board of Directors of First Federal. The Audit
Committee is comprised of Messrs. Coffman, Hennessey and Goodrich. The function
of the Audit Committee is to recommend the retention of outside auditors for
Bancorp and First Federal and to meet with such outside auditors to review the
results of their audit of Bancorp and First Federal. The Audit Committee met
once during the fiscal year ended September 30, 1996.
Messrs. Coffman, Goodrich and Matesich are the members of the Compensation
Committee. The Compensation Committee reviews and recommends to the full Board
of Directors salary levels and benefits for the executive officers of First
Federal and, in conjunction with management, for the other employees of First
Federal. The Compensation Committee met four times during the fiscal year ended
September 30, 1996.
The Board of Directors of First Federal also has a Loan Committee. The
function of the Loan Committee is to approve loans for amounts greater than
$200,000. Messrs. Plummer, Coffman and Hennessey are the members of the Loan
Committee. The Loan Committee met 15 times by telephone during the fiscal year
ended September 30, 1996.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Executive Compensation
The following Summary Compensation Table sets forth certain information
with respect to the compensation paid by First Federal to the chief executive
officer of Bancorp and the only other officer of Bancorp to receive cash
compensation in excess of $100,000 during fiscal year 1996:
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
----------------------- -------------------------------
Awards
-------------------------------
Name and Principal Restricted
Position Year Salary($) Bonus ($) Stock ($) Options/ SARs(#)
- ---------------------- ---- ----------- --------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
J. William Plummer 1996 $123,876 $50,660 $ - $ -
President and Chief 1995 113,758(1) 42,493 - 16,000(2)
Executive Officer 1994 113,396(1) 31,500 - -
Connie Ayres LaPlante 1996 80,393(3) 28,254 - -
Treasurer
<FN>
- -------------------
<F1> Includes directors' fees in the amount of $4,200 and $13,300 in fiscal
years 1995 and 1994, respectively. Does not include amounts attributable
to other miscellaneous benefits, the cost of which was less than 10% of
Mr. Plummer's cash compensation.
<F2> Represents the number of Shares underlying options granted to Mr. Plummer
under the 1994 ISO Plan. Bancorp does not have a stock benefit plan which
provides for the grant of "SARs," an abbreviation for "Stock Appreciation
Rights."
<F3> Does not include amounts attributable to other miscellaneous benefits, the
cost of which was less than 10% of Ms. LaPlante's cash compensation.
</FN>
</TABLE>
Employment Agreements
In November 1996, First Federal entered into employment agreements with
Mr. Plummer and Ms. LaPlante, each with a term of three years. The agreements
provide for a salary review by the Board of Directors not less often than
annually and the inclusion of the employee in any formally established employee
benefit, bonus pension and profit-sharing plans for which senior management
personnel are eligible. Each employment agreement may be terminated by First
Federal at any time. In the event of termination for "just cause," as defined in
the employment agreement, the employee will have no right to receive any
compensation or other benefits for any period after such termination. In the
event of termination within one year of any change in "control" (as defined
below) of First Federal or Bancorp, each employee will be entitled to receive
(a) a payment in an amount equal to the sum of (i) the amount of compensation to
which the employee is entitled for the remainder of the term of the agreement,
plus (ii) the difference between (x) the product of three multiplied by the
total compensation paid to the employee for the immediately preceding calendar
year less (y) the amount paid to the employee pursuant to (i); and (b) continued
health, life and disability insurance and other benefits substantially equal to
those which the employee was receiving at the time the agreement was terminated
until the earliest to occur of the end of the term of the agreement, or the date
the employee becomes employed by another employer. "Control," as defined in the
employment agreements, generally refers to the acquisition by any person or
entity of the ownership or power to vote ten percent (10%) or more of the Shares
of either First Federal or Bancorp, the control of the election of a majority of
the directors of either First Federal or Bancorp or the exercise of a
controlling influence over the management or policies of either First Federal or
Bancorp.
In the event of termination other than for "just cause" (as defined in the
employment agreement) or in connection with a change of control, the employee
will be entitled to a continuation of salary payments for a period of time equal
to the term of the employment agreement, as well as a continuation of benefits
substantially equal to those being provided at the date of termination of
employment until the earlier to occur of the end of the employment agreement
term or the date the employee becomes employed full-time by another employer.
Compensation of Directors
Each non-employee director of Bancorp receives a fee of $250 per month and
$50 for each meeting of the Board of Directors attended, with payment for two
excused absences per year. Each non-employee director of First Federal receives
a fee of $500 per month and $200 for each meeting of the Board of Directors
attended, with payment for four excused absences per year. In addition to
regular fees paid to the directors of First Federal, members of the Compensation
Committee and members of the Benefits Committee who are not employees receive
$150 for each meeting attended. Members of the Loan Committee, other than the
executive officers, receive $50 for each meeting attended in person, although no
fees were paid during the fiscal year ended September 30, 1996, because only
telephonic meetings were held during the year. No committee fees are paid to
members of the Audit Committee.
Certain Transactions with First Federal
First Federal makes loans to executive officers and directors of First
Federal and Bancorp in the ordinary course of business and on the same terms and
conditions, including interest rates and collateral, as those of comparable
loans to other persons. All outstanding loans to executive officers and
directors were made pursuant to such policy, do not involve more than the normal
risk of collectibility or present other unfavorable features and are current in
their payments.
During the fiscal year ended September 30, 1996, First Federal retained
the services of Ward D. Coffman, III, an attorney engaged in private practice in
the Zanesville area. Mr. Coffman is the secretary and a director of Bancorp and
serves as general counsel to First Federal. From time to time, Mr. Coffman will
serve as general counsel to First Federal during the fiscal year beginning
October 1, 1996.
Stock Option Plans
The shareholders of Bancorp approved stock option plans for employees (the
"ISO Plans") and non-employee directors (the "Non-qualified Plans") in 1993 and
in 1995. The purposes of the ISO Plans and the Non-qualified Plans include
attracting and retaining the best available personnel as officers, employees and
directors of Bancorp and First Federal and providing incentives to the officers,
employees and directors of Bancorp and First Federal by facilitating their
purchases of an ownership interest in Bancorp.
Bancorp currently has reserved 322,082 common shares for issuance under
the ISO Plans and the Non-Qualified Plans, of which 236,980 are currently
subject to outstanding options. Pursuant to the ISO Plans, options to purchase
157,880 Shares have been granted. Of such options, an option to purchase 2,000
Shares has terminated without being exercised and options to purchase 2,600
Shares have been exercised as of December 24, 1996. Such options are intended to
qualify as "incentive stock options" ("ISOs") under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), which, if certain conditions are
met, permits the optionees to delay the recognition of federal taxable income on
the Shares received upon the exercise of options. All of the ISOs already
granted are currently exercisable in full.
The Stock Option Committee of the Board of Directors may grant options
under the ISO Plans at such times as it deems most beneficial to Bancorp and
First Federal on the basis of the nature of the services rendered by the
employee, each employee's current and potential contribution to Bancorp and
First Federal and such other factors as the Stock Option Committee may, in its
sole discretion, deem relevant.
The option exercise price for ISOs is determined by the Stock Option
Committee at the time of option grant. The exercise price must not be less than
100% of the fair market value of the Shares on the date of the grant. Moreover,
for an employee who owns more than 10% of Bancorp's outstanding Shares, the
exercise price of the ISO may not be less than 110% of the fair market value of
the Shares on the date of the grant, and the ISO shall not be exercisable after
the expiration of five years from the date it is granted. No ISO will be
exercisable after the expiration of ten years from the date of grant.
The ISO Plans provide that in the event of a "change of control," as
defined in the ISO Plans, all ISOs then outstanding shall become immediately
exercisable. A "change of control" includes execution of an agreement for a
merger or acquisition or the acquisition of the beneficial ownership of 25% or
more of the voting shares of Bancorp by any person or entity.
Pursuant to the Non-qualified Plans, options to purchase 100,440 Shares of
Bancorp have been granted, and of such options, an option to purchase 16,740
Shares has terminated without being exercised. The Non-qualified Plans provide
for the grant of options that are not intended to qualify as "incentive stock
options" under Section 422 of the Code ("Non-qualified Options"). Grants of
Non-qualified Options are made automatically to each non-employee director at
the time the Non-qualified Plans became effective or upon a new director's
election. Non-qualified Options granted under the 1994 Non-qualified Plan are
immediately exercisable upon grant. Non-qualified Options granted under the 1992
Non-qualified Plan are first exercisable one year after the date of grant.
The exercise price for Non-qualified Options is the fair market value of
the Shares on the date of the grant, except that the exercise price of a
Non-qualified Option granted to a non-employee director who owns more than 10%
of Bancorp's outstanding Shares shall be 110% of the fair market value of the
Shares on the date of the grant. The term of each Non-qualified Option will be
ten years from the date each such Non-qualified Option is granted, except that
in the case of a Non-qualified Option granted to an optionee who owns a number
of Shares representing more than 10% of the Shares outstanding at the time the
Non-qualified Option is granted, the term of the Non-qualified Option shall be
five years. Termination or removal of an Option recipient for cause, as defined
in the ISO Plans and the Non-qualified Plans, will result in the annulment of
any outstanding Options. An Option recipient cannot transfer or assign an Option
other than by will or in accordance with the laws of descent and distribution.
Without further approval of the shareholders, the Board of Directors of
Bancorp may at any time alter, suspend or discontinue the ISO Plans or the
Non-qualified Plans, except that the Board of Directors may not, without
approval of the shareholders, increase the number of Shares which may be issued
under the ISO Plans or the Non-qualified Plans (except for adjustments to
reflect certain changes in the capitalization of Bancorp), materially increase
the benefits accruing to participants under the ISO Plans or the Non-qualified
Plans or materially modify the requirements for eligibility for participation in
the ISO Plans or the Non-qualified Plans. Notwithstanding the foregoing, the
Board of Directors may amend the ISO Plans or the Non-qualified Plans to take
into account changes in applicable securities, federal income tax and other
applicable laws.
The following table sets forth information regarding the number and value
of unexercised options awarded under the ISO Plans held by the person listed in
the Summary Compensation Table:
Aggregated Option/SAR Exercises In Last Fiscal Year and
9/30/96 Option/SAR Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at 9/30/96(#) at 9/30/96(1)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized Unexercisable Unexercisable
- ------------------ --------------- -------------- ------------- -------------
<S> <S> <S> <C> <C>
J. William Plummer N/A N/A 34,220/0 $316,975/0
<FN>
- -------------------
<F1> An option is "in-the-money" if the fair market value of the underlying
Shares exceeds the exercise price of the option. The figure represents the
value of such unexercised options, determined by multiplying the number of
Shares subject to unexercised options by the difference between the
exercise prices of such options and the closing sale price for the Shares
on September 30, 1996, as adjusted to reflect the November 1996 stock
dividend.
</FN>
</TABLE>
PROPOSAL TWO: APPROVAL OF THE PERFORMANCE PLAN
The Board of Directors of Bancorp proposes the adoption of the Performance
Plan. The Performance Plan must be approved by the holders of a majority of the
Common Shares represented in person or by proxy at the Annual Meeting. The Board
of Directors recommends that the shareholders of Bancorp approve the Performance
Plan.
The following is a summary of the terms of the Performance Plan and is
qualified in its entirety by reference to the full text of the Performance Plan,
a copy of which is attached hereto as Exhibit A.
Purpose and Eligibility
The purpose of the Performance Plan is to provide incentive to the four
senior executive officers and the five non-employee directors of Bancorp and
First Federal to maintain and improve the financial performance of Bancorp. The
following four senior executive officers and five non-employee directors are
eligible to participate in the Performance Plan (collectively, the
"Participants").
<TABLE>
<CAPTION>
Senior Executive Officers Non-Employee Directors
- ---------------------------------------------------------------- ----------------------
Name Office
---- ------
<S> <S> <S>
J. William Plummer President of Bancorp and First Federal John Matesich, III
Connie Ayres LaPlante Treasurer of Bancorp, Senior Vice Ward D. Coffman, III
President, Treasurer of First Federal Robert D. Goodrich, II
Thomas N. Sulens Senior Vice President of First Federal Patrick H. Hennessey
Larry W. Snode Senior Vice President of First Federal Don R. Parkhill
</TABLE>
The Performance Plan has been designed specifically to provide incentive
to the Participants to continue the comparatively strong financial performance
of Bancorp during the past five years. In order for any one of the Participants
to obtain any economic benefit from the Performance Plan, two events must occur.
First, the return on equity ("ROE") of Bancorp must be maintained at or above a
five-year average. Second, following the grant of options under the Performance
Plan, the market value of the shares must appreciate. If the ROE is maintained,
for example, but the fair market value of the shares underlying the options
never increases, then no economic benefit will be obtained by any of the
Participants.
Bancorp currently has reserved 322,082 common shares for issuance under
the ISO Plans and the Non-qualified Plans, of which 236,980 are subject to
currently outstanding options. Such options were granted (i) to employees on a
discretionary basis following a subjective evaluation of the performance of each
optionee by the Stock Option Committee and (ii) to non-employee directors on an
automatic basis after adoption of each such plan by the shareholders. See
"COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS - Stock Option Plans."
Unlike the ISO Plans and the Non-qualified Plans, the Performance Plan
provides for the grant of options if, and only if, the ROE for any fiscal year
during the five-year term of the Performance Plan equals or exceeds the average
of the returns on equity for the five fiscal years preceding any such fiscal
year (the "Average"). In order to determine whether the Participants are
eligible for an option grant, the ROE for each of the five fiscal years of the
Performance Plan will be determined as of September 30 of each such year; will
be calculated in accordance with generally accepted accounting principles; and
will be reported in the Annual Report to Shareholders for each such year.
When the ROE during any year of the five-year term equals or exceeds the
Average, then an option to purchase 2,000 common shares will be granted to each
of the Participants on December 1 of such year. However, the maximum number of
common shares which may be subject to options granted to any Participant under
the Performance Plan is 6,000. As a result, options under the Performance Plan
may only be granted in three of the five years of the term.
Exercise Price
If the Performance Plan is approved by the shareholders, 54,000 Shares
(approximately 3.44% of the Common Shares outstanding on December 24, 1996) will
be reserved for issuance by Bancorp upon the exercise of options granted to
senior executive officers and non-employee directors of Bancorp under the
Performance Plan.
Options will be granted under the Performance Plan with an exercise price
equal to the fair market value of the Shares on the date of the grant. Fair
market value is defined by the Performance Plan as the mean between the closing
high bid and low asked quotations for a Share of Bancorp on The Nasdaq Stock
Market. Notwithstanding the foregoing, in the event a participant owns Shares
representing more than 10% of the outstanding Shares at the time the option is
granted, the exercise price shall not be less than 110% of the Fair Market Value
on the date of grant.
Administration and Amendment
The Performance Plan will be administered by the Stock Option Committee.
Without further approval of the shareholders, the Board of Directors of Bancorp
may at any time alter, suspend or discontinue the Performance Plan, except that
the Board of Directors may not, without approval of the shareholders, increase
the number of Common Shares which may be issued under the Performance Plan
(except for adjustments to reflect certain changes in the capitalization of
Bancorp), materially increase the benefits accruing to participants under the
Performance Plan or materially modify the requirements for eligibility for
participation in the Performance Plan. Notwithstanding the foregoing, the Board
of Directors may amend the Performance Plan to take into account changes in
applicable securities, federal income tax and other applicable laws.
Term
The term of each option granted pursuant to the Performance Plan will be
10 years from the date of grant. However, in the case of a Senior Executive
Officer who owns a number of Shares representing more than ten percent (10%) of
the Shares outstanding at the time the option is granted, the term of the option
will be 5 years. Each option will terminate before the end of the term, one year
after termination of service due to disability, six months after death (unless
extended to one year by the Stock Option Committee) or three months after
termination of service for any reason other than termination for "cause," as
defined in the Performance Plan. Any option granted pursuant to the Performance
Plan will, unless otherwise specified by the Stock Option Committee at the time
of grant, be exercisable immediately after the date of grant of such option,
provided that the optionee shall have been a senior executive officer or
non-employee director of Bancorp or First Federal at all times during the period
beginning with the date of grant of any such option and ending on the date which
is 3 months before the date of exercise of any such option. Any options granted
pursuant to the Performance Plan will not be transferable other than by will or
by the laws of descent and distribution. All options granted pursuant to the
Performance Plan will become immediately exercisable in the event of a Change of
Control, as defined herein at "COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
- - Stock Option Plans."
Tax Treatment of ISOs
An optionee who is granted an ISO will not recognize taxable income either
on the date of grant or on the date of exercise, although the alternative
minimum tax may apply. Upon disposition of Shares acquired from the exercise of
an ISO, long-term capital gain or loss is generally recognized in an amount
equal to the difference between the amount realized on the sale or disposition
and the exercise price. If the optionee disposes of the Shares within two years
of the date of grant or within one year from the date of the transfer of the
Shares to the optionee (a "Disqualifying Disposition"), however, then the
optionee will recognize ordinary income, as opposed to capital gain, at the time
of disposition in an amount generally equal to the lesser of (i) the amount of
gain realized on the disposition, or (ii) the difference between the fair market
value of the Shares received on the date of exercise and the exercise price. Any
remaining gain or loss is treated as a short-term or long-term capital gain or
loss, depending upon the period of time the Shares have been held.
Bancorp is not entitled to a tax deduction upon either the exercise of an
ISO or the disposition of Shares acquired pursuant to such exercise, except to
the extent that the optionee recognizes ordinary income in a Disqualifying
Disposition. Ordinary income from a Disqualifying Disposition will constitute
compensation but will not be subject to tax withholding, nor will it be
considered wages for payroll tax purposes.
If the holder of an ISO pays the exercise price, in whole or in part, with
previously acquired Shares, the exchange should not affect the ISO tax treatment
of the exercise. Upon such exchange, and except as otherwise described herein,
no gain or loss is recognized by the optionee upon delivering previously
acquired Shares to Bancorp, and Shares received by the optionee equal in number
to previously acquired Shares exchanged therefor will have the same basis and
holding period for long-term capital gain purposes as the previously acquired
Shares. (The optionee, however, will not be able to utilize the prior holding
period for the purpose of satisfying the ISO statutory holding period
requirements for avoidance of a Disqualifying Disposition.) Shares received by
the optionee in excess of the number of shares previously acquired will have a
basis for federal income tax purposes of zero and a holding period which
commences as of the date the shares are transferred to the optionee upon
exercise of the ISO. If the exercise of an ISO is effected using Shares
previously acquired through the exercise of an ISO, the exchange of such
previously acquired Shares will be considered a disposition of such Shares for
the purpose of determining whether a Disqualifying Disposition has occurred.
Tax Treatment of Non-qualified Options
An optionee receiving a Non-qualified Option does not recognize taxable
income on the date of grant of the option, provided that the option does not
have a readily ascertainable fair market value at the time it is granted. The
optionee must recognize ordinary income generally at the time of exercise of a
Non-qualified Option in the amount of the difference between the fair market
value of the shares on the date of exercise and the option price. The ordinary
income received will constitute compensation for which tax withholding by
Bancorp generally will be required. The amount of ordinary income recognized by
an optionee will be deductible by Bancorp in the year that the optionee
recognizes the income if Bancorp complies with the applicable withholding
requirement.
If, at the time of exercise, the sale of the Shares could subject the
optionee to short-swing profit liability under Section 16(b) of the Securities
Exchange Act of 1934, such person generally will not recognize ordinary income
until the date that the optionee is no longer subject to such Section 16(b)
liability. Upon such date, the optionee will recognize ordinary income in an
amount equal to the fair market value of the Shares on such date less the option
exercise price. Nevertheless, the optionee may elect under Section 83(b) of the
Code within 30 days of the date of exercise to recognize ordinary income as of
the date of exercise, without regard to the restriction of Section 16(b).
Shares acquired upon the exercise of a Non-qualified Option will have a
tax basis equal to their fair market value on the exercise date or other
relevant date on which ordinary income is recognized, and the holding period for
the Shares generally will begin on the date of exercise or such other relevant
date. Upon subsequent disposition of the Shares, the optionee will recognize
long-term capital gain or loss if the optionee has held the Shares for more than
one year prior to disposition, or short-term capital gain or loss if the
optionee has held the Shares for one year or less.
If a holder of a Non-qualified Option pays the exercise price, in whole or
in part, with previously acquired Shares, the optionee will recognize ordinary
income in the amount by which the fair market value of the Shares received
exceeds the exercise price. The optionee will not recognize gain or loss with
respect to the previously acquired Shares upon delivering such previously
acquired Shares to Bancorp unless such delivery constitutes a Disqualifying
Disposition of Shares acquired through the exercise of an ISO. Shares received
by an optionee equal in number to the previously acquired Shares exchanged
therefor will have the same basis and holding period as such previously acquired
Shares. Shares received by an optionee in excess of the number of such
previously acquired Shares will have a basis equal to the fair market value of
such additional Shares as of the date ordinary income is recognized. The holding
period for such additional Shares will commence as of the date of exercise or
such other relevant date.
Awards
The following table sets forth information with respect to awards which
will be made pursuant to the Performance Plan if approved by the shareholders
and if the ROE targets required by the Performance Plan are achieved:
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
Name and Position Number of Units
----------------- ---------------
<S> <C>
J. William Plummer 6,000
Connie Ayres LaPlante 6,000
Executive Group 12,000
Non-Employee Director Group 30,000
Non-Executive Officer Employee Group 12,000
</TABLE>
Because the options are contingent upon the specific performance targets
and will not be transferable and because the exercise price will be the fair
market value at the date of grant, no value can be determined at this time. The
fair market value of each Share outstanding at December 15, 1996, based on
Nasdaq's reported closing sale price, was $16.00.
PROPOSAL THREE: RATIFICATION OF SELECTION OF AUDITORS
The Board of Directors of Bancorp has selected Crowe Chizek as the
auditors of Bancorp and its subsidiary for the current fiscal year and
recommends that the shareholders ratify such selection. Management expects that
a representative of Crowe Chizek will be present at the Annual Meeting, will
have the opportunity to make a statement if he or she so desires and will be
available to respond to appropriate questions.
PROPOSALS OF SECURITY HOLDERS AND OTHER MATTERS
Any proposals of security holders intended to be included in Bancorp's
Proxy Statement for the 1998 Annual Meeting of Shareholders should be sent to
Bancorp by certified mail and must be received by Bancorp not later than
September 12, 1997.
Management knows of no other business which may be brought before the
Annual Meeting, including matters incident to the conduct of the Annual Meeting.
If, however, other matters are brought before the Annual Meeting, the persons
named in the enclosed Proxy intend to vote such Proxy in accordance with their
best judgment.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. WHETHER OR NOT YOU
EXPECT TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO FILL IN, SIGN AND
RETURN THE PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE.
Zanesville, Ohio J. William Plummer, President and
January 10, 1997 Chief Executive Officer
Ward D. Coffman, III, Secretary
Exhibit A
FIRST FEDERAL BANCORP, INC.
1997 PERFORMANCE STOCK OPTION PLAN
FOR SENIOR EXECUTIVE OFFICERS AND OUTSIDE DIRECTORS
1. Purpose of this Plan. The purpose of the First Federal Bancorp, Inc.,
1997 Performance Stock Option Plan for Senior Executive Officers and Outside
Directors is to provide incentive to the senior executive officers and outside
directors of First Federal Bancorp, Inc., and First Federal Savings Bank of
Eastern Ohio to maintain and improve the financial performance of First Federal
Bancorp, Inc. This Plan is intended to authorize the grant of incentive stock
options, as defined in Section 422 of the Internal Revenue Code of 1986, as
amended, and options which do not qualify as incentive stock options under such
code.
2. Definitions. As used in this Plan, the following terms have the
corresponding meanings:
(a) "Board" means the Board of Directors of First Federal Bancorp, Inc.
("FFB"), or any successor corporation upon assumption of this Plan.
(b) "Cause" means failure to comply with the Human Resources Policies of
FFB or First Federal Savings Bank of Eastern Ohio ("FFS") or personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure or refusal to perform the duties and
responsibilities assigned to the Optionee in any employment agreement to which
the Optionee is a party, willful violation of any law, rule, regulation or final
cease-and desist order (other than traffic violations or similar offenses),
conviction of a felony or for fraud or embezzlement, or material breach of any
provision of any employment agreement to which the Optionee is a party.
(c) "Change of Control" means (i) the execution of an agreement for the
sale of all, or a material portion, of the assets of FFB or FFS as would require
a vote of shareholders under Ohio corporate law; (ii) the execution of an
agreement for a merger or recapitalization of FFB or FFS or any merger or
recapitalization whereby FFB is not the surviving entity; (iii) a change of
control of FFB or FFS, as defined or determined by the OTS; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of the term "beneficial ownership" as defined under Section 13(d) of the
Exchange Act and the rules promulgated thereunder) of twenty-five percent (25%)
or more of the outstanding voting securities of FFB or FFS by any person, trust,
entity or group.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the Stock Option Committee appointed by the Board in
accordance with Section 4(a) hereof.
(f) "Continuous Service" means the absence of any interruption or
termination of service to FFB or FFS by a Senior Executive Officer or by an
Outside Director. Service shall not be considered interrupted in the case of
sick leave, military leave or any other leave of absence approved by the Board.
(g) "Effective Date" means the date on which this Plan is adopted by the
Board.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(i) "Fair Market Value" shall be determined as set forth in Section 8(a)
of this Plan.
(j) "FFB" means First Federal Bancorp, Inc., or any successor corporation
upon assumption of this Plan.
(k) "FFS" means First Federal Savings Bank of Eastern Ohio, the wholly
owned subsidiary of FFB.
(l) "ISO" means an incentive stock option, as defined in Section 422 of
the Code.
(m) "NQSO" means a stock option which does not qualify as an incentive
stock option, as defined in Section 422 of the Code.
(n) "OTS" means the Office of Thrift Supervision.
(o) "Option" means an ISO or NQSO granted in accordance with the terms and
subject to the conditions of this Plan.
(p) "Optionee" means a Senior Executive Officer or an Outside Director who
receives an Option pursuant to this Plan.
(q) "Outside Directors" means the five members of the Board who are not
employees of FFB or FFS and who are members of the Board on the Effective Date.
(r) "Plan" means the First Federal Bancorp, Inc., 1997 Performance Stock
Option Plan for Senior Executive Officers and Outside Directors.
(s) "ROE" means the return on equity of FFB for a fiscal year as
calculated in accordance with generally accepted accounting principles and as
reported in the Annual Report to Shareholders for such year.
(t) "Senior Executive Officers" means the President of FFB and FFS and the
three Senior Vice Presidents of FFS on the Effective Date.
(u) "Share" or "Shares" means one or more common shares, with no par
value, of FFB.
3. Shares Subject to this Plan.
(a) Shares Available. Subject to adjustment as provided in Section 3(b) of
this Plan, the aggregate number of Shares with respect to which Options may be
granted pursuant to this Plan shall be 54,000. In the event that (i) any Shares
subject to an Option granted under this Plan, or as to which such Option
relates, are forfeited or (ii) an Option otherwise terminates or is canceled
without the delivery of Shares, the Shares covered by such Option, or as to
which such Option relates, shall become Shares with respect to which Options may
be granted to the extent permissible under Rule 16b-3 promulgated under the
Exchange Act, or any successor rule or regulation thereto as in effect from time
to time. In the event that any Option is exercised through the delivery of
Shares, the number of Shares available for Options under this Plan shall be
increased by the number of Shares surrendered, to the extent permissible under
Rule 16b-3 promulgated under the Exchange Act, or any successor rule or
regulation thereto as in effect from time to time.
(b) Adjustments and Corporate Acts. (i) In the event that any dividend or
other distribution (whether in the form of cash, Shares, other securities or
other property), recapitalization, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, exchange of Shares or other securities of FFB, issuance of warrants
or other rights to purchase Shares or other securities of FFB, or other similar
corporation transaction or event affects the Shares in a manner by which an
adjustment is necessary in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under this Plan,
the Committee shall proportionately adjust any or all (as necessary) of (I) the
number of Shares or other securities of FFB (or number and kind of other
securities or property) with respect to which Options may be granted; (II) the
number of Shares or other securities of FFB (or number and kind of other
securities or property) subject to outstanding Options; and (III) the grant or
exercise price with respect to any Options; provided, however, that no such
adjustment shall be authorized to the extent that such authority would cause
this Plan to violate Section 422(b)(1) of the Code, as from time to time
amended, or Rule 16b-3 promulgated under the Exchange Act, or any successor rule
or regulation thereto as in effect from time to time.
(ii) The existence of this Plan and the Options granted hereunder shall
not affect or restrict in any way the right or power of the Board or the
shareholders of FFB to make or authorize any adjustment, recapitalization,
reorganization or other change in FFB's capital structure or its business, any
merger, acquisition or consolidation of FFB, any issuance of bonds, debentures,
preferred or prior preference stocks ahead of or affecting FFB's capital stock
or the rights thereof, the dissolution or liquidation of FFB or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding, including any merger or acquisition which would result in the
exchange of cash, stock of another company or options to purchase the stock of
another company for any Option outstanding at the time of such corporate
transaction or which would involve the termination of all Options outstanding at
the time of such corporate transaction.
4. Administration.
(a) Stock Option Committee. This Plan shall be administered by a Stock
Option Committee appointed by the Board. The Committee shall consist of at least
three members of the Board, one of whom shall be an employee of FFS, and may
consist of the entire Board.
(b) Powers of the Committee. The Committee is authorized to interpret this
Plan and to prescribe, amend and rescind rules and regulations relating to this
Plan; to determine the form and content of Options to be issued under this Plan;
and to make such other determinations necessary or advisable for the
administration of this Plan. The Committee shall have and may exercise such
other power and authority as may be delegated to it by the Board from time to
time. A majority of the entire Committee shall constitute a quorum and the
action of a majority of the members present at any meeting at which a quorum is
present shall be deemed the action of the Committee. In no event may the
Committee revoke outstanding Options without the consent of the Optionee. The
President of FFB and such other officers as shall be designated by the Committee
are hereby authorized to execute instruments evidencing Options approved by the
Committee on behalf of FFB and to cause them to be delivered to the Optionees.
The construction and the interpretation of the provisions of this Plan are
vested with the Committee, in its absolute discretion. All such decisions,
determinations and interpretations shall be final, conclusive and binding upon
all parties having an interest in this Plan.
5. Eligibility. Eligibility to participate in this Plan shall be limited
to the Senior Executive Officers and to the Outside Directors.
6. Term of Plan. This Plan shall continue in effect for a term of five (5)
years from the Effective Date, unless earlier terminated pursuant to Section 13
hereof. Unless otherwise expressly provided in this Plan or in an applicable
award agreement, the authority of the Board or the Committee to amend, alter,
adjust, suspend, discontinue or terminate any such award or to waive any
conditions or rights under any such award shall continue after the expiration of
such term.
7. Grant of Options.
(a) Automatic Performance Grant. In the event that the ROE for any one of
the fiscal years ended September 30, 1997, 1998, 1999, 2000 or 2001, equals or
exceeds the average ROE for the five fiscal years preceding any such fiscal
year, each one of the Senior Executive Officers and each one of the Outside
Directors shall automatically be granted on the immediately following December 1
an Option to purchase 2,000 Shares; provided, however, that the maximum
aggregate number of Shares subject to Options granted to any one Senior
Executive Officer or any one Outside Director under this Plan shall not exceed
6,000.
(b) Option Agreement. Each Option granted pursuant to this Plan shall be
evidenced by an instrument in a form approved by the Committee. Such instrument
shall contain terms and conditions which are consistent with this Plan. Any
option granted to a Senior Executive Officer shall be an ISO. Any option granted
to an Outside Director shall be a NQSO.
8. Terms and Conditions of Options. Each and every Option granted pursuant
to this Plan shall comply with, and be subject to, the following terms and
conditions:
(a) Option Price. (i) The price per Share at which each Option granted
under this Plan may be exercised shall be the Fair Market Value of the Shares on
the date such Option is granted, except as set forth in subsection (ii) of this
Section 8(a). The Fair Market Value shall equal the mean between the closing
high bid and low asked quotations with respect to a Share on such date on The
Nasdaq Stock Market.
(ii) The foregoing notwithstanding, in the event an Optionee owns Shares
representing more than ten percent (10%) of the outstanding Shares at the time
the Option is granted, the Option exercise price shall not be less than one
hundred and ten percent (110%) of the Fair Market Value of the Shares at the
time the Option is granted.
(b) Method of Exercise. An Option may be exercised, in whole or in part,
by giving written notice of exercise to FFB. Such notice shall specify the
number of Shares to be purchased. Full payment for each Share purchased upon the
exercise of any Option granted under this Plan shall be made at the time of
exercise of each such Option and shall be paid in cash or cash equivalents,
including personal checks, or, if permitted by the Committee, in Shares or a
combination of cash or cash equivalents and Shares. Shares utilized in full or
partial payment of the exercise price shall be valued at the Fair Market Value
at the date of exercise. FFB shall accept full or partial payment in Shares only
to the extent permitted by applicable law. No Shares shall be issued until full
payment therefor has been received by FFB. No Optionee shall have any of the
rights of a shareholder of FFB until Shares are issued to such Optionee.
(c) Term of Option. Subject to the right of FFB to provide for earlier
termination in the event of any merger, acquisition or consolidation involving
FFB, the term of each Option granted pursuant to this Plan shall be ten (10)
years from the date each such Option is granted; provided, however, that in the
case of a Senior Executive Officer who owns a number of Shares representing more
than ten percent (10%) of the Shares outstanding at the time the Option is
granted, the term of the Option shall be five (5) years.
(d) Exercise Generally. Any Option granted pursuant to this Plan shall,
unless otherwise specified by the Committee at the time of grant, be exercisable
immediately after the date of grant of such Option; provided, however, that
except as otherwise provided in Section 9 hereof, no Option may be exercised
unless the Optionee shall have been a Senior Executive Officer or an Outside
Director of FFB or FFS at all times during the period beginning with the date of
grant of any such Option and ending on the date which is three (3) months before
the date of exercise of any such Option. The Committee may impose additional
conditions upon the right of an Optionee to exercise any Option granted
hereunder as long as such conditions are not inconsistent with the terms of this
Plan.
(e) Transferability. Any Option granted pursuant to this Plan shall be
exercised during any Optionee's lifetime only by the Optionee to whom such
option is granted and shall not be assignable or transferable other than by will
or by the laws of descent and distribution.
(f) Limit on Grant. In no event shall an Optionee be granted Options to
purchase Shares in excess of twenty-five percent (25%) of the aggregate Shares
subject to this Plan as described in Section 3 hereof.
(g) Change of Control. Notwithstanding any provision set forth in the
instruments pursuant to which individual Options are granted, all outstanding
Options shall become immediately exercisable in the event of a Change of
Control.
9. Effect of Termination of Continuous Employment, Disability or Death on
Options.
(a) Termination of Continuous Employment. In the event that any Optionee's
Continuous Service to FFB or FFS shall terminate for any reason, other than
permanent and total disability (as such term is defined in Section 22(e)(3) of
the Code, as from time to time amended), death or termination for Cause, all of
any such Optionee's Options and all of any such Optionee's rights to purchase or
receive Shares pursuant thereto shall automatically terminate on the earlier of
(i) the respective expiration dates of any such Options or (ii) the date which
is three (3) months after the date of such termination of Continuous Service.
(b) Disability. In the event that any Optionee's Continuous Service to FFB
or FFS shall terminate as the result of the permanent and total disability (as
such term is defined in Section 22(e)(3) of the Code, as from time to time
amended) of such Optionee and the Optionee was entitled to exercise Options at
the date of such termination of Continuous Service, such Optionee may exercise
any Options granted to him pursuant to this Plan at any time prior to the
earlier of (i) the respective expiration dates of any such Options or (ii) the
expiration of one (1) year after the date of such termination of Continuous
Service.
(c) Death. In the event of the death of any Optionee on a date on which
the Optionee was entitled to exercise any such Options, any Options granted to
any such Optionee may be exercised by the person or persons to whom the
Optionee's rights under any such Options pass by will or by the laws of descent
and distribution (including the Optionee's estate during the period of
administration) at any time prior to the earlier of (i) the respective
expiration dates of any such Options or (ii) the expiration of six (6) months
after the date of death of such Optionee (or such later period not to exceed one
(1) year which the Committee may permit, in its discretion).
(d) Termination for Cause. In the event an Optionee's service to FFB or
FFS is terminated for Cause, any Options granted to such Optionee which are
outstanding on the date of termination shall be forfeited.
(e) Termination of Options. To the extent that any Option granted under
this Plan to any Optionee whose Continuous Service to FFB or FFS terminates
shall not have been exercised within the applicable period set forth in this
Section 9, any such Option, and all rights to purchase or receive Shares
pursuant thereto, shall terminate on the last date of the applicable period.
10. Time of Granting Options. The date of grant of an Option under this
Plan shall be the applicable date under Section 7 of this Plan. Notice of the
grant shall be given to each Optionee to whom an Option is so granted within a
reasonable time after the date of such grant.
11. Effective Date. The Effective Date of this Plan shall be the date on
which this Plan is adopted by the Board.
12. Approval by Shareholders. This Plan shall be approved by the
shareholders of FFB within twelve (12) months before or after the Effective
Date.
13. Amendment and Termination of this Plan.
(a) Amendment and Termination of this Plan by the Board. The Board may
alter, suspend or discontinue this Plan, except that no action of the Board may
increase (other than as provided in Section 3(b) hereof) the maximum number of
Shares subject to Options granted under this Plan, materially increase the
benefits accruing to Optionees under this Plan or materially modify the
requirements for eligibility for participation in this Plan, unless such action
of the Board shall be approved or ratified by the shareholders of FFB.
(b) Change in Applicable Law. Notwithstanding any other provision
contained in this Plan, in the event of a change in any federal or state law,
rule or regulation which would make the exercise of all or part of any
previously granted Option unlawful or subject FFB to any penalty, the Committee
may restrict any such exercise without the consent of the Optionee or other
holder thereof in order to comply with any such law, rule or regulation or to
avoid any such penalty.
14. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to any Option granted under this Plan unless the issuance and delivery
of such Shares shall comply with all relevant provisions of law, including,
without limitation, the Securities Act of 1933, as amended, the rules and
regulations promulgated thereunder, any applicable state securities law and the
requirements of any stock exchange or quotation system upon which the Shares may
then be listed or quoted. As a condition to the exercise of an Option, FFB may
require the person exercising the Option to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal and state securities law.
15. Reservation of Shares. During the term of this Plan, FFB will reserve
and keep available a number of Shares sufficient to satisfy the requirements of
this Plan.
16. Unsecured Obligation. No Optionee under this Plan shall have any
interest in any fund or special asset of FFB by reason of this Plan or the grant
of any Option to such Optionee under this Plan. No trust fund shall be created
in connection with this Plan or any grant of any Option hereunder, and there
shall be no required funding of amounts which may become payable to any
Optionee.
17. Governing Law. This Plan shall be governed by and construed in
accordance with the laws of the State of Ohio, except to the extent that federal
law shall be deemed to apply.
18. Compliance with Rule 16b-3. With respect to persons subject to Section
16 of the Exchange Act, transactions under this Plan are intended to comply with
all applicable conditions of Rule 16b-3 promulgated thereunder or any successor
rule or regulation thereto as in effect from time to time. To the extent any
provision of this Plan or action by the Committee fails to so comply, it shall
be deemed null and void, to the extent permitted by law and deemed advisable by
the Committee.
19. Tax Withholding. FFB shall have the right to deduct from any
settlement, including the delivery or vesting of Shares, made under this Plan
any federal, state or local taxes of any kind required by law to be withheld
with respect to such payments or to take such other action as may be necessary
in the opinion of FFB to satisfy all obligations for the payment of such taxes.
If Shares are used to satisfy tax withholding, such Shares shall be valued based
on the Fair Market Value when the tax withholding is required.
20. No Right to Employment. Neither the adoption of this Plan nor the
granting of any Option shall confer upon any employee of FFB or FFS any right to
continued employment with FFB or FFS, as the case may be, nor shall it interfere
in any way with the right of FFB or FFS to terminate the employment of any of
its employees at any time, with or without cause.
*** PROXY CARD ***
REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF FIRST
FEDERAL BANCORP, INC.
THE FIRST FEDERAL BANCORP, INC.
ANNUAL MEETING OF SHAREHOLDERS
FEBRUARY 19, 1997
The undersigned shareholder of First Federal Bancorp, Inc. ("Bancorp")
hereby constitutes and appoints John C. Matesich III, Don R. Parkhill and Larry
W. Snode, or any one of them, the Proxy or Proxies of the undersigned with full
power of substitution and resubstitution, to vote at the Annual Meeting of
Shareholders of Bancorp to be held at the Holiday Inn, 4645 East Pike,
Zanesville, Ohio, on February 19, 1997, at 2:00 p.m. (the "Annual Meeting"), all
of the shares of Bancorp which the undersigned is entitled to vote at the Annual
Meeting, or at any adjournment thereof, on each of the following proposals, all
of which are described in the accompanying Proxy Statement:
1. To re-elect four directors of Bancorp for terms expiring in 1999;
[ ] FOR all nominees listed below [ ] WITHHOLD authority to vote for
(except as marked to the all nominees listed below:
contrary below):
Ward D. Coffman, III
Robert D. Goodrich, II
Patrick L. Hennessey
Connie Ayres LaPlante
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below.)
- --------------------------------------------------------------------------------
2. To approve the First Federal Bancorp, Inc., 1997 Performance Stock Option
Plan for Senior Executive Officers and Outside Directors; and
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To ratify the selection of Crowe, Chizek and Company as the auditors of
Bancorp for the current fiscal year; and
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
IMPORTANT: Please sign and date this Proxy on the reverse side.
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. Unless otherwise specified, the shares will be
voted FOR proposals 1, 2 and 3.
All Proxies previously given by the undersigned are hereby revoked. Receipt of
the Notice of the Annual Meeting of Shareholders of Bancorp and of the
accompanying Proxy Statement is hereby acknowledged.
Please sign exactly as your name appears on your Stock Certificates(s).
Executors, Administrators, Trustees, Guardians, Attorneys and Agents should give
their full titles.
- ------------------------------------ ------------------------------------
Signature Signature
- ------------------------------------ ------------------------------------
Print or Type Name Print or Type Name
Date: ------------------------------ Date:-------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF BANCORP. PLEASE
DATE, SIGN AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. NO POSTAGE IS
REQUIRED FOR MAILING IN THE U.S.A.
EXHIBIT 99.2
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
a "safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. First Federal Bancorp,
Inc. ("Bancorp") desires to take advantage of the "safe harbor" provisions of
the Act. Certain information, particularly information regarding future economic
performance and finances and plans and objectives of management, contained or
incorporated by reference in Bancorp's Annual Report on Form 10-KSB for fiscal
year 1996 is forward-looking. In some cases, information regarding certain
important factors that could cause actual results of operations or outcomes of
other events to differ materially from any such forward-looking statement appear
together with such statement. In addition, forward-looking statements are
subject to other risks and uncertainties affecting the financial institutions
industry, including, but not limited to, the following:
Interest Rate Risk
Bancorp's operating results are dependent to a significant degree on its
net interest income, which is the difference between interest income from loans,
investments and other interest-earning assets and interest expense on deposits,
borrowings and other interest-bearing liabilities. The interest income and
interest expense of Bancorp change as the interest rates on interest-earning
assets and interest-bearing liabilities change. Interest rates may change
because of general economic conditions, the policies of various regulatory
authorities and other factors beyond Bancorp's control. In a rising interest
rate environment, loans tend to prepay slowly and new loans at higher rates
increase slowly, while interest paid on deposits increases rapidly because the
terms to maturity of deposits tend to be shorter than the terms to maturity or
prepayment of loans. Such differences in the adjustment of interest rates on
assets and liabilities may negatively affect Bancorp's income.
Possible Inadequacy of the Allowance for Loan Losses
Bancorp maintains an allowance for loan losses based upon a number of
relevant factors, including, but not limited to, trends in the level of
nonperforming assets and classified loans, current and anticipated economic
conditions in the primary lending area, past loss experience, possible losses
arising from specific problem loans and changes in the composition of the loan
portfolio. While the Board of Directors of Bancorp believes that it uses the
best information available to determine the allowance for loan losses,
unforeseen market conditions could result in material adjustments, and net
earnings could be significantly adversely affected if circumstances differ
substantially from the assumptions used in making the final determination.
Loans not secured by one- to four-family residential real estate are
generally considered to involve greater risk of loss than loans secured by one-
to four-family residential real estate due, in part, to the effects of general
economic conditions. The repayment of multifamily residential and nonresidential
real estate loans generally depends upon the cash flow from the operation of the
property, which may be negatively affected by national and local economic
conditions. Construction loans may also be negatively affected by such economic
conditions, particularly loans made to developers who do not have a buyer for a
property before the loan is made. The risk of default on consumer loans
increases during periods of recession, high unemployment and other adverse
economic conditions. When consumers have trouble paying their bills, they are
more likely to pay mortgage loans than consumer loans. In addition, the
collateral securing such loans, if any, may decrease in value more rapidly than
the outstanding balance of the loan.
Competition
First Federal Savings Bank of Eastern Ohio ("First Federal") competes for
deposits with other savings associations, commercial banks and credit unions and
issuers of commercial paper and other securities, such as shares in money market
mutual funds. The primary factors in competing for deposits are interest rates
and convenience of office location. In making loans, First Federal competes with
other savings associations, commercial banks, consumer finance companies, credit
unions, leasing companies, mortgage companies and other lenders. Competition is
affected by, among other things, the general availability of lendable funds,
general and local economic conditions, current interest rate levels and other
factors which are not readily predictable. The size of financial institutions
competing with First Federal is likely to increase as a result of changes in
statutes and regulations eliminating various restrictions on interstate and
inter-industry branching and acquisitions. Such increased competition may have
an adverse effect upon Bancorp.
Legislation and Regulation that may Adversely Affect Bancorp's Earnings
First Federal is subject to extensive regulation by the Office of Thrift
Supervision (the "OTS") and the Federal Deposit Insurance Corporation (the
"FDIC") and is periodically examined by such regulatory agencies to test
compliance with various regulatory requirements. As a savings and loan holding
company, Bancorp is also subject to regulation and examination by the OTS. Such
supervision and regulation of First Federal and Bancorp are intended primarily
for the protection of depositors and not for the maximization of shareholder
value and may affect the ability of the company to engage in various business
activities. The assessments, filing fees and other costs associated with
reports, examinations and other regulatory matters are significant and may have
an adverse effect on Bancorp's net earnings.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance of members of the Bank Insurance Fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF"). The FDIC has established a
risk-based assessment system for both SAIF and BIF members. Under such system,
assessments may vary depending on the risk the institution poses to its deposit
insurance fund. Such risk level is determined by reference to the institution's
capital level and the FDIC's level of supervisory concern about the institution.
The recapitalization plan also provides for the merger of the SAIF and BIF
effective January 1, 1999, assuming there are no savings associations under
federal law. Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and the separate federal regulation of
thrifts. As a result, First Federal would have to convert to a different
financial institution charter. In addition, First Federal would be regulated
under federal law as a bank and would, therefore, become subject to the more
restrictive activity limitations imposed on national banks. Moreover, Bancorp
might become subject to more restrictive holding company requirements, including
activity limits and capital requirements similar to those imposed on First
Federal. Bancorp cannot predict the impact of the conversion of First Federal
to, or regulation of Federal as, a bank until the legislation requiring such
change is enacted.
