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, 1997
------------------
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
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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)
Issuer's telephone number, including area code:
(740) 453-0606
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Securities registered under Section 12(b) of the Exchange Act:
None
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Securities registered under Section 12(g) of the Exchange Act:
Common shares, 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 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
--- ---
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
$15,369,241.
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 30, 1997,
was $23,796,038.
1,575,116 of the registrant's common shares were issued and
outstanding on November 30, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
The following sections of the definitive Proxy Statement for the 1998
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 in 1992. 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 utilizes Money Concepts as a third-party provider of
investments and financial planning for its customers.
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.
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 $174.0 million at September
30, 1997, and constituted 85.43% 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,
-----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
of total of total of total of total of total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Type of Loan:
- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One-to-four
family $102,723 58.04% $ 99,496 59.57% $ 97,347 62.55% $ 90,092 62.96% $ 86,282 66.31%
Multifamily
(over 4
units) 9,692 5.47 9,176 5.49 8,265 5.31 9,179 6.41 7,642 5.87
Construction 3,082 1.74 6,582 3.94 3,601 2.31 5,485 3.83 3,168 2.43
Nonresidential
real estate 9,799 5.54 8,505 5.09 7,285 4.68 5,699 3.98 6,324 4.86
Consumer Loans
Automobile 36,267 20.49 30,376 18.19 26,767 17.20 21,950 15.34 18,135 13.94
Home equity 4,652 2.63 3,767 2.25 4,136 2.66 3,466 2.42 2,912 2.24
Home
improvement 464 .26 662 .40 818 .52 713 .50 601 .46
Deposit
account 422 .24 484 .29 298 .19 287 .20 323 .25
Education - - - - 31 .02 1,061 .74 581 .45
Other secured 7,237 4.09 5,799 3.47 5,210 3.35 4,280 2.99 3,644 2.80
Unsecured 517 .29 515 .31 339 .22 252 .18 259 .20
Commercial 2,137 1.21 1,663 1.00 1,544 .99 648 .45 246 .19
---------------------------------------------------------------------------------------------------------
Total loans $176,992 100.00% $167,025 100.00% $155,641 100.00% $143,112 100.00% $130,117 100.00%
Less:
Undisbursed
loans
in process 1,374 5,105 2,274 3,207 1,915
Net deferred
origination
fees
(costs) and
amortized
discounts (225) 11 124 267 232
Allowance
for loan
losses 1,816 1,611 1,499 1,021 821
------------------------------------------------------------------------------------------------
Total
loans - net $174,027 $160,298 $151,744 $138,617 $127,149
================================================================================================
</TABLE>
Loan Maturity Schedule. The following table sets forth certain
information at September 30, 1997, 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,
------------------------------------------------------------------------------------
2002 to 2007 to 2012 and
1998 1999 2000 2001 2006 2011 thereafter Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
- -----------------
One-to-four family
residential real estate $ 73 $ 50 $ 77 $ 455 $ 1,202 $ 1,277 $ 937 $ 4,071
Multifamily (over 4 units) - 21 30 192 646 - - 889
Nonresidential real estate 700 22 98 341 1,641 291 - 3,093
Consumer and other 4,291 3,579 7,036 27,798 3,772 - - 46,476
------------------------------------------------------------------------------------
Total Fixed Rate $5,064 $3,672 $7,241 $28,786 $ 7,261 $ 1,568 $ 937 $ 54,529
====================================================================================
Adjustable-Rate Loans:
- ----------------------
One-to-four family
residential real estate $1,557 $ 52 $ 144 $ 1,320 $ 8,006 $18,553 $72,102 $101,734
Multifamily (over 4 units) - - - 26 345 2,369 6,063 8,803
Nonresidential real estate 73 65 41 37 1,204 1,313 3,973 6,706
Consumer and other 1,570 656 739 2,255 - - - 5,220
------------------------------------------------------------------------------------
Total Adjustable- Rate $3,200 $ 773 $ 924 $ 3,638 $ 9,555 $22,235 $82,138 $122,463
====================================================================================
All Loans:
- ----------
One-to-four family
residential real estate $1,630 $ 102 $ 221 $ 1,775 $ 9,208 $19,830 $73,039 $105,805
Multifamily (over 4 units) - 21 30 218 991 2,369 6,063 9,692
Nonresidential real estate 773 87 139 378 2,845 1,604 3,973 9,799
Consumer and other 5,861 4,235 7,775 30,053 3,772 - - 51,696
------------------------------------------------------------------------------------
Total All Loans $8,264 $4,445 $8,165 $32,424 $16,816 $23,803 $83,075 $176,992
====================================================================================
</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. Fixed-rate 1-4 family residential real estate loans are
offered with terms of up to 30 years.
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"), have been
originated for sale. A majority of the fixed-rate residential real estate
loans in First Federal's loan portfolio at September 30, 1997, were
originated prior to 1981. See "Loan Originations, Purchases and Sales."
First Federal anticipates originating up to $7.5 million in 15-year fixed-
rate mortgages for First Federal's loan portfolio. No assurance can be
provided, however, that First Federal will be able to originate such loans.
Loan demand is affected by competition, interest rates, general economic
conditions, and the availability of funds for lending. See Exhibit 99.2
hereto, "Safe Harbor Under the Private Securities Litigation Reform Act of
1995," which is incorporated herein by reference.
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 $105.3 million at September 30, 1997, and
represented 59.47% of total loans. There were no construction loans
delinquent at September 30, 1997. 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, 1997, loans secured by multifamily properties totaled
approximately $9.7 million, or 5.47% of total loans. There were no
multifamily real estate loans delinquent or included in classified assets at
September 30, 1997.
Construction Loans. First Federal offers loans to owner-occupants for
the construction of single-family homes. Such loans are offered with either
adjustable or fixed 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, 1997, a total of $3.1 million, or
approximately 1.74%, 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 $540,000.
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, 1997, was equal
to 62.71% of total capital at such date.
At September 30, 1997, First Federal had a total of $9.8 million
invested in nonresidential real estate loans. There were no nonresidential
real estate loans delinquent at September 30, 1997. Such loans comprised
approximately 5.54% 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 1997, 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, 1997, automobile loans totaled approximately $36.3
million, or 20.49% of total loans. This is an increase from $30.4 million,
or 18.19% of total loans as of September 30, 1996. 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 $4.7 million, or 2.63% 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, 1997, First Federal had approximately $49.6 million,
or 28.00% 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 $1.2 million delinquent at September 30, 1997.
Commercial Loans. Commercial loans totaled $2.1 million. First
Federal has a new and used car floor-planning program for a local car dealer
with a balance of $1.9 million at September 30, 1997. 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 a loan
solicitor 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 $75,000 is submitted to the President and the principal lending
officer of First Federal for approval. Loans for more than $214,000 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 a loan origination agent
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. First
Federal anticipates originating up to $7.5 million of fixed-rate mortgages
to be held in First Federal's loan portfolio. Due to the low percentage of
fixed-rate loans in the loan portfolio, management believes that the
addition of up to $7.5 million in 15-year fixed-rate loans to the loan
portfolio, which it plans for fiscal year 1998, will enhance the first-year
income on loans without additional material interest-rate risk to the
portfolio. No assurance can be provided, however, that such fixed-rate
loans will be added to the portfolio. Loan demand is affected by
competition, interest rates, general economic conditions, and the
availability of funds for lending. See Exhibit 99.2 hereto, "Safe Harbor
Under the Private Securities Litigation Reform Act of 1995," which is
incorporated herein by reference.
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. In 1993, the volume of fixed-
rate mortgage loans originated by First Federal increased to such a level
that 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, 1997, First Federal's loan portfolio included
participation interests in loans having an aggregate book value of $494,000.
Loan participations account for 5.84% 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,
-----------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Loans originated:
Adjustable-rate:
----------------
<S> <C> <C> <C>
Real estate:
One-to-four family $27,087 $30,729 $18,204
Multifamily 1,022 748 274
Nonresidential 663 580 2,763
Consumer 8,123 9,358 7,557
-----------------------------
Total adjustable-rate loans $36,895 $41,415 $28,798
-----------------------------
Fixed-rate:
-----------
Real estate:
One-to-four family (1) $ 6,789 $ 7,229 $ 3,471
Multifamily - - -
Nonresidential 437 130 203
Consumer 28,993 24,071 22,215
-----------------------------
Total fixed-rate loans $36,219 $31,430 $25,889
-----------------------------
Total loans originated $73,114 $72,845 $54,687
-----------------------------
Loans sold 5,215 6,763 4,306
-----------------------------
Principal repayments (2) 57,932 54,698 37,852
-----------------------------
Total reductions 63,147 61,461 42,158
-----------------------------
Change in other items - net (3) 3,762 (2,830) 598
-----------------------------
Net increase $13,729 $ 8,554 $13,127
=============================
- --------------------
<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
$2.3 million to any one borrower at September 30, 1997. The largest amount
First Federal had outstanding to one borrower was $1.7 million. Such loan
was secured by non-residential real estate and was current at September 30,
1997. 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,
-----------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
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 $1,906 1.08% $1,831 1.10% $2,844 1.83%
60 to 89 days 172 0.10 372 0.22 129 0.08
90 or more days 399 0.22 337 0.20 442 0.28
-------------------------------------------------------------------
Total delinquent real estate loans $2,477 1.40 $2,540 1.52 $3,415 2.19
-------------------------------------------------------------------
Consumer loans delinquent for:
30 to 59 days 511 0.29 386 0.23 208 0.13
60 to 89 days 305 0.17 188 0.11 121 0.08
90 or more days 384 0.22 214 0.13 96 0.06
-------------------------------------------------------------------
Total delinquent consumer loans 1,200 0.68 788 0.47 425 0.27
-------------------------------------------------------------------
Total delinquent loans $3,677 2.08% $3,328 1.99% $3,840 2.46%
===================================================================
</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,
------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Real estate:
Residential $ 368 $ 211 $ 264 $ 415 $ 160
Nonresidential 0 0 0 0 37
Consumer 74 175 96 152 184
------------------------------------------
Total nonaccrual loans $ 442 $ 386 $ 360 $ 567 $ 381
------------------------------------------
Accruing loans which are contractually
past due 90 days or more:
Real estate:
Residential $ 111 $ 126 $ 178 $ 153 $ 302
Nonresidential 0 0 0 0 0
Consumer 0 0 0 0 0
------------------------------------------
Total accruing loans which are
90 days past due $ 111 $ 126 $ 178 $ 153 $ 302
------------------------------------------
Total nonaccrual loans and accruing
loans which are 90 days past due $ 553 $ 512 $ 538 $ 720 $ 683
==========================================
Percentage of total loans 0.31% 0.31% 0.35% 0.52% 0.54%
==========================================
Other nonperforming assets - net (1) $ 0 $ 0 $ 0 $ 0 $1,777
==========================================
- --------------------
<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, 1997, $67,554 of interest income
would have been recorded on nonaccruing loans had such loans been accruing
and $44,145 of interest income on those loans was included in net income for
the period. During the periods shown, First Federal had no restructured
loan within the meaning of SFAS No. 15.
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,
--------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Classified assets
Substandard $1,144 $1,006 $1,702
Doubtful - - -
Loss 346 414 345
--------------------------
Total classified assets $1,490 $1,420 $2,047
==========================
</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.
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,611 $1,499 $1,021 $ 821 $1,352
Charge-offs
Mortgage loans 0 0 (1) (7) (788)
Consumer loans (28) (28) (30) (89) (63)
----------------------------------------------
Total charge-offs (28) (28) (31) (96) (851)
----------------------------------------------
Recoveries
Mortgage loans 0 0 438 1 19
Consumer loans 11 9 11 104 20
----------------------------------------------
Total recoveries 11 9 449 105 39
----------------------------------------------
Net (charge-offs) recoveries (17) (19) 418 9 (812)
----------------------------------------------
Provision for loss 222 131 60 191 281
----------------------------------------------
Balance at end of period $1,816 $1,611 $1,499 $1,021 $ 821
==============================================
Ratio of net (charge-offs) recoveries to
average loans outstanding (0.01)% (0.01)% 0.28% 0.01% (0.65)%
==============================================
</TABLE>
First Federal classified no loans meeting the definition of impaired
during the years ended September 30, 1997 and 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,
----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- -------------------- -------------------- -------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
loans in loans in loans in loans in loans in
category to category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans $ 548 70.79% $ 521 74.05% $ 566 74.85% $ 518 77.18% $389 79.48%
Consumer loans 797 28.00 623 24.95 483 24.16 421 22.37 327 20.33
Commercial
loans 21 1.21 17 1.00 15 0.99 0 .45 0 .19
Unallocated 450 - 450 - 435 - 82 - 105 -
------------------------------------------------------------------------------------------------------------
Total $1,816 100.00% $1,611 100.00% $1,499 100.00% $1,021 100.00% $821 100.00%
============================================================================================================
</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, 1997, First Federal had no assets
classified "doubtful." First Federal's loan loss allowance at September 30,
1997, was considered by management to be adequate. See Exhibit 99.2, "Safe
Harbor Under the Private Securities Litigation Reform Act of 1995" attached
hereto, which is incorporated herein by reference.
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,
-------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
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>
Investment securities:
U.S. Government securities and
agency obligations $7,296 81.60% $4,321 69.59% $4,621 68.40%
Obligations of State and
political subdivisions 207 2.32 227 3.66 246 3.64
----------------------------------------------------------------
Total investment securities 7,503 83.92 4,548 73.25 4,867 72.04
----------------------------------------------------------------
Mortgage-backed securities 1,438 16.08 1,661 26.75 1,889 27.96
----------------------------------------------------------------
Total investment securities and
mortgage-backed securities $8,941 100.00% $6,209 100.00% $6,756 100.00%
================================================================
Average remaining life of
investment securities and
mortgage-backed securities 2.92 years 3.83 years 6.00 years
Adjusted weighted average
maturity of investment securities 3.7 months 1.7 months 4.7 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, 1997
----------------------------------------------------------------------------------
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 $7,296 $ - $ - $ - $7,296 $7,297
Obligation of States and
political subdivisions - - 170 37 207 207
Mortgage-backed securities - - 148 1,290 1,438 1,477
-----------------------------------------------------------------------------
Total investment securities and
mortgage-backed securities $7,296 $ - $318 $1,327 $8,941 $8,981
=============================================================================
Weighted average yield 5.79% -- 7.48% 7.00% 6.03% -
</TABLE>
Note: Yields on tax-exempt securities are adjusted on a tax-equivalent
basis.
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,
--------------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- -------------------------
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 $ 4,214 3% $ 3,978 3% $ 3,170 2%
Money market 24,299 19 22,307 17 20,266 16
Passbook and statement savings accounts 25,747 20 28,330 22 29,589 23
-------------------------------------------------------------------------------
Total transaction accounts 54,260 42 54,615 42 53,025 41
-------------------------------------------------------------------------------
Certificates of deposit:
Negotiated-rate certificates 4,587 4 5,466 4 5,385 4
Money-market certificates:
3 to 6 months 5,873 5 7,141 5 8,408 7
12 to 23 months 28,104 23 8,793 7 3,943 3
2 to 2 1/2 years 7,882 6 9,078 7 11,338 9
3 to 3 1/2 years 20,382 16 38,766 30 41,544 32
4 to 4 1/2 years 204 - 210 - 289 -
5 years and greater 4,968 4 5,633 5 4,979 4
-------------------------------------------------------------------------------
Total certificates of deposit 72,000 58 75,087 58 75,886 59
-------------------------------------------------------------------------------
Christmas club and other
noninterest-bearing accounts 375 - 370 - 356 -
-------------------------------------------------------------------------------
Total deposits $126,635 100% $130,072 100% $129,267 100%
===============================================================================
</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
-----------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Less than 6% $52,396 $63,901 $50,422
6 - 6.99% 18,362 9,719 23,695
7 - 7.99% 310 539 764
8 - 8.99% 589 581 678
Greater than 9% 343 347 327
-----------------------------
$72,000 $75,087 $75,886
=============================
</TABLE>
The following table presents the amount and remaining maturities of
time deposits at September 30, 1997:
<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 $45,887 $25,745 $ 327 $ 41 $72,000
Weighted average rate 5.43% 5.83% 6.80% 6.12% 5.58%
</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, 1997, and September 30, 1996:
<TABLE>
<CAPTION>
Maturity At September 30, 1997 At September 30, 1996
-------- --------------------- ---------------------
(Dollars in thousands)
<S> <C> <C>
Three months or less $ 3,892 $ 2,206
Over 3 months to 6 months 1,835 3,200
Over 6 months to 12 months 3,503 2,409
Over twelve months 2,891 4,021
------- -------
Total $12,121 $11,836
======= =======
</TABLE>
The following table presents First Federal's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30
-----------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $ 130,072 $ 129,267 $ 129,013
Deposits 382,506 321,320 309,913
Withdrawals (389,873) (324,469) (312,968)
Interest credited 3,930 3,954 3,309
-----------------------------------
Ending balance $ 126,635 $ 130,072 $ 129,267
===================================
Net increase (decrease) in deposits $ (3,437) $ 805 $ 254
-----------------------------------
Percent increase (decrease) in deposits (2.64)% .62% .20%
</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, 1997, 1996 and 1995, and the
average aggregate balances of FHLB advances outstanding during the years
ended September 30, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
At or for the
year ended September 30
-----------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of FHLB advances
outstanding during period $59,805 $37,970 $32,132
Average amount of FHLB advances
outstanding during period $50,260 $30,334 $27,143
Amount of FHLB advances outstanding at
end of period $59,805 $37,970 $27,600
Weighted average interest cost of FHLB
advances during period based on month-end
balances 5.75% 5.55% 6.17%
</TABLE>
First Federal had variable-rate advances with original maturities of
less than 90 days totaling $29.8 million at a 6.53% interest rate at
September 30, 1997. Fixed-rate long-term advances with a 6.34% weighted
average consisted of the following by scheduled maturity:
<TABLE>
<CAPTION>
As of September 30, 1997
------------------------
Weighted
Amount Average Rate
------ ------------
<S> <C> <C>
One year or less $ 3,000 6.22%
More than one year through 3 years $20,000 6.22%
More than 3 years through 5 years $ 2,000 6.65%
More than 5 years through 10 years $ 5,000 6.79%
</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,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on loan portfolio 8.59% 8.58% 7.97%
Weighted average yield on mortgage-backed securities 7.35 5.92 6.82
Weighted average yield on investments 5.67 5.62 5.39
Weighted average yield on all interest-earning assets 8.44 8.43 7.85
Weighted average rate paid on deposits 4.16 4.26 3.90
Weighted average rate paid on FHLB advances 5.75 5.55 6.17
Weighted average rate paid on all interest-bearing liabilities 4.62 4.51 4.31
Interest rate spread (spread between weighted average rate on all interest-
earning assets and all interest-bearing liabilities) 3.82 3.92 3.54
Net interest yield (net interest income as a percentage of average interest-
earning assets) 3.87 4.04 3.70
</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. Yields on tax-exempt assets have been computed on a
fully tax-exempt basis assuming a tax rate of 34%.
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------- -------------------------------
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) $166,185 $14,274 8.59% $153,277 $13,153 8.58% $147,451 $11,746 7.97%
Mortgage-backed securities 1,538 113 7.35 1,773 105 5.92 1,965 134 6.82
Interest-bearing deposits in
FHLB 3,047 163 5.35 2,385 121 5.07 1,993 40 2.00
Investment securities 5,196 304 5.85 4,248 252 5.93 4,037 285 7.06
-------------------- -------------------- --------------------
Total interest-earning assets $175,966 $14,854 8.44 $161,683 $13,631 8.43 $155,446 $12,205 7.85
==================== ==================== ====================
Interest-bearing liabilities:
Certificates of deposit $ 72,942 $ 3,968 5.44 $ 76,379 $ 4,223 5.53 $ 70,316 $ 3,559 5.06
Passbook accounts 27,461 670 2.44 28,721 706 2.46 30,755 757 2.46
NOW accounts 23,316 504 2.16 21,857 485 2.22 21,392 460 2.15
FHLB advances 50,260 2,888 5.75 30,334 1,685 5.55 27,143 1,676 6.17
-------------------- -------------------- --------------------
Total interest-bearing
liabilities $173,979 $ 8,030 4.62 $157,291 $ 7,099 4.51 $149,606 $ 6,452 4.31
==================== ==================== ===================
Net interest income; interest
rate spread $ 6,824 3.82 $ 6,532 3.92 $ 5,753 3.54
======= ======= =======
Net interest yield (2) 3.87 4.04 3.70
Average interest-earning
assets to average interest-
bearing liabilities 102.62% 102.79% 103.90%
- --------------------
<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%, and because the
OTS is not currently enforcing the regulation, 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, 1997, 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, 1997
----------------------
Change in Interest Rate $ Change % Change
(Basis Points) In NPV in NPV
- ----------------------- -------- --------
(Dollars in thousands)
<S> <C> <C>
+400 $(1,987) (9)%
+300 $ (654) (3)%
+200 $ 213 1%
+100 $ 439 2%
0 0 0
-100 $ (824) (4)%
-200 $(1,312) (6)%
-300 $(1,488) (7)%
-400 $(1,212) (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,
---------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Noninterest-earning assets:
REO $ 16 $ 16 $ -
Fixed assets 7,114 5,355 2,918
Other assets 3,474 2,533 2,166
---------------------------
Total noninterest-earning assets $10,604 $7,904 $5,084
===========================
Noninterest-bearing liabilities:
Noninterest-bearing NOW accounts $ 4,357 $3,945 $2,893
Other liabilities 2,269 2,561 2,078
---------------------------
Total noninterest-bearing liabilities $ 6,626 $6,506 $4,971
===========================
</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,
-------------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
--------------------------- --------------------------- ---------------------------
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 $1,106 $ 15 $1,121 $479 $928 $1,407 $1,428 $647 $2,075
Mortgage-backed securities (10) 18 8 (12) (17) (29) (16) 3 (13)
Investment securities 91 3 94 34 14 48 9 82 91
--------------------------------------------------------------------------------------------
Total interest income $1,187 $ 36 $1,223 $501 $925 $1,426 $1,421 $732 $2,153
============================================================================================
Interest expense attributable to:
Deposits $ (142) $(130) $ (272) $181 $457 $ 638 $ (128) $452 $ 324
FHLB advances 1,140 63 1,203 62 (53) 9 1,185 368 1,553
--------------------------------------------------------------------------------------------
Total interest expense $ 998 $ (67) $ 931 $243 $404 $ 647 $1,057 $820 $1,877
============================================================================================
Increase (decrease) in net
interest income $ 189 $ 103 $ 292 $258 $521 $ 779 $ 364 $(88) $ 276
============================================================================================
</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 third in deposit share with 12.95% of the
savings market as of June 30, 1996, and ranks first in residential real
estate originations for purchase of residential property with 17.21% of the
mortgage loan originations for the first nine months of the 1997 calendar
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, 1997, First Federal had 70 full-time employees and
12 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, by certain other persons who
acquire or transfer voting shares after public disclosure of the acquisition
or by certain officers of Bancorp or directors of Bancorp who are also
employees of Bancorp. The Control Share Acquisition Statute was intended,
in part, to protect shareholders of Ohio corporations from coercive tender
offers.
Takeover Bid Statute. Ohio law provides that an offeror may not make
a tender offer or request or invitation for tenders that would result in the
offeror beneficially owning more than ten percent of any class of the target
company's equity securities unless such offeror files certain information
with the Ohio Division of Securities (the "Securities Division") and
provides such information to the target company and the offerees within
Ohio. The Securities Division may suspend the continuation of the control
bid if the Securities Division determines that the offeror's filed
information does not provide full disclosure to the offerees of all material
information concerning the control bid. The statute also provides that an
offeror may not acquire any equity security of a target company within two
years of the offeror's previous acquisition of any equity security of the
same target company pursuant to a control bid unless the Ohio offerees may
sell such security to the offeror on substantially the same terms as
provided by the previous control bid. The statute does not apply to a
transaction if either the offeror or the target company is a savings and
loan holding company and the proposed transaction requires federal
regulatory approval.
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, 1997:
<TABLE>
<CAPTION>
At September 30, 1997
----------------------
Percent
Amount of assets
------ ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital $13,862 6.82%
Tangible capital requirement 3,049 1.50
-------------------
Excess $10,813 5.32%
===================
Core capital $13,862 6.82%
Core capital requirement 6,097 3.00
-------------------
Excess $ 7,765 3.82%
===================
Total capital $15,167 11.31%
Risk-based capital requirement 10,729 8.00
-------------------
Excess $ 4,438 3.31%
===================
</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. First Federal's capital at September 30, 1997, 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
maintain a specified level of investments in assets that are designated as
qualifying thrift investments ("QTIs"). 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 the QTL 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.
Under legislation effective in 1996, QTIs were expanded to include credit
card and educational loans without restriction, and the QTL Test could be
met by qualifying as a "domestic building and loan" under the Internal
Revenue Code of 1986, as amended (the "Code"). Under this test, 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 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, 1997, 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, 1997, 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
deposits). 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 to the general public or as
offered to all employees in a company-wide benefit program. Loans to
executive officers are subject to additional limitations. First Federal was
in compliance with such restrictions at September 30, 1997.
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, 1997.
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, 1997, 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. The FDIC maintains and administers two
separate insurance funds, the Bank Insurance Fund ("BIF") for commercial
banks and state savings banks and the SAIF for savings associations.
The deposits of First Federal and other savings associations are
insured by the FDIC in the SAIF. 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.
FRB Regulations
Reserve Requirements. FRB regulations require savings associations to
maintain reserves against their transaction accounts (primarily NOW
accounts) and non-personal time deposits. Effective December 12, 1997, such
regulations generally require that reserves of 3% be maintained against
deposits in transaction accounts up to $47.8 million (subject to an
exemption of up to $4.7 million), and that an initial reserve of 10% be
maintained against that portion of total net transaction accounts in excess
of $47.8 million. These percentages are subject to adjustment by the FRB.
At September 30, 1997, First Federal was in compliance with the reserve
requirements then in effect and also in compliance with the new
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 $3,041,900 at September 30, 1997.
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 and First Federal are each subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the
regular income tax, Bancorp and First Federal may be subject to an
alternative 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.
However, the Taxpayer Relief Act of 1997 repealed the alternative minimum
tax for certain "small corporations" for tax years beginning after December
31, 1997. A corporation initially qualifies as a small corporation if it
had average gross receipts of $5,000,000 or less for the three tax years
ending with its first tax year beginning after December 31, 1996. Once a
corporation is recognized as a small corporation, it will continue to be
exempt from the alternative minimum tax for as long as its average gross
receipts for the prior three-year period does not exceed $7,500,000. In
determining if a corporation meets this requirement, the first year that it
achieved small corporation status is not taken into consideration.
First Federal's average gross receipts for the three tax years ending
on September 30, 1997, is $14,910,000, and as a result, First Federal does
not qualify as a small corporation exempt from the alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Small Business Act"), which was signed into law on August 21, 1996, certain
thrift institutions, including First Federal, were allowed deductions for
bad debts under methods more favorable than 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 one of the two reserve methods of Section 593 of the Code. The
reserve methods under Section 593 of the Code permitted a thrift institution
annually to 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 1996, 1995 and 1994, First Federal used the percentage of taxable
income method because such method provided a higher bad debt deduction than
the experience method.
The Small Business Act eliminated the percentage of taxable income
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 only the specific charge-off method.
First Federal would be treated as a small bank.
A thrift institution required to change its method of computing
reserves for bad debt will threat 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. Section 481(a) of the Code requires
certain amounts to be recaptured with respect to such change. Generally,
the amounts to be recaptured 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, 1998 (i.e., the "pre-1998 reserves"). In the case of a thrift
institution that becomes a small 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 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 of the 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 then 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.
The tax returns of First Federal have been audited or closed without
audit through fiscal year 1993. 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.
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, 1997, First Federal's "pre-1988 reserves" for tax purposes
totaled approximately $1.6 million. First Federal believes it has
approximately $7.1 million of accumulated earnings and profits for tax
purposes as of September 30, 1997, 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.
The federal income tax provision decreased by $226,000 from fiscal
1996 to fiscal 1997. The effective tax rate for fiscal 1997 was 33%
compared to 34.2% for fiscal year 1996.
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.
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. For tax years beginning after
December 31, 1998, the tax rate is the greater of (i) 5.1% on the first
$50,000 of computed Ohio taxable income and 8.5% of computed Ohio taxable
income in excess of $50,000 or (ii) .400% times taxable net worth.
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. For tax year 1999, however, the franchise
tax on financial institutions will be 1.4% of the book net worth and for tax
years thereafter the tax will be 1.3% of the book net worth. 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,
1997, 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 $4,908,265
Branch Offices:
990 Military Road
Zanesville, Ohio 43701 Owned 1975 5,000 418,323
2810 Maysville Pike
South Zanesville, Ohio 43701 Owned 1994 2,050 460,618
55 East Main Street
Roseville, Ohio 43777 Owned 1990 2,394 121,432
639 Main Street
Coshocton, Ohio 43812 Owned 1982 4,310 119,860
132 Main Street
Newcomerstown, Ohio 43832 Owned 1984 2,128 4,770
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 61,250
- --------------------
<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 was completed in
November 1996 for a cost of $4.3 million.
</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 $1.3 million at September 30, 1997.
First Federal believes such properties are adequately insured. See Notes to
Consolidated Financial Statements 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.
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, 1997.
<TABLE>
<CAPTION>
09/97 06/97 03/97 12/96 09/96 06/96 03/96 12/95
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend Declared $0.060 $0.060 $0.060 $0.060 $0.055 $0.055 $0.050 $0.050
High Bid During Quarter 20.250 19.000 18.500 16.500 13.750 12.250 11.875 10.125
Low Bid During Quarter 17.000 17.000 16.000 13.250 11.750 11.125 10.125 9.750
Last Bid Of Quarter 18.750 18.250 18.500 16.000 13.750 11.750 11.125 10.125
</TABLE>
On 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.
Bancorp had 1,575,116 common shares outstanding and held of record by
approximately 557 shareholders as of November 30, 1997. Bancorp's common
shares are traded in the over-the-counter market.
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, other types of
consumer loans, including home equity, home improvement loans, and secured
and unsecured lines-of-credit, and commercial loans. 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 1998;
(3) Management's anticipation that loan demand will increase
slightly;
(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 1998 if interest rates remain
relatively stable;
(6) Management's anticipation to add up to $7.5 million in fixed-
rate residential loans to the loan portfolio;
(7) Legislative changes with respect to the federal thrift charter;
(8) Management's expectation that the amount of its consumer loans
will increase; and
(9) Management's expectation that a significant portion of the
certificates of deposit at First Federal maturing in fiscal year
1998 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 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $ 203,703 $ 184,467 $ 171,624 $ 156,305 $ 146,048
Mortgage-backed securities 1,438 1,661 1,889 2,063 2,395
Loans receivable - net 174,027 160,298 151,744 138,618 127,149
Federal funds sold and
other short-term investments 1,600 3,175 975 550 -
Investment securities and FHLB stock 10,545 6,478 6,502 6,233 5,638
Deposits 126,635 130,072 129,267 129,013 130,331
Borrowed funds 59,805 37,970 27,600 14,625 3,225
Stockholders' equity 15,626 13,998 12,745 11,484 11,231
Number of:
Real estate loans outstanding 2,972 3,008 2,675 2,655 2,642
Consumer loans outstanding 5,994 5,189 4,938 4,735 4,483
Deposit accounts 20,349 20,312 20,750 20,237 20,516
Full service offices 6 6 6 6 6
<CAPTION>
Summary of operations 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total interest income $ 14,854 $ 13,630 $ 12,205 $ 10,052 $ 10,805
Total interest expense 8,031 7,099 6,452 4,575 5,206
-------------------------------------------------------------
Net interest income 6,823 6,531 5,753 5,477 5,599
Provision for loan losses 222 131 60 192 281
-------------------------------------------------------------
Net interest income after
provision for loan losses 6,601 6,400 5,693 5,285 5,318
Noninterest income 1,096 871 766 731 765
Noninterest expense 4,753 5,092 4,062 4,084 3,909
Provision for loss on property
held for sale - - - - -
-------------------------------------------------------------
Income before federal income tax and
cumulative effect of a change in accounting
method 2,944 2,179 2,397 1,932 2,174
Provision for federal income taxes 971 745 802 573 677
-------------------------------------------------------------
Income before cumulative effect of a
change in accounting method 1,973 1,434 1,595 1,359 1,497
Cumulative effect of change in accounting
for income taxes - - - (360) -
-------------------------------------------------------------
Net income $ 1,973 $ 1,434 $ 1,595 $ 999 $ 1,497
=============================================================
Primary earnings per share before cumulative effect
of a change in accounting method $ 1.15 $ .84 $ .97 $ .80 $ .88
Change in accounting method - - - (.21) -
-------------------------------------------------------------
Primary earnings per share $ 1.15 $ .84 $ .97 $ .59 $ .88
=============================================================
Fully diluted earnings per share before cumulative
effect of a change in accounting method $ 1.14 $ .84 $ .96 $ .79 $ .87
Change in accounting method - - - (.21) -
-------------------------------------------------------------
Fully diluted earnings per share $ 1.14 $ .84 $ .96 $ .58 $ .87
=============================================================
Cash dividend declared per share $ 0.24 $ 0.21 $ 0.18 $ 0.14 $ 0.09
Weighted average common and
common equivalent shares (1)
Primary 1,721,481 1,697,094 1,640,194 1,695,948 1,706,096
Fully diluted 1,728,007 1,716,515 1,660,670 1,702,556 1,710,692
- --------------------
<F1> 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 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<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 3.52% 3.71% 3.48% 3.73% 3.87%
Average interest rate spread 3.82 3.92 3.54 3.84 3.99
Net interest yield (net interest
income divided by average interest-
earning assets) 3.87 4.04 3.70 3.99 4.15
Return on stockholders' equity (1) 13.36 10.65 13.14 12.57 14.00
Return on stockholders' equity (2) 13.36 10.65 13.14 9.24 14.00
Return on assets (3) 1.02 .81 .96 .93 1.03
Return on assets (4) 1.02 .81 .96 .68 1.03
Average interest-earning assets to
average interest-bearing liabilities 102.62 102.79 103.90 104.69 104.12
Stockholders' equity to total assets at
end of period 7.67 7.59 7.43 7.35 7.69
Average stockholders' equity to average
total assets 7.61 7.65 7.33 7.51 7.36
Dividend payout 19.13 25.00 18.75 24.14 10.35
Nonperforming assets ratio (total
nonperforming assets divided by
total assets) at end of period (5) .27 .28 .31 .46 1.68
General valuation allowance to net
loans outstanding at end of period 0.74 0.75 0.76 0.57 0.52
- --------------------
<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 $203.7 million at September
30, 1997, from $184.5 million at September 30, 1996. The increase in assets
is the result primarily of an increase in net loans receivable of $13.7
million, or 8.56%, from $160.3 million at September 30, 1996, to $174.0
million at September 30, 1997, an increase in securities held to maturity
from $4.5 million to $7.5 million, and an increase in premises and equipment
from $6.6 million to $7.5 million. The increase in loans receivable was
primarily due to an increase in residential real estate loans of $4.0
million, a $5.9 million increase in consumer automobile loans, a $1.3
million increase in other real estate loans, a $474,000 increase in
commercial loans and a $2.1 million increase in other consumer loans. The
increase in residential loans was due to new loan originations and
refinancing of loans from other institutions. The increase in consumer auto
loans was due to new originations and refinancing of loans from other
institutions.
Cash and cash equivalents increased $675,000 to $8.8 million at
September 30, 1997. Investment securities increased $3.0 million to
increase the level of securities available for liquidity as assets have
continued to increase. See "Liquidity and Capital Resources." Mortgage-
backed securities decreased by $223,000, or 13.42%, during the 1997 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 $1.2 million to $4.4 million
at September 30, 1997. Premises and equipment increased $1.0 million due to
the renovation of the Main Office, which cost $4.3 million. FHLB stock
increased $1.1 million, which is included in accrued interest receivable and
other assets.
The allowance for loan losses increased by $205,000 from $1,611,000 at
September 30, 1996, to $1,816,000 at September 30, 1997. 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. See Exhibit 99.2 hereto, "Safe Harbor Under the
Private Securities Litigation Reform Act of 1995," which is incorporated
herein by reference.
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 decreased by $3.4 million, or 2.64%, from $130.1 million at
September 30, 1996, to $126.6 million at September 30, 1997. The decrease
is primarily due to the decline in certificate of deposit accounts at
September 30, 1997. The balance of such deposits decreased $3.1 million to
$72.0 million at September 30, 1997, from $75.1 million at September 30,
1996. At September 30, 1997, FHLB advances totaled $59.8 million, an
increase of $21.8 million over the $38 million of advances outstanding at
September 30, 1996. Management believes that deposits will grow slightly
during early fiscal year 1998 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, the
attractiveness of alternative investments and other national and local
economic circumstances.
Stockholders' equity was $15.6 million, or 7.67% of total assets, at
September 30, 1997, compared to $14 million, or 7.59% of total assets, at
September 30, 1996. The increase was attributable to $2.0 million in net
income for the 1997 fiscal year, $377,000 in dividends declared, and $32,850
received from exercised options.
Comparison of the Years Ended
September 30, 1997 and 1996
First Federal reported net income for the 1997 fiscal year of
approximately $2.0 million, compared to $1.4 million in fiscal year 1996.
The most significant changes from 1996 to 1997 were the increase in net
interest income of $292,000 and the decrease in noninterest expense of
$421,000 due primarily to not having a special deposit insurance assessment
by the Savings Association Insurance Fund ("the SAIF") of the FDIC as in
1996.
Net interest income increased by $292,000 in fiscal year 1997 compared
to fiscal year 1996. Interest income increased $1.2 million during fiscal
year 1997 from $13.6 million during fiscal year 1996. This increase was a
result of average loans increasing $12.9 million during 1997 compared to
1996 and the highly competitive mortgage loan market in which 1996's first-
year rates on adjustable-rate mortgages were set at rates lower than the
fully indexed rates and adjusted to higher rates in 1997. Only 2.85%, or
$5.0 million, of First Federal's total loan portfolio of $174.0 million
consists of fixed-rate residential real estate loans. Due to the low
percentage of fixed-rate loans in the loan portfolio, management believes
that the addition of up to $7.5 million in 15-year fixed-rate loans to the
loan portfolio, which it plans for fiscal year 1998, will enhance the
first-year income on loans without additional material interest-rate risk to
the portfolio. No assurance can be provided, however, that such fixed-rate
loans will be added to the portfolio. Loan originations are affected by
loan demand, which in turn is affected by interest rates offered, general
economic conditions and the availability of funds for lending activities.
If interest rates remain relatively stable during fiscal year 1998, 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 1997 increased $931,000 from $7.1 million during fiscal year
1996. Included in interest expense for 1997 is approximately $2.9 million
of interest on borrowed funds. The increase in interest expense on deposits
is the result of higher interest rates on certificates of deposit. It is
expected that the amount of interest paid on borrowed funds will increase
during fiscal year 1998 as First Federal relies on additional advances from
the FHLB to fund loan demand.
First Federal's average interest rate spread decreased from 3.92% in
fiscal 1996 to 3.82% in fiscal 1997 as a result of the average rate First
Federal is paying on deposits and borrowings increasing more than the
average rate First Federal is earning on loans and securities.
The provision for loan losses was $222,000 in the 1997 fiscal year, an
increase of $91,000 from the 1996 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 1997 by $225,000 from
fiscal 1996. This is a result of the increase in dividends paid on FHLB
stock of $59,000, an increase of $20,000 in the gain on loans sold, and an
increase in other income of $124,000, due to the sale of land that was held
in the subsidiary, Firstfedco Agency, Inc., at a zero balance. The land had
been written off in 1992.
Noninterest expenses decreased by approximately $339,000 from fiscal
1996 to fiscal 1997. The decrease is primarily attributable to not having a
special deposit insurance assessment of $800,100 in fiscal 1997. In
addition, salaries and benefits increased $33,000, mainly due to an increase
in staff and normal pay increases. Occupancy expense increased $251,000
mainly due to increased depreciation for the new building and furniture and
fixtures as a result of the renovation of the Main Office at a cost of $4.3
million. The renovation also accounted for a $28,000 increase in costs due
to the grand opening and reappraisal of the building. Other operating
expenses increased $229,000 due to an $88,000 increase in write-offs of
consumer loans and dishonored checks, $20,000 in start-up costs for the
debit card program, a $20,000 increase in auditing and consulting fees
related to the addition of Money Concepts, our third-party provider of
investments and financial planning, a $20,000 increase in stationary and
supplies, and a $12,000 increase in contributions.
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, 1997, First Federal had approximately
$1.0 million in bad debt reserves subject to recapture for federal income
tax purposes and approximately $1.1 million at September 30, 1996. 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 increased by $226,000 from fiscal
1996 to fiscal 1997. The effective tax rate for fiscal 1997 was 33.00%
compared to 34.2% for fiscal year 1996.
Year 2000 Considerations
- ------------------------
First Federal has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000"
issue and is developing an implementation plan to resolve the issue. The
Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer
programs that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a major
system failure or miscalculations. First Federal presently believes that,
with modifications to existing software and converting to new software, the
Year 2000 problem will not pose significant operational problems for First
Federal's computer systems as so modified and converted. However, if such
modifications and conversions are not completed timely, the Year 2000
problem may have a negative impact on the operations of First Federal.
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 SAIF.
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. 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.
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 the
special deposit insurance assessment of $800,100 in 1996. 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.
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.
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
1997, the automobile loans increased to $36.3 million from $30.4 million in
fiscal year 1996. 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 eight 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 parameters for the maximum absolute 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 1% and (6)% at September
30, 1997.
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. At September 30, 1997,
such minimum requirement was 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 requirement has since been
lowered to 4%. 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 7.53% at September 30,
1997.
During the fiscal year ended September 30, 1997, 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 1998 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, 1997, First Federal had outstanding
commitments to originate loans of $591,000, unfunded lines-of-credit
totaling $4.6 million (a significant portion of which normally remains
unfunded) and $139,000 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, 1997, totaled $45.9
million. Management believes that a significant portion of the amounts
maturing during 1998 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,
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net cash provided by operating activities $ 1,996 $ 1,888 $ 2,086
Net cash used in investing (19,218) (11,157) (14,442)
Net cash provided by financing activities 17,897 11,095 13,099
--------------------------------
(Decrease) Increase in cash and cash equivalents 675 1,826 743
Cash and cash equivalents at beginning of year 8,162 6,336 5,593
--------------------------------
Cash and cash equivalents at end of year $ 8,837 $ 8,162 $ 6,336
================================
</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, 1997.
<TABLE>
<CAPTION>
Percent
Amount of assets
------ ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital $13,862 6.82%
Tangible capital requirement 3,049 1.50
-------------------
Excess $10,813 5.32%
===================
Core capital $13,862 6.82%
Core capital requirement 6,097 3.00
-------------------
Excess $ 7,765 3.82%
===================
Total risk-based capital $15,167 11.31%
Risk-based capital requirement 10,729 8.00
-------------------
Excess $ 4,438 3.31%
===================
</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
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 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. The pro forma impact of this pronouncement is disclosed in First
Federal's financial statements.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinquishments of Liabilities," was issued by the FASB in 1996.
SFAS 125 revises the accounting for transfers of financial assets, such as
loans and securities, and for distinguishing between sales and secured
borrowings. It was originally effective for some transactions in 1997 and
others in 1998. SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125" was issued in December 1996. SFAS 127
defers, for one year, the effective date of provisions related to securities
lending, repurchase agreements and other similar transactions. The
remaining portions of SFAS 125 continued to be effective January 1, 1997.
SFAS 125 did not have a material impact on First Federal's financial
statements.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share"
which is effective for financial statements for periods ending after
December 15, 1997, including interim periods. SFAS 128 simplifies the
calculation of earnings per share ("EPS") by replacing primary EPS with
basic EPS. It also requires dual presentation of basic EPS and diluted EPS
for entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common shareholders
by the weighted-average common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in
earnings such as stock options, warrants or other common stock equivalents.
All prior period EPS data will be restated to conform with the new
presentation; however, First Federal does not expect such restatement to be
materially different from EPS data previously reported.
In February 1997, the FASB issued SFAS No. 129, "Disclosures of
Information about Capital Structure." SFAS 129 consolidated existing
accounting guidance relating to disclosure about a company's capital
structure. Public companies generally have always been required to make
disclosures now required by SFAS 129 and, therefore, SFAS 129 should have no
material impact on First Federal. SFAS 129 is effective for financial
statements for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
loses) in a full set of general-purpose financial statements. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. It does not require a specific format for that financial
statement but requires that an enterprise display an amount representing
total comprehensive income for the period in that financial statement.
SFAS 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of a statement of financial position. SFAS 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is
required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement
significantly changes the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about reportable
segments in interim financial reports issues to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 uses a "management approach"
to disclose financial and descriptive information about an enterprise's
reportable operating segments which is based on reporting information the
way the management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, the Statement requires significantly more information to be
disclosed for each reportable segment than is presently being reported in
annual financial statements. The Statement also requires that selected
information be reported in interim financial statements. SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997.
Item 7. Financial Statements.
FIRST FEDERAL BANCORP, INC.
Zanesville, Ohio
September 30, 1997
<TABLE>
CONTENTS
<S> <C>
REPORT OF INDEPENDENT AUDITORS 40
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 41
CONSOLIDATED STATEMENTS OF INCOME 42
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 43
CONSOLIDATED STATEMENTS OF CASH FLOWS 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 46
</TABLE>
FIRST FEDERAL BANCORP, INC.
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, 1997 and 1996,
and related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1997.
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 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 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 overall financial
statement presentation. We believe 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, 1997 and 1996, and results of its
operations and cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
Columbus, Ohio
October 23, 1997
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 7,237,127 $ 4,986,988
Overnight deposits 1,600,000 3,175,000
----------------------------
Cash and cash equivalents 8,837,127 8,161,988
Securities held to maturity (Fair value - $7,504,000 in 1997 and
$4,546,000 in 1996) 7,503,561 4,548,069
Mortgage-backed securities held to maturity (Fair value -
$1,477,000 in 1997 and $1,658,000 in 1996) 1,437,681 1,661,018
Loans receivable, net 174,026,629 160,297,702
Premises and equipment, net 7,501,696 6,553,874
Accrued interest receivable and other assets 4,396,375 3,244,605
----------------------------
Total assets $203,703,069 $184,467,256
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $126,634,570 $130,071,616
Borrowed funds 59,805,000 37,970,000
Advances from borrowers for taxes and insurance 376,276 540,734
Accrued expenses and other liabilities 1,261,362 1,887,057
----------------------------
Total liabilities 188,077,208 170,469,407
----------------------------
Commitments and contingencies
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, 1,651,700 shares issued 3,656,323 3,656,323
Retained earnings 12,461,620 10,876,921
Treasury shares, 76,584 and 81,584 shares, at cost (492,082) (535,395)
----------------------------
Total stockholders' equity 15,625,861 13,997,849
----------------------------
Total liabilities and stockholders' equity $203,703,069 $184,467,256
============================
</TABLE>
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income
Interest and fees on loans $14,273,365 $13,152,751 $11,746,698
Interest on securities 417,158 356,921 418,374
Other interest income 163,389 120,957 39,967
-----------------------------------------
Total interest income 14,853,912 13,630,629 12,205,039
-----------------------------------------
Interest expense
Interest on deposits 5,142,179 5,414,339 4,776,004
Interest on borrowed funds 2,888,430 1,685,085 1,675,527
-----------------------------------------
Total interest expense 8,030,609 7,099,424 6,451,531
-----------------------------------------
Net interest income 6,823,303 6,531,205 5,753,508
Provision for loan losses 222,268 130,823 60,340
-----------------------------------------
Net interest income after provision for
loan losses 6,601,035 6,400,382 5,693,168
-----------------------------------------
Noninterest income
Service charges on deposit accounts 310,308 316,480 292,814
Gain on sale of loans 67,624 47,652 37,208
Dividends on FHLB stock 177,456 118,870 91,469
Other operating income 540,487 387,923 344,944
-----------------------------------------
Total noninterest income 1,095,875 870,925 766,435
-----------------------------------------
Noninterest expense
Salaries and employee benefits 2,031,085 1,998,265 1,830,241
Occupancy and equipment expense 758,537 508,015 449,454
Deposit insurance expense 174,218 1,148,468 336,744
Data processing expense 328,213 299,849 299,848
Advertising 267,088 186,986 166,041
Ohio franchise taxes 192,511 179,342 167,207
Other operating expenses 1,000,983 771,657 812,970
-----------------------------------------
Total noninterest expense 4,752,635 5,092,582 4,062,505
-----------------------------------------
Income before income taxes 2,944,275 2,178,725 2,397,098
Provision for income taxes 971,697 744,899 801,821
-----------------------------------------
Net income $ 1,972,578 $ 1,433,826 $ 1,595,277
=========================================
Primary earnings per share $ 1.15 $ .84 $ .97
=========================================
Fully diluted earnings per share $ 1.14 $ .84 $ .96
=========================================
</TABLE>
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Minimum
Additional Total
Common Retained Treasury Pension Stockholders'
Stock Earnings Stock Liability Equity
------ -------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance,
October 1, 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
Dividends declared,
$.24 per share (377,416) (377,416)
Net income for the
year ended
September 30, 1997 1,972,578 1,972,578
Sale of treasury stock
from exercise of
options (10,463) 43,313 32,850
---------------------------------------------------------------------
Balance,
September 30, 1997 $3,656,323 $12,461,620 $(492,082) $ 0 $15,625,861
=====================================================================
</TABLE>
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,972,578 $ 1,433,826 $ 1,595,277
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and intangible amortization 472,846 253,549 219,628
Net amortization (accretion) on securities (63,517) (17,356) 73,180
Provision for loan losses 222,268 130,823 60,340
Net amortization of deferred fees 236,789 (112,329) (142,268)
Deferred taxes 159,930 (244,484) 36,491
Mortgage loans originated for sale (5,216,323) (6,903,822) (2,925,247)
Proceeds from sale of mortgage loans 5,214,597 6,763,321 3,027,571
FHLB stock dividend (177,200) (118,600) (91,200)
Changes in other assets and other
liabilities (825,594) 703,320 231,980
--------------------------------------------
Net cash provided by operating
activities 1,996,374 1,888,248 2,085,752
--------------------------------------------
Cash flows from investing activities
Purchase of FHLB stock (1,111,800) (176,800) (535,600)
Purchase of securities (8,980,101) (5,455,986) (1,730,914)
Proceeds from maturities of securities 6,265,325 5,792,447 2,016,655
Principal collected on mortgage-backed
securities 223,337 228,400 173,189
Loans made to customers, net of principal
repayments (14,305,110) (8,431,367) (14,424,893)
Proceeds from sales and payments received
on real estate owned 110,701
Proceeds from sale of student loans 1,277,831
Purchases of premises and equipment (1,420,669) (3,114,164) (1,218,427)
--------------------------------------------
Net cash used for investing
activities (19,218,317) (11,157,470) (14,442,159)
--------------------------------------------
</TABLE>
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities
Net change in deposit accounts (3,437,046) 805,001 374,269
Net change in short-term FHLB advances 7,835,000 10,370,000 3,975,000
Proceeds from long-term FHLB advances 17,000,000 1,000,000 16,000,000
Repayment of long-term FHLB advances (3,000,000) (1,000,000) (7,000,000)
Net change in advance payments by
borrowers for taxes and insurance (164,458) 229,049 32,131
Dividends paid (369,264) (313,823) (282,441)
Proceeds from exercise of options 32,850 5,400
-------------------------------------------
Net cash provided by financing activities 17,897,082 11,095,627 13,098,959
-------------------------------------------
Net change in cash and cash equivalents 675,139 1,826,405 742,552
Cash and cash equivalents at beginning of year 8,161,988 6,335,583 5,593,031
-------------------------------------------
Cash and cash equivalents at end of year $ 8,837,127 $ 8,161,988 $ 6,335,583
===========================================
Supplemental disclosures of cash flow information
Cash paid during the year:
Interest on deposits and borrowings $ 8,034,416 $ 7,116,809 $ 6,291,521
Income taxes 850,000 1,015,000 663,000
Noncash transactions:
Transfer of real estate owned balance
to loans $ 108,541
</TABLE>
FIRST FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
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.
Concentration of Credit Risk: 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 58% of the Company's loan portfolio, 21% is made
up of automobile loans, 12% is made up of multi-family, nonresidential and
construction mortgage loans and the remaining 9% 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 affecting 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 use of management's
estimates and assumptions include allowance for loan losses, realization of
deferred tax assets, determination and carrying value of impaired loans,
depreciation of premises and equipment, fair value of financial instruments,
net accrued pension liability, 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: The Company classifies 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 the positive intent and ability to hold to maturity.
Trading securities are those purchased principally to sell in the near term,
and are 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 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.
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.
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 and commercial loans 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 on 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: The Company follows 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.
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
on the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. The common stock equivalents
resulting from the outstanding stock options granted are based on 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, the Board of
Directors declared a two-for-one stock split in the form of a 100% stock
dividend. All earnings and dividends per share disclosures have been
restated to reflect this stock split. The weighted average number of common
stock and common stock equivalents during each year ended September 30 was
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Primary 1,721,481 1,697,094 1,640,194
Fully diluted 1,728,007 1,716,515 1,660,670
</TABLE>
Reclassifications: Certain reclassifications have been made to the 1996 and
1995 financial statements to be comparable to the 1997 presentation.
NOTE 2 - SECURITIES
The amortized cost and estimated fair value of securities held to maturity
are as follows at September 30:
<TABLE>
<CAPTION>
-------------------------1997-----------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government Treasury
and agency securities $7,296,591 $ 3,693 $ (3,284) $7,297,000
Other debt securities 206,970 30 207,000
----------------------------------------------------
Total securities 7,503,561 3,723 (3,284) 7,504,000
Mortgage-backed securities 1,437,681 39,319 1,477,000
----------------------------------------------------
$8,941,242 $43,042 $ (3,284) $8,981,000
====================================================
<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 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>
The amortized cost and estimated fair value of debt securities held to
maturity at September 30, 1997, 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 $7,296,591 $7,297,000
Due after five through ten years 206,970 207,000
------------------------
7,503,561 7,504,000
Mortgage-backed securities 1,437,681 1,477,000
------------------------
$8,941,242 $8,981,000
========================
</TABLE>
No debt securities were sold for fiscal years ending September 30, 1997,
1996 or 1995.
At September 30, 1997 and 1996, $3,085,000 and $3,585,000 of securities were
pledged to collateralize public funds deposited in the Bank.
NOTE 3 - LOANS RECEIVABLE
The loan portfolio at September 30 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Real estate loans
One- to four-family residences $102,723,272 $ 99,495,953
Multifamily 9,691,513 9,176,379
Nonresidential 9,799,389 8,504,671
Construction loans 3,082,024 6,581,920
----------------------------
125,296,198 123,758,923
Less
Undisbursed portion of loans in process 1,373,844 5,104,813
Net deferred loan origination fees 474,858 559,731
----------------------------
Total real estate loans 123,447,496 118,094,379
----------------------------
Consumer and other loans
Automobile 36,267,264 30,375,556
Loans on deposit accounts 421,866 484,244
Home equity, education and other 12,869,551 10,743,261
Commercial loans 2,136,709 1,663,436
----------------------------
51,695,390 43,266,497
Net deferred loan origination costs 699,743 547,826
----------------------------
Total consumer and other loans 52,395,133 43,814,323
----------------------------
Total loans 175,842,629 161,908,702
Less allowance for loan losses 1,816,000 1,611,000
----------------------------
$174,026,629 $160,297,702
============================
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $1,611,000 $1,499,444 $1,021,209
Provision charged to income 222,268 130,823 60,340
Charge-offs (28,649) (28,017) (31,545)
Recoveries 11,381 8,750 449,440
--------------------------------------
Balance at end of year $1,816,000 $1,611,000 $1,499,444
======================================
</TABLE>
The Bank classified no loans as impaired under SFAS No. 114 at September 30,
1997 and 1996 or during the years 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, 1997 and 1996 were approximately
$14,730,000 and $12,854,000.
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>
<S> <C>
Balance at September 30, 1996 $ 531,934
Additions 108,000
Repayments (167,414)
Other (57,867)
---------
Balance at September 30, 1997 $ 414,653
=========
</TABLE>
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment consists of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land and improvements $ 759,449 $ 759,449
Office buildings and leasehold improvements 6,516,883 2,263,921
Furniture, fixtures and equipment 2,433,874 2,381,161
Construction in progress - 3,422,175
------------------------
Total 9,710,206 8,826,706
Accumulated depreciation 2,208,510 2,272,832
------------------------
$7,501,696 $6,553,874
========================
</TABLE>
Depreciation expense was $462,707, $247,971 and $189,050 for the years ended
September 30, 1997, 1996 and 1995.
NOTE 5 - DEPOSITS
Deposits at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Noninterest-bearing checking $ 4,214,234 $ 3,978,251
Christmas club and other noninterest-bearing 375,242 369,976
----------------------------
Total noninterest-bearing 4,589,476 4,348,227
----------------------------
Money market checking 24,298,655 22,306,521
Passbook and statement savings 25,746,917 28,329,780
Negotiated-rate certificates of deposit 4,586,588 5,465,772
Fixed-rate certificates of deposit 67,412,934 69,621,316
----------------------------
Total interest-bearing 122,045,094 125,723,389
----------------------------
Total deposits $126,634,570 $130,071,616
============================
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $12,121,000 and $11,836,000 at September 30,
1997 and 1996. Deposits greater than $100,000 are not insured by the
Federal Deposit Insurance Corporation (FDIC).
At September 30, 1997, scheduled maturities of certificates of deposit are
as follows for the year ending September 30:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
1998 $45,886,452
1999 21,153,635
2000 3,446,574
2001 1,145,098
2002 273,080
Thereafter 94,683
-----------
$71,999,522
===========
</TABLE>
In conjunction with renovation of the Company's main office, $96,862 of
interest expense was capitalized into the cost of 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 had not been
capitalized.
NOTE 6 - BORROWED FUNDS
Borrowed funds consist solely of Federal Home Loan Bank (FHLB) advances. At
September 30, 1997, the Company had advances with original maturities of
less than three months totaling $29,805,000 with variable rates of 6.53%.
Fixed-rate long-term advances (ranging from 5.90% to 6.90%) consist of the
following at September 30, 1997, by scheduled maturity:
<TABLE>
<CAPTION>
Amount
-----------
<S> <C>
1998 $ 3,000,000
1999 13,000,000
2000 6,000,000
2001 1,000,000
2002 1,000,000
Thereafter 6,000,000
-----------
$30,000,000
===========
</TABLE>
At September 30, 1996, the Company had $21,970,000 (6.10% interest rate) of
variable-rate advances and $16,000,000 (6.51% average interest rate) of
fixed-rate advances.
At September 30, 1997, $3,041,900 of FHLB stock and $101,240,000 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,
1997, the Company could borrow up to $101,751,000.
NOTE 7 - FEDERAL INCOME TAXES
The provision for federal income taxes for the years ended September 30
consists of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current federal income taxes $811,767 $ 989,383 $765,330
Deferred federal income tax expense
(benefit) 159,930 (244,484) 36,491
---------------------------------
$971,697 $ 744,899 $801,821
=================================
</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>
1997 1996 1995
--------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Income tax computed
at the statutory rate $1,001,054 34.0% $740,767 34.0% $815,013 34.0%
Tax effect of
miscellaneous items (29,357) (1.2) 4,132 .2 (13,192) (.6)
-----------------------------------------------------------------
$ 971,697 32.8% $744,899 34.2% $801,821 33.4%
=================================================================
</TABLE>
The following are sources of gross deferred tax assets and liabilities as of
September 30:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Items giving rise to deferred tax assets:
Allowance for loan losses in excess of tax
reserve $ 262,342 $ 174,256 $ 218,518
Deferred compensation 3,372 3,628 46,951
Pension expense 17,462 17,516 7,300
Accrued vacation and sick pay 34,986 33,320 5,745
Gain on sale of real estate owned 16,954 18,614 9,185
Savings Association Insurance Fund
capitalization assessment 272,030
Organizational costs 10,625 10,625
Other 18,969 9,813 8,190
-----------------------------------
Gross deferred tax asset 354,085 539,802 306,514
-----------------------------------
Items giving rise to deferred tax liabilities:
Deferred loan fees (95,903) (192,727) (283,867)
FHLB stock dividends (326,951) (266,703) (226,345)
Depreciation (221,360) (190,844) (164,926)
Amortization of certificate of deposit premium (14,078) (16,331) (18,583)
Investment accretion (801) (8,925) (3,019)
Other (664) (10,014)
-----------------------------------
Gross deferred tax liability (659,757) (685,544) (696,740)
-----------------------------------
Net deferred tax liability $(305,672) $(145,742) $(390,226)
===================================
</TABLE>
In August 1996, legislation was enacted repealing the reserve method of
accounting used by many thrifts to calculate their bad debt reserve for
federal income tax purposes. As a result, thrifts such as the Bank must
recapture that portion of the reserve exceeding the amount that could have
been taken under the experience method for tax years beginning after
December 31, 1987. Legislation also requires thrifts to account for bad
debts for federal income tax purposes on the same basis as commercial banks
for tax years beginning after December 31, 1995. The recapture will occur
over a six-year period, the commencement of which will be delayed until the
first taxable year beginning after December 31, 1997, provided the
institution meets certain residential lending requirements. At September
30, 1997, the Bank had approximately $1,044,000 in bad debt reserves subject
to recapture for federal income tax purposes. The deferred tax liability
related to the recapture has been previously established. In fiscal 1997,
no bad debt reserves were recaptured as the Bank met the residential lending
requirements.
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, 1997,
the Company had commitments to make loans and unfunded lines of credit (at
market rates) of approximately $6,245,000, excluding loans in process.
$6,022,000 were variable-rate and $223,000 were fixed-rate commitments. The
fixed-rate commitments had interest rates ranging from 6.40% to 7.88%. The
Company also had commitments to sell $139,000 of fixed-rate mortgage loans
at September 30, 1997.
At September 30, 1997 and 1996, the Company was required to have $786,000
and $832,000 on deposit with the Federal Reserve Bank or as cash on hand.
These reserves do not earn interest.
NOTE 9 - RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL REQUIREMENTS
Retained earnings at September 30, 1997 and 1996 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, 1997 and 1996 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 involving
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, 1997 and 1996, management believes the
Bank is 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, 1997 and 1996. To be well capitalized, the Bank must maintain
minimum tangible, core and risk-based capital ratios of 5%, 6% and 10%,
respectively. There are no conditions or events since September 30, 1997
that management believes have changed the Bank's capital amounts. The
Bank's actual capital amounts and ratios for capital adequacy purposes are
as follows at September 30:
<TABLE>
<CAPTION>
1997
--------------------------------------------
Tangible Core Risk-based
Capital Capital Capital
-------- ------- ----------
<S> <C> <C> <C>
Regulatory capital - computed $ 13,862,000 $ 13,862,000 $ 15,167,000
Minimum capital requirement 3,048,000 6,097,000 10,729,000
--------------------------------------------
Regulatory capital - excess $ 10,814,000 $ 7,765,000 $ 4,438,000
============================================
Regulatory capital - computed 6.82% 6.82% 11.31%
Minimum capital requirement 1.50 3.00 8.00
--------------------------------------------
Excess 5.32% 3.82% 3.31%
============================================
Regulatory asset base $203,229,000 $203,229,000 $134,109,000
============================================
1996
--------------------------------------------
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 - 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, 1997, these limitations would
not restrict the Company from paying normal dividends.
NOTE 11 - 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during year $ 62,396 $107,029 $ 77,174
Interest cost on projected benefit obligation 80,369 78,113 61,115
Actual return on plan assets (86,240) 8,571 (31,435)
Net amortization and deferral 49,964 (10,722) 25,473
--------------------------------
Net pension cost $106,489 $182,991 $132,327
================================
</TABLE>
The following table sets forth the funded status and amounts recognized in
the statements of financial condition at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation $ 724,919 $ 598,783
========================
Accumulated benefit obligation $ 744,872 $ 612,254
========================
Plan assets at fair value $ 962,230 $ 774,606
Actuarial present value of projected benefit
obligation for services rendered to date 1,251,878 1,042,402
------------------------
Unfunded projected benefit obligation (289,648) (267,796)
Unrecognized net loss 291,410 200,373
Unrecognized transition liability, net of amortization 13,775 15,043
------------------------
Net accrued pension liability $ 15,537 $ (52,380)
========================
Assumptions for the plan valuations include:
Weighted average discount rate 7.40% 7.71%
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 in cash surrender value of insurance policies.
NOTE 12 - STOCK OPTION PLANS
The Company has five stock option plans, two Incentive Stock Option Plans
for Officers and Key Employees, two Stock Option Plans for Nonemployee
Directors and the 1997 Performance Stock Option Plan for Executive Officers
and 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, February 1995 and February 1997. 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>
1997 1996
---- ----
<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 4,400
14.75 per share 3,200
------------------
155,080 151,880
------------------
Shares available 53,190 56,390
==================
Options exercised: $ 5.00 per share 800 400
5.25 per share 800 400
6.50 per share 2,800 200
10.75 per share 600
------------------
5,000 1,000
==================
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 16,740
------------------
83,700 83,700
------------------
Shares available 30,112 30,112
==================
Shares reserved and available for issuance under the 1997 Performance
Stock Option Plan for Executive Officers and Nonemployee Directors 54,000
=======
</TABLE>
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which encourages the use of
a fair value-based method to account for stock-based compensation plans such
as the Company's stock option plans. As allowed by SFAS No. 123; however,
the Company has elected to continue to follow prior standards in accounting
for its stock options. Under these standards, because the exercise price of
the Company's stock options equals the market price of the underlying stock
on the date of grant, no compensation is recognized. If compensation
expense is not recorded, pro forma information regarding net income and
earnings per share is required by SFAS No. 123, and has been determined as
if the Company had accounted for its stock options under the fair value
method of that standard. The fair value for these options was estimated at
the date of grant using an option pricing model with the following
assumptions for 1997 and 1996, respectively: risk-free interest rates of
6.24% and 5.70%; dividend yields of 2.44% and 3.35%; volatility factors of
the expected market price of the Company's stock of 5.42%; and a weighted
average life of the options of 10 years. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period. The Company's pro forma information
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Income as reported $1,972,578 $1,433,826
Pro forma net income 1,938,000 1,338,000
Earnings per share as reported
Primary $ 1.15 $ 0.84
Diluted 1.14 0.84
Pro forma earnings per share
Primary 1.13 0.79
Diluted 1.12 0.78
</TABLE>
A summary of the Company's stock option activity and related information
subject to SFAS No. 123 follows:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
Average Average
Exercise Exercise
Options Price Options Price
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding beginning of year 21,140 $10.06
Granted 4,600 14.75 22,140 $10.09
Exercised (600) 10.75
Forfeited (1,400) 13.04 (1,000) 10.75
Outstanding end of year 23,740 10.77 21,140 10.06
Exercisable end of year 19,940 10.02 8,000 9.88
Weighted average fair value of options granted
during year 6.79 7.59
</TABLE>
NOTE 13 - 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 paid 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 14 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table shows the carrying values and the related estimated fair
values of financial instruments at September 30. Items that are not
financial instruments are not included.
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amounts Fair Value Amounts Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 8,837,127 $ 8,837,000 $ 8,161,988 $ 8,162,000
Securities held to maturity 7,503,561 7,504,000 5,458,069 4,546,000
Mortgage-backed securities 1,437,681 1,477,000 1,661,018 1,658,000
FHLB stock 3,041,900 3,042,000 1,930,100 1,930,000
Loans, net 174,026,629 173,838,000 160,297,702 160,123,000
Accrued interest receivable 1,133,146 1,133,000 956,148 956,000
Financial liabilities
Demand and savings deposits (54,635,048) (54,635,000) (54,984,528) (54,985,000)
Certificates of deposit (71,999,522) (72,317,000) (75,087,088) (75,333,000)
Borrowed funds (59,805,000) (59,877,000) (37,970,000) (38,099,000)
Advances from borrowers for
taxes and insurance (376,276) (376,000) (540,734) (541,000)
Accrued interest payable (429,841) (430,000) (433,648) (434,000)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of September 30, 1997 and 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 twelve 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, 1997 and
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, 1997 and 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, 1997 or 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, 1997 and
1996 should not necessarily be considered to apply at subsequent dates.
NOTE 15 - PARENT COMPANY
Condensed financial information of First Federal Bancorp, Inc. as of
September 30 is as follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Deposits with subsidiary $ 469,623 $ 884,328
Commercial loans 861,732 262,799
Other assets 14,741 13,218
Securities held to maturity (fair value - $250,000 in
1997 and $249,000 in 1996) 250,102 249,408
Investment in subsidiary, at equity in underlying
value of net assets 14,124,568 12,679,951
--------------------------
Total assets $15,720,766 $14,089,704
==========================
LIABILITIES
Other liabilities 94,905 $ 91,855
STOCKHOLDERS' EQUITY 15,625,861 13,997,849
--------------------------
Total liabilities and stockholders' equity $15,720,766 $14,089,704
==========================
</TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividend income $ 550,000 $ 400,000 $ 500,000
Equity in undistributed income of
subsidiary and net earnings 1,444,617 1,057,871 1,123,989
Interest income 90,729 65,571 87,556
--------------------------------------
Total income 2,085,346 1,523,442 1,711,545
Other expenses 112,768 89,616 116,268
--------------------------------------
Net income $1,972,578 $1,433,826 $1,595,277
======================================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income $ 1,972,578 $ 1,433,826 $ 1,595,277
Amortization/(accretion) of
securities (694) (1,812) 25
Equity in undistributed income of
subsidiary (1,444,617) (1,057,871) (1,123,989)
Net change in other assets and
liabilities (6,625) 110,665 (109,996)
-----------------------------------------
Net cash provided by
operating activities 520,642 484,808 361,317
-----------------------------------------
Investing activities
Purchase of securities (499,483)
Proceeds from maturities of
securities 750,000 500,000
Loans made to customers, net
of principal repayments (598,933) (193,113) (69,686)
-----------------------------------------
Net cash provided/(used) by
investing activities (598,933) 57,404 430,314
-----------------------------------------
Financing activities
Proceeds from exercise of options 32,850 5,400
Dividends paid (369,264) (313,823) (282,441)
-----------------------------------------
Net cash used by
financing activities (336,414) (308,423) (282,441)
-----------------------------------------
Net change in cash and cash
equivalents (414,705) 233,789 509,190
Cash and cash equivalents at
beginning of year 884,328 650,539 141,349
-----------------------------------------
Cash and cash equivalents at
end of year $ 469,623 $ 884,328 $ 650,539
=========================================
</TABLE>
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
1998 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 44 Secretary
Connie Ayres LaPlante 41 Treasurer
John C. Matesich, III 54 Chairman of the Board
J. William Plummer 52 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 41 Treasurer and
Senior Vice President
John C. Matesich, III 54 Chairman of the Board
J. William Plummer 52 President and
Chief Executive Officer
Larry W. Snode 48 Secretary and
Senior Vice President -
Operations
Thomas N. Sulens 46 Senior Vice President -
Lending
- --------------------
<F1> There are no family relationships among the executive officers of
Bancorp or First Federal.
<F2> As of December 15, 1997.
</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" is 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, 1997 and 1996.
(B) Consolidated Statements of Income for each of the years ended
September 30, 1997, 1996 and 1995.
(C) Consolidated Statements of Shareholders' Equity for each of
the years ended September 30, 1997, 1996 and 1995.
(D) Consolidated Statements of Cash Flows for each of the years
ended September 30, 1997, 1996 and 1995.
(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.
First Federal Bancorp, Inc. 1992 Stock Option Plan
for Officers and Key Employees
First Federal Bancorp, Inc. 1992 Stock Option Plan
for Non-Employee Directors
First Federal Bancorp, Inc. 1994 Stock Option Plan
for Officers and Key Employees
First Federal Bancorp, Inc. 1994 Stock Option Plan
for Non-Employee Directors
First Federal Bancorp, Inc. 1997 Performance Stock
Option Plan for Senior Executive Officers and
Outside Directors
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
No reports on Form 8-K were filed during the quarter for which this report
is filed.
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 17, 1997 Date December 17, 1997
----------------- -----------------
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 17, 1997 Date December 17, 1997
----------------- -----------------
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 17, 1997 Date December 17, 1997
----------------- -----------------
By /s/ Patrick L. Hennessey
----------------------------
Patrick L. Hennessey
Director
Date December 17, 1997
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
3.1 Articles of Incorporation of First Federal Bancorp, The Articles of Incorporation of First Federal
Inc. 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.
3.2 Amendment to the Articles of Incorporation of The Amendment to the Articles of Incorporation of
First Federal Bancorp, Inc. 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.
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.
3.4 Amendment to the Code of Regulations of First The Amendment to the code of Regulations of
Federal Bancorp, Inc. Bancorp filed as Exhibit 3.4 to the 1992 10-K is
incorporated herein by reference.
10.1 Amended Management Recognition Plan and The Amended Management Recognition Plan and
Trust Agreement of First Federal Savings Bank of Trust Agreement of First Federal Savings Bank of
Eastern Ohio 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 Stock Option The First Federal Bancorp, Inc. 1992 Stock Option
Plan for Officers and Key Employees Plan for Officers and Key Employees included as
Exhibit B to 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 Option The First Federal Bancorp, Inc. 1992 Stock Option
Plan for Non-Employee Directors Plan 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 Federal The tax sharing agreement between First Federal
Savings Bank of Eastern Ohio and First Federal Bancorp and First Federal filed as exhibit 10.6 in the
Bancorp, Inc. 1993 10-KSB is incorporated herein by reference.
10.7 First Federal Bancorp, Inc. 1994 Stock Option The First Federal Bancorp, Inc. 1994 Stock Option
Plan for Officers and Key Employees Plan for Officers and Key Employees included as
Exhibit A 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 Option The First Federal Bancorp, Inc. 1994 Stock Option
Plan for Non-Employee Directors Plan 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.
10.9 First Federal Bancorp, Inc. 1997 Performance The First Federal Bancorp, Inc. 1997 Performance
Stock Option Plan for Senior Executive Officers Stock Option Plan for Senior Executive Officers and
and Outside Directors Outside Directors included as Exhibit A to Bancorp's
Proxy Statement filed as Exhibit 99.1 to the 1996
10-KSB is incorporated herein by reference.
21 Subsidiaries of First Federal Bancorp, Inc. The list of the subsidiary of Bancorp filed as 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 1998 Annual Meeting of Incorporated by reference to the Definitive Proxy
Shareholders of First Federal Bancorp, Inc. Statement for the 1998 Annual Meeting of
Shareholders, to be filed.
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 1st day of October, 1997, 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 (herein after
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 September 30, 2000 (hereinafter referred to as
the "TERM"). In September 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
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 $125,080.00 until changed by the
Boards of Directors of the EMPLOYERS in accordance with Section 3(b)
of this AGREEMENT.
(b) Annual Salary Review. In September 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
October 1, at an amount not less than $125,080.00, 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 year,
such leave shall accrue to subsequent 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 1st day of October, 1997, 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 (herein after
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 Senior Vice President and Treasurer of each
of the EMPLOYERS;
WHEREAS, the EMPLOYEE desires to continue to serve as the Senior Vice
President and Treasurer 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 Senior Vice President and Treasurer of
each of the EMPLOYERS. The term of this AGREEMENT shall commence on the
date hereof and shall end on September 30, 2000 (hereinafter referred to as
the "TERM"). In September 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 Senior Vice
President and Treasurer of each of the EMPLOYERS, 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 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 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 $83,175.00 until
changed by the Boards of Directors of the EMPLOYERS in accordance with
Section 3(b) of this AGREEMENT.
(b) Annual Salary Review. In September 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
October 1, at an amount not less than $83,175.00, 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 year,
such leave shall accrue to subsequent 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 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, 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 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, 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:
Mrs. Connie Ayres LaPlante
826 Convers Ave.
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/ 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 /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 23, 1997
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, 1997, 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 26, 1997
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-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 7,237
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 8,941
<INVESTMENTS-MARKET> 8,941
<LOANS> 174,027
<ALLOWANCE> 1,816
<TOTAL-ASSETS> 203,703
<DEPOSITS> 126,635
<SHORT-TERM> 32,805
<LIABILITIES-OTHER> 1,638
<LONG-TERM> 27,000
0
0
<COMMON> 3,656
<OTHER-SE> 11,970
<TOTAL-LIABILITIES-AND-EQUITY> 203,703
<INTEREST-LOAN> 14,273
<INTEREST-INVEST> 417
<INTEREST-OTHER> 163
<INTEREST-TOTAL> 14,853
<INTEREST-DEPOSIT> 5,142
<INTEREST-EXPENSE> 8,031
<INTEREST-INCOME-NET> 6,823
<LOAN-LOSSES> 222
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,753
<INCOME-PRETAX> 2,944
<INCOME-PRE-EXTRAORDINARY> 1,973
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,973
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 3.87
<LOANS-NON> 442
<LOANS-PAST> 111
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,611
<CHARGE-OFFS> 29
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 1,816
<ALLOWANCE-DOMESTIC> 0
<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 Annual Report on Form 10-KSB for fiscal year 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.
