FORM 10-QSB
Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-20380
FIRST FEDERAL BANCORP, INC.
(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
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (740) 453-0606
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of April 30, 1998, the latest practicable date, 1,575,116 shares of the
registrant's common stock, no par value, were issued and outstanding.
FIRST FEDERAL BANCORP, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION 13
SIGNATURES 15
PART I
FINANCIAL INFORMATION
First Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
At March 31 At September 30
1998 1997
----------- ---------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 7,875,326 $ 7,237,127
Overnight deposits 2,725,000 1,600,000
------------ ------------
Cash and cash equivalents $ 10,600,326 $ 8,837,127
Investment securities held to maturity
(Fair value - $7,252,000 in 3/98 and
$7,504,000 in 9/97) 7,251,892 7,503,561
Mortgage-backed securities held to maturity
(Fair value - $1,372,000 in 3/98 and $1,477,000
in 9/97) 1,360,310 1,437,681
Loans receivable, net 179,991,450 174,026,629
Premises and equipment, net 7,451,016 7,501,696
Accrued interest receivable and other assets 4,989,117 4,396,375
------------ ------------
Total Assets $211,644,111 $203,703,069
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $133,909,488 $126,634,570
Borrowed funds 60,365,000 59,805,000
Advances from borrowers for taxes and insurance 376,266 376,276
Accrued expenses and other liabilities 870,569 1,261,362
------------ ------------
Total Liabilities $195,521,323 $188,077,208
------------ ------------
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 12,958,547 12,461,620
Treasury shares, 76,584 shares (492,082) (492,082)
------------ ------------
Total Stockholders' Equity $ 16,122,788 $ 15,625,861
------------ ------------
Total Liabilities and Stockholders' Equity $211,644,111 $203,703,069
============ ============
</TABLE>
See Notes to the Consolidated Financial Statements.
First Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
-------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,828,236 $3,443,385 $7,623,805 $6,876,189
Interest on mortgage-backed securities 36,671 28,773 62,696 58,972
Interest on investment securities 103,975 56,728 202,662 120,670
Interest on other interest earning investments 23,405 42,578 56,496 85,120
---------- ---------- ---------- ----------
Total Interest Income 3,992,287 3,571,464 7,945,659 7,140,951
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 1,315,182 1,244,427 2,650,422 2,541,963
Interest on borrowed money 974,875 683,289 1,920,213 1,283,173
---------- ---------- ---------- ----------
Total Interest Expense 2,290,057 1,927,716 4,570,635 3,825,136
---------- ---------- ---------- ----------
Net Interest Income 1,702,230 1,643,748 3,375,024 3,315,815
---------- ---------- ---------- ----------
Provision for Loan Losses 179,102 12,427 408,058 160,090
Net Interest Income After Provision
for Loan Losses 1,523,128 1,631,321 2,966,966 3,155,725
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 76,095 74,787 157,886 150,635
Gain on sale of loans 38,772 9,552 63,234 24,912
Dividends on FHLB stock 59,719 41,673 116,109 79,297
Other operating income 121,797 100,604 237,332 203,736
---------- ---------- ---------- ----------
Total Noninterest Income 296,383 226,616 574,561 458,580
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 574,239 553,533 1,026,968 1,010,625
Occupancy and equipment expense 211,060 175,872 407,062 348,548
Deposit insurance expense 34,825 18,253 69,112 105,855
Data processing expense 126,271 88,516 209,541 167,608
Advertising 55,182 66,671 119,167 124,285
Ohio franchise taxes 55,294 49,209 104,152 94,147
Other operating expenses 241,955 250,700 520,770 475,161
---------- ---------- ---------- ----------
Total Noninterest Expenses 1,298,826 1,202,754 2,456,772 2,326,229
---------- ---------- ---------- ----------
Income Before Income Taxes 520,685 655,183 1,084,755 1,288,076
---------- ---------- ---------- ----------
Provision for Income Taxes 175,797 219,413 367,313 428,348
---------- ---------- ---------- ----------
Net Income $ 344,888 $ 435,770 $ 717,442 $ 859,728
========== ========== ========== ==========
EARNINGS PER SHARE
Basic $ .22 $ .28 $ .46 $ .55
---------- ---------- ---------- ----------
Diluted $ .20 $ .25 $ .41 $ .49
---------- ---------- ---------- ----------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
Basic 1,575,116 1,571,716 1,575,116 1,571,716
---------- ---------- ---------- ----------
Diluted 1,753,435 1,726,654 1,745,518 1,751,309
---------- ---------- ---------- ----------
DIVIDENDS DECLARED PER SHARE $ .07 $ .06 $ .14 $ .12
---------- ---------- ---------- ----------
</TABLE>
First Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
March 31
---------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 717,442 $ 859,728
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 408,058 160,090
Depreciation 263,456 210,096
Federal Home Loan Bank stock dividends (116,000) (79,200)
Amortization of net premiums (discounts) on
investment securities (12,648) (39,808)
Mortgage loans originated for sale (4,937,781) (2,271,476)
Proceeds from sale of mortgage loans 5,012,256 2,272,142
Change in other assets and other liabilities (616,436) (425,928)
----------- -----------
Net Cash Provided by Operating Activities 718,347 685,644
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 4,260,714 3,255,074
Purchases of investment securities/FHLB stock (4,247,497) (3,672,681)
Loans originated, net of principal repayments (6,591,392) (5,819,385)
Principal collected on mortgage-backed securities 77,370 118,764
Sale of real estate owned 128,290 83,228
Purchases of premises and equipment (212,776) (986,579)
----------- -----------
Net Cash Used for Investing Activities (6,585,291) (7,021,579)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposit accounts 7,274,918 (1,552,009)
Net change in advance payments by borrowers
for taxes and insurance (10) (166,836)
Net change in borrowed funds with original
maturities of less than three months 560,000 8,720,000
Dividends paid (204,765) (180,659)
Proceeds from exercise of options 0 9,300
----------- -----------
Net Cash Provided by Financing Activities 7,630,143 6,829,796
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,763,199 493,861
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,837,127 8,161,988
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,600,326 $ 8,655,849
=========== ===========
</TABLE>
FIRST FEDERAL BANCORP, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-QSB. The Form
10-QSB does not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements.
Only material changes in financial condition and results of operations are
discussed in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
In the opinion of management, the condensed Consolidated Financial
Statements contain all adjustments necessary to present fairly the financial
condition of First Federal Bancorp, Inc. ("Bancorp"), as of March 31, 1998,
and September 30, 1997, and the results of its operations for the three and
six months ended March 31, 1998, and 1997, and its cash flow for the six
months ended March, 1998 and 1997. The results of operations for the
interim periods reported herein are not necessarily indicative of results of
operations to be expected for the entire year.
2. Commitments
Outstanding commitments to originate mortgage loans and to sell mortgage
loans were $3,994,000 and $64,300 respectively, at March 31, 1998, and
$591,000 and $139,000 respectively at September 30, 1997.
3. Earnings and Dividends Per Common Share
Basic and diluted earnings per share are computed under a new accounting
standard effective in the quarter ended December 31, 1997. All prior
amounts have been restated to be comparable. Basic earnings per share is
based on net income (less preferred dividends) divided by the weighted
average number of shares outstanding during the period. Diluted earnings
per share shows the dilutive effect of additional common shares issuable
under stock options (and convertible securities). 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.
4. Allowance for Losses on Loans
Because some loans may not be repaid in full, an allowance for loan losses
is recorded. Increases to the allowance are recorded by a provision for
loan losses charged to expense. Estimating the risk of loss and the amount
of loss on any loan is necessarily subjective. Accordingly, the allowance
is maintained by management at a level considered adequate to cover possible
losses that are currently anticipated based on past loss experience, general
economic conditions, information about specific borrower situations,
including their financial position and collateral values, and other factors
and estimates which are subject to change over time. While management may
periodically allocate portions of the allowance for specific problem loan
situations, the whole allowance is available for any loan charge-offs that
occur. A loan is charged-off by management as a loss when deemed
uncollectible, although collection efforts continue and future recoveries
may occur.
Loans are considered impaired if full principal or interest payments are not
anticipated. Impaired loans are carried at the present value of expected
cash flows discounted at the loan's effective interest rate or at the fair
value of the collateral if the loan is collateral dependent. A portion of
the allowance for loan losses is allocated to impaired loans.
Smaller-balance, homogeneous loans are evaluated for impairment in total.
Such loans include residential first mortgage loans secured by one- to four-
family residences, residential construction loans, and automobile, home
equity and second mortgage loans. Mortgage loans secured by other
properties are evaluated individually for impairment. When analysis of
borrower operating results and financial condition indicates that underlying
cash flows of the borrower's business are not adequate to meet its debt
service requirements, the loan is evaluated for impairment. Loans are
generally moved to nonaccrual status when 90 days or more past due. These
loans are often also considered impaired. Impaired loans, or portions
thereof, are charged-off when deemed uncollectible. The nature of
disclosures for impaired loans is considered generally comparable to prior
nonaccrual and renegotiated loans and nonperforming and past-due asset
disclosures. The Savings Bank had no loans meeting the definition of
impaired during the quarters ended March 31, 1998, and September 30, 1997.
5. Interest Income on Loans
Interest on loans is accrued over the term of the loans based upon the
principal outstanding. Management reviews loans delinquent 90 days or more
to determine if the interest accrual should be discontinued. The carrying
value of impaired loans reflects cash payments, revised estimates of future
cash flows, and increases in the present value of expected cash flows due to
the passage of time. Cash payments representing interest income are
reported as such and other cash payments are reported as reductions in
carrying value. Increases or decreases in carrying value due to changes in
estimates of future payments or the passage of time are reported as
reductions or increases in bad debt expense.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
First Federal Bancorp, Inc. ("Bancorp"), is a savings and loan holding
company that wholly owns First Federal Savings Bank of Eastern Ohio (the
"Savings Bank"). The Savings Bank is engaged in the savings and loan
business primarily in Central and Eastern Ohio. The Savings Bank is a
member of the Federal Home Loan Bank ("FHLB") of Cincinnati, and the
accounts in the Savings Bank are insured up to the applicable limits by the
Federal Deposit Insurance Corporation in the Savings Association Insurance
Fund ("SAIF").
Note Regarding Forward-Looking Statements
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, First Federal's operations and First
Federal's actual results could differ significantly from those discussed in
the forward-looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein but also include changes
in the economy and interest rates in the nation and First Federal's market
area generally. See Exhibit 99 hereto, which is incorporated herein by
reference.
Some of the forward-looking statements included herein are the statements
regarding the following:
1. Management's determination of the amount of loan loss allowance;
2. Management's belief that deposits will grow modestly during fiscal year
1998, and plans to become more aggressive in promoting deposit products;
3. Management's anticipation that adjustable-rate loans will reprice higher
in fiscal year 1998 if interest rates remain relatively stable;
4. Legislative changes with respect to the federal thrift charter; and
5. Management's expectation that the amount of its consumer loans will
increase.
Changes in Financial Condition from September 30, 1997, to March 31, 1998
Total consolidated assets of Bancorp increased by $7.9 million, or 3.90%,
from $203.7 million at September 30, 1997, to $211.6 million at March 31,
1998. The increase is due primarily to an increase in loans receivable of
$6.0 million, and a $1.8 million increase in cash and cash equivalents.
Total liquidity (consisting of cash and amounts due from depository
institutions, interest-bearing deposits in other banks, and investment
securities) was $17.9 million at March 31, 1998, which is an increase of
$1.5 million from September 30, 1997. The regulatory liquidity of the
Savings Bank was 8.73% at March 31, 1998, and 7.53% at September 30, 1997,
which was in excess of the minimum regulatory requirement of 4%. Funds are
available through FHLB advances to meet the Savings Bank's liquidity
requirement if necessary.
The loans receivable balance increased $6.0 million for the six-month period
as the anticipated steady mortgage and consumer loan volume in the Savings
Bank's market area continued.
As of March 31, 1998, the Savings Bank had borrowed funds from the FHLB in
the amount of $60.4 million at a weighted average rate of 6.26%. FHLB
advances increased $560,000, or .94%, from $59.8 million at September 30,
1997. Deposits increased by $7.3 million, or 5.74%, from $126.6 million at
September 30, 1997, to $133.9 million at March 31, 1998. Management believes
that the Savings Bank will experience a modest increase in deposits during
the current fiscal year. As the result of the decrease in the SAIF premium
cost, the Savings Bank can afford to pay depositors a slightly higher rate
while managing the cost of funds. FHLB advances have increased in cost more
than deposits of a similar term. The Savings Bank therefore plans to become
more aggressive in promoting deposit products. No assurance can be
provided, however, that deposits will grow. Deposit levels are affected by
national, as well as local, interest rates and other national and local
economic circumstances.
The Savings Bank is subject to regulatory capital requirements established
by the Office of Thrift Supervision ("OTS"). The Savings Bank's capital
ratios were as follows at March 31, 1998.
<TABLE>
<CAPTION>
Amount Percent of
(In Thousands) Assets
-------------- ----------
<S> <C> <C>
Actual Tangible Capital $14,288 6.75%
Required Tangible Capital 3,180 1.50%
------- -----
Excess Tangible Capital $11,108 5.25%
Actual Core Capital $14,288 6.75%
Required Core Capital 6,360 3.00%
------- -----
Excess Core Capital $ 7,928 3.75%
Actual Risk Based Capital $15,726 11.27%
Required Risk Based Capital 11,245 8.00%
------- -----
Excess Risk Based Capital $ 4,481 3.27%
</TABLE>
Management is not aware of any proposed regulations or recommendations by
the OTS that, if implemented, would have a material effect upon the Savings
Bank's capital.
The deposits of First Federal and other savings associations are insured by
the FDIC in the SAIF. The deposit accounts of commercial banks are insured
by the FDIC in the Bank Insurance Fund (the "BIF"), except to the extent
such banks have acquired SAIF deposits. Legislation to recapitalize the
SAIF and to eliminate the significant premium disparity between the BIF and
the SAIF became effective September 30, 1996.
The recapitalization plan also provides that the cost of prior thrift
failures will be shared by both the SAIF and the BIF, which increased BIF
assessments for healthy banks to $.013 per $100 of deposits in 1997 and
1998. SAIF assessments for healthy savings associations in 1997 were, and
remain in 1998, $.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 March 31, 1998, First Federal had approximately $1.0
million in bad debt reserves subject to recapture for federal income tax
purposes. The deferred tax liability related to the recapture was
established in prior years, so First Federal's net income will not be
negatively affected by this legislation.
Year 2000 Considerations
As with all financial institutions, First Federal's operations depend almost
entirely on computer systems. First Federal is addressing the potential
problems associated with the possibility that the computers that control or
operate First Federal's operating systems, facilities and infrastructure may
not be programmed to read four-digit date codes and, upon arrival of the
year 2000, may recognize the two-digit code "00" as the year 1900, causing
systems to fail to function or to generate erroneous data. First Federal is
working with the companies that supply or service its computer-operated or
- -dependent systems to identify and remedy any year 2000 related problems.
As of the date of this Form 10-QSB, First Federal has not identified any
specific expenses that are reasonably likely to be incurred by First Federal
in connection with this issue and does not expect to incur significant
expense to implement corrective measures. No assurance can be given,
however, that significant expense will not be incurred in future periods.
In the event that First Federal is ultimately required to purchase
replacement computer systems, programs and equipment, or that substantial
expense must be incurred to make First Federal's current systems, programs
and equipment year 2000 compliant, First Federal's net income and financial
condition could be adversely affected.
In addition to possible expense related to its own systems, First Federal
could incur losses if loan payments are delayed due to year 2000 problems
affecting any of First Federal's primary market area. Because First
Federal's loan portfolio is highly diversified with regard to individual
borrowers and types of businesses and First Federal's primary market area is
not significantly dependent upon one employer or industry, First Federal
does not expect any significant or prolonged difficulties that will affect
net earnings or cash flow.
Comparison of Operating Results for the Three- and Six-Month
Periods Ended March 31, 1998, and 1997
Net interest income before provision for loan losses increased $58,000 for
the three-month comparative periods and $59,000 for the comparative six-
month periods. Total interest income increased by $421,000 for the three-
month period and $805,000 for the six-month period ended March 31, 1998,
compared to the same periods in 1997. The increase is primarily due to an
increase in the interest rate earned on mortgage loans and an increase in
loans receivable as the result of the stable loan market. The majority of
the loans in the Savings Bank's portfolio are adjustable-rate mortgage loans
whose interest rates fluctuate with market interest rates.
Interest expense increased by $362,000 for the comparative three-month
period and $746,000 for the comparative six-month period ended March 31,
1998, as the result of increases in interest rates of savings deposits at
First Federal and an increase in the amount of borrowings at the Federal
Home Loan Bank. It is anticipated that the adjustable-rate mortgage loan
portfolio will reprice at slightly higher rates because most loans
originated during fiscal year 1997 were not initially priced at the fully-
indexed interest rate and will be repricing upward at their first adjustment
and because the balance of the adjustable-rate mortgage loan portfolio will
not reprice substantially lower during 1998. 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
Bancorp.
Nonperforming and Delinquent Loans and Allowance for Loan Losses
Total nonaccrual loans and accruing loans that are 90 days past due were
$478,000 at March 31, 1998, which represents .27% of total loans. This was
a decrease of $135,000 from March 31, 1997.
There were no loans that are not currently classified as nonaccrual, 90 days
past due or restructured but which may be so classified in the near future
because management has concerns as to the ability of the borrowers to comply
with repayment terms.
The Savings Bank maintains an allowance for losses on loans and on real
estate owned. The allowance for losses on loans and on real estate owned
was $2,148,000 at March 31, 1998, compared to $1,711,000 at March 31, 1997.
During the six-month period ended March 31, 1998, the Savings Bank recorded
charge-offs of $76,000 and no recoveries, compared to $60,000 in charge-offs
and no recoveries during the same period in 1997. The provisions for loan
losses during the six-month periods ended March 31, 1998, and 1997, were
$408,000 and $160,000 respectively. The increase in loan loss provision is
due to increased delinquencies. Consumer loan delinquencies were $1,335,000
at March 31, 1998, an increase of $625,000 from March 31, 1997, and a
decrease of $177,000 from December 31, 1997.
Noninterest Income and Expense
The federal income tax provision decreased $44,000 for the three-month
period and $61,000 for the six-month period ended March 31, 1998, compared
to the same periods in 1997 due to lower net income for the period.
Total noninterest income increased $70,000 for the three-month period and
$116,000 for the six-month period ended March 31, 1998, compared to the same
periods in 1997. Dividends on FHLB stock increased $18,000 for the
comparative three-month periods and $37,000 for the comparative six-month
periods due to an increase in FHLB stock held. Gain on sale of loans
increased $29,000 for the comparative three-month periods and $38,000 for
the comparative six-month periods. Other income increased $21,000 for the
comparative three-month periods and $34,000 for the comparative six-month
periods due to increased collection of loan late charges and fees from the
ATM and automatic transfer services.
Total noninterest expenses increased $96,000 for the three-month period and
$131,000 for the six-month period ended March 31, 1998, compared to the same
periods in 1997. Salaries and benefits increased $21,000 for the three-
month comparative periods and $16,000 for the comparative six-month periods.
The salaries and benefits increase is a result of a decrease of $12,000 in
retirement plan accrual costs, partially offset by an increase in salaries
of $20,000. Salaries increased due to the increase in staff for the
comparative three- and six-month periods. The SAIF premium increased
$17,000 for the comparative three-month periods due to increased deposits
and decreased $37,000 for the comparative six-month periods due to the
reduction in the SAIF premium that was reflected in the SAIF quarterly
billing of January 1997. Occupancy expense increased $35,000 for the three-
month period and $59,000 for the six-month period, compared to the same time
period in 1997, due to the increased depreciation on the new Main Office
building. Other noninterest expenses decreased $9,000 for the comparative
three-month period and increased $46,000 for the comparative six-month
period due to several items, including a change in our area code to 740,
which required all business cards and stationary having to be reordered, a
Sales Tax assessment, a loss on checks of $25,000 due to a fraudulent act,
one-time debit card start-up costs, and increased training and seminar
costs.
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
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 was
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 has been restated to conform with the new presentation; however, such
restatement is not 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 had no material impact on
First Federal. SFAS 129 was 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 issued 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 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.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting was held February 18, 1998. The following directors were
elected to terms expiring in 2000.
For Withheld
--- --------
John C. Matesich, III 1,213,380 74,796
Don R. Parkhill 1,213,380 74,796
J. William Plummer 1,213,380 74,796
Those directors continuing their term were Ward D. Coffman, III; Robert D.
Goodrich, II; Patrick L. Hennessey; and Connie Ayres LaPlante.
One other matter was presented to the shareholders.
1. To ratify the selection of Crowe, Chizek and Company LLP as the auditors
of Bancorp for the current fiscal year:
For 1,284,076 Against 0 Abstentions 4,100
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 3.1 Articles of Incorporation of First Federal Bancorp, Inc. (The
Articles of Incorporation of First Federal Bancorp, Inc.
("Bancorp"), filed as Exhibit 3.1 to Bancorp's Registration
Statement on Form S-1 ("S-1") filed with the Securities and
Exchange Commission ("SEC") on March 16, 1992, are
incorporated herein by reference.)
Exhibit 3.2 Amendment to the Articles of Incorporation of First Federal
Bancorp, Inc. (The Amendment to the Articles of Incorporation
of Bancorp filed as Exhibit 3.2 to Bancorp's 10-K for the
fiscal year ended September 30, 1992, filed with the SEC on
December 29, 1992 (the "1992 10-K") is incorporated herein by
reference.)
Exhibit 3.3 Code of Regulations of First Federal Bancorp, Inc. (The Code
of Regulations of Bancorp filed as Exhibit 3.2 to Bancorp's
S-1 filed with the SEC on March 16, 1992, is incorporated
herein by reference.)
Exhibit 3.4 Amendment to the Code of Regulations of First Federal Bancorp,
Inc. (The Amendment to the code of Regulations of Bancorp
filed as Exhibit 3.4 to the 1992 10-K is incorporated herein
by reference.)
Exhibit 27.1 Financial Data Schedule for March 31, 1998
Exhibit 27.2 Restated Financial Data Schedule for September 30, 1996
Exhibit 27.3 Restated Financial Data Schedule for December 31, 1996
Exhibit 27.4 Restated Financial Data Schedule for March 31, 1997
Exhibit 27.5 Restated Financial Data Schedule for June 30, 1997
Exhibit 27.6 Restated Financial Data Schedule for September 30, 1997
Exhibit 99.2 Safe Harbor Under the Private Securities Litigation Reform Act
of 1995
No reports on Form 8-K were filed during the quarter for which this report
is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 1998 By: /s/ J. William Plummer
J. William Plummer
President
Date: May 15, 1998 By: /s/ Connie Ayres LaPlante
Connie Ayres LaPlante
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-QSB.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 7,875
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,725
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 8,612
<INVESTMENTS-MARKET> 8,624
<LOANS> 179,991
<ALLOWANCE> 2,148
<TOTAL-ASSETS> 211,644
<DEPOSITS> 133,909
<SHORT-TERM> 9,365
<LIABILITIES-OTHER> 1,247
<LONG-TERM> 51,000
3,656
0
<COMMON> 0
<OTHER-SE> 12,466
<TOTAL-LIABILITIES-AND-EQUITY> 211,644
<INTEREST-LOAN> 7,624
<INTEREST-INVEST> 265
<INTEREST-OTHER> 57
<INTEREST-TOTAL> 7,946
<INTEREST-DEPOSIT> 2,650
<INTEREST-EXPENSE> 1,920
<INTEREST-INCOME-NET> 3,375
<LOAN-LOSSES> 408
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,457
<INCOME-PRETAX> 1,085
<INCOME-PRE-EXTRAORDINARY> 717
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 717
<EPS-PRIMARY> .46
<EPS-DILUTED> .41
<YIELD-ACTUAL> 3.58
<LOANS-NON> 476
<LOANS-PAST> 2
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,002
<CHARGE-OFFS> 33
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,148
<ALLOWANCE-DOMESTIC> 1,698
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 450
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 4,987
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,175
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 6,209
<INVESTMENTS-MARKET> 6,204
<LOANS> 160,298
<ALLOWANCE> 1,611
<TOTAL-ASSETS> 184,467
<DEPOSITS> 130,072
<SHORT-TERM> 24,970
<LIABILITIES-OTHER> 2,428
<LONG-TERM> 13,000
2,656
0
<COMMON> 0
<OTHER-SE> 10,342
<TOTAL-LIABILITIES-AND-EQUITY> 184,467
<INTEREST-LOAN> 13,153
<INTEREST-INVEST> 357
<INTEREST-OTHER> 121
<INTEREST-TOTAL> 13,631
<INTEREST-DEPOSIT> 5,414
<INTEREST-EXPENSE> 7,099
<INTEREST-INCOME-NET> 6,532
<LOAN-LOSSES> 131
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,093
<INCOME-PRETAX> 2,179
<INCOME-PRE-EXTRAORDINARY> 1,434
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,434
<EPS-PRIMARY> .91
<EPS-DILUTED> .84
<YIELD-ACTUAL> 4.04
<LOANS-NON> 386
<LOANS-PAST> 126
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,499
<CHARGE-OFFS> 28
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 1,161
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 450
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-QSB.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,669
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 6,131
<INVESTMENTS-MARKET> 6,142
<LOANS> 163,148
<ALLOWANCE> 1,723
<TOTAL-ASSETS> 189,065
<DEPOSITS> 126,315
<SHORT-TERM> 33,670
<LIABILITIES-OTHER> 1,742
<LONG-TERM> 13,000
3,656
0
<COMMON> 0
<OTHER-SE> 10,680
<TOTAL-LIABILITIES-AND-EQUITY> 189,065
<INTEREST-LOAN> 3,433
<INTEREST-INVEST> 93
<INTEREST-OTHER> 43
<INTEREST-TOTAL> 3,569
<INTEREST-DEPOSIT> 1,297
<INTEREST-EXPENSE> 600
<INTEREST-INCOME-NET> 1,672
<LOAN-LOSSES> 148
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,123
<INCOME-PRETAX> 633
<INCOME-PRE-EXTRAORDINARY> 424
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 424
<EPS-PRIMARY> .27
<EPS-DILUTED> .25
<YIELD-ACTUAL> 3.86
<LOANS-NON> 607
<LOANS-PAST> 111
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,611
<CHARGE-OFFS> 36
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,723
<ALLOWANCE-DOMESTIC> 1,273
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 450
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-QSB.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 5,356
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 6,092
<INVESTMENTS-MARKET> 6,092
<LOANS> 165,865
<ALLOWANCE> 1,711
<TOTAL-ASSETS> 191,686
<DEPOSITS> 128,520
<SHORT-TERM> 16,690
<LIABILITIES-OTHER> 1,798
<LONG-TERM> 30,000
3,656
0
<COMMON> 0
<OTHER-SE> 11,022
<TOTAL-LIABILITIES-AND-EQUITY> 191,686
<INTEREST-LOAN> 6,876
<INTEREST-INVEST> 180
<INTEREST-OTHER> 85
<INTEREST-TOTAL> 7,141
<INTEREST-DEPOSIT> 2,542
<INTEREST-EXPENSE> 1,283
<INTEREST-INCOME-NET> 3,316
<LOAN-LOSSES> 160
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,326
<INCOME-PRETAX> 1,288
<INCOME-PRE-EXTRAORDINARY> 860
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 860
<EPS-PRIMARY> .55
<EPS-DILUTED> .49
<YIELD-ACTUAL> 3.75
<LOANS-NON> 492
<LOANS-PAST> 121
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,611
<CHARGE-OFFS> 60
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,711
<ALLOWANCE-DOMESTIC> 1,261
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 450
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FROM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-QSB.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 7,470
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,675
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 8,008
<INVESTMENTS-MARKET> 8,023
<LOANS> 171,242
<ALLOWANCE> 1,739
<TOTAL-ASSETS> 201,262
<DEPOSITS> 129,074
<SHORT-TERM> 29,445
<LIABILITIES-OTHER> 1,551
<LONG-TERM> 26,000
3,656
0
<COMMON> 0
<OTHER-SE> 11,536
<TOTAL-LIABILITIES-AND-EQUITY> 201,262
<INTEREST-LOAN> 10,550
<INTEREST-INVEST> 275
<INTEREST-OTHER> 130
<INTEREST-TOTAL> 10,955
<INTEREST-DEPOSIT> 3,826
<INTEREST-EXPENSE> 2,045
<INTEREST-INCOME-NET> 5,084
<LOAN-LOSSES> 162
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,546
<INCOME-PRETAX> 2,192
<INCOME-PRE-EXTRAORDINARY> 1,468
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,468
<EPS-PRIMARY> .93
<EPS-DILUTED> .85
<YIELD-ACTUAL> 3.84
<LOANS-NON> 451
<LOANS-PAST> 111
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,611
<CHARGE-OFFS> 73
<RECOVERIES> 39
<ALLOWANCE-CLOSE> 1,739
<ALLOWANCE-DOMESTIC> 1,289
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 450
</TABLE>
<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 FROM 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> 8,981
<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
3,656
0
<COMMON> 0
<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> 1.25
<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 Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1998, 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 that 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.
Legislation enacted in 1996 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.