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 June 30, 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 executive office) (Zip Code)
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 July 31, 1998, the latest practicable date, 3,150,532 shares of the
registrant's common stock, no par value, were issued and outstanding.
Page 1 of 14 Pages
FIRST FEDERAL BANCORP, INC.
INDEX
-----
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
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 14
</TABLE>
PART I
FINANCIAL INFORMATION
First Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
At June 30 At September 30
1998 1997
------------ ---------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 7,218,137 $ 7,237,127
Overnight deposits 3,600,000 1,600,000
-----------------------------
Cash and cash equivalents 10,818,137 8,837,127
Investment and mortgage-backed securities held to maturity (Fair
value - $8,597,000 in 6/98 and $8,981,000 in 9/97) 8,473,640 8,941,242
Loans receivable, net 175,645,985 174,026,629
Premises and equipment, net 7,382,938 7,501,696
Accrued interest receivable and other assets 5,060,779 4,396,375
-----------------------------
Total Assets $207,381,479 $203,703,069
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $139,858,377 $126,634,570
Borrowed funds 49,999,004 59,805,000
Accrued expenses and other liabilities 1,031,263 1,637,638
-----------------------------
Total Liabilities $190,888,644 $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,
3,303,400 shares issued $ 3,656,323 $ 3,656,323
Retained earnings 13,327,630 12,461,620
Treasury shares, 152,868 and 153,168 shares (491,118) (492,082)
-----------------------------
Total Stockholders' Equity $ 16,492,835 $ 15,625,861
-----------------------------
Total Liabilities and Stockholders' Equity $207,381,479 $203,703,069
=============================
</TABLE>
See Notes to the Consolidated Financial Statements.
First Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
------------------------ --------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,823,602 $3,674,303 $11,447,408 $10,550,492
Interest on mortgage-backed securities 14,042 27,067 76,738 86,039
Interest on investment securities 103,112 67,906 305,773 188,576
Interest on other interest-earning investments 31,829 45,180 88,325 130,300
------------------------------------------------------
Total Interest Income 3,972,585 3,814,456 11,918,244 10,955,407
------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,424,959 1,283,796 4,075,381 3,825,759
Interest on borrowed money 833,998 762,019 2,754,210 2,045,193
------------------------------------------------------
Total Interest Expense 2,258,957 2,045,815 6,829,591 5,870,952
------------------------------------------------------
Net Interest Income 1,713,628 1,768,641 5,088,653 5,084,455
------------------------------------------------------
Provision for Loan Losses (78,953) 2,206 329,105 162,296
Net Interest Income After Provision for Loan Losses 1,792,581 1,766,435 4,759,548 4,922,159
------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 85,123 78,495 243,009 229,129
Gain on sale of loans 65,746 14,481 128,980 39,392
Dividends on FHLB stock 61,691 46,480 177,800 125,778
Other operating income 117,937 217,917 355,269 421,652
------------------------------------------------------
Total Noninterest Income 330,497 357,373 905,058 815,951
------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 537,198 496,177 1,564,166 1,506,802
Occupancy and equipment expense 203,569 200,330 610,631 548,876
Deposit insurance expense 34,748 34,144 103,860 139,999
Data processing expense 127,332 78,223 336,873 245,831
Advertising 60,875 86,303 180,042 210,587
Ohio franchise taxes 55,625 49,505 159,777 143,652
Other operating expenses 390,780 275,015 911,552 750,175
------------------------------------------------------
Total Noninterest Expenses 1,410,127 1,219,697 3,866,901 3,545,922
------------------------------------------------------
Income Before Income Taxes 712,951 904,111 1,797,705 2,192,188
------------------------------------------------------
Provision for Income Taxes 234,847 295,905 602,160 724,253
------------------------------------------------------
Net Income $ 478,104 $ 608,206 $ 1,195,545 $ 1,467,935
======================================================
EARNINGS PER SHARE (1)
Basic $ .15 $ .19 $ .38 $ .47
------------------------------------------------------
Diluted .14 .18 .34 .43
------------------------------------------------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES (1)
Basic 3,150,532 3,143,432 3,150,532 3,143,432
------------------------------------------------------
Diluted 3,539,740 3,452,764 3,536,677 3,449,818
------------------------------------------------------
DIVIDENDS DECLARED PER SHARE (1) $ .035 $ .03 $ .105 $ .09
------------------------------------------------------
<FN>
- -------------------
<F1> On June 3, 1998, and on November 6, 1996, the Board of Directors declared
two-for-one stock splits in the form of 100% stock dividends. All
earnings and dividends per share disclosures have been restated to
reflect these stock splits.
</FN>
</TABLE>
See Notes to the Consolidated Financial Statements.
First Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 30
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 1,060,140 $ 917,475
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 5,864,208 4,760,188
Purchases of investment securities/FHLB stock (5,757,913) (7,417,014)
Loans originated, net of principal repayments (2,325,570) (11,251,905)
Principal collected on mortgage-backed securities 128,124 152,715
Proceeds from sales of real estate owned and other chattel owned 419,575 110,701
Purchases of premises and equipment (279,534) (1,173,103)
--------------------------
Net Cash Used for Investing Activities (1,951,110) (14,818,418)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposit accounts 13,223,807 (997,999)
Net change in advance payments by borrowers for taxes and insurance (233,021) (327,428)
Net change in borrowed funds with original maturities of less than
three months (9,805,996) 17,475,000
Dividends paid (315,023) (274,963)
Proceeds from exercise of options 2,213 9,300
--------------------------
Net Cash Provided by Financing Activities 2,871,980 15,883,910
--------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,981,010 1,982,967
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,837,127 8,161,988
--------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,818,137 $10,144,955
==========================
</TABLE>
See Notes to the Consolidated Financial Statements.
FIRST FEDERAL BANCORP, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
- ---------------------------
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. The Form 10-QSB does
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. Only material changes
in financial condition and results of operations are discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
In the opinion of management, the condensed Consolidated Financial Statements
contain all adjustments necessary to present fairly the financial condition of
First Federal Bancorp, Inc. ("Bancorp"), as of June 30, 1998, and September 30,
1997, and the results of its operations for the three and nine months ended
June 30, 1998, and 1997, and its cash flow for the nine months ended June, 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 $1,064,000 and $197,000 respectively, at June 30, 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 June 3, 1998, and on November 6, 1996, the Board of
Directors declared two-for-one stock splits in the form of 100% stock
dividends. All earnings and dividends per share disclosures have been restated
to reflect these stock splits.
4. Allowance for Losses on Loans
- -----------------------------------
Because some loans may not be repaid in full, an allowance for loan losses is
recorded. Increases to the allowance are recorded by a provision for loan
losses charged to expense. Estimating the risk of loss and the amount of loss
on any loan is necessarily subjective. Accordingly, the allowance is maintained
by management at a level considered adequate to cover possible losses that are
currently anticipated based on past loss experience, general economic
conditions, information about specific borrower situations, including their
financial position and collateral values, and other factors and estimates which
are subject to change over time. While management may periodically allocate
portions of the allowance for specific problem loan situations, the whole
allowance is available for any loan charge-offs that occur. A loan is
charged-off by management as a loss when deemed uncollectible, although
collection efforts continue and future recoveries may occur.
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 June 30, 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"
or "First Federal"). 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 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;
5. Management's expectation that the amount of its consumer loans will
increase; and
6. Management's expectation that losses on car loans may increase.
Changes in Financial Condition from September 30, 1997, to June 30, 1998
- ------------------------------------------------------------------------
Total consolidated assets of Bancorp increased by $3.7 million, or 1.81%, from
$203.7 million at September 30, 1997, to $207.4 million at June 30, 1998. The
increase is due primarily to an increase in loans receivable of $1.6 million,
and a $2.0 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 $18.0 million at June 30, 1998, which is an increase of $1.7
million from September 30, 1997. The regulatory liquidity of the Savings Bank
was 7.73% at June 30, 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 $1.6 million for the nine-month period
as the anticipated steady mortgage and consumer loan volume in the Savings
Bank's market area continued.
As of June 30, 1998, the Savings Bank had borrowed funds from the FHLB in the
amount of $50.0 million at a weighted average rate of 6.35%. FHLB advances
decreased $9.8 million, or 16.40%, from $59.8 million at September 30, 1997.
Deposits increased by $13.3 million, or 10.44%, from $126.6 million at
September 30, 1997, to $139.9 million at June 30, 1998. A Jumbo CD Program has
generated $6.2 million in deposits at a weighted average interest rate of 5.80%
since its initiation in February of 1998. Management believes that the Savings
Bank will continue to experience an 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 June 30, 1998.
<TABLE>
<CAPTION>
Amount Percent of
(In Thousands) Assets
-------------- ----------
<S> <C> <C>
Actual Tangible Capital $14,729 7.12%
Required Tangible Capital 4,136 1.50%
------------------------
Excess Tangible Capital $10,593 5.62%
Actual Core Capital $14,729 7.12%
Required Core Capital 8,272 3.00%
------------------------
Excess Core Capital $ 6,457 4.12%
Actual Risk-Based Capital $16,185 11.88%
Required Risk-Based Capital 10,895 8.00%
------------------------
Excess Risk-Based Capital $ 5,290 3.88%
</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 June 30,
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 Nine-Month Periods Ended
June 30, 1998, and 1997
- ---------------------------------------------------------------------------
Net interest income before provision for loan losses decreased $55,000 for the
three-month comparative periods and increased $4,000 for the comparative
nine-month periods. Total interest income increased by $158,000 for the
three-month period and $963,000 for the nine-month period ended June 30, 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 $213,000 for the comparative three-month period
and $959,000 for the comparative nine-month period ended June 30, 1998, as the
result of increases in interest rates on savings deposits at First Federal and
a reliance on the 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
$676,000 at June 30, 1998, which represents .38% of total loans. This was an
increase of $114,000 from June 30, 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
$2,109,000 at June 30, 1998, compared to $1,739,000 at June 30, 1997. During
the nine-month period ended June 30, 1998, the Savings Bank recorded
charge-offs of $78,000 and $42,000 of recoveries, compared to $73,000 in
charge-offs and net recoveries of $39,000 during the same period in 1997. The
provisions for loan losses during the nine-month periods ended June 30, 1998,
and 1997, were $329,000 and $162,000 respectively. The increase in loan loss
provision is due to increased delinquencies and charge-offs. Consumer loan
delinquencies were $1.5 million at June 30, 1998, an increase of $.5 million
from June 30, 1997, and no change from December 31, 1997.
Noninterest Income and Expense
- ------------------------------
The federal income tax provision decreased $61,000 for the three-month period
and $122,000 for the nine-month period ended June 30, 1998, compared to the
same periods in 1997 due to lower net income for the period.
Total noninterest income decreased $27,000 for the three-month period and
increased $89,000 for the nine-month period ended June 30, 1998, compared to
the same periods in 1997. Dividends on FHLB stock increased $15,000 for the
comparative three-month periods and $52,000 for the comparative nine-month
periods due to an increase in FHLB stock held. Gain on sale of loans increased
$51,000 for the comparative three-month periods and $90,000 for the comparative
nine-month periods. Other income decreased $100,000 for the comparative
three-month periods and $75,000 for the comparative nine-month periods due to
not repeating the sale of written-off land in June of 1997 resulting in a gain
of $115,000.
Total noninterest expenses increased $19,000 for the three-month period and
$321,000 for the nine-month period ended June 30, 1998, compared to the same
periods in 1997. Salaries and benefits increased $41,000 for the three-month
comparative periods and $57,000 for the comparative nine-month periods. The
salaries and benefits increase is a result of a decrease of $13,000 in
retirement plan accrual costs, partially offset by an increase in salaries of
$28,000. Salaries increased due to the increase in staff for the comparative
three- and nine-month periods. The SAIF premium remained stable for the
comparative three-month periods and decreased $36,000 for the comparative
nine-month periods due to the reduction in the SAIF premium that was reflected
in the SAIF quarterly billing of January 1997. Occupancy expense remained
stable for the three-month period and increased $53,000 for the nine-month
period, compared to the same time period in 1997, due to the increased
depreciation on the new Main Office building. Other noninterest expenses
increased $116,000 for the comparative three-month period and $161,000 for the
comparative nine-month period due to the loss on the sale of repossessed car
loans, as delinquencies continued and repossession of the cars occurred. Due to
the increased delinquencies on car loans, First Federal may experience
increased losses on these loans.
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 Bancorp'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 Bancorp. 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
---------------------------------------------------
Not applicable
ITEM 5. OTHER INFORMATION
-----------------
Any proposals of shareholders intended to be included in Bancorp's
proxy statement and proxy card for the 1999 Annual Meeting of
Shareholders should be sent to Bancorp by certified mail and must
be received by Bancorp not later than September 11, 1998. In
addition, if a shareholder intends to present a proposal at the
1999 Annual Meeting without including the proposal in the proxy
materials related to that meeting, and if the proposal is not
received by November 25, 1998, then the proxies designated by the
Board of Directors of Bancorp for the 1999 Annual Meeting of
Shareholders of Bancorp may vote in their discretion on any such
proposal any shares for which they have been appointed proxies
without mention of such matter in the proxy statement or on the
proxy card for such meeting.
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 Financial Data Schedule for June 30, 1998
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: August 14, 1998 By: /s/ J. William Plummer
-----------------------------------
J. William Plummer
President
Date: August 14, 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 CONSLIDATED STATEMENT OF INCOME FILED AS PART
OF THE QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-QSB.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 7,218
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 8,474
<INVESTMENTS-MARKET> 8,597
<LOANS> 175,646
<ALLOWANCE> 2,109
<TOTAL-ASSETS> 207,381
<DEPOSITS> 139,858
<SHORT-TERM> 7,999
<LIABILITIES-OTHER> 1,031
<LONG-TERM> 42,000
0
0
<COMMON> 3,656
<OTHER-SE> 12,837
<TOTAL-LIABILITIES-AND-EQUITY> 207,381
<INTEREST-LOAN> 11,447
<INTEREST-INVEST> 383
<INTEREST-OTHER> 88
<INTEREST-TOTAL> 11,918
<INTEREST-DEPOSIT> 4,075
<INTEREST-EXPENSE> 2,754
<INTEREST-INCOME-NET> 5,089
<LOAN-LOSSES> 329
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,867
<INCOME-PRETAX> 1,798
<INCOME-PRE-EXTRAORDINARY> 1,196
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,196
<EPS-PRIMARY> .38
<EPS-DILUTED> .34
<YIELD-ACTUAL> 3.66
<LOANS-NON> 610
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,148
<CHARGE-OFFS> 2
<RECOVERIES> 42
<ALLOWANCE-CLOSE> 2,109
<ALLOWANCE-DOMESTIC> 1,759
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 350
</TABLE>
EXHIBIT 99.2
------------
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
----------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
a "safe harbor" for forward-looking statements to encourage companies to
provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those discussed in the statement. First
Federal Bancorp, Inc. ("Bancorp") desires to take advantage of the "safe
harbor" provisions of the Act. Certain information, particularly information
regarding future economic performance and finances and plans and objectives of
management, contained or incorporated by reference in Bancorp's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 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.
