FORM 10-QSB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from ____________ to ____________
Commission File No. 0-20380
---------
FIRST FEDERAL BANCORP, INC.
- -------------------------------------------------------------------------------
(Exact name of small business issuer 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
- --------------------------------------- ------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (614) 453-0606
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of July 31, 1997, the latest practicable date, 1,571,716 shares of the
registrant's common stock, no par value, were issued and outstanding.
Page 1 of 13 Pages
<PAGE> 1
FIRST FEDERAL BANCORP, INC.
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II OTHER INFORMATION 12
SIGNATURES 13
<PAGE> 2
PART I
------
FINANCIAL INFORMATION
---------------------
First Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
At June 30 At September 30
1997 1996
------------- ---------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 7,469,955 $ 4,986,988
Overnight deposits 2,675,000 3,175,000
--------------------------------
Cash and cash equivalents $ 10,144,955 $ 8,161,988
Investment securities held to maturity (Fair value - $6,501,000 in
6/97 and $4,546,000 in 9/96) 6,499,809 4,548,069
Mortgage-backed securities held to maturity (Fair value - $1,522,000
in 6/97 and $1,658,000 in 9/96) 1,508,303 1,661,018
Loans receivable, net 171,242,115 160,297,702
Premises and equipment, net 7,387,393 6,553,874
Accrued interest receivable and other assets 4,479,194 3,244,605
--------------------------------
Total Assets $ 201,261,769 $ 184,467,256
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 129,073,617 $ 130,071,616
Borrowed funds 55,445,000 37,970,000
Advances from borrowers for taxes and insurance 213,306 540,734
Accrued expenses and other liabilities 1,337,669 1,887,057
--------------------------------
Total Liabilities $ 186,069,592 $ 170,469,407
--------------------------------
Stockholders' Equity
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, 1,650,100
shares issued $ 3,656,323 $ 3,656,323
Retained earnings 12,050,249 10,876,921
Treasury shares, 78,384 shares (514,395) (535,395)
--------------------------------
Total Stockholders' Equity $ 15,192,177 $ 13,997,849
--------------------------------
Total Liabilities and Stockholders' Equity $ 201,261,769 $ 184,467,256
================================
</TABLE>
See Notes to the Consolidated Financial Statements.
<PAGE> 3
First Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 3,674,303 $ 3,300,185 $ 10,550,492 $ 9,741,523
Interest on mortgage-backed securities 27,067 8,063 86,039 73,649
Interest on investment securities 67,906 58,698 188,576 192,121
Interest on other interest earning investments 45,180 23,499 130,300 87,659
--------------------------------------------------------
Total Interest Income 3,814,456 3,390,445 10,955,407 10,094,952
--------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,283,796 1,355,745 3,825,759 4,083,331
Interest on borrowed money 762,019 383,333 2,045,193 1,205,561
--------------------------------------------------------
Total Interest Expense 2,045,815 1,739,078 5,870,952 5,288,892
--------------------------------------------------------
Net Interest Income 1,768,641 1,651,367 5,084,455 4,806,060
--------------------------------------------------------
Provision for Loan Losses 2,206 (17,305) 162,296 28,716
Net Interest Income After Provision for Loan Losses 1,766,435 1,668,672 4,922,159 4,777,344
--------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 78,495 81,494 229,129 236,397
Gain on sale of loans 14,481 13,883 39,392 39,304
Dividends on FHLB stock 46,480 29,507 125,778 87,302
Other operating income 217,917 115,113 421,652 303,789
--------------------------------------------------------
Total Noninterest Income 357,373 239,997 815,951 666,792
--------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 496,177 436,779 1,506,802 1,430,525
Occupancy and equipment expense 200,330 135,335 548,876 376,002
Deposit insurance expense 34,144 87,855 139,999 259,331
Data processing expense 78,223 75,065 245,831 221,681
Advertising 86,303 52,953 210,587 139,700
Ohio franchise taxes 49,505 46,116 143,652 133,818
Other operating expenses 275,015 206,717 750,175 608,402
--------------------------------------------------------
Total Noninterest Expenses 1,219,697 1,040,820 3,545,922 3,169,459
--------------------------------------------------------
Income Before Income Taxes 904,111 867,849 2,192,188 2,274,677
--------------------------------------------------------
Provision for Income Taxes 295,905 287,925 724,253 755,972
--------------------------------------------------------
Net Income $ 608,206 $ 579,924 $ 1,467,935 $ 1,518,705
========================================================
EARNINGS PER COMMON & COMMON EQUIVALENT SHARES
Primary $ .35 $ .34 $ .85 $ .90
--------------------------------------------------------
Fully diluted $ .35 $ .34 $ .85 $ .89
--------------------------------------------------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
Primary 1,725,561 1,704,200 1,718,024 1,693,516
--------------------------------------------------------
Fully diluted 1,726,382 1,703,124 1,724,909 1,702,980
--------------------------------------------------------
DIVIDENDS DECLARED PER SHARE $ .06 $ .055 $ .18 $ .155
--------------------------------------------------------
</TABLE>
<PAGE> 4
First Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 30
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,467,936 $ 1,518,705
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 162,296 28,715
Depreciation 339,584 183,379
Federal Home Loan Bank stock dividends (125,600) (87,100)
Amortization of net premiums (discounts) on investment
securities (57,914) 15,597
Mortgage loans originated for sale (3,511,434) (5,575,692)
Proceeds from sale of mortgage loans 3,537,985 5,205,877
Change in other assets and other liabilities (895,378) (176,330)
------------------------------
Net Cash Provided by Operating Activities 917,475 1,113,151
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 4,760,188 3,014,249
Purchases of investment securities/FHLB stock (7,417,014) (2,724,048)
Loans originated, net of principal repayments (11,251,905) (3,872,138)
Principal collected on mortgage-backed securities 152,715 174,018
Purchases of premises and equipment (1,173,103) (2,230,543)
Proceeds from sales of real estate and other chattel owned 110,701 57,975
------------------------------
Net Cash Used for Investing Activities (14,818,418) (5,580,487)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposit accounts (997,999) 1,159,538
Net change in advance payments by borrowers for taxes and
insurance (327,428) (24,224)
Net change in borrowed funds 17,475,000 3,940,000
Dividends paid (274,963) (243,213)
Proceeds from exercise of options 9,300 1,300
------------------------------
Net Cash Provided by Financing Activities 15,883,910 4,833,401
------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,982,967 366,065
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,161,988 6,335,583
------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,144,955 $ 6,701,648
==============================
</TABLE>
<PAGE> 5
FIRST FEDERAL BANCORP, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
---------------------
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. The Form 10-QSB does
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. Only material changes
in financial condition and results of operations are discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
In the opinion of management, the condensed Consolidated Financial Statements
contain all adjustments necessary to present fairly the financial condition of
First Federal Bancorp, Inc. ("Bancorp"), as of June 30, 1997, and September 30,
1996, and the results of its operations for the three and nine months ended
June 30, 1997, and 1996, and its cash flow for the nine months ended June, 1997
and 1996. The results of operations for the interim periods reported herein are
not necessarily indicative of results of operations to be expected for the
entire year.
2. Commitments
-----------
Outstanding commitments to originate mortgage loans and to sell mortgage loans
were $1,432,555 and $180,296 respectively, at June 30, 1997.
3. 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.
4. 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.
Statement of Financial Accounting Standards ("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. The Savings Bank had no loans meeting the definition of impaired
during the quarter ended June 30, 1997.
<PAGE> 6
5. 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.
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- -------
First Federal Bancorp, Inc. ("Bancorp"), is a savings and loan holding company
that wholly owns First Federal Savings Bank of Eastern Ohio (the "Savings
Bank"). The Savings Bank is engaged in the savings and loan business primarily
in Central and Eastern Ohio. The Savings Bank is a member of the Federal Home
Loan Bank ("FHLB") of Cincinnati, and the accounts in the Savings Bank are
insured up to the applicable limits by the Federal Deposit Insurance
Corporation in the Savings Association Insurance Fund ("SAIF").
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. See Exhibit 99.2 hereto, which is incorporated herein by reference.
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; and
3. Legislative changes with respect to the federal thrift charter.
Changes in Financial Condition from September 30, 1996, to June 30, 1997
- ------------------------------------------------------------------------
Total consolidated assets of Bancorp increased by $16.8 million, or 9.10%, from
$184.5 million at September 30, 1996, to $201.3 million at June 30, 1997. The
increase is due to a $10.9 million increase in loans receivable, a $2.0 million
increase in cash and cash equivalents, a $1.9 million increase in investment
securities, an $834,000 increase in premises and equipment, and a $1.2 million
increase in accrued interest receivable. The increase in premises and equipment
is due to the $4.0 million renovation and construction project at the Main
Office, which was completed in November 1996. The increase in accrued interest
receivable is due primarily to the increase in FHLB stock of $889,000.
Total liquidity (consisting of cash and amounts due from depository
institutions, interest-bearing deposits in other banks, and investment
securities) was $16.6 million at June 30, 1997, which is an increase of $3.9
million from September 30, 1996. The regulatory liquidity of the Savings Bank
was 7.55% at June 30, 1997, which was in excess of the minimum regulatory
requirement of 5%. Funds are available through FHLB advances to meet the
Savings Bank's liquidity requirement if necessary.
The loans receivable balance increased $10.9 million for the nine-month period
as the anticipated steady mortgage and consumer loan volume in the Savings
Bank's market area continued.
As of June 30, 1997, the Savings Bank had borrowed funds from the FHLB in the
amount of $55.4 million at a weighted average rate of 6.43%. FHLB advances
increased $17.5 million, or 46%, from $38 million at September 30, 1996.
Deposits decreased by $1 million, or .76%, from $130.1 million at September 30,
1996, to $129.1 million at June 30, 1997. Management believes that the Savings
Bank will experience a slight increase in deposits during the current fiscal
year in spite of the decrease during the nine months. As the result of the
decrease in the SAIF premium cost, the Savings Bank can afford to pay
depositors a slightly higher rate while managing the cost of funds. FHLB
advances have increased in cost compared to deposits of a similar term. The
Savings Bank therefore plans to become more aggressive in promoting deposit
products. No assurance can be provided, however, that deposits will grow.
Deposit levels are affected by national, as well as local, interest rates and
other national and local economic circumstances.
The Savings Bank is subject to regulatory capital requirements established by
the Office of Thrift Supervision ("OTS"). The Savings Bank's capital ratios
were as follows at June 30, 1997.
<PAGE> 8
<TABLE>
<CAPTION>
Amount Percent of
(In Thousands) Assets
-------------- ----------
<S> <C> <C>
Actual Tangible Capital $ 13,508 6.74%
Required Tangible Capital 3,007 1.50%
-----------------------
Excess Tangible Capital $ 10,501 5.24%
Actual Core Capital $ 13,508 6.74%
Required Core Capital 6,015 3.00%
-----------------------
Excess Core Capital $ 7,493 3.74%
Actual Risk Based Capital $ 14,801 11.44%
Required Risk Based Capital 10,350 8.00%
-----------------------
Excess Risk Based Capital $ 4,451 3.44%
</TABLE>
Management is not aware of any proposed regulations or recommendations by the
OTS that, if implemented, would have a material effect upon the Savings Bank's
capital.
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.
Legislation to recapitalize the SAIF and to eliminate the significant premium
disparity between the BIF and the SAIF became effective September 30, 1996.
Pursuant to the recapitalization plan, 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 has increased BIF
assessments for healthy banks to $.013 per $100 of deposits in 1997. SAIF
assessments for healthy savings associations in 1997 are $.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 regulation
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. A two-year delay is permitted for
institutions meeting a residential mortgage loan origination test. At September
30, 1996, First Federal had 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.
Comparison of Operating Results for the Three- and Nine-Month Periods Ended
June 30, 1997, and 1996
- ---------------------------------------------------------------------------
Net interest income before provision for loan losses increased $117,000 for the
three-month period and $278,000 for the nine-month period. The net increase is
a result of the increases in total interest income exceeding increases in total
interest expense. Total interest income increased by $424,000 for the
three-month period and $860,000 for the nine-month period ended June 30, 1997,
compared to the same period in 1996. The increases are primarily due to an
increase in the interest rate earned on mortgage loans and an increase in loans
receivable as the result of the stable loan market. The majority of the loans
in the Savings Bank's portfolio are adjustable-rate mortgage loans whose
interest rates fluctuate with market interest rates.
<PAGE> 9
Interest expense increased by $307,000 for the three-month period and $582,000
for the nine-month period ended June 30, 1997, as the result of the increases
in borrowings at the Federal Home Loan Bank due to a decline in savings
deposits and the increased rate paid for funds. The weighted average rate on
the FHLB borrowings is 6.43%, which is higher than the weighted average rate of
4.05% that was paid on savings deposits.
Nonperforming and Delinquent Loans and Allowance for Loan Losses
- ----------------------------------------------------------------
Total nonaccrual loans and accruing loans that are 90 days past due were
$562,000 at June 30, 1997, which represents .33% of total loans. This was an
increase of $107,000 from June 30, 1996.
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.
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
$1,739,000 at June 30, 1997, compared to $1,550,000 at June 30, 1996. During
the nine-month period ended June 30, 1997, the Savings Bank recorded
charge-offs of $73,000 and net recoveries of $39,000, compared to zero
charge-offs and net recoveries of $22,000 during the same period of 1996. The
provisions for loan losses during the nine-month periods ended June 30, 1997,
and 1996, were $162,000 and $29,000 respectively.
The Savings Bank classified no loans meeting the definition of impaired during
the quarter ended June 30, 1997.
The Savings Bank reviews on a monthly basis the allowance for loan losses. The
review of loans to determine the appropriate loan loss provision includes
consideration 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 appropriate 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.
Noninterest Income and Expense
- ------------------------------
The federal income tax provision increased $8,000 for the three-month period
due to increased net income and decreased $32,000 for the nine-month period
ended June 30, 1997, due to lower net income for the period.
Total noninterest income increased $117,000 for the comparative three-month
periods and $149,000 for the comparative nine-month periods ended June 30,
1997, and 1996. The increase for the comparative three- and nine-month periods
was due to an increase in dividends on FHLB stock of $17,000 for the
comparative three-month periods and $38,000 for the comparative nine-month
periods, due to the increase in FHLB stock held, and an increase in other
income of $103,000 for the comparative three-month periods and $118,000 for the
comparative nine-month periods ended June 30, 1997, and 1996, due to the sale
of land for $115,000 that was held in the subsidiary, Firstfedco Agency, Inc,
at a zero balance. The land had been written off in 1992.
Total noninterest expenses increased $179,000 for the comparative three-month
periods and $376,000 for the comparative nine-month periods ended June 30,
1997, and 1996. Salaries and benefits increased $59,000 for the three-month
comparative periods and $76,000 for the comparative nine-month periods. The
salaries and benefits increase is due to the increase in staff for the
comparative three- and nine-month periods ended June 30, 1997. The data
processing expense increased $3,200 and $24,000 for the three- and nine-month
periods due to increased use of the service bureau products. Occupancy expenses
increased $65,000 for the comparative three-month periods and $173,000 for the
comparative nine-month periods ended June 30, 1997, and 1996, due to increased
depreciation of $62,000 for the three-month comparative period and $154,000 for
the comparative nine-month period as a result of the completion of the Main
Office construction project. FDIC insurance premiums decreased $54,000 for the
comparative three-month periods and $119,000 for the comparative nine-month
periods ended June 30, 1997, due to the reduction in the SAIF premium and a
reduction in the total deposit balances. Other operating expenses increased
$68,000 and $142,000 for the three- and nine-month periods due to $20,000 in
start-up costs for the Debit Card Program and $12,000 for an increase in
auditing and consulting fees related to the addition of Money Concepts, our
third-party provider of investments and financial planning.
Advertising increased $33,000 for the comparative three-month periods and
$71,000 for the comparative nine-month periods ended June 30, 1997, and 1996,
due to the promotion of the new Main Office construction.
<PAGE> 10
Impact of New Accounting Standards
- ----------------------------------
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 was adopted by First Federal on 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 SFAS No. 122 did not
have a significant impact on First Federal's financial statements.
On October 1, 1996, First Federal adopted 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.
On March 3, 1997, FASB issued SFAS No. 128, "Earnings Per Share," which is
effective for financial statements issued after December 15, 1997. SFAS No. 128
simplifies the calculation of earnings per share by replacing primary EPS with
basis EPS. First Federal expects SFAS No. 128 to have little impact on its
earnings per share calculations in future years. The Statement will not apply
to First Federal until the first quarter of fiscal year 1998.
<PAGE> 11
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
Not applicable
ITEM 2. CHANGES IN SECURITIES
---------------------
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable
ITEM 5. OTHER INFORMATION
-----------------
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Exhibit 3.1 Articles of Incorporation of First Federal Bancorp,
Inc. (The Articles of Incorporation of First Federal
Bancorp, 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.)
Exhibit 3.2 Amendment to the Articles of Incorporation of First
Federal Bancorp, Inc. (The Amendment to the Articles of
Incorporation of Bancorp filed as Exhibit 3.2 to
Bancorp's 10-K for the fiscal year ended September 30,
1992, filed with the SEC on December 29, 1992 (the
"1992 10-K") is incorporated herein by reference.)
Exhibit 3.3 Code of Regulations of First Federal Bancorp, Inc. (The
Code of Regulations of Bancorp filed as Exhibit 3.2 to
Bancorp's S-1 filed with the SEC on March 16, 1992, is
incorporated herein by reference.)
Exhibit 3.4 Amendment to the Code of Regulations of First Federal
Bancorp, Inc. (The Amendment to the code of Regulations
of Bancorp filed as Exhibit 3.4 to the 1992 10-K is
incorporated herein by reference.)
Exhibit 10.9 First Federal Bancorp, Inc., 1997 Performance Stock
Option Plan for Senior Executive Officers and Outside
Directors (Incorporated by reference to Proxy Statement
for 1997 Annual Meeting filed on January 10, 1997.)
Exhibit 27 Financial Data Schedule
Exhibit 99.2 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995
No reports on Form 8-K were filed during the quarter for which this
report is filed.
<PAGE> 12
SIGNATURES
Pursuant to the requirements 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.
Date: August 13, 1997 By: /s/ J. William Plummer
---------------------------------
J. William Plummer
President
Date: August 13, 1997 By: /s/ Connie Ayres LaPlante
---------------------------------
Connie Ayres LaPlante
Chief Financial Officer
<PAGE> 13
<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 QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-QSB.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 7,470
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,675
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 8,008
<INVESTMENTS-MARKET> 8,023
<LOANS> 171,242
<ALLOWANCE> 1,739
<TOTAL-ASSETS> 201,262
<DEPOSITS> 129,074
<SHORT-TERM> 29,445
<LIABILITIES-OTHER> 1,551
<LONG-TERM> 26,000
<COMMON> 3,656
0
0
<OTHER-SE> 11,536
<TOTAL-LIABILITIES-AND-EQUITY> 201,262
<INTEREST-LOAN> 10,550
<INTEREST-INVEST> 275
<INTEREST-OTHER> 130
<INTEREST-TOTAL> 10,955
<INTEREST-DEPOSIT> 3,826
<INTEREST-EXPENSE> 2,045
<INTEREST-INCOME-NET> 5,084
<LOAN-LOSSES> 162
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,546
<INCOME-PRETAX> 2,192
<INCOME-PRE-EXTRAORDINARY> 1,468
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,468
<EPS-PRIMARY> .85
<EPS-DILUTED> .85
<YIELD-ACTUAL> 3.84
<LOANS-NON> 451
<LOANS-PAST> 111
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,611
<CHARGE-OFFS> 73
<RECOVERIES> 39
<ALLOWANCE-CLOSE> 1,739
<ALLOWANCE-DOMESTIC> 1,289
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 450
</TABLE>
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 Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1997, 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.
