FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1998
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission File Number: 0-20380
FIRST FEDERAL BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-1341110
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
505 Market Street, Zanesville, Ohio 43701
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code:
(740) 453-0606
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Securities registered under Section 12(b) of the Exchange Act:
None
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Securities registered under Section 12(g) of the Exchange Act:
Common shares, without par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ X ]
---
The issuer's revenues for its most recent fiscal year were
$17,023,618.
Based upon information regarding the average of the bid and asked
price provided by The Nasdaq SmallCap Market, the aggregate market value of
the voting shares held by nonaffiliates of the registrant on November 30,
1998, was $26,793,312.
3,150,532 of the registrant's common shares were issued and
outstanding on November 30, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
The following sections of the definitive Proxy Statement for the 1999
Annual Meeting of Shareholders of First Federal Bancorp, Inc., are
incorporated by reference into Part III of this Form 10-KSB:
1. Proposal One: Election of Directors;
2. Proposal Two: Amendment to Articles of Incorporation;
3. Proposal Three: Ratification of Selection of Auditors;
4. Compensation of Executive Officers and Directors; and
5. Voting Securities and Ownership of Certain Beneficial Owners and
Management.
Item 1. Description of Business.
General
First Federal Bancorp, Inc. ("Bancorp"), is a unitary savings and loan
holding company organized under Ohio law in 1992. Through its wholly-owned
subsidiary, First Federal Savings Bank of Eastern Ohio ("First Federal"),
Bancorp is engaged in the savings and loan business in Ohio.
First Federal is a stock federal savings bank that has served the
Zanesville, Ohio, area for over 100 years. Originally organized as a mutual
federal savings bank, First Federal completed its conversion from mutual to
stock form on July 14, 1992 (the "Conversion"). The deposits of First
Federal are insured up to applicable limits by the Federal Deposit Insurance
Corporation (the "FDIC") in the Savings Association Insurance Fund (the
"SAIF"). First Federal is a member of the Federal Home Loan Bank (the
"FHLB") of Cincinnati and is subject to regulation and supervision by the
Office of Thrift Supervision (the "OTS").
First Federal is principally engaged in the business of making first
mortgage loans secured by one-to-four family residential real estate located
in First Federal's primary market area. First Federal also originates loans
secured by multifamily real estate (over four units) and nonresidential real
estate. The origination of consumer loans, particularly automobile loans,
also constitutes a significant portion of First Federal's lending
activities. Loan funds are obtained primarily from savings deposits, which
are insured up to applicable limits by the FDIC, FHLB advances, and loan
repayments. In addition to originating loans, First Federal invests in U.S.
government and agency obligations, interest-bearing deposits in banks,
mortgage-backed securities and other investments permitted by applicable
law. First Federal has contracted with Money Concepts as a third-party
provider of investment products and financial planning services for its
customers.
First Federal conducts business from its main office in Zanesville,
Ohio, and from five full-service branch offices. Two of First Federal's
branches are located in Zanesville. The other branches are located in
Roseville, Coshocton and Newcomerstown, Ohio. First Federal's primary
market area consists of the Ohio counties of Muskingum, Coshocton and
Tuscarawas, in which the offices of First Federal are located, and the
adjacent county of Perry.
In addition to the historic financial information contained herein,
the following discussion includes forward-looking statements that involve
risks and uncertainties. Economic circumstances and Bancorp's operations
and actual results could differ significantly from those discussed in those
forward-looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein, but also include
changes in the economy and interest rates in the nation and in Bancorp's
general market area. See Exhibit 99.2 hereto, "Safe Harbor Under the
Private Securities Litigation Reform Act of 1995," which is incorporated
herein by reference.
Lending Activities
General. First Federal's primary lending activity is the origination
of permanent loans and construction loans secured by one-to-four family
homes located in First Federal's primary market area. Construction loans
and permanent loans secured by multifamily properties containing five units
or more and nonresidential properties are also offered by First Federal. In
addition to mortgage lending, First Federal makes automobile loans and other
consumer loans, including loans secured by deposit accounts, home equity
lines-of-credit, home improvement loans and unsecured loans. First
Federal's net loan portfolio was approximately $169.6 million at September
30, 1998, and constituted 79.45% of total assets.
Loan Portfolio Composition. The following table presents certain
information in respect of the composition of First Federal's loan portfolio
at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
Percent Percent Percent Percent Percent
of total of total of total of total of total
Amount loans Amount loans Amount loans Amount loans Amount loans
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Type of Loan:
- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One-to-four
family $ 96,856 55.99% $102,723 58.04% $ 99,496 59.57% $ 97,347 62.55% $ 90,092 62.96%
Multifamily
(over 4
units) 8,735 5.05 9,692 5.47 9,176 5.49 8,265 5.31 9,179 6.41
Construction 4,459 2.58 3,082 1.74 6,582 3.94 3,601 2.31 5,485 3.83
Nonresidential
real estate 10,620 6.14 9,799 5.54 8,505 5.09 7,285 4.68 5,699 3.98
Consumer Loans
Automobile 35,861 20.73 36,267 20.49 30,376 18.19 26,767 17.20 21,950 15.34
Home equity 6,287 3.63 4,652 2.63 3,767 2.25 4,136 2.66 3,466 2.42
Home
improvement 323 .19 464 .26 662 .40 818 .52 713 .50
Deposit
account 467 .27 422 .24 484 .29 298 .19 287 .20
Education - - - - - - 31 .02 1,061 .74
Other secured 6,813 3.94 7,237 4.09 5,799 3.47 5,210 3.35 4,280 2.99
Unsecured 670 .39 517 .29 515 .31 339 .22 252 .18
Commercial 1,892 1.09 2,137 1.21 1,663 1.00 1,544 .99 648 .45
---------------------------------------------------------------------------------------------------------
Total loans $172,983 100.00% $176,992 100.00% $167,025 100.00% $155,641 100.00% $143,112 100.00%
Less:
Undisbursed
loans
in process 1,485 1,374 5,105 2,274 3,207
Net deferred
origination
fees
(costs) and
amortized
discounts (167) (225) 11 124 267
Allowance
for loan
losses 2,042 1,816 1,611 1,499 1,021
---------------------------------------------------------------------------------------------------------
Total
loans - net $169,623 $174,027 $160,298 $151,744 $138,617
=========================================================================================================
</TABLE>
Loan Maturity Schedule. The following table sets forth certain
information at September 30, 1998, regarding the net dollar amount of
certain loans maturing in First Federal's portfolio, based on contractual
terms to maturity:
<TABLE>
<CAPTION>
Due during the years ending September 30,
-----------------------------------------
2000 to
1999 2003 > 2003 Total
(In thousands)
<S> <C> <C> <C> <C>
Fixed Rate Loans:
Real Estate - Construction $ - $ - $ - $ -
Commercial - - - -
----------------------------------------
$ - $ - $ - $ -
========================================
Adjustable Rate Loans:
Real Estate - Construction $ 524 $ - $3,935 $4,459
Commercial 1,892 - - 1,892
----------------------------------------
$2,416 $ - $3,935 $6,351
========================================
Total Fixed and Adjustable Rate Loans:
Real Estate - Construction $ 524 $ - $3,935 $4,459
Commercial 1,892 - - 1,892
----------------------------------------
$2,416 $ - $3,935 $6,351
========================================
</TABLE>
One-to-Four Family Residential Real Estate Loans. The primary lending
activity of First Federal has been the origination of permanent and
construction loans secured by one-to-four family residences, primarily
single-family residences, located within First Federal's primary market
area. Each of such loans is secured by a mortgage on the underlying real
estate and improvements thereon, if any.
OTS regulations limit the amount which First Federal may lend in
relationship to the appraised value of the real estate and improvements at
the time of loan origination. In accordance with such regulations, First
Federal makes loans on one-to-four family residences up to 95% of the value
of the real estate and improvements (the "Loan-to-Value Ratio" or "LTV").
The principal amount of any loan which exceeds an 80% LTV at the time of
origination is usually covered by private mortgage insurance at the expense
of the borrower. Fixed-rate 1-4 family residential real estate loans are
offered with terms of up to 30 years.
Adjustable-rate mortgage loans ("ARMs") are offered by First Federal
for terms of up to 30 years. The interest rate adjustment periods on the
residential ARMs are either one or three years. The maximum allowable
adjustment at each adjustment date is usually 2% with a maximum adjustment
of 6% over the term of the loan. The interest rate adjustments on one-year
and three-year residential ARMs presently originated by First Federal are
tied to changes in the weekly average yield on one- and three-year U.S.
Treasury securities, respectively. Rate adjustments are computed by adding
a stated margin, typically 300 basis points, to the index. From time to
time, First Federal originates residential ARMs which have an initial
interest rate that is lower than the sum of the specified index plus the
margin. Such loans are subject to increased risk of delinquency or default
due to increasing monthly payments as the interest rates on such loans
increase to the fully-indexed level. First Federal attempts to reduce such
risk by underwriting such loans at the fully-indexed rate. Most of the
loans in First Federal's portfolio that were written at reduced rates have
been through at least one adjustment cycle.
In the past, virtually all of the fixed-rate mortgage loans originated
by First Federal, including loans insured by the Federal Housing
Administration ("FHA") or guaranteed by the Veterans Administration ("VA"),
have been originated for sale. A majority of the fixed-rate residential
real estate loans in First Federal's loan portfolio at September 30, 1998,
were originated prior to 1981. See "Loan Originations, Purchases and
Sales." During fiscal year 1998, First Federal retained $10 million of the
$20 million fixed-rate residential real estate loans it originated during
the year. First Federal anticipates originating up to $8.0 million in 15-
year fixed-rate mortgages for First Federal's loan portfolio during the 1999
fiscal year. This would be a decrease of $2 million from the 15-year fixed-
rate mortgages that were originated for the portfolio during the 1998 fiscal
year. No assurance can be provided, however, that First Federal will be
able to originate such loans. Loan demand is affected by competition,
interest rates, general economic conditions, and the availability of funds
for lending. See Exhibit 99.2 hereto, "Safe Harbor Under the Private
Securities Litigation Reform Act of 1995," which is incorporated herein by
reference.
First Federal's one-to-four family residential real estate loan
portfolio, including loans for the construction of one-to-four family
residences, was approximately $101.3 million at September 30, 1998, and
represented 58.57% of total loans. There were no construction loans
delinquent at September 30, 1998. See "Construction Loans."
Multifamily Residential Real Estate Loans. In addition to loans on
one-to-four family properties, First Federal makes adjustable-rate loans
secured by multifamily properties containing over four units. Multifamily
loans generally have terms of up to 25 years and a maximum loan-to-value
ratio of 80%. First Federal does originate multifamily loans for up to 30
years or with an LTV of up to 80% if the creditworthiness of the borrower
and the quality of the project justify such terms.
Multifamily lending is generally considered to involve a higher degree
of risk because the borrower typically depends upon income generated by the
project to cover operating expenses and debt service. The profitability of
a project can be affected by economic conditions, government policies and
other factors beyond the control of the borrower. First Federal attempts to
reduce the risk associated with multifamily lending by evaluating the
creditworthiness of the borrower and the projected income from the project
and by obtaining personal guarantees on loans made to corporations and
partnerships. First Federal requires that the borrower submit rent rolls
and financial statements annually to enable First Federal to monitor the
loan.
At September 30, 1998, loans secured by multifamily properties totaled
approximately $8.7 million, or 5.05% of total loans, the largest of which
had a balance of $997,000. There were no multifamily real estate loans
delinquent or included in classified assets at September 30, 1998.
Construction Loans. First Federal offers loans to owner-occupants for
the construction of single-family homes. Such loans are offered with
adjustable rates of interest and for terms of up to 30 years. The borrower
pays interest only for the first six months while the residence is being
constructed. At September 30, 1998, a total of $4.5 million, or
approximately 2.58%, of First Federal's total loans, consisted of
construction loans. First Federal currently has no multifamily or
nonresidential real estate construction loans in its portfolio.
Construction loans, particularly for multifamily and nonresidential
real estate projects, generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties. Loan funds
are advanced upon the security of the project under construction, which is
more difficult to value before the completion of construction. Moreover,
because of the uncertainties inherent in estimating construction costs, it
is relatively difficult to evaluate accurately the LTVs and the total loan
funds required to complete a project. In the event a default on a
construction loan occurs and foreclosure follows, First Federal would have
to take control of the project and attempt either to arrange for completion
of construction or dispose of the unfinished project. The principal amounts
of individual loans for the construction of single-family residences
typically do not exceed $250,000.
Nonresidential Real Estate Loans. First Federal also makes loans
secured by nonresidential real estate consisting of nursing homes, day care
centers, churches, office properties and various retail and other income-
producing properties. Such loans are typically made with adjustable rates
of interest for terms of up to 25 years.
Nonresidential real estate lending is generally considered to involve
a higher degree of risk than residential lending due to the relatively
larger loan amounts and the effects of general economic conditions on the
successful operation of income-producing properties. First Federal has
endeavored to reduce such risk by carefully evaluating the credit history
and past performance of the borrower, the location of the real estate, the
quality of the management constructing and operating the property, the debt-
service ratio, the quality and characteristics of the income stream
generated by the property and appraisals supporting the property's
valuation. See "Delinquent Loans, Nonperforming Assets and Classified
Assets."
Federal regulations limit the amount of nonresidential mortgage loans
which an association can make to 400% of total capital. First Federal's
nonresidential real estate loan portfolio at September 30, 1998, was equal
to 62.71% of total capital at such date.
At September 30, 1998, First Federal had a total of $10.6 million
invested in nonresidential real estate loans, the largest of which had a
balance of $524,000. There were no nonresidential real estate loans
delinquent at September 30, 1998. Such loans comprised approximately 6.14%
of First Federal's total loans.
Consumer Loans. First Federal makes various types of consumer loans,
including automobile loans, loans made to depositors on the security of
their deposit accounts, home improvement loans, home equity lines-of-credit,
other secured loans and unsecured personal loans. Consumer loans, except
home equity lines-of-credit, are generally made at fixed rates of interest
for terms of up to five years. Home equity lines-of-credit generally have
interest rates which adjust monthly based on changes in the composite prime
rate of 75% of the thirty largest U.S. banks, as reported by The Wall
Street Journal.
Automobile loans are originated by First Federal directly and
indirectly in conjunction with automobile dealers in First Federal's primary
market area. During 1998, approximately 60% of the automobile loans
originated by First Federal were originated in conjunction with automobile
dealers. When loans are originated in such manner, the dealer takes the
loan application and receives a fee if the loan is approved by First
Federal. Automobile loans are secured by the automobile purchased with the
loan proceeds.
At September 30, 1998, automobile loans totaled approximately $35.9
million, or 20.73% of total loans. This is a decrease from $36.3 million,
or 20.49% of total loans as of September 30, 1997. The change is due
primarily to the tightening of underwriting, as First Federal's consumer
delinquencies increased, and more competition from car manufacturers'
favorably-priced buyers' programs and lease programs.
Home equity lines-of-credit are originated for terms of up to ten
years. Such loans are secured by a first or second mortgage on the
borrowers' principle residence. First Federal originates home equity lines-
of-credit based on a combined LTV of not more than 80% for the first
mortgage, if any, and the line-of-credit. Home equity lines-of-credit
totaled $6.3 million, or 3.63% of First Federal's total loans, at such date.
Home improvement loans are made for terms of up to five years,
typically at fixed rates of interest. Such loans are usually secured by a
second mortgage on the property being improved.
When colleges were given the authority to make Guaranteed Student
Loans, First Federal decided to eliminate this product and sell its
education loans to the Student Loan Funding Corporation. In June of 1995,
the sale of the student loans was completed.
Consumer loans, particularly consumer loans which are unsecured or
secured by rapidly depreciating assets such as automobiles, may entail
greater risk than do residential mortgage loans. Repossessed collateral for
a defaulted consumer loan may not provide an adequate source of repayment of
the outstanding loan balance. The cost of collecting a remaining deficiency
is often disproportionate to the amount of the deficiency. In addition,
consumer loan collections are dependent on the borrower's continuing
financial stability and are, therefore, more likely to be adversely affected
by job loss, divorce, illness or personal bankruptcy. The risk of default
on consumer loans increases during periods of recession, high unemployment
and other adverse economic conditions. Despite the increased risks
associated with consumer lending, consumer loans typically provide a higher
rate of return than real estate loans and have shorter terms to maturity,
thereby assisting First Federal in managing the interest-rate sensitivity of
its assets and liabilities.
At September 30, 1998, First Federal had approximately $50.5 million,
or 29.18% of total loans, invested in consumer loans. Such amount complied
with federal regulations limiting the aggregate amount of consumer loans in
which a savings association can invest. There were consumer loans with
aggregate balances of $1.1 million delinquent at September 30, 1998.
Commercial Loans. Commercial loans totaled $1.9 million. First
Federal has new and used car floor-planning programs for two local car
dealers with a balance of $1.4 million and $269,000 at September 30, 1998.
The floor-plan loans are secured by the title of the cars as well as the
real estate. First Federal currently has a commercial line-of-credit loan
in its portfolio with a maximum principal amount of $400,000. First Federal
intends to originate commercial loans on a very select basis in the future.
Loan Solicitation and Processing. Loan originations are developed
from a number of sources, including continuing business with depositors,
other borrowers and real estate developers, solicitations by First Federal's
lending staff and walk-in customers. Effective the second quarter of 1998,
First Federal no longer utilizes a loan solicitor for FHA and VA loans,
which were originated for sale.
Conventional mortgage loan applications are taken by one of First
Federal's branch managers or loan personnel. First Federal obtains a credit
report, verification of employment and other documentation concerning the
creditworthiness of the borrower. An appraisal of the fair market value of
the real estate which will be given as security for the loan is prepared by
a staff appraiser or by a fee appraiser approved by the Board of Directors.
Upon the completion of the appraisal and the receipt of all necessary
information on the credit history of the borrower, the application for a
loan over $100,000 is submitted to the President and the principal lending
officer of First Federal for approval. Loans for more than $227,150 must be
approved by the Loan Committee of the Board of Directors.
First Federal's policy is to obtain a Phase I environmental site
assessment on commercial properties. No assessment is required on
residential properties.
If a mortgage loan application is approved, an attorney's opinion of
title is obtained on the real estate which will secure the mortgage loan.
Borrowers are required to carry satisfactory fire and casualty insurance and
flood insurance, if applicable, and to name First Federal as an insured
mortgagee.
The procedure for approval of construction loans is the same as for
residential mortgage loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs.
First Federal also evaluates the feasibility of the proposed construction
project and the experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to
repay the loan and the value of the collateral, if any.
Loan Originations, Purchases and Sales. During the past several
years, First Federal has been actively originating new fixed-rate and
adjustable-rate loans. Adjustable-rate loans originated by First Federal
are generally held in First Federal's loan portfolio. First Federal
anticipates originating up to $8.0 million of 15-year fixed-rate mortgages
to be held in First Federal's loan portfolio. Due to the low percentage of
fixed-rate loans in the loan portfolio, management believes that the
addition of up to $8.0 million in 15-year fixed-rate loans to the loan
portfolio, which it plans for fiscal year 1999, will enhance the first-year
income on loans without additional material interest-rate risk to the
portfolio. No assurance can be provided, however, that such fixed-rate
loans will be added to the portfolio. Loan demand is affected by
competition, interest rates, general economic conditions, and the
availability of funds for lending. See Exhibit 99.2 hereto, "Safe Harbor
Under the Private Securities Litigation Reform Act of 1995," which is
incorporated herein by reference.
Prior to 1992, virtually all conventional residential fixed-rate loans
made by First Federal were originated in conjunction with unaffiliated
mortgage companies. First Federal originated such loans pursuant to a
commitment from a mortgage company to fund the loan or to purchase the loan
after it was funded by First Federal. First Federal received a fee,
typically 1.50% of the principal amount of the loan. First Federal
originated fixed-rate loans in conjunction with mortgage companies because
the volume of such loans was not sufficient for First Federal to sell them
profitably directly in the secondary market. In 1993, the volume of fixed-
rate mortgage loans originated by First Federal increased to such a level
that First Federal commenced originating such loans directly and selling
them in the secondary market. First Federal retains servicing on loans sold
in such manner, from which it derives servicing income. The risk of loss
associated with the sale of fixed-rate loans increases as a result of the
absence of a commitment for the purchase of a loan at the time a loan is
originated. First Federal sells loans on a per loan basis in an attempt to
minimize risk. In 1998, First Federal began to retain for its portfolio a
portion of the 15-year fixed-rate mortgages originated. For fiscal year
1998, $10 million of 15-year fixed-rate loans were retained for the
portfolio.
Prior to 1986, First Federal purchased whole loans and participation
interests in loans secured by real estate outside First Federal's primary
market area. At September 30, 1998, First Federal's loan portfolio included
participation interests in loans having an aggregate book value of $448,000,
of which $86,000 were classified assets and nonperforming assets at such
date. See "Delinquent Loans, Nonaccruing Loans and Classified Assets."
The following table presents First Federal's mortgage loan
origination, purchase and sale activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
-------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Loans originated:
Adjustable-rate:
----------------
<S> <C> <C> <C>
Real estate:
One-to-four family $24,608 $27,087 $30,729
Multifamily - 1,022 748
Nonresidential 1,015 663 580
Consumer (4) 11,784 8,123 9,358
-------------------------------
Total adjustable-rate loans $37,407 $36,895 $41,415
-------------------------------
Fixed rate:
-----------
Real estate:
One-to-four family (1) $20,917 $ 6,789 $ 7,229
Multifamily 1,000 - -
Nonresidential - 437 130
Consumer 25,632 28,993 24,071
-------------------------------
Total fixed-rate loans $47,549 $36,219 $31,430
-------------------------------
Total loans originated $84,956 $73,114 $72,845
-------------------------------
Loans sold 10,336 5,215 6,763
-------------------------------
Principal repayments (2) 78,629 57,932 54,698
-------------------------------
Total reductions 88,965 63,147 61,461
-------------------------------
Change in other items - net (3) (395) 3,762 (2,830)
-------------------------------
Net increase (decrease) $(4,404) $13,729 $ 8,554
===============================
- --------------------
<F1> Includes construction loans.
<F2> Includes advances drawn, repayments on lines-of-credits and transfers
to real estate owned.
<F3> Consists of loans in process, net deferred origination costs and
unamortized discounts and allowance for loan losses.
<F4> Includes car floorplan loans secured by real estate and cars.
</TABLE>
Federal regulations limit the amount of loans which an association can
make to any one borrower. Under OTS regulations, the aggregate amount of
loans which First Federal may make to any one borrower (including related
entities), with certain exceptions, is limited in general to 15% of First
Federal's total capital for risk-based capital purposes plus any additional
loan reserves not included in total capital (collectively "Lending Limit
Capital"). A savings association may lend to one borrower an additional
amount not to exceed 10% of the association's Lending Limit Capital if the
additional amount is fully secured by "readily marketable collateral." Real
estate is not "readily marketable collateral." In addition, the regulations
require that loans to certain related or affiliated borrowers be aggregated
for purposes of such limits.
Based on such limits, First Federal was able to lend approximately
$2.4 million to any one borrower at September 30, 1998. The largest amount
First Federal had outstanding to one borrower was $1.7 million. Such loan
was secured by non-residential real estate and was current at September 30,
1998. See "REGULATION - OTS Regulations -- Lending Limits."
Loan Origination and Other Fees. First Federal realizes loan
origination fee and other fee income from its lending activities and also
realizes income from late payment charges, application fees and fees for
other miscellaneous services. Loan origination fees, or "points", are paid
by borrowers for mortgage loans.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending and economic conditions. All
nonrefundable loan origination fees and certain direct loan origination
costs are deferred and recognized in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 91 as an adjustment to yield over the life
of the related loan.
Delinquent Loans, Nonaccruing Loans and Classified Assets. When a
borrower fails to make a required payment on a loan, First Federal attempts
to cause the deficiency to be cured by contacting the borrower. In most
cases, deficiencies are cured promptly.
For mortgage loans, a notice is mailed to the borrower after a payment
is 15 days past due and a late penalty is assessed against the borrower at
such time. After a payment is 30 days past due, First Federal's collections
department will contact the borrower by telephone or letter. After a
payment is 90 days past due, First Federal sends the borrower a demand
letter. In addition, when a loan becomes delinquent more than 90 days, an
appraisal of the security is performed by First Federal's staff appraiser.
If the appraisal indicates that the value is less than the book value of the
loan, a valuation allowance is established for such loan.
When deemed appropriate by management, First Federal institutes action
to foreclose on the real estate or to acquire the real estate by deed in
lieu of foreclosure. A decision as to whether and when to initiate
foreclosure proceedings is based on such factors as the amount of the
outstanding loan in relation to the original indebtedness, the extent of the
delinquency and the borrower's ability and willingness to cooperate in
curing delinquencies. If a foreclosure occurs, the real estate is sold at
public sale and may be purchased by First Federal.
Real estate acquired by First Federal as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned ("REO") until
it is sold. When property is so acquired, it is recorded by First Federal
at estimated fair value of the property less estimated costs to sell at the
date of acquisition, and any write-down resulting therefrom is charged to
the book balance of the property. Interest accrual, if any, ceases no later
than the date of acquisition of the real estate and all costs incurred from
such date in maintaining the property are expensed. Costs relating to the
development and improvement of the property are capitalized to the extent
they increase the fair value.
In the case of delinquencies on consumer loans, the borrower is
contacted after a payment is ten days past due and a late penalty is
assessed. When a consumer loan secured by an automobile or other collateral
becomes more than 90 days past due, an estimate is made of the value of the
collateral. If the estimate of value indicates that the value of the
collateral is less than the book value of the loan, a valuation allowance is
established.
The following table reflects the amount of loans in a delinquent
status as of the dates indicated:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Percent of Percent of Percent of
Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans delinquent for:
30 to 59 days $1,177 0.68% $1,906 1.08% $1,831 1.10%
60 to 89 days 210 0.12 172 0.10 372 0.22
90 or more days 541 0.31 399 0.22 337 0.20
------------------------------------------------------------------------
Total delinquent real estate loans $1,928 1.11 $2,477 1.40 $2,540 1.52
------------------------------------------------------------------------
Consumer loans delinquent for:
30 to 59 days 641 0.37 511 0.29 386 0.23
60 to 89 days 238 0.14 305 0.17 188 0.11
90 or more days 234 0.13 384 0.22 214 0.13
------------------------------------------------------------------------
Total delinquent consumer loans 1,113 0.64 1,200 0.68 788 0.47
------------------------------------------------------------------------
Total delinquent loans $3,041 1.75% $3,677 2.08% $3,328 1.99%
========================================================================
</TABLE>
Each consumer loan which is delinquent 90 days or more and each real
estate loan which is delinquent 120 days or more is reviewed by one of First
Federal's loan officers to assess the collectibility of the loan. If the
loan is deemed to be uncollectible, First Federal ceases to accrue interest
on the loan.
The following table sets forth information with respect to the accrual
and nonaccrual status of First Federal's loans which are 90 days or more
past due and other nonperforming assets as of the dates indicated:
<TABLE>
<CAPTION>
September 30,
---------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Real estate:
Residential $ 610 $ 368 $ 211 $ 264 $ 415
Nonresidential 0 0 0 0 0
Consumer 17 74 175 96 152
---------------------------------------------
Total nonaccrual loans $ 627 $ 442 $ 386 $ 360 $ 567
---------------------------------------------
Accruing loans which are contractually
past due 90 days or more:
Real estate:
Residential $ 0 $ 111 $ 126 $ 178 $ 153
Nonresidential 0 0 0 0 0
Consumer 0 0 0 0 0
---------------------------------------------
Total accruing loans which are
90 days past due $ 0 $ 111 $ 126 $ 178 $ 153
---------------------------------------------
Total nonaccrual loans and accruing
loans which are 90 days past due $ 627 $ 53 $ 512 $ 538 $ 720
=============================================
Percentage of total loans 0.37% 0.31% 0.31% 0.35% 0.52%
=============================================
Other nonperforming assets - net (1) $ 0 $ 0 $ 0 $ 0 $ 0
=============================================
- --------------------
<F1> Consists of REO, property held for future sale and First Federal's
investment in a joint venture.
</TABLE>
During the year ended September 30, 1998, $97,668 of interest income
would have been recorded on nonaccruing loans had such loans been accruing
and $55,369 of interest income on those loans was included in net income for
the period. During the periods shown, First Federal had no restructured
loan within the meaning of SFAS No. 15.
There were no loans that are not currently classified as nonaccrual,
90 days past due or restructured but which may be so classified in the near
future because management has concerns as to the ability of the borrowers to
comply with repayment terms.
OTS regulations require that each thrift institution classify its own
assets on a regular basis. Problem assets are classified as "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined
weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. "Doubtful" assets have the same weaknesses as "substandard"
assets, with the additional characteristics that (i) the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable and (ii) there is a high possibility of
loss. An asset classified "loss" is considered uncollectible and of such
little value that its continuance as an asset of the institution is not
warranted. The regulations also contain a "special mention" category,
consisting of assets which do not currently expose an institution to a
sufficient degree of risk to warrant classification but which possess credit
deficiencies or potential weaknesses deserving management's close attention.
It is First Federal's policy to classify nonaccrual loans and accruing
loans which are 90 days or more delinquent. When a loan becomes 90 days or
more delinquent it is classified as "substandard" regardless of the value of
the collateral securing the loan. If the collateral value is less than the
book value, a specific valuation allowance is established for the
difference. When a "substandard" loan is brought current, it is placed in
the "special mention" category until the borrower has demonstrated to
management's satisfaction his ability to perform his obligation under the
loan. At such time, the loan is removed from "special mention." Other
assets, including REO and property held for future sale, are also classified
if they possess weaknesses that warrant the classification of such assets.
Federal examiners are authorized to classify an association's assets. If an
association does not agree with an examiner's classification of an asset, it
may appeal this determination to the District Director of the OTS.
The aggregate amounts of First Federal's classified assets at the
dates indicated were as follows:
<TABLE>
<CAPTION>
At September 30,
----------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Classified assets
Substandard $1,846 $1,144 $1,006
Doubtful - - -
Loss 725 346 414
----------------------------
Total classified assets $2,571 $1,490 $1,420
============================
</TABLE>
Assets classified as substandard or doubtful require First Federal to
establish prudent general allowances for loan losses. If an asset, or
portion thereof, is classified as loss, First Federal must either establish
specific allowances for losses in the amount of 100% of the portion of the
asset classified loss, or charge-off such amount. First Federal maintains
an allowance for loan losses with respect to loans that are classified and
an allowance for loss on property held for future sale for other classified
assets.
First Federal sets up a specific reserve for the entire balance of
repossessed cars at the time of repossession. That reserve is reversed at
the time of the sale of the car and the loss from the sale is recorded as a
charge-off.
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,816 $1,611 $1,499 $1,021 $ 821
Charge-offs
Mortgage loans - - - (1) (7)
Consumer loans (455) (28) (28) (30) (89)
--------------------------------------------------
Total charge-offs (455) (28) (28) (31) (96)
--------------------------------------------------
Recoveries
Mortgage loans - - - 438 1
Consumer loans - 11 9 11 104
--------------------------------------------------
Total recoveries - 11 9 449 105
--------------------------------------------------
Net (charge-offs) recoveries (455) (17) (19) 418 9
--------------------------------------------------
Provision for loss 681 222 131 60 191
--------------------------------------------------
Balance at end of period $2,042 $1,816 $1,611 $1,499 $1,021
==================================================
Ratio of net (charge-offs) recoveries to
average loans outstanding (0.26)% (0.01)% (0.01)% 0.28% 0.01%
==================================================
</TABLE>
First Federal classified no loans meeting the definition of impaired
during the years ended September 30, 1998 and 1997.
The following table sets forth an analysis of First Federal's
allowance for loan losses allocated by type of loan:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------- -------------------- -------------------- -------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
loans in loans in loans in loans in loans in
category to category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans Amount Total loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans $ 600 69.73% $ 548 70.79% $ 521 74.05% $ 566 74.85% $ 518 77.18%
Consumer loans 1,073 29.18 797 28.00 623 24.95 483 24.16 421 22.37
Commercial
loans 19 1.09 21 1.21 17 1.00 15 0.99 0 .45
Unallocated 350 - 450 - 450 - 435 - 82 -
-------------------------------------------------------------------------------------------------------------
Total $2,042 100.00% $1,816 100.00% $1,611 100.00% $1,499 100.00% $1,021 100.00%
=============================================================================================================
</TABLE>
The allocation of the allowance does not restrict the ability of First
Federal to utilize such allocated amounts for other types of loans.
The amount of the unallocated portion of First Federal's loan loss
allowance is based on its historical five-year average loss experience for
various types of mortgage and consumer loans which are not classified
assets, the level of classified assets, general economic conditions and
other variables. Unallocated reserves for assets classified "substandard"
are established at 15%. For assets for which a specific reserve has been
established for the portion of the asset classified "loss," general
valuation allowances are typically not established for the balance of the
asset classified "substandard." At September 30, 1998, First Federal had no
assets classified "doubtful." First Federal's loan loss allowance at
September 30, 1998, was considered by management to be adequate. See
Exhibit 99.2, "Safe Harbor Under the Private Securities Litigation Reform
Act of 1995" attached hereto, which is incorporated herein by reference.
Investment Activities
OTS regulations require that First Federal maintain a minimum amount
of liquid assets, which may be invested in United States Treasury
obligations, securities of various federal agencies, certificates of deposit
at insured banks, bankers' acceptances and federal funds. First Federal is
also permitted to make investments in certain commercial paper, corporate
debt securities rated in one of the four highest rating categories by one or
more nationally recognized statistical rating organizations, and mutual
funds, as well as other investments permitted by federal regulations. In
recent periods, First Federal has maintained liquid assets in an amount
between 5% and 15% of total assets.
The following table sets forth an analysis of First Federal's
investment portfolio at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
Book Percent of Book Percent of Book Percent of
value total value total value total
----- ---------- ----- ---------- ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government securities and
agency obligations $11,907 89.20% $7,296 81.60% $4,321 69.59%
Obligations of State and
political subdivisions 185 1.39 207 2.32 227 3.66
------------------------------------------------------------------
Total investment securities 12,092 90.59 7,503 83.92 4,548 73.25
------------------------------------------------------------------
Mortgage-backed securities 1,256 9.41 1,438 16.08 1,661 26.75
------------------------------------------------------------------
Total investment securities and
mortgage-backed securities $13,348 100.00% $8,941 100.00% $6,209 100.00%
==================================================================
<S> <C> <C> <C>
Average remaining life of
investment securities and
mortgage-backed securities .95 years 2.92 years 3.83 years
Adjusted weighted average
maturity of investment securities 1.7 months 3.7 months 1.7 months
</TABLE>
The composition and maturities of First Federal's investment
securities and mortgage-backed securities are indicated in the following
table:
<TABLE>
<CAPTION>
At September 30, 1998
-----------------------------------------------------------------------------
Less than 1 to 5 5 to 10 Over Total investment
1 year years years 10 years securities
--------- ---------- ---------- ---------- -------------------------
Book value Book value Book value Book value Book value Market value
--------- ---------- ---------- ---------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government securities
and agency obligations $11,907 $ - $ - $ - $11,907 $11,920
Obligation of States and
political subdivisions - - 185 - 185 185
Mortgage-backed securities - - 118 1,138 1,256 1,252
-------------------------------------------------------------------------
Total investment securities and
mortgage-backed securities $11,907 $ - $ 303 $1,138 $13,348 $13,357
=========================================================================
Weighted average yield 5.68% - 7.38% 7.30% 5.86% -
</TABLE>
Note: Yields on tax-exempt securities are adjusted on a tax-equivalent
basis.
Deposits and Borrowings
General. Deposits have traditionally been the primary source of First
Federal's funds for use in lending and other investment activities. In
addition to deposits, First Federal derives funds from borrowings from the
FHLB, interest payments and principal repayments on loans and other earning
assets. Loan payments are a relatively stable source of funds, while
deposit inflows and outflows fluctuate more in response to general interest
rates and money market conditions. Borrowings from the FHLB of Cincinnati
have been used to compensate for reductions in the availability of funds
from other sources.
Deposits. Deposits are attracted principally from within First
Federal's primary market area through the offering of a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW")
accounts, money market deposit accounts, regular passbook and statement
savings accounts, term certificate accounts and retirement savings plans.
Interest rates paid, maturity terms, service fees and withdrawal penalties
for the various types of accounts are established periodically by management
of First Federal based on First Federal's liquidity requirements, growth
goals and interest rates paid by competitors. First Federal does not use
brokers to attract deposits.
First Federal's deposits were represented by the various types of
savings programs described in the following table, at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------
1998 1997 1996
------------------------ ----------------------- -----------------------
Percent of Percent of Percent of
Amount total deposits Amount total deposits Amount total deposits
------ -------------- ------ -------------- ------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts:
Noninterest bearing $ 4,446 4% $ 4,214 3% $ 3,978 3%
Money market 28,872 19 24,299 19 22,307 17
Passbook and statement savings accounts 25,668 17 25,747 20 28,330 22
------------------------------------------------------------------------
Total transaction accounts 58,986 40 54,260 42 54,615 42
------------------------------------------------------------------------
Certificates of deposit:
Negotiated-rate certificates 6,070 4 4,587 4 5,466 4
Money-market certificates:
3 to 6 months 12,462 8 5,873 5 7,141 5
12 to 23 months 44,656 30 28,104 23 8,793 7
2 to 2-1/2 years 6,741 5 7,882 6 9,078 7
3 to 3-1/2 years 12,736 9 20,382 16 38,766 30
4 to 4-1/2 years 184 - 204 - 210 -
5 years and greater 5,458 4 4,968 4 5,633 5
------------------------------------------------------------------------
Total certificates of deposit 88,307 60 72,000 58 75,087 58
Christmas club and other
noninterest-bearing accounts 396 - 375 - 370 -
------------------------------------------------------------------------
Total deposits $147,689 100% $126,635 100% $130,072 100%
========================================================================
</TABLE>
The following table presents the amount and remaining maturities of
time deposits at September 30, 1998:
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------
Up to Over one year Over 3 years Over
Rate one year to 3 years to 5 years 5 years Total
--------------------- -------- ------------- ------------ ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount maturing $51,414 $35,320 $1,500 $73 $88,307
Weighted average rate 5.52% 5.82% 6.20% 6.12% 5.65%
</TABLE>
The following table presents the amount of First Federal's
certificates of deposit of $100,000 or more by the time remaining until
maturity as of September 30, 1998, and September 30, 1997:
<TABLE>
<CAPTION>
Maturity At September 30, 1998 At September 30, 1997
-------------------------- --------------------- ---------------------
(Dollars in thousands)
<S> <C> <C>
Three months or less $ 2,104 $ 3,892
Over 3 months to 6 months 2,688 1,835
Over 6 months to 12 months 6,508 3,503
Over twelve months 5,154 2,891
------- -------
Total $16,454 $12,121
======= =======
</TABLE>
The following table presents First Federal's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30
-------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $ 126,635 $ 130,072 $ 129,267
Deposits 480,298 382,506 321,320
Withdrawals (463,413) (389,873) (324,469)
Interest credited 4,169 3,930 3,954
-------------------------------------
Ending balance $ 147,689 $ 126,635 $ 130,072
=====================================
Net increase (decrease) in deposits $ 21,054 $ (3,437) $ 805
-------------------------------------
Percent increase (decrease) in deposits 16.63% (2.64)% .62%
</TABLE>
Borrowings. The FHLB System functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. See "REGULATION - Federal Home Loan Banks." As a member in
good standing of the FHLB of Cincinnati, First Federal is authorized to
apply for advances from the FHLB of Cincinnati, provided certain standards
of creditworthiness have been met. Advances are made pursuant to several
different programs, each having its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances
are based either on a fixed percentage of an institution's regulatory
capital or on the FHLB's assessment of the institution's creditworthiness.
Under current regulations, an association must meet certain qualifications
to be eligible for FHLB advances. The extent to which an association is
eligible for such advances will depend upon whether it meets the Qualified
Thrift Lender Test (the "QTL Test"). See "REGULATION - Office of Thrift
Supervision -- Qualified Thrift Lender Test." If an association meets the
QTL Test, it will be eligible for 100% of the advances it would otherwise be
eligible to receive. If an association does not meet the QTL Test, it will
be eligible for such advances only to the extent it holds specified QTL Test
assets.
The following table presents the maximum amount of First Federal's
FHLB advances outstanding at September 30, 1998, 1997 and 1996, and the
average aggregate balances of FHLB advances outstanding during the years
ended September 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
At or for the
year ended September 30
-------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of FHLB advances
outstanding during period $65,460 $59,805 $37,970
Average amount of FHLB advances
outstanding during period $56,400 $50,260 $30,334
Amount of FHLB advances outstanding at
end of period $47,996 $59,805 $37,970
Weighted average interest cost of FHLB
advances during period based on month-end
balances 6.23% 5.75% 5.55%
</TABLE>
First Federal had no variable-rate advances with original maturities
of less than 90 days at September 30, 1998. Fixed-rate long-term advances
with a 6.35% weighted average rate consisted of the following by scheduled
maturity:
<TABLE>
<CAPTION>
As of September 30, 1998
------------------------
Weighted
Amount Average Rate
------ ------------
<S> <C> <C>
One year or less $12,000 6.17%
More than one year through 3 years $18,000 6.17%
More than 3 years through 5 years $ 7,000 6.56%
More than 5 years through 10 years $10,996 6.71%
</TABLE>
Yields Earned and Rates Paid
The following table sets forth, for the periods and at the dates
indicated, the weighted average yields earned on First Federal's interest-
earning assets, the weighted average interest rates paid on interest-bearing
liabilities, the interest rate spread and the net interest yield on
interest-earning assets. Such yields and costs are derived by dividing
income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
month-end balances. Management does not believe that the use of month-end
balances instead of daily balances has caused any material difference in the
information presented.
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on loan portfolio 8.55% 8.59% 8.58%
Weighted average yield on mortgage-backed securities 7.50 7.35 5.92
Weighted average yield on investments 5.43 5.67 5.62
Weighted average yield on all interest-earning assets 8.35 8.44 8.43
Weighted average rate paid on deposits 4.27 4.16 4.26
Weighted average rate paid on FHLB advances 6.23 5.75 5.55
Weighted average rate paid on all interest-bearing liabilities 4.86 4.62 4.51
Interest rate spread (spread between weighted average rate on all interest-
earning assets and all interest-bearing liabilities) 3.49 3.82 3.92
Net interest yield (net interest income as a percentage of average interest-
earning assets) 3.52 3.87 4.04
</TABLE>
The following table sets forth certain information relating to First
Federal's average balance sheet information and reflects the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of interest-
earning assets or interest-bearing liabilities, respectively, for the
periods presented. Average balances are derived from month-end balances,
which include nonaccruing loans in the loan portfolio net of the allowance
for loss. Management does not believe that the use of month-end balances
instead of daily balances has caused any material difference in the
information presented. Yields on tax-exempt assets have been computed on a
fully tax-exempt basis assuming a tax rate of 34%.
<TABLE>
<CAPTION>
Year ended September 30,
-------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable-net (1) $175,846 $15,041 8.55% $166,185 $14,274 8.59% $153,277 $13,153 8.58%
Mortgage-backed securities 1,346 101 7.50 1,538 113 7.35 1,773 105 5.92
Interest-bearing deposits in
FHLB 3,903 202 5.17 3,047 163 5.35 2,385 121 5.07
Investment securities 7,958 442 5.57 5,196 304 5.85 4,248 252 5.93
------------------- ------------------- -------------------
Total interest-earning assets $189,053 $15,786 8.35 $175,966 $14,854 8.44 $161,683 $13,631 8.43
=================== =================== ===================
Interest-bearing liabilities:
Certificates of deposit $ 78,349 $ 4,374 5.58 $ 72,942 $ 3,968 5.44 $ 76,379 $ 4,223 5.53
Passbook accounts 25,769 564 2.19 27,461 670 2.44 28,721 706 2.46
NOW accounts 27,519 685 2.49 23,316 504 2.16 21,857 485 2.22
FHLB advances 56,400 3,516 6.23 50,260 2,888 5.75 30,334 1,685 5.55
------------------- ------------------- -------------------
Total interest-bearing
liabilities $188,037 $ 9,139 4.86 $173,979 $ 8,030 4.62 $157,291 $ 7,099 4.51
=================== =================== ===================
Net interest income; interest
rate spread $ 6,647 3.49 $ 6,824 3.82 $ 6,532 3.92
======= ======= =======
Net interest yield (2) 3.52 3.87 4.04
Average interest-earning
assets to average interest-
bearing liabilities 100.54% 102.62% 102.79%
- --------------------
<F1> Includes nonaccrual loans.
<F2> Net interest yield is net interest income divided by average interest-
earning assets.
</TABLE>
First Federal's interest rate spread is the principal determinant of
income. The interest rate spread, and therefore net interest income, can
vary considerably over time because asset and liability repricing do not
coincide. Moreover, the long-term or cumulative effect of interest rate
changes can be substantial. Interest rate risk is defined as the
sensitivity of an institution's earnings and net asset values to changes in
interest rates. The management and Board of Directors of First Federal
attempt to manage First Federal's exposure to interest rate risk in a manner
to maintain the projected four-quarter percentage change in net interest
income and the projected change in the market value of portfolio equity
within the limits established by the Board of Directors, assuming a
permanent and instantaneous parallel shift in interest rates.
As a part of its effort to monitor its interest rate risk, First
Federal reviews the reports of the OTS which set forth the application of
the "net portfolio value" ("NPV") methodology adopted by the OTS as part of
its capital regulations to the assets and liabilities of First Federal.
Although First Federal is not currently subject to the NPV regulation
because such regulation does not apply to institutions with less than $300
million in assets and risk-based capital in excess of 12%, and because the
OTS is not currently enforcing the regulation, the application of the NPV
methodology may illustrate First Federal's interest rate risk.
Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning and other assets and
outgoing cash flows on interest-bearing liabilities. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
which would result from a theoretical 200 basis point (1 basis point equals
.01%) change in market interest rates. Both a 200 basis point increase in
market interest rates and a 200 basis point decrease in market interest
rates are considered. If the NPV would decrease more than 2% of the present
value of the institution's assets with either an increase or a decrease in
market rates, the institution must deduct 50% of the amount of the decrease
in excess of such 2% in the calculation of the institution's risk-based
capital. See "Liquidity and Capital Resources" in the Annual Report to
Shareholders.
Presented below, as of September 30, 1998, is an analysis of First
Federal's interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts of 100 basis points in market interest rates.
As illustrated in the table, NPV is moderately sensitive to both
rising and declining rates. Differences in sensitivity occur principally
because, as rates rise, borrowers do not prepay fixed-rate loans as quickly
as they do when interest rates are declining. Thus, in a rising interest
rate environment, the amount of interest First Federal would receive on its
loans would increase slowly as variable-rate loans are repriced upward and
as loans are slowly prepaid and new loans at higher rates are made.
Moreover, the interest First Federal would pay on its deposits would
increase because First Federal's deposits generally have shorter periods to
repricing. Assumptions used in calculating the amounts in this table are
OTS assumptions.
<TABLE>
<CAPTION>
September 30, 1998
--------------------
Change in Interest Rate $ Change % Change
(Basis Points) In NPV in NPV
----------------------- -------- --------
(Dollars in thousands)
<S> <C> <C>
+400 $ 3,637 22%
+300 $ 3,515 22%
+200 $ 2,838 17%
+100 $ 1,485 9%
0 0 0
-100 $(1,368) (8)%
-200 $(2,434) (15)%
-300 $(3,010) (18)%
-400 $(3,348) (21)%
</TABLE>
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the NPV approach. For example, although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other types may lag behind changes in market rates. Further, in
the event of a change in interest rates, expected rates of prepayment on
loans and mortgage-backed securities and early withdrawal levels from
certificates of deposit may deviate significantly from those assumed in
making the risk calculations.
In the event that interest rates rise from the recent low levels,
First Federal's net interest income could be expected to be positively
affected, although rising interest rates could negatively affect First
Federal's earnings due to diminished loan demand. In the event that
interest rates decline from recent levels, First Federal's net interest
income could be expected to be negatively affected.
The following table sets forth the average outstanding balances of
First Federal's noninterest-earning assets and liabilities for the periods
indicated:
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Noninterest-earning assets:
REO $ 20 $ 16 $ 16
Fixed assets 7,286 7,114 5,355
Other assets 4,398 3,474 2,533
----------------------------
Total noninterest-earning assets $11,704 $10,604 $7,904
============================
Noninterest-bearing liabilities:
Noninterest-bearing NOW accounts $ 5,433 $ 4,357 $3,945
Other liabilities 1,059 2,269 2,561
----------------------------
Total noninterest-bearing liabilities $ 6,492 $ 6,626 $6,506
============================
</TABLE>
The following table describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected First Federal's interest income and expense during
the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (change in volume multiplied by prior-
year rate), (ii) changes in rate (change in rate multiplied by prior-year
volume) and (iii) total changes in rate and volume. The combined effects of
changes in both volume and rate, which cannot be separately identified, have
been allocated proportionately to the change due to volume and the change
due to rate:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996 1996 vs. 1995
---------------------------- ---------------------------- ----------------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
due to due to due to
Volume Rate Total Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Loans receivable $ 834 $ (67) $ 767 $1,106 $ 15 $1,121 $479 $928 $1,407
Mortgage-backed securities (14) 2 (12) (10) 18 8 (12) (17) (29)
Investment securities 196 (19) 177 91 3 94 34 14 48
-----------------------------------------------------------------------------------------
Total interest income $1,016 $ (84) $ 932 $1,187 $ 36 $1,223 $501 $925 $1,426
=========================================================================================
Interest expense attributable to:
Deposits $ 113 $ 368 $ 481 $ (142) $(130) $ (272) $181 $457 $ 638
FHLB advances 373 255 628 1,140 63 1,203 62 (53) 9
-----------------------------------------------------------------------------------------
Total interest expense $ 486 $ 623 $1,109 $ 998 $ (67) $ 931 $243 $404 $ 647
=========================================================================================
Increase (decrease) in net
interest income $ 530 $(707) $ (177) $ 89 $ 103 $ 292 $258 $521 $ 779
=========================================================================================
</TABLE>
Competition
First Federal competes for deposits with other savings associations,
savings banks, commercial banks and credit unions and with the issuers of
commercial paper and other securities, such as shares in money market mutual
funds. The primary factors in competing for deposits are interest rates and
convenience of office location. In making loans, First Federal competes
with other savings associations, savings banks, commercial banks, consumer
finance companies, credit unions, leasing companies and other lenders.
First Federal competes for loan originations primarily through the interest
rates and loan fees it charges and through the efficiency and quality of
services it provides to borrowers. Competition is affected by, among other
things, the general availability of lendable funds, general and local
economic conditions, current interest rate levels and other factors which
are not readily predictable.
There is only one other thrift institution which has its principal
offices in Muskingum County, Ohio, but several other savings associations
and commercial banks have offices in First Federal's primary market area.
Of the seven banks and thrifts which have offices in Muskingum County, First
Federal ranks approximately fourth in deposit share with 12.63% of the
savings market as of June 30, 1997, and ranks second in residential real
estate originations for purchase of residential property with 13.32% of the
mortgage loan originations for the first eight months of the 1998 calendar
year.
The number and size of financial institutions competing with First
Federal is also likely to increase as a result of changes in statutes and
regulations eliminating various restrictions on interstate branching by
federal savings associations and national banks. Such increased competition
may have an adverse effect upon First Federal.
Personnel
As of September 30, 1998, First Federal had 76 full-time employees and
8 part-time employees. First Federal believes that relations with its
employees are excellent. First Federal offers health and life insurance
benefits. None of the employees of First Federal are represented by a
collective bargaining unit.
REGULATION
General
As a savings and loan holding company within the meaning of the Home
Owners Loan Act of 1933, as amended (the "HOLA"), Bancorp is subject to
regulation, examination and oversight by the OTS, and will be required to
submit periodic reports to the OTS. As a corporation organized under Ohio
law, Bancorp is subject to provisions of the Ohio Revised Code applicable to
corporations generally.
As a savings bank chartered under the laws of the United States, First
Federal, Bancorp's wholly-owned subsidiary, is subject to regulation,
examination and oversight by the OTS. First Federal must file with the OTS
periodic reports concerning its activities and financial condition. Because
First Federal's deposits are insured by the FDIC, First Federal is subject
to regulatory oversight by the FDIC. First Federal is also a member of the
FHLB of Cincinnati. The OTS periodically conducts examinations to determine
whether First Federal is in compliance with the various regulatory
requirements and is operating in a safe and sound manner.
Ohio Law
Merger Moratorium Statute. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which
have significant ties to Ohio. This statute prohibits, with some
exceptions, any merger, combination or consolidation and any of certain
other sales, leases, distributions, dividends, exchanges, mortgages or
transfers between such an Ohio corporation and any person who has the right
to exercise, alone or with others, 10% or more of the voting power of such
corporation (an "Interested Shareholder"), for three years following the
date on which such person first becomes an Interested Shareholder. Such a
business combination is permitted only if, prior to the time such person
first becomes an Interested Shareholder, the Board of Directors of the
issuing corporation has approved the purchase of shares which resulted in
such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (1) an exception specifically enumerated in the statute
is applicable to the combination, (2) the combination is approved, at a
meeting held for such purpose, by the affirmative vote of the holders of the
issuing public corporation entitling them to exercise at least two-thirds of
the voting power of the issuing public corporation in the election of
directors of such different proportion as the articles may provide, provided
the combination is also approved by the affirmative vote of the holders of
at least a majority of the disinterested shares, or (3) the business
combination meets certain statutory criteria designed to ensure that the
issuing public corporation's remaining shareholders receive fair
consideration for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation.
However, the statute still prohibits for twelve months any business
combination that would have been prohibited but for the adoption of such an
opt-out amendment. The statute also provides that it will continue to apply
to any business combination between a person who became an Interested
Shareholder prior to the adoption of such an amendment as if the amendment
had not been adopted. The Articles of Incorporation of Bancorp do not opt
out of the protection afforded by Chapter 1704.
Control Share Acquisition. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that certain acquisitions
of voting securities which would result in the acquiring shareholder owning
20%, 33-1/3%, or 50% of the outstanding voting securities of Bancorp (a
"Control Share Acquisition") must be approved in advance by the holders of
at least a majority of the outstanding voting shares represented at a
meeting at which a quorum is present and a majority of the portion of the
outstanding voting shares represented at such a meeting excluding the voting
shares owned by the acquiring shareholder, by certain other persons who
acquire or transfer voting shares after public disclosure of the acquisition
or by certain officers of Bancorp or directors of Bancorp who are also
employees of Bancorp. The Control Share Acquisition Statute was intended,
in part, to protect shareholders of Ohio corporations from coercive tender
offers.
Takeover Bid Statute. Ohio law provides that an offeror may not make
a tender offer or request or invitation for tenders that would result in the
offeror beneficially owning more than ten percent of any class of the target
company's equity securities unless such offeror files certain information
with the Ohio Division of Securities (the "Securities Division") and
provides such information to the target company and the offerees within
Ohio. The Securities Division may suspend the continuation of the control
bid if the Securities Division determines that the offeror's filed
information does not provide full disclosure to the offerees of all material
information concerning the control bid. The statute also provides that an
offeror may not acquire any equity security of a target company within two
years of the offeror's previous acquisition of any equity security of the
same target company pursuant to a control bid unless the Ohio offerees may
sell such security to the offeror on substantially the same terms as
provided by the previous control bid. The statute does not apply to a
transaction if either the offeror or the target company is a savings and
loan holding company and the proposed transaction requires federal
regulatory approval.
Office of Thrift Supervision
General. The OTS is an office in the Department of the Treasury and
is responsible for the regulation and supervision of all federally chartered
savings associations and all other savings associations, the deposits of
which are insured by the FDIC in the SAIF. The OTS issues regulations
governing the operation of savings associations and regularly examines such
associations. It also promulgates regulations that prescribe the
permissible investments and activities of federally chartered savings
associations. This includes the type of lending that such associations may
engage in and the investments in real estate, subsidiaries and corporate or
government securities that such associations may make. The OTS has
authority over mergers and acquisitions of control of federally chartered
savings associations. The OTS also may initiate enforcement actions against
savings associations and certain persons affiliated with them for violations
of laws or regulations or for engaging in unsafe or unsound practices. If
the grounds provided by law exist, the OTS may appoint a conservator or
receiver for a savings association.
Federally chartered savings associations are subject to regulatory
oversight by the OTS under various consumer protection and fair lending
laws. These laws govern, among other things, truth-in-lending disclosure,
equal credit opportunity, fair credit reporting and community reinvestment.
Failure to abide by federal laws and regulations governing community
reinvestment could limit the ability of an association to open a new branch
or engage in a merger transaction. Community reinvestment regulations
evaluate how well and to what extent an institution lends and invests in its
designated service area, particularly in low-to-moderate income areas.
First Federal has received a "satisfactory" rating under those regulations.
Regulatory Capital Requirements. First Federal is required by OTS
regulations to meet certain minimum capital requirements. The following
table sets forth certain information regarding First Federal's compliance
with applicable regulatory capital requirements at September 30, 1998:
<TABLE>
<CAPTION>
At September 30, 1998
---------------------
Percent
Amount of assets
----- ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital $14,717 6.87%
Tangible capital requirement 3,211 1.50
------------------
Excess $11,506 5.37%
==================
Core capital $14,717 6.87%
Core capital requirement 6,422 3.00
------------------
Excess $ 8,295 3.87%
==================
Total capital $16,147 11.86%
Risk-based capital requirement 10,890 8.00
------------------
Excess $ 5,257 3.86%
==================
</TABLE>
Current capital requirements call for tangible capital of 1.5% of
adjusted total assets, core capital (which for First Federal consists of
tangible capital) of 3.0% of adjusted total assets and risk-based capital
(which for First Federal consists of core capital and general valuation
reserves) of 8.0% of risk-weighted assets (assets and certain off balance
sheet items are weighted at percentage levels ranging from 0% to 100%
depending on their relative risk). The OTS has proposed to amend the core
capital requirement so that those associations that do not have the highest
examination rating and an acceptable level of risk will be required to
maintain core capital of from 4% to 5%, depending on the association's
examination rating and overall risk. First Federal does not anticipate that
it will be adversely affected if the core capital requirement regulation is
amended as proposed.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, although the implementation of that component has been
delayed. Pursuant to that requirement, each savings association would
measure the impact of an immediate 200 basis point change in interest rates
on the value of its portfolio, as determined under the methodology
established by the OTS. If the measured interest rate risk is above the
level deemed normal under the regulation, the association would have to
deduct one-half of that excess exposure from its total capital when
determining its risk-based capital. In general, an association with less
than $300 million in assets and a risk-based capital ratio in excess of 12%
is not subject to this requirement. Pending implementation of the interest
rate risk component, the OTS has the authority to impose a higher
individualized capital requirement on any savings association it deems to
have excess interest rate risk. The OTS may also adjust the risk-based
capital requirement on an individualized basis to take into account risks
due to concentrations of credit and nontraditional activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. Certain regulatory actions are mandated or recommended for
savings associations that are deemed to be well-capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. At each successively lower capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility
in determining how to resolve the problems of the institution. In addition,
the OTS can downgrade an association's designation notwithstanding its
capital level, after notice and an opportunity for hearing, if the
association is deemed to be in an unsafe or unsound condition or to be
engaging in an unsafe or unsound practice, including a less than
satisfactory examination rating on matters other than capital. All
undercapitalized associations must submit a capital restoration plan to the
OTS within 45 days after becoming undercapitalized. Such associations will
be subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging
in new lines of business. Furthermore, critically undercapitalized
institutions must be placed in conservatorship or receivership within 90
days of reaching that capitalization level, except under limited
circumstances. First Federal's capital at September 30, 1998, meets the
standards for the highest category, a "well-capitalized" association.
Federal law prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having
control of the association if, after such distribution or payment, the
association would be undercapitalized. In addition, each company
controlling an undercapitalized association must guarantee that the
association will comply with its capital plan until the association has been
adequately capitalized on an average during each of four consecutive
calendar quarters and must provide adequate assurances of performance. The
aggregate liability pursuant to such guarantee is limited to the lesser of
(a) an amount equal to 5% of the association's total assets at the time the
association became undercapitalized or (b) the amount that is necessary to
bring the association into compliance with all capital standards applicable
to such institution at the time the association fails to comply with its
capital restoration plan.
Qualified Thrift Lender Test. Savings associations are required to
maintain a specified level of investments in assets that are designated as
qualifying thrift investments ("QTIs"). QTIs are generally related to
domestic residential real estate and manufactured housing and include stock
issued by any FHLB, the FHLMC or the FNMA. Under the QTL Test, 65% of an
institution's "portfolio assets" (total assets less goodwill and other
intangibles, property used to conduct business and 20% of liquid assets)
must consist of QTI on a monthly average basis in 9 out of every 12 months.
Under legislation effective in 1996, QTIs were expanded to include credit
card and educational loans without restriction, and the QTL Test could be
met by qualifying as a "domestic building and loan" under the Internal
Revenue Code of 1986, as amended (the "Code"). Under this test, at least
60% of the institution's assets (on a tax basis) must consist of specified
assets (generally loans secured by residential real estate or deposits,
educational loans, cash and certain governmental obligations). The OTS may
grant exceptions to the QTL Test under certain circumstances. If a savings
association fails to meet the QTL Test, the association and its holding
company become subject to certain operating and regulatory restrictions. A
savings association that fails to meet the QTL Test will not be eligible for
new FHLB advances. At September 30, 1998, First Federal met the QTL Test.
Lending Limit. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower to an amount equal to
15% of the association's Lending Limit Capital. A savings association may
loan to one borrower an additional amount not to exceed 10% of the
association's Lending Limit Capital if the additional amount is fully
secured by certain forms of "readily marketable collateral." Real estate is
not considered "readily marketable collateral." Certain types of loans are
not subject to this limit. In applying this limit, the regulations require
that loans to certain related borrowers be aggregated. At September 30,
1998, First Federal was in compliance with this lending limit. See "Lending
Activities -- Loan Originations, Purchases and Sales."
Transactions with Insiders and Affiliates. Loans to executive
officers, directors and principal shareholders and their related interests
must conform to limits on loans to one borrower, and the total of all such
loans to executive officers, directors, principal shareholders and their
related interests cannot exceed the association's total capital (or 200% of
total capital for a qualifying institution with less than $100 million in
deposits). Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the
"disinterested" members of board of directors of the association with any
"interested" director not participating. All loans to directors, executive
officers and principal shareholders must be made on terms substantially the
same as offered in comparable transactions to the general public or as
offered to all employees in a company-wide benefit program. Loans to
executive officers are subject to additional limitations. First Federal was
in compliance with such restrictions at September 30, 1998.
Savings associations must comply with Sections 23A and 23B of the
Federal Reserve Act ("FRA"). An affiliate of a savings association is any
company or entity that controls, is controlled by or is under common control
with the savings association. Bancorp is an affiliate of First Federal.
Generally, Sections 23A and 23B of the FRA (i) limit the extent to which a
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's
capital stock and surplus, (ii) limit the aggregate of all such transactions
with all affiliates to an amount equal to 20% of such capital stock and
surplus, and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable to the association, as
those in transactions with a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee
and other similar types of transactions. First Federal was in compliance
with these requirements and restrictions at September 30, 1998.
Holding Company Regulation. Bancorp is a savings and loan holding
company within the meaning of the HOLA. The HOLA generally prohibits a
savings and loan holding company from controlling any other savings
association or savings and loan holding company, without prior approval of
the OTS, or from acquiring or retaining more than 5% of the voting shares of
a savings association or holding company thereof which is not a subsidiary.
Under certain circumstances a savings and loan holding company is permitted
to acquire, with the approval of the OTS, up to 15% of the previously
unissued voting shares of an undercapitalized savings association for cash
without such savings association being deemed to be controlled by the
holding company. Except with the prior approval of the OTS, no director or
officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock may
also acquire control of any savings institution, other than a subsidiary
institution, or any other savings and loan holding company.
Bancorp is a unitary savings and loan holding company. Under current
law, there are generally no restrictions on the activities of a unitary
savings and loan holding company. However, if the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the
OTS may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii)
any activities of the savings association that might create a serious risk
that the liabilities of the holding company and its affiliates may be
imposed on the savings association. Notwithstanding the foregoing rules as
to permissible business activities of a unitary savings and loan holding
company, if the savings association subsidiary of a holding company fails to
meet the QTL Test, then such unitary holding company would become subject to
the activities restrictions applicable to multiple holding companies. At
September 30, 1998, First Federal met the QTL Test.
If Bancorp were to acquire control of another savings institution,
other than through a merger or other business combination with First
Federal, Bancorp would thereupon become a multiple savings and loan holding
company. Unless such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and each subsidiary savings association meets
the QTL Test, the activities of Bancorp and any of its subsidiaries (other
than First Federal or other subsidiary savings associations) would
thereafter be subject to further restrictions. The HOLA provides that,
among other things, no multiple savings and loan holding company or
subsidiary thereof that is not a savings institution shall commence or shall
continue for more than a limited period of time after becoming a multiple
savings and loan holding company or subsidiary thereof, any business
activity other than (i) furnishing or performing management services for a
subsidiary savings institution, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing or liquidating assets owned by or
acquired from a subsidiary savings institution, (iv) holding or managing
properties used or occupied by a subsidiary savings institution, (v) acting
as trustee under deeds of trust, (vi) those activities previously directly
authorized by federal regulation as of March 5, 1987, to be engaged in by
multiple holding companies, or (vii) those activities authorized by the FRB
as permissible for bank holding companies, unless the OTS by regulation
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above must also be approved by the OTS
prior to being engaged in by a multiple holding company.
The OTS may also approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations
in more than one state, if the multiple savings and loan holding company
involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987,
or if the laws of the state in which the institution to be acquired is
located specifically permit institutions to be acquired by state-chartered
institutions or savings and loan holding companies located in the state
where the acquiring entity is located (or by a holding company that controls
such state-chartered savings institutions). As under prior law, the OTS may
approve an acquisition resulting in a multiple savings and loan holding
company controlling savings associations in more than one state in the case
of certain emergency thrift acquisitions.
Federal Regulation of Acquisitions of Control of Bancorp and First
Federal. In addition to Ohio law limitations on the merger and acquisition
of Bancorp previously discussed, federal limitations generally require
regulatory approval of acquisitions at specified levels. Under pertinent
federal law and regulations, no person, directly or indirectly, or acting in
concert with others, may acquire control of First Federal or Bancorp without
60 days prior notice to the OTS. "Control" is generally defined as having
more than 25% ownership or voting power; however, ownership or voting power
of more than 10% may be deemed "control" if certain factors are present. If
the acquisition of control is by a company, the acquirer must obtain
approval, rather than give notice, of the acquisition as a savings and loan
holding company. In addition, any merger of First Federal or of Bancorp in
which Bancorp is not the resulting company must be approved by the OTS.
Federal Deposit Insurance Corporation.
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally
insured banks and thrifts and safeguards the safety and soundness of the
banking and thrift industries. The FDIC maintains and administers two
separate insurance funds, the Bank Insurance Fund ("BIF") for commercial
banks and state savings banks and the SAIF for savings associations.
The deposits of First Federal and other savings associations are
insured by the FDIC in the SAIF. Legislation to recapitalize the SAIF and
to eliminate the significant premium disparity between the BIF and the SAIF
became effective September 30, 1996. Pursuant to the recapitalization plan,
First Federal paid, on November 27, 1996, an additional pre-tax assessment
of $800,100. Such payment was recorded as an expense and accounted for by
First Federal as of September 30, 1996. Earnings and capital were,
therefore, negatively affected for the quarter ended September 30, 1996, by
an after-tax amount of approximately $528,000.
The recapitalization plan also provides that the cost of prior thrift
failures will be shared by both the SAIF and the BIF, which has increased
BIF assessments for healthy banks to $.013 per $100 of deposits in 1998.
SAIF assessments for healthy savings associations in 1998 are $.064 per $100
in deposits and may never be reduced below the level set for healthy BIF
institutions.
The recapitalization plan also provides for the merger of the SAIF and
the BIF effective January 1, 1999, assuming there are no savings
associations under federal law. Under separate proposed legislation,
Congress is considering the elimination of the federal thrift charter and
the separate federal regulation of thrifts. As a result, First Federal
would have to convert to a different financial institution charter and would
be regulated under federal law as a bank, including being subject to the
more restrictive activity limitations imposed on national banks.
In addition, Bancorp might become subject to more restrictive holding
company requirements, including activity limits and capital requirements
similar to those imposed on First Federal. Bancorp cannot predict the
impact of the conversion of First Federal to, or regulation of First Federal
as, a bank until the legislation requiring such change is enacted.
FRB Regulations
Reserve Requirements. FRB regulations require savings associations to
maintain reserves against their transaction accounts (primarily NOW
accounts) and non-personal time deposits. Effective December 1, 1998, such
regulations generally require that reserves of 3% be maintained against
deposits in transaction accounts up to $46.5 million (subject to an
exemption of up to $4.9 million), and that an initial reserve of 10% be
maintained against that portion of total net transaction accounts in excess
of $46.5 million. These percentages are subject to adjustment by the FRB.
At September 30, 1998, First Federal was in compliance with the reserve
requirements then in effect and also in compliance with the new
requirements.
Federal Home Loan Banks
The FHLBs, under the regulatory oversight of the Federal Housing
Financing Board, provide credit to their members in the form of advances.
Federally chartered savings associations are required to be members of a
FHLB. First Federal is a member of the FHLB of Cincinnati and must maintain
an investment in the capital stock of that FHLB in an amount equal to the
greater of 1.0% of the aggregate outstanding principal amount of First
Federal's residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of its advances from the
FHLB. First Federal is in compliance with this requirement with an
investment in FHLB of Cincinnati stock of $3,041,900 at September 30, 1998.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed,
whole first mortgage loans on improved residential property or securities
representing a whole interest in such loans; securities issued, insured or
guaranteed by the United States government or an agency thereof; deposits in
any FHLB; or other real estate related collateral (up to 30% of the member
association's capital) acceptable to the applicable FHLB, if such collateral
has a readily ascertainable value and the FHLB can perfect its security
interest in the collateral.
Each FHLB is required to establish standards of community investment
or service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's
performance under the Community Reinvestment Act and its record of lending
to first-time home buyers. All long-term advances by each FHLB must be made
only to provide funds for residential housing finance.
TAXATION
Federal Taxation
Bancorp and First Federal are each subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the
regular income tax, Bancorp and First Federal may be subject to an
alternative minimum tax. An alternative minimum tax is imposed at a minimum
tax rate of 20% on "alternative minimum taxable income" (which is the sum of
a corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986.
In addition, 75% of the amount by which a corporation's "adjusted current
earnings" exceeds its alternative minimum taxable income computed without
regard to this preference item and prior to reduction by net operating
losses, is included in alternative minimum taxable income. Net operating
losses can offset no more than 90% of alternative minimum taxable income.
The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years.
However, the Taxpayer Relief Act of 1997 repealed the alternative minimum
tax for certain "small corporations" for tax years beginning after December
31, 1997. A corporation initially qualifies as a small corporation if it
had average gross receipts of $5,000,000 or less for the three tax years
ending with its first tax year beginning after December 31, 1996. Once a
corporation is recognized as a small corporation, it will continue to be
exempt from the alternative minimum tax for as long as its average gross
receipts for the prior three-year period does not exceed $7,500,000. In
determining if a corporation meets this requirement, the first year that it
achieved small corporation status is not taken into consideration.
First Federal's average gross receipts for the three tax years ending
on September 30, 1998 exceeds $7.5 million, and, as a result, First Federal
does not qualify as a small corporation exempt from the alternative minimum
tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Small Business Act"), which was signed into law on August 21, 1996, certain
thrift institutions, including First Federal, were allowed deductions for
bad debts under methods more favorable than those granted to other
taxpayers. Qualified thrift institutions could compute deductions for bad
debts using either the specific charge-off method of Section 166 of the
Code, or one of the two reserve methods of Section 593 of the Code. The
reserve methods under Section 593 of the Code permitted a thrift institution
annually to elect to deduct bad debts under either (i) the "percentage of
taxable income" method applicable only to thrift institutions, or (ii) the
"experience" method that also was available to small banks. Under the
"percentage of taxable income" method, a thrift institution generally was
allowed a deduction for an addition to its bad debt reserve equal to 8% of
its taxable income (determined without regard to this deduction and with
additional adjustments). Under the experience method, a thrift institution
was generally allowed a deduction for an addition to its bad debt reserve
equal to the greater of (i) an amount based on its actual average experience
for losses in the current and five preceding taxable years, or (ii) an
amount necessary to restore the reserve to its balance as of the close of
the base year. A thrift institution could elect annually to compute its
allowable addition to bad debt reserves for qualifying loans either under
the experience method or the percentage of taxable income method. For tax
years 1995, 1994 and 1993, First Federal used the percentage of taxable
income method because such method provided a higher bad debt deduction than
the experience method.
The Small Business Act eliminated the percentage of taxable income
reserve method of accounting for bad debts by thrift institutions, effective
for taxable years beginning after 1995. Thrift institutions that would be
treated as small banks are allowed to utilize the experience method
applicable to such institutions, while thrift institutions that are treated
as large banks are required to use only the specific charge-off method.
First Federal is treated as a small bank.
A thrift institution required to change its method of computing
reserves for bad debt will threat such change as a change in the method of
accounting, initiated by the taxpayer, and having been made with the consent
of the Secretary of the Treasury. Section 481(a) of the Code requires
certain amounts to be recaptured with respect to such change. Generally,
the amounts to be recaptured will be determined solely with respect to the
"applicable excess reserves" of the taxpayer. The amount of the applicable
excess reserves will be taken into account ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject
to the residential loan requirement described below. In the case of a
thrift institution that becomes a large bank, the amount of the
institution's applicable excess reserves generally is the excess of (i) the
balances of its reserve for losses on qualifying real property loans
(generally loans secured by improved real estate) and its reserve for losses
on nonqualifying loans (all other types of loans) as of the close of its
last taxable year beginning before January 1, 1996, over (ii) the balances
of such reserves as of the close of its last taxable year beginning before
January 1, 1998 (i.e., the "pre-1998 reserves"). In the case of a thrift
institution that becomes a small bank, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of
its reserve for losses on qualifying real property loans and its reserve for
losses on nonqualifying loans as of the close of its last taxable year
beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the thrift's reserves would have been
at the close of its last year beginning before January 1, 1996, had the
thrift always used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a
tax year, the recapture of the applicable excess reserves otherwise required
to be taken into account as a Code Section 481(a) adjustment for the year
will be suspended. A thrift meets the residential loan requirement if, for
the tax year, the principal amount of residential loans made by the thrift
during the year is not less then its base amount. The "base amount"
generally is the average of the principal amounts of the residential loans
made by the thrift during the six most recent tax years beginning before
January 1, 1996. A residential loan is a loan as described in Section
7701(a)(19)(C)(v) (generally a loan secured by residential real and church
property and certain mobile homes), but only to the extent that the loan is
made to the owner of the property.
The tax returns of First Federal have been audited or closed without
audit through fiscal year 1994. In the opinion of management, any
examination of open returns would not result in a deficiency which could
have a material adverse effect on the financial condition of First Federal.
The balance of the "pre-1988 reserves" is subject to the provisions of
Section 593(e) as modified by the Small Business Job Protection Act which
requires recapture in the case of certain excessive distributions to
shareholders. The "pre-1988 reserves" may not be utilized for payment of
cash dividends or other distributions to a shareholder (including
distributions in dissolution or liquidation) or for any other purpose
(except to absorb bad debt losses). Distribution of a cash dividend by a
thrift institution to a shareholder is treated as made: first, out of the
institution's post-1951 accumulated earnings and profits; second, out of the
"pre-1988 reserves"; and, third, out of such other accounts as may be
proper. To the extent a distribution by First Federal to Bancorp is deemed
paid out of its "pre-1988 reserves" under these rules, the "pre-1988
reserves" would be reduced and First Federal's gross income for tax purposes
would be increased by the amount which, when reduced by the income tax, if
any, attributable to the inclusion of such amount in its gross income,
equals the amount deemed paid out of the "pre-1988 reserves." As of
September 30, 1998, First Federal's "pre-1988 reserves" for tax purposes
totaled approximately $1.6 million. First Federal believes it has
approximately $8.3 million of accumulated earnings and profits for tax
purposes as of September 30, 1998, which would be available for dividend
distributions, provided regulatory restrictions applicable to the payment of
dividends are met. No representation can be made as to whether First
Federal will have current or accumulated earnings and profits in subsequent
years.
The federal income tax provision decreased by $313,000 from fiscal
1997 to fiscal 1998. The effective tax rate for fiscal 1998 was 33.1%
compared to 33% for fiscal year 1997.
Ohio Taxation
Bancorp is subject to the Ohio corporation franchise tax, which, as
applied to Bancorp, is a tax measured by both net income and net worth. The
rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.9% of computed Ohio taxable income in excess of $50,000
or (ii) .582% times taxable net worth. For tax years beginning after
December 31, 1998, the tax rate is the greater of (i) 5.1% on the first
$50,000 of computed Ohio taxable income and 8.5% of computed Ohio taxable
income in excess of $50,000 or (ii) .400% times taxable net worth. However,
holding companies such as Bancorp will be exempt from the Ohio net worth tax
for years beginning after December 31, 1998 if certain conditions are met.
Bancorp anticipates meeting these conditions, thus exempting it from the
Ohio net worth tax in 1999 and subsequent years.
A special litter tax is also applicable to all corporations, including
Bancorp, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the
litter tax is equal to .11% of the first $50,000 of computed Ohio taxable
income and .22% of computed Ohio taxable income in excess of $50,000. If
the franchise tax is paid on the net worth basis, the litter tax is equal to
.014% times taxable net worth.
First Federal is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of
First Federal's book net worth determined in accordance with generally
accepted accounting principles. For tax year 1999, however, the franchise
tax on financial institutions will be 1.4% of the book net worth and for tax
years thereafter the tax will be 1.3% of the book net worth. As a
"financial institution," First Federal is not subject to any tax based upon
net income or net profits imposed by the State of Ohio.
Item 2. Description of Property.
The following table sets forth certain information at September 30,
1998, regarding the properties on which the main office and each branch
office of First Federal is located and other office properties owned by
First Federal:
<TABLE>
<CAPTION>
Location Owned or leased Date acquired Square footage Net book value (1)
- -------- --------------- ------------- -------------- ------------------
<S> <C> <C> <C> <C>
Main Office:
Fifth and Market Streets
Zanesville, Ohio 43701 Owned 1961 23,600 $4,721,597
Branch Offices:
990 Military Road
Zanesville, Ohio 43701 Owned 1975 5,000 398,652
2810 Maysville Pike
South Zanesville, Ohio 43701 Owned 1994 2,050 447,861
55 East Main Street
Roseville, Ohio 43777 Owned 1990 2,394 112,387
639 Main Street
Coshocton, Ohio 43812 Owned 1982 4,310 112,215
132 Main Street
Newcomerstown, Ohio 43832 Owned 1984 2,128 4,698
Other Offices:
FHA-VA Lending Office
995 Beverly Avenue
Zanesville, Ohio 43701 Owned 1975 1,000 4,500
Other Properties:
1003 Beverly Avenue
Zanesville, Ohio 43701 Owned 1994 1,284 60,125
- --------------------
<F1> Net book value amounts are for land, buildings and improvements.
</TABLE>
First Federal also owns furniture, fixtures and various bookkeeping
and accounting equipment. The net book value of First Federal's investment
in office premises and equipment totaled $7.3 million at September 30, 1998.
First Federal believes such properties are adequately insured. See Notes to
Consolidated Financial Statements for additional information.
Item 3. Legal Proceedings.
Neither Bancorp nor First Federal is presently involved in any legal
proceedings of a material nature. From time to time, First Federal is a
party to legal proceedings incidental to its business to enforce its
security interest in collateral pledged to secure loans made by First
Federal.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Price information with respect to Bancorp's common shares is listed on
The Nasdaq SmallCap Market ("Nasdaq") under the symbol of FFBZ. The
following table sets forth the range of high and low bid information for the
common shares of Bancorp, as quoted by Nasdaq, together with the dividends
declared per common share for each quarter during the fiscal year ended
September 30, 1998.
<TABLE>
<CAPTION>
09/98 06/98 03/98 12/97 09/97 06/97 03/97 12/96
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend Declared $0.035 $0.035 $0.035 $0.035 $0.030 $0.030 $0.030 $0.030
High Bid During Quarter 14.500 13.625 12.875 10.750 10.125 9.500 9.250 8.250
Low Bid During Quarter 9.750 11.875 10.125 9.375 8.500 8.500 8.000 6.625
Last Bid Of Quarter 11.250 13.625 12.875 10.5625 9.375 9.125 9.250 8.000
</TABLE>
On each of November 6, 1996 and June 3, 1998, the Board of Directors
declared a stock dividend in the nature of a 2-for-1 stock split. All
earnings and dividends per share disclosures have been restated to reflect
these stock dividends. Bancorp had 3,150,532 common shares outstanding and
held of record by approximately 517 stockholders as of November 30, 1998.
Bancorp's common shares are traded in the over-the-counter market.
The income of Bancorp consists primarily of dividends from First
Federal. In addition to certain federal income tax considerations, OTS
regulations impose limitations on the payment of dividends and other capital
distributions by savings banks. Under OTS regulations applicable to
converted savings banks, First Federal is not permitted to pay a cash
dividend on its capital stock if First Federal's regulatory capital would,
as a result of the payment of such dividend, be reduced below the amount
established for the purpose of granting a limited priority claim on the
assets of First Federal in the event of a complete liquidation to those
members of First Federal before the Conversion who maintain a savings
account at First Federal after the Conversion or applicable regulatory
capital requirements prescribed by the OTS.
In addition, OTS regulations provide that a savings association which
immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution (including a dividend), has total capital (as
defined by OTS regulations) that is equal to or greater than the amount of
its fully phased-in capital requirements is generally permitted without OTS
approval (but subsequent to 30 days prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not
to exceed the greater of (1) 100% of its net earnings to date during the
year, plus an amount equal to one-half the amount by which its total capital
to assets ratio exceeded its required fully phased-in capital to assets
ratio at the beginning of the year, or (2) 75% of its net earnings during
the most recent four-quarter period. Savings associations with total
capital in excess of the fully phased-in capital requirements that have been
notified by the OTS that they are in need of more than normal supervision
and associations whose capital does not exceed their fully phased-in capital
requirements are subject to restrictions on dividends.
Item 6. Management's Discussion and Analysis or Plan of Operations.
General
First Federal is primarily engaged in the business of attracting
savings deposits from the general public and investing such funds in loans
secured by one-to-four family residential real estate located primarily in
eastern Ohio. In recent years, First Federal has increased its origination
of consumer loans, primarily direct and indirect loans for the purchase of
automobiles. First Federal also originates loans secured by multifamily
real estate (over four units) and nonresidential real estate, other types of
consumer loans, including home equity, home improvement loans, and secured
and unsecured lines-of-credit, and commercial loans. Prior to 1986, First
Federal purchased participation interests in various loans secured by
multifamily and nonresidential real estate located outside of First
Federal's primary market area. First Federal also invests in U.S.
government and agency obligations, interest-bearing deposits in other banks,
mortgage-backed securities and other investments permitted by applicable
law.
First Federal's profitability is primarily dependent upon its net
interest income, which is the difference between interest income on its loan
and investment portfolios and interest paid on deposits and other borrowed
funds. Net interest income is directly affected by the relative amounts of
interest-earning assets and interest-bearing liabilities and the interest
rates earned or paid on such amounts. First Federal's profitability is also
affected by the provision for loan losses and the level of other income and
other expenses. Other income consists primarily of service charges, other
fees on deposits, dividends on FHLB stock and gain on sale of loans. The
gain on sale of loans is the result of First Federal's origination and sale
of fixed-rate mortgage loans in the secondary market. Other expenses
include salaries and employee benefits, occupancy of premises, federal
deposit insurance premiums, data processing, advertising, state franchise
tax and other operating expenses.
The operating results of First Federal are also affected by general
economic conditions, the monetary and fiscal policies of federal agencies
and the regulatory policies of agencies that regulate financial
institutions. First Federal's cost of funds is influenced by interest rates
on competing investments and general market rates of interest. Lending
activities are influenced by the demand for real estate loans and other
types of loans, which is in turn affected by the interest rates at which
such loans are made, general economic conditions affecting loan demand and
the availability of funds for lending activities.
Note Regarding Forward-Looking Statements
- -----------------------------------------
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, First Federal's operations and First
Federal's actual results could differ significantly from those discussed in
the forward-looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein but also include changes
in the economy and interest rates in the nation and First Federal's market
area generally.
Some of the forward-looking statements included herein are the
statements regarding the following:
1. Management's determination of the amount of loan loss allowance;
2. Management's belief that deposits will increase slightly during
fiscal year 1999;
3. Management's anticipation that loan demand will increase due to
the low interest-rate environment; however, the mortgage loan
portfolio is projected to remain stable as the 30-year fixed-rate
mortgages originated will be sold in the secondary market;
4. Management's anticipation that no additional advances from the
FHLB will be necessary to fund loan originations;
5. Management's anticipation that adjustable-rate loans will reprice
higher in fiscal year 1999 if interest rates remain relatively
stable;
6. Management's anticipation to add up to $8.0 million in 15-year
fixed-rate residential loans to the loan portfolio;
7. Legislative changes with respect to the federal thrift charter;
8. Management's expectation that the amount of its consumer loans
will increase; and
9. Management's expectation that a significant portion of the
certificates of deposit at First Federal maturing in fiscal year
1999 will remain on deposit with First Federal.
Selected Consolidated Financial Data
The following table sets forth certain information concerning the
consolidated financial condition and results of operations of First Federal
as of and for the periods indicated:
<TABLE>
<CAPTION>
Selected financial information At or for the year ended September 30,
and other data 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $ 213,502 $ 203,703 $ 184,467 $ 171,624 $ 156,305
Mortgage-backed securities 1,256 1,438 1,661 1,889 2,063
Loans receivable - net 169,623 174,027 160,298 151,744 138,618
Federal funds sold and
other short-term investments 13,375 1,600 3,175 975 550
Investment securities and FHLB stock 15,629 10,545 6,478 6,502 6,233
Deposits 147,689 126,635 130,072 129,267 129,013
Borrowed funds 47,996 59,805 37,970 27,600 14,625
Stockholders' equity 16,500 15,626 13,998 12,745 11,484
Number of:
Real estate loans outstanding 2,833 2,972 3,008 2,675 2,655
Consumer loans outstanding 6,485 5,994 5,189 4,938 4,735
Deposit accounts 21,085 20,349 20,312 20,750 20,237
Full service offices 6 6 6 6 6
<CAPTION>
Summary of operations 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total interest income $ 15,786 $ 14,854 $ 13,630 $ 12,205 $ 10,052
Total interest expense 9,139 8,031 7,099 6,452 4,575
-------------------------------------------------------------
Net interest income 6,647 6,823 6,531 5,753 5,477
Provision for loan losses 681 222 131 60 192
-------------------------------------------------------------
Net interest income after
provision for loan losses 5,966 6,601 6,400 5,693 5,285
Noninterest income 1,238 1,096 871 766 731
Noninterest expense 5,216 4,753 5,092 4,062 4,084
-------------------------------------------------------------
Income before federal income tax and
cumulative effect of a change in accounting
method 1,988 2,944 2,179 2,397 1,932
Provision for federal income taxes 659 971 745 802 573
-------------------------------------------------------------
Income before cumulative effect of a
change in accounting method 1,329 1,973 1,434 1,595 1,359
Cumulative effect of change in accounting
for income taxes - - - - (360)
-------------------------------------------------------------
Net income $ 1,329 $ 1,973 $ 1,434 $ 1,595 $ 999
=============================================================
Basic earnings per share before cumulative effect
of a change in accounting method $ .42 $ . 63 $ .46 $ .51 $ .43
Change in accounting method - - - - (.11)
-------------------------------------------------------------
Basic earnings per share $ .42 $ .63 $ .46 $ .51 $ .32
=============================================================
Fully diluted earnings per share before cumulative
effect of a change in accounting method $ .38 $ .57 $ .42 $ .48 $ .395
Change in accounting method - - - - (.105)
-------------------------------------------------------------
Fully diluted earnings per share $ .38 $ .57 $ .42 $ .48 $ .29
=============================================================
Cash dividend declared per share $ 0.14 $ 0.12 $ 0.105 $ 0.09 $ 0.07
Weighted average common and
common equivalent shares (1)
Basic 3,150,532 3,143,452 3,143,452 3,138,232 3,138,232
Fully diluted 3,505,014 3,456,014 3,433,030 3,321,340 3,405,112
- --------------------
<F1> On each of October 26, 1994, November 6, 1996, and June 3, 1998, the
Board of Directors declared a stock dividend in the nature of a
2-for-1 stock split. All earnings and dividends per share disclosures
have been restated to reflect these stock dividends.
</TABLE>
<TABLE>
<CAPTION>
At or for the
year ended September 30,
-------------------------------------------------------
Key Operating Ratios 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest rate spread (spread between
weighted average rate on all
interest-earning assets and all
interest-bearing liabilities) at end
of period 3.18% 3.52% 3.71% 3.48% 3.73%
Average interest rate spread 3.49 3.82 3.92 3.54 3.84
Net interest yield (net interest
income divided by average interest-
earning assets) 3.52 3.87 4.04 3.70 3.99
Return on stockholders' equity (1) 8.23 13.36 10.65 13.14 12.57
Return on stockholders' equity (2) 8.23 13.36 10.65 13.14 9.24
Return on assets (3) .64 1.02 .81 .96 .93
Return on assets (4) .64 1.02 .81 .96 .68
Average interest-earning assets to
average interest-bearing liabilities 100.54 102.62 102.79 103.90 104.69
Stockholders' equity to total assets at
end of period 7.73 7.67 7.59 7.43 7.35
Average stockholders' equity to average
total assets 7.72 7.61 7.65 7.33 7.51
Dividend payout 23.98 19.13 25.00 18.75 24.14
Nonperforming assets ratio (total
nonperforming assets divided by
total assets) at end of period (5) .29 .27 .28 .31 .46
General valuation allowance to net
loans outstanding at end of period 0.84 0.74 0.75 0.76 0.57
- --------------------
<F1> Net income before cumulative effect of change in accounting principle
divided by average stockholders' equity.
<F2> Net income divided by average stockholders' equity.
<F3> Net income before cumulative effect of change in accounting principle
divided by average total assets.
<F4> Net income divided by average total assets.
<F5> Nonperforming assets consist of nonaccruing loans, accruing loans
which are past due 90 days or more, real estate owned and property
held for future sale.
</TABLE>
Financial Condition Data
Total assets of First Federal increased to $213.5 million at September
30, 1998, from $203.7 million at September 30, 1997. The increase in assets
is the result primarily of an increase in securities held to maturity from
$7.5 million to $12.1 million, an increase in interest-bearing deposits from
$1.6 million to $13.4 million and a decrease in net loans receivable of $4.4
million, or 2.53%, from $174.0 million at September 30, 1997, to $169.6
million at September 30, 1998. The decrease in loans receivable was
primarily due to a decrease in residential real estate loans of $5.4
million, a $406,000 decrease in consumer automobile loans, a $766,000
increase in other real estate loans, a $245,000 decrease in commercial loans
and a $1.3 million increase in other consumer loans. The decrease in
residential loans was due to customers refinancing loans with other
institutions. The decrease in consumer auto loans was due to the tightening
of underwriting, as consumer delinquencies increased, and more competition
from car manufacturers' favorably-priced buyers' programs and lease
programs.
Cash and cash equivalents increased $9.5 million to $18.3 million at
September 30, 1998. Investment securities increased $4.5 million to
increase the level of securities available for liquidity as assets have
continued to increase. See "Liquidity and Capital Resources." Mortgage-
backed securities decreased by $181,000, or 12.6%, during the 1998 fiscal
year due to principal repayments on the mortgage-backed securities portfolio
and the use of such funds for operations and loan originations. Accrued
interest receivable and other assets increased $455,000 to $4.9 million at
September 30, 1998. FHLB stock increased $492,000, which is included in
accrued interest receivable and other assets.
The allowance for loan losses increased by $226,000 from $1,816,000 at
September 30, 1997, to $2,042,000 at September 30, 1998. Management
determined to increase the allowance due to increased consumer loan charge-
offs. First Federal reviews on a monthly basis the allowance for loan
losses as it relates to a number of relevant factors, including but not
limited to, trends in the level of nonperforming assets and classified
loans, current and anticipated economic conditions in the primary lending
area, past loss experience and probable losses arising from specific problem
assets. To a lesser extent, management also considers loan concentrations
to single borrowers and changes in the composition of the loan portfolio.
While management believes that it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could
result in adjustments, and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the
final determination. See Exhibit 99.2 hereto, "Safe Harbor Under the
Private Securities Litigation Reform Act of 1995," which is incorporated
herein by reference.
Loans not secured by one- to four-family residential real estate are
generally considered to involve greater risk of loss than loans secured by
one- to four-family residential real estate due, in part, to the effects of
general economic conditions. The repayment of multifamily residential and
nonresidential real estate loans generally depends upon the cash flow from
the operation of the property, which may be negatively affected by national
and local economic conditions that cause leases not to be renewed or that
negatively affect the operations of a commercial borrower. Construction
loans may also be negatively affected by such economic conditions,
particularly loans made to developers who do not have a buyer for a property
before the loan is made. The risk of default on consumer loans increases
during periods of recession, high unemployment and other adverse economic
conditions. When consumers have trouble paying their bills, they are more
likely to pay mortgage loans than consumer loans, and the collateral
securing such loans, if any, may decrease in value more rapidly than the
outstanding balance of the loan.
Deposits increased by $21.1 million, or 16.63%, from $126.6 million at
September 30, 1997, to $147.7 million at September 30, 1998. The increase
is primarily due to the increase in certificate of deposit accounts at
September 30, 1998. The balance of such deposits increased $16.3 million to
$88.3 million at September 30, 1998, from $72.0 million at September 30,
1997. At September 30, 1998, FHLB advances totaled $48.0 million, a
decrease of $11.8 million over the $59.8 million of advances outstanding at
September 30, 1997. Management believes that deposits will increase
slightly during fiscal year 1999 and that it will not be necessary to fund
the anticipated steady loan demand with further advances from the FHLB,
whose rates are now in line with current market savings rates and their SAIF
premiums. No assurance can be provided, however, that deposits will
increase slightly and that loan demand will increase. Deposit levels and
loan demand are affected by national, as well as local, interest rates, the
attractiveness of alternative investments and other national and local
economic circumstances.
Stockholders' equity was $16.5 million, or 7.73% of total assets, at
September 30, 1998, compared to $15.6 million, or 7.67% of total assets, at
September 30, 1997. The increase was attributable to $1.3 million in net
income for the 1998 fiscal year and $457,000 in dividends declared.
Comparison of the Years Ended
September 30, 1998 and 1997
First Federal reported net income for the 1998 fiscal year of
approximately $1.3 million, compared to $2.0 million in fiscal year 1997.
The most significant changes from 1997 to 1998 were the decrease in net
interest income of $177,000 and the increase in the provision for loan
losses of $458,000 and an increase in noninterest expense of $463,000.
Net interest income decreased by $177,000 in fiscal year 1998 compared
to fiscal year 1997. Interest income increased $932,000 during fiscal year
1998 from $14.8 million during fiscal year 1997. This increase was a result
of the highly competitive mortgage loan market in which 1997's first-year
rates on adjustable-rate mortgages were set at rates lower than the fully
indexed rates and adjusted to higher rates in 1998. Only 9.94%, or $16.9
million, of First Federal's total loan portfolio of $170.0 million consists
of fixed-rate residential real estate loans. Due to the low percentage of
fixed-rate loans in the loan portfolio, management believes that the
addition of up to $8.0 million in 15-year fixed-rate loans to the loan
portfolio, which it plans for fiscal year 1999, will enhance the first-year
income on loans without additional material interest-rate risk to the
portfolio. No assurance can be provided, however, that such fixed-rate
loans will be added to the portfolio. Loan originations are affected by
loan demand, which in turn is affected by interest rates offered, general
economic conditions and the availability of funds for lending activities.
If interest rates remain relatively stable during fiscal year 1999, the
adjustable-rate mortgage loan portfolio will reprice at slightly higher
rates, as most loans originated during fiscal year 1998 were not initially
priced at the fully indexed interest rate. These loans will be repricing
upward at their first adjustment in fiscal year 1999 while the balance of
the adjustable-rate mortgage loan portfolio will not reprice substantially
lower during fiscal year 1999. No assurance can be provided, however, that
interest rates will remain stable. Interest rates are affected by general,
local and national economic conditions, the policies of various regulatory
authorities and other factors beyond the control of First Federal. Interest
expense for fiscal year 1998 increased $1.1 million from $8.0 million during
fiscal year 1997. Included in interest expense for 1998 is approximately
$3.5 million of interest on borrowed funds. The increase in interest
expense on deposits is the result of increased deposits and higher interest
rates on certificates of deposit. It is expected that the amount of
interest paid on borrowed funds will decrease during fiscal year 1999 as
First Federal relies on savings deposits to fund loan demand.
First Federal's average interest rate spread decreased from 3.82% in
fiscal 1997 to 3.49% in fiscal 1998 as a result of the average rate First
Federal is paying on deposits and borrowings increasing more than the
average rate First Federal is earning on loans and securities.
The provision for loan losses was $681,000 in the 1998 fiscal year, an
increase of $458,000 from the 1997 fiscal year. Management increased the
provision for loan losses as a result of increased losses and delinquencies
on consumer loans. In addition, management performed an in-depth review of
consumer loans originated during the first half of the year. As a result of
that review, additional provisions for consumer loan losses were made
because of identified weakness in underwriting and probable losses on the
loans reviewed.
Noninterest income increased for fiscal year 1998 by $142,000 from
fiscal 1997. This is a result of the increase in dividends paid on FHLB
stock of $64,000, an increase of $91,000 in the gain on loans sold, and a
decrease in other income of $26,000.
Noninterest expenses increased by approximately $545,000 from fiscal
1997 to fiscal 1998. The increase is attributable to a $138,000 increase in
data processing costs at the Service Bureau as new services such as imaging
and networking were added. To enhance the long-term profitability of the
Bank and continue the Bancorp's focus on the creation of value for the
Bancorp's shareholders, management retained outside consultants to assist in
identifying ways in which Bank processes can be conducted more efficiently
and to suggest manners in which the Bank's products can be made more
profitable. This investment in long-term profitability increased expenses
during the last quarter of the fiscal year by approximately $120,000. In
addition, salaries and benefits increased $169,000, mainly due to an
increase in staff and an increase in beginning wages and normal pay
increases. Occupancy expense increased $57,000 mainly due to increased
depreciation and increased property taxes. Other operating expenses
increased $213,000.
The federal income tax provision decreased by $313,000 from fiscal
1997 to fiscal 1998. The effective tax rate for fiscal 1998 was 33.10%
compared to 33.0% for fiscal year 1997.
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.
The Board of Directors appointed a Year 2000 Committee, which reports to the
Board of Directors monthly.
First Federal has been upgrading its technology as part of a planned
performance quality commitment and for maintaining a competitive position.
As a result, much of the Bank's internal systems now incorporates technology
which has been year 2000 ("Y2K") tested and certified. Beginning in fiscal
year 1996, the Bank's capital budget included replacement of all personal
computers ("PCs") throughout the Company over a 3-to-4-year period. This
will bring most PCs into compliance. First Federal believes that any
additional Y2K costs will be immaterial.
First Federal relies primarily on third-party vendors for its computer
output and processing, as well as other significant functions and services,
such as securities safekeeping services, securities pricing information and
wire transfers. The Year 2000 Committee is working with the vendors to
assess their Y2K readiness. Based upon an initial assessment, the Board of
Directors believes that with planned modifications to existing software and
hardware and planned conversions to new software and hardware, the third-
party vendors are taking the appropriate steps to ensure that critical
systems will function properly. The planned modifications and conversions
should be completed and tested by June 30, 1999.
If the modifications and conversions by both third-party vendors and
First Federal are not completed on a timely basis or if they fail to
function properly, the operations and financial condition of First Federal
could be materially adversely affected. First Federal is developing
contingency plans for continued operations in the event of system failure.
In addition to possible expense related to its own systems, First
Federal may experience increases in problem loans and credit losses in the
event that borrowers fail to prepare properly for Y2K, and higher funding
costs could result if consumers react to publicity about the issue by
withdrawing deposits. First Federal is assessing such risks among its
customers. First Federal could also be materially adversely affected if
other third parties, such as governmental agencies, clearinghouses,
telephone companies, utilities and other service providers fail to prepare
properly. First Federal is therefore attempting to assess these risks and
take action to minimize their effect.
Comparison of the Years Ended
September 30, 1997 and 1996
First Federal reported net income for the 1997 fiscal year of
approximately $2.0 million, compared to $1.4 million in fiscal year 1996.
The most significant changes from 1996 to 1997 were the increase in net
interest income of $292,000 and the decrease in noninterest expense of
$421,000 due primarily to not having a special deposit insurance assessment
by the Savings Association Insurance Fund ("the SAIF") of the FDIC as in
1996.
Net interest income increased by $292,000 in fiscal year 1997 compared
to fiscal year 1996. Interest income increased $1.2 million during fiscal
year 1997 from $13.6 million during fiscal year 1996. This increase was a
result of average loans increasing $12.9 million during 1997 compared to
1996 and the highly competitive mortgage loan market in which 1996's first-
year rates on adjustable-rate mortgages were set at rates lower than the
fully indexed rates and adjusted to higher rates in 1997. Only 2.85%, or
$5.0 million, of First Federal's total loan portfolio of $174.0 million
consists of fixed-rate residential real estate loans. Interest expense for
fiscal year 1997 increased $931,000 from $7.1 million during fiscal year
1996. Included in interest expense for 1997 is approximately $2.9 million
of interest on borrowed funds.
First Federal's average interest rate spread decreased from 3.92% in
fiscal 1996 to 3.82% in fiscal 1997 as a result of the average rate First
Federal is paying on deposits and borrowings increasing more than the
average rate First Federal is earning on loans and securities.
The provision for loan losses was $222,000 in the 1997 fiscal year, an
increase of $91,000 from the 1996 fiscal year. Management increased the
provision for loan losses as a result of the increase in the loan portfolio.
Noninterest income increased for fiscal year 1997 by $225,000 from
fiscal 1996. This is a result of the increase in dividends paid on FHLB
stock of $59,000, an increase of $20,000 in the gain on loans sold, and an
increase in other income of $124,000, due to the sale of land that was held
in the subsidiary, Firstfedco Agency, Inc., at a zero balance. The land had
been written off in 1992.
Noninterest expenses decreased by approximately $339,000 from fiscal
1996 to fiscal 1997. The decrease is primarily attributable to not having a
special deposit insurance assessment of $800,100 in fiscal 1997. In
addition, salaries and benefits increased $33,000, mainly due to an increase
in staff and normal pay increases. Occupancy expense increased $251,000
mainly due to increased depreciation for the new building and furniture and
fixtures as a result of the renovation of the Main Office at a cost of $4.3
million. The renovation also accounted for a $28,000 increase in costs due
to the grand opening and reappraisal of the building. Other operating
expenses increased $229,000 due to an $88,000 increase in write-offs of
consumer loans and dishonored checks, $20,000 in start-up costs for the
debit card program, a $20,000 increase in auditing and consulting fees
related to the addition of Money Concepts, our third-party provider of
investments and financial planning, a $20,000 increase in stationary and
supplies, and a $12,000 increase in contributions.
Asset and Liability Management
First Federal's Board of Directors has formulated an asset and
liability management policy designed to accomplish First Federal's principal
financial objective of enhancing long-term profitability while reducing its
interest rate risk. The principal elements of such policy are to: (i)
originate long-term, fixed-rate mortgage loans for sale; (ii) emphasize the
origination of adjustable-rate loans; (iii) originate high quality, short-
term consumer loans; (iv) maintain excess liquidity in relatively short-
term, interest-bearing instruments; and (v) lengthen the maturity of its
liabilities by seeking longer-term deposits. First Federal's asset and
liability management policy is designed to reduce the impact of changes in
interest rates on its net interest income by achieving a more favorable
match between the maturity or repricing dates of its interest-earning assets
and interest-bearing liabilities.
First Federal has emphasized the origination of adjustable-rate
mortgage loans and consumer loans in order to more closely match the
maturities or repricing dates of its interest-earning assets and its
interest-bearing liabilities. It has, therefore, sold most of the fixed-
rate loans it has originated in the last few years. The origination of
adjustable-rate mortgage loans in a low or decreasing interest rate
environment, as the economy has been experiencing recently, is more
difficult, however, due to the increased consumer demand for fixed-rate
mortgage loans. First Federal has, therefore, begun retaining more of its
fixed-rate mortgage loans.
In recent years, First Federal has stressed short-term consumer
lending, primarily the origination of automobile loans. In fiscal year
1998, the automobile loans decreased to $35.9 million from $36.3 million in
fiscal year 1997. The change is due primarily to the tightening of
underwriting, as consumer delinquencies increased, and more competition from
car manufacturers' favorably-priced buyers' programs and lease programs.
First Federal intends to continue to maintain consumer loans at current
levels or increase such amounts, depending upon the demand for such loans.
Consumer loans may decrease, however, due to decreased demand or increased
competition.
First Federal's interest rate spread is the principal determinant of
income. The interest rate spread, and therefore net interest income, can
vary considerably over time, because asset and liability repricing do not
coincide. Moreover, the long-term or cumulative effect of interest rate
changes can be substantial. Interest rate risk is defined as the
sensitivity of an institution's earnings and net asset value to changes in
interest rates. The management and Board of Directors of First Federal
carefully manage First Federal's exposure to interest rate risk in a manner
designed to maintain the projected four-quarter percentage change in net
interest income and the projected change in the market value of portfolio
equity within the limits established by the Board of Directors assuming a
permanent and instantaneous parallel shift in interest rates. The Board has
established parameters for the maximum absolute change in net interest
income and market value of portfolio equity at +/- 200 basis points at (25)%
and (40)%. First Federal's projected change in market value of portfolio is
17% and (15)% at September 30, 1998.
Liquidity and Capital Resources
First Federal's principal sources of funds are deposits, repayments on
loans and mortgage-backed securities, maturities of investment securities,
FHLB advances, and funds provided by operations. While scheduled loan and
mortgage-backed securities amortization and maturing interest-bearing
deposits and investment securities are relatively predictable sources of
funds, deposit flows and loan and mortgage-backed securities prepayments are
greatly influenced by economic conditions, the general level of interest
rates and competition. The particular sources of funds utilized by First
Federal from time to time are selected based on comparative costs and
availability. First Federal generally manages the pricing of its deposits
to maintain a steady deposit balance. From time to time, First Federal has
decided not to pay rates on deposits as high as the rates paid by its
competitors. First Federal has, when necessary, supplemented deposits with
longer term or less expensive alternative sources of funds, such as advances
from the FHLB.
The OTS requires savings associations to maintain a minimum level of
investments in specified types of liquid assets intended to provide a source
of relatively liquid funds upon which First Federal may rely if necessary to
fund deposit withdrawals and other short-term funding needs. First
Federal's regulatory liquidity was 14.13% at September 30, 1998. OTS
regulations presently require First Federal to maintain an average daily
balance of investments in United States Treasury obligations, federal agency
obligations and other investments having maturities of five years or less
equal to 4% of the sum of First Federal's average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less.
During the fiscal year ended September 30, 1998, cash provided by
operating activities, mortgage-backed securities repayments, loan repayments
and borrowings were used to fund deposit maturities, withdrawals and loan
originations.
Liquidity management is both a daily and long-term responsibility of
management. First Federal adjusts its investments in cash and cash
equivalents based upon management's assessment of (i) expected loan demand,
(ii) projected mortgage-backed and investment security maturities, (iii)
expected deposit flows, (iv) yields available on interest-bearing deposits,
and (v) the objectives of its asset/liability management program. Excess
liquidity is invested generally in federal funds sold, mortgage-backed
securities, interest-bearing deposits and floating-rate corporate debt
securities. If First Federal requires funds beyond its ability to generate
them internally, it has additional borrowing capacity with the FHLB of
Cincinnati and collateral eligible for reverse repurchase agreements.
First Federal anticipates that it will have sufficient funds available
in 1998 from loan and mortgage-backed securities repayments, investment
security maturities and savings balances to meet expected loan demand. It
anticipates it will not be necessary to borrow an additional amount from the
FHLB, although such borrowings may occur if loan demand weakens or deposits
decrease sufficiently. At September 30, 1998, First Federal had outstanding
commitments to originate loans of $1,846,000, unfunded lines-of-credit
totaling $5.5 million (a significant portion of which normally remains
unfunded) and $53,700 in commitments to sell loans. There were no
commitments to purchase loans at such date. Certificates of deposit
scheduled to mature in one year or less at September 30, 1998, totaled $51.4
million. Management believes that a significant portion of the amounts
maturing during 1999 will remain on deposit with First Federal because they
are mostly from within First Federal's primary market area and are not
negotiated rate deposits. Deposits may not remain, however, due to changes
in the economy, changes in interest rates that may make alternative
investments more attractive, or increased competition among financial
institutions.
First Federal's liquidity is a product of its operating, investing and
financing activities. These activities for the periods presented are
summarized in the following table:
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net cash provided by operating activities $ 2,118 $ 1,760 $ 2,001
Net cash used in investing (1,364) (18,982) (11,270)
Net cash provided by financing activities 8,741 17,897 11,095
------- ------- -------
(Decrease) Increase in cash and cash equivalents 9,495 675 1,826
Cash and cash equivalents at beginning of year 8,837 8,162 6,336
------- ------- -------
Cash and cash equivalents at end of year $18,332 $ 8,837 $ 8,162
======= ======= =======
</TABLE>
First Federal is required by OTS regulations to meet certain minimum
capital requirements. The following table sets forth certain information
regarding First Federal's compliance with applicable regulatory capital
requirements at September 30, 1998.
<TABLE>
<CAPTION>
Percent
Amount of assets
------ ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital $14,717 6.87%
Tangible capital requirement 3,211 1.50
------- -----
Excess $11,506 5.37%
======= =====
Core capital $14,717 6.87%
Core capital requirement 6,422 3.00
------- -----
Excess $ 8,295 3.87%
======= =====
Total risk-based capital $16,147 11.86%
Risk-based capital requirement 10,890 8.00
------- -----
Excess $ 5,257 3.86%
======= =====
</TABLE>
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles
("GAAP"), which require the measurement of financial position and results of
operations in terms of historical dollars without considering changes in
relative purchasing power of money over time because of inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of First Federal are monetary in nature. As a result, interest
rates have a more significant impact on First Federal's performance than the
effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods
and services.
Effect of Accounting Changes
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 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 No. 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 No. 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 No. 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.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132
amends the disclosure requirements of SFAS No. 87, "Employers' Accounting
for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination of
Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." This Statement standardizes the disclosure
requirements of SFAS No. 87 and No. 106 to the extent practicable and
recommends a parallel format for presenting information about pensions and
other postretirement benefits. The Statement does not change any of the
measurement or recognition provisions provided for in SFAS No. 87, No. 88 or
No. 106. This Statement is effective for fiscal years beginning after
December 15, 1997. First Federal adopted SFAS No. 132 on October 1, 1998,
and required disclosures will be included beginning with the Company's 1999
Annual Report.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts. Under the standard, entities are
required to carry all derivative instruments in the statement of financial
position at fair value. The accounting for changes in the fair value (i.e.
gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, if so, on
the reason for holding it. If certain conditions are met, entities may
elect to designate a derivative instrument as a hedge of exposures to
changes in fair value, cash flows, or foreign currencies. If the hedged
exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported
initially as a component of other comprehensive income (outside earnings)
and subsequently reclassified into earnings when the forecasted transaction
affects earnings. Any amounts excluded from the assessment of hedge
effectiveness as well as the ineffective portion of the gain or loss are
reported in earnings immediately. Accounting for foreign currency hedges is
similar to accounting for fair value and cash flow hedges. If the
derivative instrument is not designated as a hedge, the gain or loss is
recognized in earnings in the period of change. This Statement will not
have a material effect on the Company.
Item 7. Financial Statements.
FIRST FEDERAL BANCORP, INC.
Zanesville, Ohio
September 30, 1998
CONTENTS
REPORT OF INDEPENDENT AUDITORS 39
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 40
CONSOLIDATED STATEMENTS OF INCOME 41
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 42
CONSOLIDATED STATEMENTS OF CASH FLOWS 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 45
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
First Federal Bancorp, Inc.
Zanesville, Ohio
We have audited the accompanying consolidated statements of financial
condition of First Federal Bancorp, Inc., as of September 30, 1998 and 1997,
and related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1998.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating overall financial
statement presentation. We believe our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Federal Bancorp, Inc. as of September 30, 1998 and 1997, and results of its
operations and cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
Columbus, Ohio
October 30, 1998
____________________________________________________________________________
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1998 and 1997
____________________________________________________________________________
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 4,957,155 $ 7,237,127
Overnight deposits 13,375,000 1,600,000
----------------------------
Cash and cash equivalents 18,332,155 8,837,127
Securities held to maturity (Fair value - $12,105,000
in 1998 and $7,504,000 in 1997) 12,092,484 7,503,561
Mortgage-backed securities held to maturity (Fair value -
$1,252,000 in 1998 and $1,477,000 in 1997) 1,256,327 1,437,681
Loans receivable, net 169,622,791 174,026,629
Premises and equipment, net 7,347,715 7,501,696
Accrued interest receivable and other assets 4,850,905 4,396,375
----------------------------
Total assets $213,502,377 $203,703,069
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $147,688,662 $126,634,570
Borrowed funds 47,995,988 59,805,000
Advances from borrowers for taxes and insurance 295,463 376,276
Accrued expenses and other liabilities 1,022,450 1,261,362
----------------------------
Total liabilities 197,002,563 188,077,208
----------------------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $100 par value, 1,000,000 shares
authorized, no shares issued and outstanding
Common stock, no par value, 4,000,000 shares
authorized, 3,303,400 shares issued in 1998,
1,651,700 shares issued in 1997 3,656,323 3,656,323
Retained earnings 13,334,589 12,461,620
Treasury shares, 152,868 shares in 1998 and
76,584 shares in 1997, at cost (491,098) (492,082)
----------------------------
Total stockholders' equity 16,499,814 15,625,861
----------------------------
Total liabilities and stockholders' equity $213,502,377 $203,703,069
============================
</TABLE>
____________________________________________________________________________
See accompanying notes to consolidated financial statements.
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1998, 1997 and 1996
____________________________________________________________________________
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income
Interest and fees on loans $15,040,568 $14,273,365 $13,152,751
Interest on securities 543,359 417,158 356,921
Other interest income 202,064 163,389 120,957
-----------------------------------------
Total interest income 15,785,991 14,853,912 13,630,629
-----------------------------------------
Interest expense
Interest on deposits 5,622,884 5,142,179 5,414,339
Interest on borrowed funds 3,516,457 2,888,430 1,685,085
-----------------------------------------
Total interest expense 9,139,341 8,030,609 7,099,424
-----------------------------------------
Net interest income 6,646,650 6,823,303 6,531,205
Provision for loan losses 680,757 222,268 130,823
-----------------------------------------
Net interest income after provision for
loan losses 5,965,893 6,601,035 6,400,382
-----------------------------------------
Noninterest income
Service charges on deposit accounts 324,836 310,308 316,480
Gain on sale of loans 158,540 67,624 47,652
Dividends on FHLB stock 241,150 177,456 118,870
Other operating income 513,101 540,487 387,923
-----------------------------------------
Total noninterest income 1,237,627 1,095,875 870,925
-----------------------------------------
Noninterest expense
Salaries and employee benefits 2,200,042 2,031,085 1,998,265
Occupancy and equipment expense 814,220 758,537 508,015
Deposit insurance expense 139,818 174,218 1,148,468
Data processing expense 466,186 328,213 299,849
Advertising 248,505 267,088 186,986
Ohio franchise taxes 215,209 192,511 179,342
Other operating expenses 1,132,402 1,000,983 771,657
-----------------------------------------
Total noninterest expense 5,216,382 4,752,635 5,092,582
-----------------------------------------
Income before income taxes 1,987,138 2,944,275 2,178,725
Provision for income taxes 658,594 971,697 744,899
-----------------------------------------
Net income $ 1,328,544 $ 1,972,578 $ 1,433,826
=========================================
Basic earnings per share $ .42 $ .63 $ .46
=========================================
Diluted earnings per share $ .38 $ .57 $ .42
=========================================
</TABLE>
____________________________________________________________________________
See accompanying notes to consolidated financial statements.
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1998, 1997 and 1996
____________________________________________________________________________
<TABLE>
<CAPTION>
Minimum
Additional Total
Common Retained Treasury Pension Stockholders'
Stock Earnings Stock Liability Equity
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance,
October 1, 1995 $3,656,323 $ 9,773,827 $(541,958) $(143,155) $12,745,037
Dividends declared,
$.11 per share (329,569) (329,569)
Net income for the
year ended
September 30, 1996 1,433,826 1,433,826
Sale of treasury stock
from exercise of
options (1,163) 6,563 5,400
Change in minimum
additional pension
liability 143,155 143,155
-----------------------------------------------------------------
Balance,
September 30, 1996 3,656,323 10,876,921 (535,395) 0 13,997,849
Dividends declared,
$.12 per share (377,416) (377,416)
Net income for the
year ended
September 30, 1997 1,972,578 1,972,578
Sale of treasury stock
from exercise of
options (10,463) 43,313 32,850
-----------------------------------------------------------------
Balance,
September 30, 1997 3,656,323 12,461,620 (492,082) 15,625,861
Dividends declared,
$.14 per share (456,803) (456,803)
Net income for the
year ended
September 30, 1998 1,328,544 1,328,544
Sale of treasury stock
from exercise of
options 1,228 984 2,212
-----------------------------------------------------------------
Balance,
September 30, 1998 $3,656,323 $13,334,589 $(491,098) $ 0 $16,499,814
=================================================================
</TABLE>
____________________________________________________________________________
See accompanying notes to consolidated financial statements.
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1998, 1997 and 1996
____________________________________________________________________________
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,328,544 $ 1,972,578 $ 1,433,826
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and intangible amortization 537,603 472,846 253,549
Net amortization (accretion) on securities (63,061) (63,517) (17,356)
Provision for loan losses 680,757 222,268 130,823
Deferred taxes (89,968) 159,930 (244,484)
Net change in mortgage loans
originated for sale 85,075 (1,726) (140,501)
FHLB stock dividend (241,000) (177,200) (118,600)
Changes in other assets and other
liabilities (119,616) (825,594) 703,320
-----------------------------------------
Net cash provided by operating
activities 2,118,334 1,759,585 2,000,577
-----------------------------------------
Cash flows from investing activities
Purchase of FHLB stock (251,100) (1,111,800) (176,800)
Purchase of securities (12,845,646) (8,980,101) (5,455,986)
Proceeds from maturities of securities 8,319,785 6,265,325 5,792,447
Principal collected on mortgage-backed
securities 181,353 223,337 228,400
Loans made to customers, net of principal
repayments 3,196,745 (14,068,321) (8,543,696)
Proceeds from sales and payments received
on real estate owned and repossessed assets 417,991 110,701
Purchases of premises and equipment (383,621) (1,420,669) (3,114,164)
-----------------------------------------
Net cash used for investing
activities (1,364,493) (18,981,528) (11,269,799)
-----------------------------------------
Cash flows from financing activities
Net change in deposit accounts 21,054,092 (3,437,046) 805,001
Net change in short-term FHLB advances (29,809,012) 7,835,000 10,370,000
Proceeds from long-term FHLB advances 21,000,000 17,000,000 1,000,000
Repayment of long-term FHLB advances (3,000,000) (3,000,000) (1,000,000)
Net change in advance payments by
borrowers for taxes and insurance (80,813) (164,458) 229,049
Dividends paid (425,292) (369,264) (313,823)
Proceeds from exercise of options 2,212 32,850 5,400
-----------------------------------------
Net cash provided by financing activities 8,741,187 17,897,082 11,095,627
-----------------------------------------
Net change in cash and cash equivalents 9,495,028 675,139 1,826,405
Cash and cash equivalents at beginning of year 8,837,127 8,161,988 6,335,583
-----------------------------------------
Cash and cash equivalents at end of year $18,332,155 $ 8,837,127 $ 8,161,988
=========================================
Supplemental disclosures of cash flow information
Cash paid during the year:
Interest on deposits and borrowings $ 9,053,106 $ 8,034,416 $ 7,116,809
Income taxes 875,000 850,000 1,015,000
Noncash transactions:
Transfer of loan balances to real
estate owned and repossessed assets $ 441,261 $ 108,541
</TABLE>
____________________________________________________________________________
See accompanying notes to consolidated financial statements.
FIRST FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of First Federal Bancorp, Inc. (the "Company") and its wholly-
owned subsidiary, First Federal Savings Bank of Eastern Ohio (the "Bank").
All significant intercompany accounts and transactions have been eliminated.
Concentration of Credit Risk: The Company grants residential, consumer and
commercial loans to customers located primarily in east-central Ohio. These
loans account for substantially all of the Company's revenues. Mortgage
loans make up approximately 56% of the Company's loan portfolio, 21% is made
up of automobile loans, 14% is made up of multi-family, nonresidential and
construction mortgage loans and the remaining 9% is made up of other
consumer and commercial loans.
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions affecting the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Areas involving use of management's
estimates and assumptions include allowance for loan losses, realization of
deferred tax assets, determination and carrying value of impaired loans,
depreciation of premises and equipment, fair value of financial instruments,
net accrued pension liability, carrying value of other real estate and loans
held for sale recognized in the Company's financial statements. Actual
results could differ from those estimates. Estimates subject to possible
change in the near term include the allowance for loan losses and fair value
of financial instruments.
Investments and Mortgage-Backed Securities: The Company classifies certain
debt and equity securities as held to maturity, trading or available for
sale. Securities classified as held to maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts using the
interest method. Securities classified as held to maturity are those
management has the positive intent and ability to hold to maturity.
Trading securities are those purchased principally to sell in the near term,
and are carried at fair value with unrealized gains and losses reflected in
earnings. The Company has no trading securities.
Securities classified as available for sale are carried at fair value. Net
unrealized gains and losses are reflected as a separate component of
stockholders' equity, net of tax effects. Securities classified as
available for sale are those management intends to sell or that could be
sold for liquidity, investment management or similar reasons, even if
management does not presently intend such a sale.
Realized gains and losses on disposition are based on net proceeds and the
amortized cost of the security sold, using the specific identification
method.
Loans Held for Sale: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value
in aggregate. Net unrealized losses are recognized in a valuation allowance
by charges to income.
Allowance for Losses on Loans: Because some loans may not be repaid in
full, an allowance for loan losses is recorded. Increases to the allowance
are recorded by a provision for loan losses charged to expense. Estimating
the risk of loss and the amount of loss on any loan is necessarily
subjective. Accordingly, the allowance is maintained by management at a
level considered adequate to cover probable 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 and commercial loans are evaluated individually for impairment.
When analysis of borrower operating results and financial condition
indicates that underlying cash flows of the borrower's business are not
adequate to meet its debt service requirements, the loan is evaluated for
impairment. Loans are generally moved to nonaccrual status when 90 days or
more past due. These loans are often also considered impaired. Impaired
loans, or portions thereof, are charged off when deemed uncollectible. The
nature of disclosures for impaired loans is considered generally comparable
to prior nonaccrual and renegotiated loans and nonperforming and past-due
asset disclosures.
Real Estate Owned: Real estate owned, other than that used in the normal
course of business, is initially recorded at fair market value less
estimated costs to sell the property. Any reduction to fair market value at
the time of acquisition is accounted for as a loan charge off. Additional
provisions for losses are made when the net realizable value of the property
is determined to be less than the recorded value. Costs relating to
development and improvement of real estate are capitalized, whereas costs of
holding such real estate are expensed as incurred. Also, gains or losses
are recorded when the property is sold and are reflected in the Consolidated
Statement of Income.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Premises are depreciated using the straight-line
method over a 25- to 50-year period. Equipment is depreciated using the
straight-line method, with lives ranging primarily from 3 to 20 years.
Maintenance and repairs are expensed and major improvements are capitalized.
Interest Income on Loans: Interest on loans is accrued over the term of the
loans based on the principal outstanding. Management reviews loans
delinquent 90 days or more to determine if the interest accrual should be
discontinued. The carrying value of impaired loans reflects cash payments,
revised estimates of future cash flows and increases in the present value of
expected cash flows due to the passage of time. Cash payments representing
interest income are reported as such and other cash payments are reported as
reductions in carrying value. Increases or decreases in carrying value due
to changes in estimates of future payments or the passage of time are
reported as reductions or increases in bad debt expense.
Loan Fees and Costs: The Company defers loan origination fees, net of
direct loan origination costs and recognizes them over the life of the loan
as a yield adjustment. The net amount deferred is reported as a reduction
of loans.
Income Taxes: The Company follows the liability method in accounting for
income taxes. The liability method provides that deferred tax assets and
liabilities are recorded based on the difference between the tax basis of
assets and liabilities and their carrying amounts for financial reporting
purposes.
Statement of Cash Flows: For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks and interest-
bearing time deposits in financial institutions with initial maturities of
90 days or less. The Company reports net cash flows for customer loan and
deposit transactions and borrowed funds with maturities of less than three
months.
Earnings and Dividends per Common Share: Basic and diluted earnings per
common share are computed under a new accounting standard effective
beginning with the quarter ended December 31, 1997. All prior earnings per
common share amounts have been restated to be comparable. Basic earnings
per common share is based on the net income divided by the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share shows the dilutive effect of additional potential common shares
issuable under stock options. On June 3, 1998, the Board of Directors
declared a two-for-one stock split in the form of a 100% stock dividend.
All earnings and dividends per share disclosures have been restated to
reflect this stock split. The weighted average number of common stock and
common stock equivalents during each year ended September 30 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Basic earnings per share 3,150,532 3,143,452 3,143,452
Diluted earnings per share 3,505,014 3,456,014 3,433,030
</TABLE>
Reclassifications: Certain reclassifications have been made to the 1997 and
1996 financial statements to be comparable to the 1998 presentation.
NOTE 2 - SECURITIES
The amortized cost and estimated fair value of securities held to maturity
are as follows at September 30:
<TABLE>
<CAPTION>
1998
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Treasury
and agency securities $11,907,299 $14,310 $ (1,609) $11,920,000
Other debt securities 185,185 (185) 185,000
------------------------------------------------------
Total 12,092,484 14,310 (1,794) 12,105,000
Mortgage-backed securities 1,256,327 36,864 (41,191) 1,252,000
------------------------------------------------------
$13,348,811 $51,174 $(42,985) $13,357,000
======================================================
<CAPTION>
1997
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Treasury
and agency securities $ 7,296,591 $ 3,693 $ (3,284) $ 7,297,000
Other debt securities 206,970 30 207,000
------------------------------------------------------
Total 7,503,561 3,723 (3,284) 7,504,000
Mortgage-backed securities 1,437,681 39,319 1,477,000
------------------------------------------------------
$ 8,941,242 $43,042 $ (3,284) $ 8,981,000
======================================================
</TABLE>
The amortized cost and estimated fair value of debt securities held to
maturity at September 30, 1998, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
--------------------------
<S> <C> <C>
Due in one year or less $11,907,299 $11,920,000
Due after five through ten years 185,185 185,000
Mortgage-backed securities 1,256,327 1,252,000
--------------------------
$13,348,811 $13,357,000
==========================
</TABLE>
No debt securities were sold for fiscal years ending September 30, 1998,
1997 or 1996.
At September 30, 1998 and 1997, $ 4,125,000 and $ 3,085,000 of securities
were pledged to collateralize public funds deposited in the Bank.
NOTE 3 - LOANS RECEIVABLE
The loan portfolio at September 30 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Real estate loans
One- to four-family residences $ 96,856,082 $102,723,272
Multifamily 8,734,898 9,691,513
Nonresidential 10,620,454 9,799,389
Construction loans 4,459,100 3,082,024
----------------------------
120,670,534 125,296,198
Less
Undisbursed portion of loans in process 1,485,402 1,373,844
Net deferred loan origination fees 414,950 474,858
----------------------------
Total real estate loans 118,770,182 123,447,496
----------------------------
Consumer and other loans
Automobile 35,861,551 36,267,264
Loans on deposit accounts 466,721 421,866
Home equity, education and other 14,092,671 12,869,551
Commercial loans 1,891,737 2,136,709
----------------------------
52,312,680 51,695,390
Net deferred loan origination costs 581,929 699,743
----------------------------
Total consumer and other loans 52,894,609 52,395,133
----------------------------
Total loans 171,664,791 175,842,629
Less allowance for loan losses 2,042,000 1,816,000
----------------------------
$169,622,791 $174,026,629
============================
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $1,816,000 $1,611,000 $1,499,444
Provision charged to income 680,757 222,268 130,823
Charge-offs (454,996) (28,649) (28,017)
Recoveries 239 11,381 8,750
--------------------------------------
Balance at end of year $2,042,000 $1,816,000 $1,611,000
======================================
</TABLE>
Impaired loans are not material at September 30, 1998 and 1997 or during the
years then ended.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal
balances of these loans at September 30, 1998 and 1997 were approximately
$21,319,000 and $14,730,000. Mortgage servicing rights at September 30,
1998 and 1997 and activity for capitalized mortgage servicing rights for
1998, 1997 and 1996 are not material.
In the ordinary course of business, the Bank has granted loans to certain
officers, directors and their related interests. Related party loans are
made substantially on the same terms as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. Related party loan activity, for loans
aggregating $60,000 or more to any one related party, is summarized as
follows:
<TABLE>
<S> <C>
Balance at September 30, 1997 $ 414,653
Additions 910,003
Repayments (336,284)
---------
Balance at September 30, 1998 $ 988,372
=========
</TABLE>
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment consists of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land and improvements $ 776,939 $ 759,449
Office buildings and leasehold improvements 6,513,048 6,516,883
Furniture, fixtures and equipment 2,804,818 2,433,874
-------------------------
Total 10,094,805 9,710,206
Accumulated depreciation 2,747,090 2,208,510
-------------------------
$ 7,347,715 $7,501,696
=========================
</TABLE>
Depreciation expense was $537,089, $462,707 and $247,971 for the years
ended September 30, 1998, 1997 and 1996.
NOTE 5 - DEPOSITS
Deposits at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Noninterest-bearing checking $ 4,446,098 $ 4,214,234
Christmas club and other noninterest-bearing 396,118 375,242
----------------------------
Total noninterest-bearing 4,842,216 4,589,476
----------------------------
Money market checking 28,872,047 24,298,655
Passbook and statement savings 25,667,771 25,746,917
Negotiated-rate certificates of deposit 6,070,120 4,586,588
Fixed-rate certificates of deposit 82,236,508 67,412,934
----------------------------
Total interest-bearing 142,846,446 122,045,094
----------------------------
Total deposits $147,688,662 $126,634,570
============================
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $16,454,000 and $12,121,000 at September 30,
1998 and 1997. Deposits greater than $100,000 are not insured by the
Federal Deposit Insurance Corporation (FDIC).
At September 30, 1998, scheduled maturities of certificates of deposit are
as follows for the year ending September 30:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
1999 $51,413,511
2000 33,429,377
2001 1,890,704
2002 364,442
2003 1,135,900
Thereafter 72,694
-----------
$88,306,628
===========
</TABLE>
In conjunction with renovation of the Company's main office, $96,862 of
interest expense was capitalized into the cost of construction in progress
during the year ended September 30, 1996. Total interest expense for 1996
would have been $7,196,286 if the construction period interest had not been
capitalized.
NOTE 6 - BORROWED FUNDS
Borrowed funds consist solely of Federal Home Loan Bank (FHLB) advances.
Fixed-rate long-term advances (ranging from 5.77% to 6.90%) consist of the
following at September 30, 1998, by scheduled maturity:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
1999 $12,000,000
2000 7,000,000
2001 11,000,000
2002 1,000,000
2003 6,000,000
Thereafter 10,995,988
-----------
$47,995,988
===========
</TABLE>
At September 30, 1997, the Company had $29,805,000 (6.53% interest rate) of
variable-rate advances and $30,000,000 (ranging from 5.90% to 6.90%) of
fixed-rate advances.
At September 30, 1998, $3,534,000 of FHLB stock and $71,994,000 of one- to
four-family residential loans were pledged to collateralize advances from
the FHLB. Based on the Company's FHLB stock investment at September 30,
1998, the Company could borrow up to $67,919,000.
NOTE 7 - FEDERAL INCOME TAXES
The provision for federal income taxes for the years ended September 30
consists of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current federal income taxes $748,562 $811,767 $989,383
Deferred federal income tax
expense (benefit) (89,968) 159,930 (244,484)
--------------------------------
$658,594 $971,697 $744,899
================================
</TABLE>
The reconciled difference between the financial statement provision and
amounts computed by using the statutory rate is as follows for the years
ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ -------------------- ------------------
Amount Percent Amount Percent Amount Percent
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax computed
at the statutory rate $675,627 34.0% $1,001,054 34.0% $740,767 34.0%
Tax effect of
miscellaneous items (17,033) (1.1) (29,357) (1.2) 4,132 .2
------------------------------------------------------------
$658,594 32.9% $ 971,697 32.8% $744,899 34.2%
============================================================
</TABLE>
The following are sources of gross deferred tax assets and liabilities as of
September 30:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Items giving rise to deferred tax assets:
Allowance for loan losses in excess of tax
reserve $ 339,182 $ 262,342 $ 174,256
Pension expense 16,620 17,462 17,516
Accrued vacation and sick pay 34,986 34,986 33,320
Gain on sale of real estate owned 16,954 18,614
Savings Association Insurance Fund
capitalization assessment 272,030
Other 15,856 22,341 24,066
-----------------------------------
Gross deferred tax asset 406,644 354,085 539,802
-----------------------------------
Items giving rise to deferred tax liabilities:
Deferred loan fees (95,903) (192,727)
FHLB stock dividends (408,891) (326,951) (266,703)
Depreciation (201,449) (221,360) (190,844)
Amortization of certificate of deposit premium (11,826) (14,078) (16,331)
Other (182) (1,465) (18,939)
-----------------------------------
Gross deferred tax liability (622,348) (659,757) (685,544)
-----------------------------------
Net deferred tax liability $(215,704) $(305,672) $(145,742)
===================================
</TABLE>
In August 1996, legislation was enacted repealing the reserve method of
accounting used by many thrifts to calculate their bad debt reserve for
federal income tax purposes. As a result, thrifts such as the Bank must
recapture that portion of the reserve exceeding the amount that could have
been taken under the experience method for tax years beginning after
December 31, 1987. Legislation also requires thrifts to account for bad
debts for federal income tax purposes on the same basis as commercial banks
for tax years beginning after December 31, 1995. The recapture will occur
over a six-year period, the commencement of which will be delayed until the
first taxable year beginning after December 31, 1997, provided the
institution meets certain residential lending requirements. At September
30, 1998, the Bank had approximately $1,044,000 in bad debt reserves subject
to recapture for federal income tax purposes. The deferred tax liability
related to the recapture has been previously established. In fiscal 1998,
no bad debt reserves were recaptured as the Bank met the residential lending
requirements.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company can be a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet financing needs of its
customers. These financial instruments include commitments to make loans.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to make loans is
represented by the contractual amount of those instruments. The Company
follows the same credit policy to make such commitments as is followed for
those loans recorded in the financial statements. As of September 30, 1998,
the Company had commitments to make loans and unfunded lines of credit (at
market rates) of approximately $7,296,000, excluding loans in process.
$6,158,000 were variable-rate and $1,138,000 were fixed-rate commitments.
The fixed-rate commitments had interest rates ranging from 6.75% to 8.50%.
The Company also had commitments to sell $54,000 of fixed-rate mortgage
loans at September 30, 1998.
At September 30, 1998 and 1997, the Company was required to have $796,000
and $786,000 on deposit with the Federal Reserve Bank or as cash on hand.
These reserves do not earn interest.
NOTE 9 - RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL REQUIREMENTS
Retained earnings at September 30, 1998 and 1997 include approximately
$1,615,000 for which no deferred federal income tax liability has been
recorded. This amount represents an allocation of income to bad debt
deductions for tax purposes alone. Reduction of amounts so allocated for
purposes other than tax bad-debt losses or adjustments from carryback of net
operating losses would create income for tax purposes only, which would be
subject to current tax. The unrecorded deferred tax liability on the above
amount at September 30, 1998 and 1997 was approximately $549,000.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory actions that, if undertaken,
could have a direct material effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines involving
quantitative measures of the Bank's assets, liabilities and certain off-
balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings
and other factors. At September 30, 1998 and 1997, management believes the
Bank is in compliance with all regulatory capital requirements. Based on
the Bank's computed regulatory capital ratios, the Bank is considered well
capitalized under Section 38 of the Federal Deposit Insurance Act at
September 30, 1998 and 1997. To be well capitalized, the Bank must maintain
minimum tangible, core and risk-based capital ratios of 5%, 6% and 10%,
respectively. There are no conditions or events since September 30, 1998
that management believes have changed the Bank's capital amounts. The
difference between Risk-based and Tangible Capital is the general valuation
allowance for loan losses. The Bank's actual capital amounts and ratios for
capital adequacy purposes are as follows at September 30:
<TABLE>
<CAPTION>
Tangible Core Risk-based
1998 Capital Capital Capital
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Regulatory capital - computed $ 14,717,000 $ 14,717,000 $ 16,147,000
Minimum capital requirement 3,211,000 6,422,000 10,890,000
--------------------------------------------
Regulatory capital - excess $ 11,506,000 $ 8,295,000 $ 5,257,000
============================================
Regulatory capital - computed 6.87% 6.87% 11.86%
Minimum capital requirement 1.50 3.00 8.00
--------------------------------------------
Excess 5.37% 3.87% 3.86%
============================================
Regulatory asset base $214,070,000 $214,070,000 $136,121,000
============================================
<CAPTION>
Tangible Core Risk-based
1997 Capital Capital Capital
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Regulatory capital - computed $ 13,862,000 $ 13,862,000 $ 15,167,000
Minimum capital requirement 3,048,000 6,097,000 10,729,000
--------------------------------------------
Regulatory capital - excess $ 10,814,000 $ 7,765,000 $ 4,438,000
============================================
Regulatory capital - computed 6.82% 6.82% 11.31%
Minimum capital requirement 1.50 3.00 8.00
--------------------------------------------
Excess 5.32% 3.82% 3.31%
============================================
Regulatory asset base $203,229,000 $203,229,000 $134,109,000
============================================
</TABLE>
NOTE 10 - DIVIDENDS
By regulation, limitations have been imposed on all capital distributions by
savings institutions, including cash dividends. The regulation establishes
a three-tiered system of restrictions, with the greatest flexibility
afforded to thrifts which are both well-capitalized and given favorable
qualitative examination ratings by the Office of Thrift Supervision (OTS).
For example, a thrift which is given one of the two highest examination
ratings and has capital, as defined, equal to its fully phased-in regulatory
capital requirements could, after prior notice but without the prior
approval of the OTS, make capital distributions in any year that would
reduce by one-half the amount of its capital which exceeds its fully phased-
in capital requirement, as adjusted to reflect net income to date during the
year. Other thrifts would be subject to more stringent procedural and
substantive requirements, the most restrictive being prior OTS approval of
any capital distribution. At September 30, 1998, these limitations would
not restrict the Company from paying normal dividends.
NOTE 11 - PENSION PLAN
The Bank has a noncontributory defined benefit pension plan providing
retirement and death benefits for all of its eligible employees. The
Plan's benefit formula is the projected unit credit formula which
encompasses future salary levels and participants' years of service and cash
surrender value of insurance policies. Net pension cost for the years ended
September 30 includes the following components:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during year $ 72,610 $ 62,396 $107,029
Interest cost on projected benefit obligation 92,639 80,369 78,113
Actual return on plan assets (95,081) (86,240) 8,571
Net amortization and deferral 53,056 49,964 (10,722)
--------------------------------
Net pension cost $123,224 $106,489 $182,991
================================
</TABLE>
The following table sets forth the funded status and amounts recognized in
the statements of financial condition at September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation $ 890,314 $ 724,919
========================
Accumulated benefit obligation $ 915,759 $ 744,872
========================
Plan assets at fair value $1,148,857 $ 962,230
Actuarial present value of projected benefit
obligation for services rendered to date 1,368,294 1,251,878
------------------------
Unfunded projected benefit obligation (219,437) (289,648)
Unrecognized net loss 270,028 291,410
Unrecognized transition liability, net of amortization 12,507 13,775
------------------------
Net accrued pension asset $ 63,098 $ 15,537
========================
Assumptions for the plan valuations include:
Weighted average discount rate 6.74% 7.40%
Annual rate of increase in compensation levels 4.00 4.00
Expected long-term rate of return on assets 5.00 5.00
</TABLE>
The unrecognized transition liability is being amortized straight-line as a
component of pension cost over a 19-year period.
Plan assets are invested in Bank certificates of deposit and money market
funds held by the Bank and in cash surrender value of insurance policies.
NOTE 12 - STOCK OPTION PLANS
The Company has five stock option plans, two Incentive Stock Option Plans
for Officers and Key Employees and two Stock Option Plans for Nonemployee
Directors, and one Stock Option Plan for Senior Executive Officers and
Outside Directors, that were approved by the Board of Directors and were
ratified by the Company's shareholders at the annual meetings in February
1993, February 1995 and February 1997. Reserved shares and options granted
under the plans at September 30 are as follows, stated to reflect the two-
for-one stock split effected in the form of a stock dividend approved by the
Board of Directors on June 3, 1998:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Shares reserved for issuance to Officers and Key Employees 464,540 416,540
Options granted: $1.25 per share 145,760 145,760
2.50 per share 4,000 4,000
2.63 per share 4,000 4,000
3.25 per share 13,200 13,200
3.78 per share 128,000 128,000
5.38 per share 7,600 7,600
7.38 per share 7,100 7,600
9.88 per share 3,900
9.97 per share 16,000
------------------
329,560 310,160
------------------
Shares available 134,980 106,380
==================
Options exercised: $2.50 per share 1,600
2.63 per share 1,600
3.25 per share 5,600
5.38 per share 1,200
7.38 per share 300
------------------
300 10,000
==================
Shares reserved for issuance to Nonemployee Directors 287,624 227,624
Options granted: $1.25 per share 69,920 69,920
3.41 per share 64,000 64,000
4.94 per share 33,480 33,480
9.97 per share 20,000
------------------
187,400 167,400
------------------
Shares available 100,224 60,224
==================
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages the use
of a fair value-based method to account for stock-based compensation plans
such as the Company's stock option plans. As allowed by SFAS No. 123;
however, the Company has elected to continue to follow prior standards in
accounting for its stock options. Under these standards, because the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation is recognized. If
compensation expense is not recorded, pro forma information regarding net
income and earnings per share is required by SFAS No. 123, and has been
determined as if the Company had accounted for its stock options under the
fair value method of that Statement. The fair value for these options was
estimated at the date of grant using an option pricing model with the
following assumptions for 1998, 1997 and 1996 respectively: risk-free
interest rates of 6.24%, 5.70% and 6.01%; dividend yields of 1.44%, 2.44%
and 3.35%; and a weighted average life of the options of 10 years. For
purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income as reported $1,328,544 $ 1,972,578 $1,433,826
Pro forma net income 1,229,000 1,938,000 1,338,000
Earnings per share as reported
Basic $ .42 $ .63 $ .46
Diluted .38 .57 .42
Pro forma earnings per share
Basic .39 .61 .43
Diluted .35 .56 .39
</TABLE>
A summary of the Company's stock option activity and related information
subject to SFAS No. 123 follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding beginning
of year 47,480 $5.01 42,280 $5.03
Granted 40,100 9.96 9,200 7.38 44,280 $5.05
Exercised (300) 7.38 (1,200) 5.38
Forfeited (700) 8.09 (2,800) 6.52 (2,000) 5.38
------ ------ ------
Outstanding end of year 86,580 7.48 47,480 5.39 (42,280) 5.03
Exercisable end of year 82,680 7.37 39,880 5.01 16,000 4.94
Weighted average fair value
of options granted during year 3.63 3.40 3.80
</TABLE>
NOTE 13 - SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT
On September 30, 1996, legislation was passed to recapitalize the Savings
Association Insurance Fund (SAIF). As a result, all savings and loan
institutions paid a one time assessment of $.657 per $100 of deposits held
as of March 31, 1995. Consequently, the Company recognized an $800,100
expense in the 1996 Consolidated Statement of Income.
NOTE 14 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table shows the carrying values and the related estimated fair
values of financial instruments at September 30. Items that are not
financial instruments are not included.
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amounts Fair Value Amounts Fair Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 18,332,155 $ 18,332,000 $ 8,837,127 $ 8,837,000
Securities held to maturity 12,092,484 12,105,000 7,503,561 7,504,000
Mortgage-backed securities 1,256,327 1,252,000 1,437,681 1,477,000
FHLB stock 3,534,000 3,534,000 3,041,900 3,042,000
Loans, net 169,622,791 171,102,000 174,026,629 173,838,000
Accrued interest receivable 1,144,313 1,144,000 1,133,146 1,133,000
Financial liabilities
Demand and savings deposits (59,382,034) (59,382,000) (54,635,048) (54,635,000)
Certificates of deposit (88,306,628) (89,022,000) (71,999,522) (72,317,000)
Borrowed funds (47,995,988) (49,005,000) (59,805,000) (59,877,000)
Advances from borrowers for
taxes and insurance (295,463) (295,000) (376,276) (376,000)
Accrued interest payable (516,076) (516,000) (429,841) (430,000)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of September 30, 1998 and 1997. The estimated fair
values for cash and cash equivalents, FHLB stock, accrued interest
receivable, demand and savings deposits, variable-rate borrowed funds,
advances from borrowers for taxes and insurance and accrued interest payable
are considered to approximate cost. The estimated fair value for securities
is based on quoted market values for the individual securities or for
equivalent securities. The estimated fair value for variable-rate loans
which reprice in less than twelve months is considered to approximate cost.
The estimated fair value for fixed-rate loans is based on estimates of the
rates the Company would charge for similar loans at September 30, 1998 and
1997, applied over estimated payment periods. The estimated fair values for
certificates of deposit and fixed-rate borrowings are based on estimates of
the rates the Company would pay on such deposits and borrowings at
September 30, 1998 and 1997, applied for the time period until maturity.
The estimated fair value of commitments is not material. While these
estimates of fair values are based on management's judgment of appropriate
factors, there is no assurance that, were the Company to have disposed of
such items at September 30, 1998 or 1997, the estimated fair values would
necessarily have been achieved at that date, since fair values may differ
depending on various circumstances. The estimated fair values at September
30, 1998 and 1997 should not necessarily be considered to apply at
subsequent dates.
NOTE 15 - PARENT COMPANY
Condensed financial information of First Federal Bancorp, Inc. as of
September 30 is as follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Deposits with subsidiary $ 1,501,025 $ 469,623
Commercial loans 259,215 861,732
Other assets 21,702 14,741
Securities held to maturity (fair value -
$250,000 in 1997) 250,102
Investment in subsidiary, at equity in
underlying value of net assets 14,861,986 14,124,568
--------------------------
Total assets $16,643,928 $15,720,766
==========================
LIABILITIES
Other liabilities $ 144,114 $ 94,905
STOCKHOLDERS' EQUITY 16,499,814 15,625,861
--------------------------
Total liabilities and stockholders' equity $16,643,928 $15,720,766
==========================
</TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend income $ 600,000 $ 550,000 $ 400,000
Equity in undistributed income of
subsidiary and net earnings 737,419 1,444,617 1,057,871
Interest income 108,114 90,729 65,571
--------------------------------------
Total income 1,445,533 2,085,346 1,523,442
Other expenses 116,989 112,768 89,616
--------------------------------------
Net income $1,328,544 $1,972,578 $1,433,826
======================================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income $1,328,544 $1,972,578 $1,433,826
Amortization/(accretion) of
securities 103 (694) (1,812)
Equity in undistributed income of
subsidiary (737,419) (1,444,617) (1,057,871)
Net change in other assets and
liabilities 10,737 (6,625) 110,665
--------------------------------------
Net cash provided by
operating activities 601,965 520,642 484,808
--------------------------------------
Investing activities
Purchase of securities (499,483)
Proceeds from maturities of
securities 250,000 750,000
Loans made to customers, net
of principal repayments 602,517 (598,933) (193,113)
--------------------------------------
Net cash provided/(used) by
investing activities 852,517 (598,933) 57,404
--------------------------------------
Financing activities
Proceeds from exercise of options 2,212 32,850 5,400
Dividends paid (425,292) (369,264) (313,823)
--------------------------------------
Net cash used by
financing activities (423,080) (336,414) (308,423)
--------------------------------------
Net change in cash and cash
equivalents 1,031,402 (414,705) 233,789
Cash and cash equivalents at
beginning of year 469,623 884,328 650,539
--------------------------------------
Cash and cash equivalents at
end of year $1,501,025 $ 469,623 $ 884,328
======================================
</TABLE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information contained in the definitive Proxy Statement for the
1999 Annual Meeting of Shareholders of First Federal Bancorp, Inc. (the
"Proxy Statement"), under the captions "Proposal One: Election of
Directors" and "Voting Securities and Ownership of Certain Beneficial Owners
and Management" is incorporated herein by reference.
The following table presents certain information in respect of the
executive officers of Bancorp:
<TABLE>
<CAPTION>
Name(1) Age(2) Position
------- ------ --------
<S> <C> <S>
Ward D. Coffman, III 45 Secretary
Connie Ayres LaPlante 42 Treasurer
John C. Matesich, III 55 Chairman of the Board
J. William Plummer 53 President
</TABLE>
The following table presents certain information in respect of the
executive officers of First Federal:
<TABLE>
<CAPTION>
Name(1) Age(2) Position
------- ------ --------
<S> <C> <S>
Connie Ayres LaPlante 42 Treasurer and
Senior Vice President
John C. Matesich, III 55 Chairman of the Board
J. William Plummer 53 President and
Chief Executive Officer
Larry W. Snode 49 Secretary and
Senior Vice President -
Operations
Thomas N. Sulens 47 Senior Vice President -
Lending
- --------------------
<F1> There are no family relationships among the executive officers of
Bancorp or First Federal.
<F2> As of December 15, 1998.
</TABLE>
Ward D. Coffman, III, the Secretary of Bancorp, is an attorney who has
been engaged in private practice in the Zanesville area for more than five
years. Mr. Coffman also serves as a director of both Bancorp and First
Federal.
Connie Ayres LaPlante is the Treasurer of both Bancorp and First
Federal and is also a Senior Vice President of First Federal. Ms. LaPlante
began employment with First Federal in 1978. Ms. LaPlante is a member of
the Board of Directors of both Bancorp and First Federal.
John C. Matesich, III, the Chairman of the Board of both Bancorp and
First Federal, is the President of Matesich Distributing Co., a beer
distributor in Southeastern Ohio. Mr. Matesich has been the President of
Matesich Distributing Co. since 1990 and has been employed by Matesich
Distributing for more than five years.
J. William Plummer has been the President and Chief Executive Officer
of First Federal since 1979 and has been the President of Bancorp since its
incorporation in January 1992. Mr. Plummer also serves as a director of
both Bancorp and First Federal.
Larry W. Snode is First Federal's Secretary and Senior Vice President
in charge of Operations. Mr. Snode began employment with First Federal in
1977.
Thomas N. Sulens is the Senior Vice President in charge of Lending for
First Federal. Mr. Sulens commenced employment with First Federal in 1973.
Item 10. Executive Compensation.
The information contained in the Proxy Statement under the captions
"Compensation of Executive Officers and Directors" is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners
The information contained in the Proxy Statement under the caption
"Voting Securities and Ownership of Certain Beneficial Owners and
Management" is incorporated herein by reference.
(b) Security Ownership of Management
The information contained in the Proxy Statement under the caption
"Voting Securities and Ownership of Certain Beneficial Owners and
Management" is incorporated herein by reference.
(c) Changes in Control
Not applicable.
Item 12. Certain Relationships and Related Transactions.
The information contained in the Proxy Statement under the caption
"Compensation of Executive Officers and Directors -- Certain Transactions
with First Federal" is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Item 3. Articles of Incorporation, Amendment to Articles
of Incorporation, Code of Regulations, and
Amendment to Code of Regulations.
Item 10. Material contracts.
First Federal Bancorp, Inc. 1992 Stock Option
Plan for Officers and Key Employees
First Federal Bancorp, Inc. 1992 Stock Option
Plan for Non-Employee Directors
First Federal Bancorp, Inc. 1994 Stock Option
Plan for Officers and Key Employees
First Federal Bancorp, Inc. 1994 Stock Option
Plan for Non-Employee Directors
First Federal Bancorp, Inc. 1997 Performance
Stock Option Plan for Senior Executive Officers
and Outside Directors
Employment Agreement - J. William Plummer
Employment Agreement - Connie Ayres LaPlante
Item 21. Subsidiaries of the Registrant.
Item 23. Consent of Auditors
Item 27. Financial Data Schedule
Item 99.1 Proxy Statement
Item 99.2 Safe Harbor Under the Private Securities
Litigation Reform Act of 1995
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
First Federal Bancorp, Inc.
By /s/ J. William Plummer
------------------------------------
J. William Plummer
President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been duly signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
By /s/ Connie Ayres LaPlante By /s/ Don R. Parkhill
------------------------------ ---------------------------
Connie Ayres LaPlante Don R. Parkhill
Treasurer and a Director Director
(Principal Accounting Officer)
Date December 16, 1998 Date December 16, 1998
---------------------------- -------------------------
By /s/ Ward D. Coffman, III By /s/ John C. Matesich, III
------------------------------ ---------------------------
Ward D. Coffman, III John C. Matesich, III
Secretary and a Director Chairman of the Board
Date December 16, 1998 Date December 16, 1998
---------------------------- -------------------------
By /s/ Robert D. Goodrich, II By /s/ J. William Plummer
------------------------------ ---------------------------
Robert D. Goodrich, II J. William Plummer
Director President and a Director
Date December 16, 1998 Date December 16, 1998
---------------------------- -------------------------
By /s/ Patrick L. Hennessey
------------------------------
Patrick L. Hennessey
Director
Date December 16, 1998
----------------------------
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <S>
3.1 Articles of Incorporation of First Federal The Articles of Incorporation of First Federal
Bancorp, Inc. Bancorp, Inc. ("Bancorp"), filed as Exhibit 4a(1) to
Bancorp's Registration Statement on Form S-8 filed
with the Securities and Exchange Commission ("SEC")
on February 1, 1994 (the "1994 S-8"), are incorporated
herein by reference.
3.2 Amendment to the Articles of Incorporation The Amendment to the Articles of Incorporation of
of First Federal Bancorp, Inc. Bancorp, filed as Exhibit 4a(1) to the 1994 S-8, is
incorporated herein by reference.
3.3 Code of Regulations of First Federal The Code of Regulations of Bancorp filed as Exhibit
Bancorp, Inc. 4b to Bancorp's Registration Statement on S-8, filed
with the SEC on February 1, 1994, is incorporated
herein by reference.
3.4 Amendment to the Code of Regulations of The Amendment to the Code of Regulations of Bancorp
First Federal Bancorp, Inc. filed as Exhibit 4b to Bancorp's Registration Statement
on S-8, filed with the SEC on February 1, 1994, is
incorporated herein by reference.
10.1 First Federal Bancorp, Inc. 1992 Stock
Option Plan for Officers and Key Employees
10.2 First Federal Bancorp, Inc. 1992 Stock
Option Plan for Non-Employee Directors
10.3 Employment Agreement between First Federal
Savings Bank of Eastern Ohio and J. William
Plummer
10.4 Employment Agreement between First Federal
Savings Bank of Eastern Ohio and Connie
Ayres LaPlante
10.5 First Federal Bancorp, Inc. 1994 Stock The First Federal Bancorp, Inc. 1994 Stock Option Plan
Option Plan for Officers and Key Employees for Officers and Key Employees, filed as Exhibit 4 to
Bancorp's Registration Statement on Form S-8 filed with
the SEC on July 17, 1995, is incorporated herein by
reference.
10.6 First Federal Bancorp, Inc. 1994 Stock The First Federal Bancorp, Inc. 1994 Stock Option Plan
Option Plan for Non-Employee Directors for Non-Employee Directors included as Exhibit 4 to
Bancorp's Registration Statement on Form S-8 filed with
the SEC on July 17, 1995, is incorporated herein by
reference.
10.7 First Federal Bancorp, Inc. 1997 The First Federal Bancorp, Inc. 1997 Performance Stock
Performance Stock Option Plan for Senior Option Plan for Senior Executive Officers and Outside
Executive Officers and Outside Directors Directors, filed as Exhibit 4(a) to Bancorp's
Registration Statement on S-8 filed with the SEC on
December 9, 1998, is incorporated herein by reference.
21 Subsidiaries of First Federal Bancorp, Inc.
23 Consent of Auditors
27 Financial Data Schedule
99.1 Proxy Statement for the 1999 Annual Meeting Incorporated by reference to the Definitive Proxy
of Shareholders of First Federal Bancorp, Statement for the 1999 Annual Meeting of Shareholders,
Inc. to be filed.
99.2 Safe Harbor Under the Private Securities
Litigation Reform Act of 1995
</TABLE>
EXHIBIT 10.1
------------
FIRST FEDERAL BANCORP, INC.
1992 INCENTIVE STOCK OPTION PLAN
FOR OFFICERS AND KEY EMPLOYEES
1. Purpose of the Plan. The purpose of the First Federal Bancorp,
Inc., 1992 Incentive Stock Option Plan for Officers and Key Employees
(hereinafter referred to as the "Plan") is to attract and retain the best
available personnel as officers and key employees of First Federal Bancorp,
Inc., (hereinafter referred to as the "Company") or any present or future
Parent or Subsidiary of the Company and to provide additional incentives to
the officers and key employees of the Company or any present or future
parent or subsidiary of the Company. The Plan is intended to provide for
the grant of "Incentive Stock Options", as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
2. Definitions. As used in the Plan, the following terms have the
corresponding meaning:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as
amended.
(c) "Common Shares" means the common shares, with no par
value, of the Company.
(d) "Committee" means the Stock Option Committee appointed by
the Board in accordance with paragraph 4(a) of the Plan.
(e) "Company" means First Federal Bancorp, Inc.
(f) "Continuous Employment" or "Continuous Status as an
Employee" means the absence of any interruption or termination of
employment by the Company or any present or future Parent or
Subsidiary of the Company. Employment shall not be considered
interrupted in the case of sick leave, military leave or any other
leave of absence approved by the Company or in the case of transfers
between payroll locations of the Company or between the Company, its
Parent, its Subsidiaries or a successor.
(g) "Effective Date" means the date specified in Section 13 of
the Plan.
(h) "Employee" means any person employed on a full-time basis
by the Company or any present or future Parent or Subsidiary of the
Company.
(i) "Incentive Stock Option" means the right to purchase
Shares which is granted by the Committee pursuant to the Plan and
which is intended to qualify as an incentive stock option under
Section 422 of the Code. Each and every one of the provisions of the
Plan relating to Incentive Stock Options shall be interpreted to
conform to the requirements of Section 422 of the Code.
(j) "Officer" means an Employee of the Company who holds one
of the positions described in Article Three of the Code of Regulations
of the Company or any person who holds a comparable position with any
Parent or Subsidiary.
(k) "Optioned Stock" means Common Shares subject to an
Incentive Stock Option granted pursuant to the Plan.
(l) "Optionee" means a Participant who receives an Incentive
Stock Option pursuant to the Plan.
(m) "Parent" means any present or future corporation which
would be a "Parent Corporation" as defined in Subsections 424(e) and
(g) of the Code.
(n) "Participant" means any Officer or Employee of the Company
or any present or future Parent or Subsidiary of the Company selected
by the Committee to receive an Incentive Stock Option.
(o) "Plan" means the First Federal Bancorp, Inc,. 1992
Incentive Stock Option Plan for Officers and Key Employees.
(p) "Repurchase Right" means the right defined in Section 10
of this Plan.
(q) "Share" or Shares" means one or more Common Shares.
(r) "Subsidiary" means any present or future corporation which
would be a "Subsidiary Corporation" as defined in Subsections 424(f)
and (g) of the Code, including, but not limited to, First Federal
Savings Bank of Eastern Ohio.
3. Shares Subject to the Plan. Except as otherwise required by the
provisions of Section 11 hereof, the aggregate number of Shares with respect
to which Incentive Stock Options may be granted pursuant to the Plan shall
not exceed six and one half percent (6.5%) of the Shares to be issued in
connection the conversion of First Federal Savings Bank of Eastern Ohio from
mutual to stock form.
4. Administration.
(a) Stock Option Committee. The Plan shall be administered by
a Stock Option Committee appointed by the Board. The Committee shall
consist of two or more members of the Board who are not Employees of
the Company and who at all times shall be "disinterested persons,"
within the meaning of Rule 16b-3 as promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, for the
purposes of administering the Plan.
(b) Powers of the Committee. The Committee is authorized to
interpret the Plan and to prescribe, amend and rescind rules and
regulations relating to the Plan; to determine the form and content of
Incentive Stock Options to be issued under the Plan; and to make such
other determinations necessary or advisable for the administration of
the Plan. The Committee shall have and may exercise such other power
and authority as may be delegated to it by the Board from time to
time. A majority of the entire Committee shall constitute a quorum
and the action of a majority of the members present at any meeting at
which a quorum is present shall be deemed the action of the Committee.
In no event may the Committee revoke outstanding Incentive Stock
Options without the consent of the Participant. The president of the
Company and such other Officers as shall be designated by the
Committee are hereby authorized to execute instruments evidencing
Incentive Stock Options on behalf of the Company and to cause them to
be delivered to the Participants. The construction and interpretation
of the Plan provisions are vested with the Committee, in its absolute
discretion, including without limitation the grant of Incentive Stock
Options, eligibility and interpretation of Plan provisions. All such
decisions, determinations and interpretations shall be final,
conclusive and binding upon all parties having an interest in the
Plan.
5. Eligibility. Eligibility to participate in the Plan shall be
limited to Employees of the Company or any Parent or Subsidiary.
6. Grants of Incentive Stock Options by the Committee. The
Committee shall from time to time determine the Officers and key Employees
to whom Incentive Stock Options shall be granted under the Plan and the
number of Shares subject to granted Incentive Stock Options. In selecting
the Participants and in determining the number of Shares subject to each
Incentive Stock Option granted under the Plan, the Committee may consider
the nature of the services rendered by each such Participant, each such
Participant's current and potential contribution to the Company or any
Parent or Subsidiary and such other factors as the Committee may, in its
sole discretion, deem relevant. Officers and key Employees who have been
granted an Incentive Stock Option may, if otherwise eligible, be granted
additional Incentive Stock Options.
7. Term of Plan. The Plan shall continue in effect for a term of
ten (10) years from the Effective Date, unless earlier terminated pursuant
to Section 16. No Incentive Stock Option shall be granted under the Plan
after ten (10) years from the Effective Date.
8. Terms and Conditions of Incentive Stock Options. Each Incentive
Stock Option granted pursuant to the Plan shall be evidenced by an
instrument in such form as the Committee shall from time to time approve.
Each and every Incentive Stock Option granted pursuant to the Plan shall
comply with, and be subject to, the following terms and conditions:
(a) Option Price. The price per Share at which each Incentive
Stock Option granted under the Plan may be exercised shall not, as to
any particular Incentive Stock Option, be less than the fair market
value of the Common Shares at the time such Incentive Stock Option is
granted. The fair market value shall be determined as follows:
(i) If the Common Shares are traded otherwise than on a
national securities exchange at the time of the granting of an
Incentive Stock Option, then the price per share of the Optioned
Stock shall be not less than the mean between the bid and asked
price on the date the Incentive Stock Option is granted or, if
there is no bid and asked price on such date, then on the next
prior business day on which there was a bid and asked price. If
no such bid and asked price is available, then the price per
Share shall be determined by the Committee.
(ii) If the Common Shares are listed on a national
securities exchange at the time of the granting of an Incentive
Stock Option, then the price per Share shall be not less than
the average of the highest and lowest selling price on such
exchange on the date such Incentive Stock Option is granted or,
if there were no sales on such date, then on the next prior
business day on which there was a selling price.
(iii) In the case of a Participant who owns Common Shares
representing more than ten percent (10%) of the outstanding
Common Shares at the time the Incentive Stock Option is granted,
the Incentive Stock Option price shall not be less than one
hundred and ten percent (110%) of the fair market value of the
Common Shares at the time the Incentive Stock Option is granted.
(b) Payment. Full payment for each Shares purchased upon the
exercise of any Incentive Stock Option granted under the Plan shall be
made at the time of exercise of each such Incentive Stock Option and
shall be paid in cash, Common Shares or a combination of cash and
Common Shares. Common Shares utilized in full or partial payment of
the exercise price shall be valued at fair market value at the date of
exercise. The Company shall accept full or partial payment in Common
Shares only to the extent permitted by applicable law. No Shares
shall be issued until full payment therefor has been received by the
Company and no Optionee shall have any of the rights of a shareholder
of the Company until Shares are issued to such Optionee.
(c) Term of Incentive Stock Option. The term of each
Incentive Stock Option granted pursuant to the Plan shall be not more
than ten (10) years from the date each such Incentive Stock Option is
granted; provided, however, that in the case of a Participant who owns
a number of Shares representing more than ten percent (10%) of the
Common Shares outstanding at the time the Incentive Stock Option is
granted, the term of the Incentive Stock Option shall not exceed five
(5) years.
(d) Holding Period. Any Incentive Stock Option granted
pursuant to the Plan shall not be exercisable for a period of twelve
months from the date of grant of such Incentive Stock Option or the
date of shareholder approval of the Plan, whichever is later.
(e) Exercise Generally. Except as otherwise provided in
Section 9 hereof, no Incentive Stock Option may be exercised unless
the Optionee shall have been an Employee of the Company or any Parent
or Subsidiary at all times during the period beginning with the date
of grant of any such Incentive Stock Option and ending on the date
which is three (3) months before the date of exercise of any such
Incentive Stock Option. The Committee may impose additional
conditions upon the right of an Optionee to exercise any Incentive
Stock Option granted hereunder as long as such conditions are not
inconsistent with the terms of the Plan or the requirements for
qualification as an Incentive Stock Option under Section 422 of the
Code.
(f) Transferability. Any Incentive Stock Option granted
pursuant to the Plan shall be exercised during any Optionee's lifetime
only by the Optionee to whom such option is granted and shall not be
assignable or transferable other than by will or by the laws of
descent and distribution, or pursuant to a qualified domestic
relations order.
(g) Limit on Grant. In no event shall one Participant be
granted Options to purchase Shares in excess of twenty-five percent
(25%) of the aggregate Shares subject to the Plan as described in
Section 3 hereof.
9. Effect of Termination of Continuous Employment, Disability or
Death on Incentive Stock Options.
(a) Termination of Continuous Employment. In the event that
any Optionee's Continuous Employment by the Company or any Parent or
Subsidiary shall terminate for any reason, other than permanent and
total disability (as such term is defined in Section 22(e)(3) of the
Code) or death, all of any such Optionee's Incentive Stock Options and
all of any such Optionee's rights to purchase or receive Shares
pursuant thereto shall automatically terminate on the date of such
termination of Continuous Employment; provided, however, that no
termination of an Optionee's Incentive Stock Options shall occur in
the event that (i) the Committee authorizes the Optionee to exercise
any such Incentive Stock Options at any time before the earlier of
(I) the respective expiration dates of any such Incentive Stock
Options or (II) the expiration of not more than three (3) months after
the date of such termination of Continuous Employment, and (ii) the
Optionee was entitled to exercise any such Incentive Stock Options at
the date of such termination of Continuous Employment. In the event
that a Subsidiary ceases to be a Subsidiary of the Company, the
Continuous Employment of all of its Employees who are not immediately
thereafter Employees of the Company shall be deemed to terminate upon
the date such Subsidiary so ceases to be a Subsidiary of the Company.
(b) Disability. In the event that any Optionee's Continuous
Employment by the Company or any Parent or Subsidiary shall terminate
as the result of the permanent and total disability (as such term is
defined in Section 22(e)(3) of the Code) of such Optionee and the
Optionee was entitled to exercise Incentive Stock Options at the date
of such termination of Continuous Employment, such Optionee may
exercise any Incentive Stock Options granted to him pursuant to the
Plan at any time prior to the earlier of (i) the respective expiration
dates of any such Incentive Stock Options or (ii) the expiration of
one (1) year after the date of such termination of Continuous
Employment.
(c) Death. In the event of the death of any Optionee on a
date on which the Optionee was entitled to exercise any such Incentive
Stock Options, any Incentive Stock Options granted to any such
Optionee may be exercised by the person or persons to whom the
Optionee's rights under any such Incentive Stock Options pass by will
or by the laws of descent and distribution (including the Optionee's
estate during the period of administration) at any time prior to the
earlier of (i) the respective expiration dates of any such Incentive
Stock Options or (ii) the expiration of six (6) months after the date
of death of such Optionee (or such later period not to exceed one (1)
year to which the Committee may permit, in its discretion). For
purposes of this Section 9(c), any Incentive Stock Option held by an
Optionee shall be considered exercisable at the date of such
Optionee's death if the only unsatisfied condition precedent to the
exercisability of such Incentive Stock Option at the date of death is
the passage of a specified period of time.
(d) Termination of Incentive Stock Options. To the extent
that any Incentive Stock Option granted under the Plan to any Optionee
whose Continuous Employment by the Company or any Parent or Subsidiary
terminates shall not have been exercised within the applicable period
set forth in this Section 9, any such Incentive Stock Option, and all
rights to purchase or receive shares of Common Shares pursuant thereto
shall terminate on the last date of the applicable period.
10. Right of Repurchase and Restrictions on Disposition. The
Committee, in its sole discretion, may include, as a term of any Incentive
Stock Option the right (herein referred to as the "Repurchase Right"), but
not the obligation, to repurchase all or any amount of the Shares acquired
by an Optionee pursuant to the exercise of any Incentive Stock Options. The
intent of the Repurchase Right is to encourage the continued employment of
the Optionee. The Repurchase Right shall provide for, among other terms, a
specified duration of the Repurchase Right, a specified price per Share to
be paid upon the exercise of the Repurchase Right and a restriction on the
disposition of the Shares by the Optionee during the period of the
Repurchase Right. The Repurchase Right may permit the Company to transfer
or assign such right to another party. The Company may exercise the
Repurchase Right only to the extent permitted by applicable law.
11. Recapitalization, Merger, Consolidation, Change in Control and
Similar Transactions.
(a) Adjustment. Subject to any required action by the
shareholders of the Company, the aggregate number of Shares for which
Incentive Stock Options may be granted hereunder, the number of Shares
covered by each outstanding Incentive Stock Option and the exercise
price per Share of each such Incentive Stock Option shall all be
proportionately adjusted for any increase or decrease in the number of
issued and outstanding Shares resulting from a subdivision or
consolidation of Shares or the payment of a stock dividend (but only
on the Common Shares) or any other increase or decrease in the number
of such Shares effected without the receipt of consideration by the
Company.
(b) Change in Control. All outstanding Incentive Stock
Options shall become immediately exercisable in the event of a change
in control or imminent change in control of the Company, as determined
by the Committee. For purposes of this Section 11, "change in
control" shall mean: (i) the execution of an agreement for the sale of
all, or a material portion, of the assets of the Company; (ii) the
execution of an agreement for a merger or recapitalization of the
Company or any merger or recapitalization whereby the Company is not
the surviving entity; (iii) a change of control of the Company, as
defined or determined by the Office of Thrift Supervision (the "OTS");
or (iv) the acquisition, directly or indirectly, of the beneficial
ownership (within the meaning of the term "beneficial ownership" as
defined under Section 13(d) of the Securities Exchange Act of 1934 and
the rules promulgated thereunder) of twenty-five percent (25%) or more
of the outstanding voting securities of the Company by any person,
trust, entity or group. For purposes of this Section 11, "imminent
change in control" shall refer to any offer or announcement, oral or
written, by any person or any persons acting as a group, to acquire
control of the Company as to which an application or notice has been
filed with the OTS and such application has been approved or such
notice has not been disapproved.
(c) Extraordinary Corporate Action. Subject to any required
action by the shareholders of the Company, in the event of any change
in control, recapitalization, merger, consolidation, exchange of
shares, spin-off, reorganization, tender offer, liquidation or other
extraordinary corporate action or event, the Committee, in its sole
discretion, shall have the power, before or subsequent to such action
or event, to:
(i) Adjust as appropriate the number of Shares subject
to each Incentive Stock Option, the exercise price per Share and
the consideration to be given or received by the Company upon
the exercise of any outstanding Option, provided, however, such
adjustment shall be in compliance with the term of this Plan;
(ii) Cancel any or all previously granted Incentive Stock
Options; provided, however, that appropriate consideration is
paid to the Optionee in connection therewith; and/or
(iii) Make such other adjustments in connection with the
Plan as the Committee, in its sole discretion, deems necessary,
desirable, appropriate or advisable; provided, however, that no
action shall be taken by the Committee would cause Incentive
Stock Options granted pursuant to the Plan to fail to meet the
requirements of Section 422 of the Code, provided, however, such
adjustment shall be in compliance with the term of this Plan.
Except as expressly provided in section 11(a) and 11(b) hereof, no Optionee
shall have any rights by reason of the occurrence of any of the events
described in this Section 11.
(d) Acceleration. Subject to the limitation set forth in
Section 8(d) of this Plan, the Committee shall at all times have the
power to accelerate the exercise date of Incentive Stock Options
previously granted under the Plan.
12. Time of Granting Incentive Stock Options. The date of grant of
an Incentive Stock Option under the Plan shall be the date on which the
Committee makes the determination to grant Incentive Stock Option. Notice
of the determination shall be given to each Participant to whom an Incentive
Stock Option is so granted within a reasonable time after the date of such
grant.
13. Effective Date. The Plan shall become effective upon the
completion of the conversion of First Federal Savings Bank of Eastern Ohio
from mutual to stock form.
14. Approval by Shareholders. The Plan shall be approved by the
shareholders of the Company within twelve (12) months before or after the
date it becomes effective. Incentive Stock Options may be granted prior to
ratification of the Plan by the shareholders if the exercise of such
Incentive Stock Options is subject to such shareholder ratification.
15. Modification of Incentive Stock Options. At any time and from
time to time, the Board may authorize the Committee to direct the execution
of an instrument providing for the modification of any outstanding Incentive
Stock Option provided, however, that no such modification, extension or
renewal shall confer on the holder of such Incentive Stock Option any right
or benefit which could not be conferred on such holder by the grant of a new
Incentive Stock Option at such time and shall not materially decrease the
Optionee's benefits under the Incentive Stock Option without the consent of
the holder of the Incentive Stock Option, except as otherwise permitted
under Section 16 hereof.
16. Amendment and Termination of the Plan.
(a) Amendment and Termination of the Plan by the Board. The
Board may alter, suspend or discontinue the Plan, except that no
action of the Board may increase (other than as provided in Section
11) the maximum number of Shares subject to Incentive Stock Options
granted under the Plan, materially increase the benefits accruing to
Participants under the Plan or materially modify the requirements for
eligibility for participation in the Plan unless such action of the
Board shall be approved or ratified by the shareholders of the
Company. In no event shall the Board modify the requirements for
eligibility for participation in the Plan to allow persons who are not
Employees to participate.
(b) Change in Applicable Law. Notwithstanding any other
provision contained in the Plan, in the event of a change in any
federal or state law, rule or regulation which would make the exercise
of all or part of any previously granted Incentive Stock Option
unlawful or subject the Company to any penalty, the Committee may
restrict any such exercise without the consent of the Optionee or
other holder thereof in order to comply with any such law, rule or
regulation or to avoid any such penalty.
17. Conditions Upon Issuance of Shares. Shares shall not be issued
with respect to any Incentive Stock Option granted under the Plan unless the
issuance and delivery of such Shares shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of
1933, as amended, the rules and regulations promulgated thereunder, any
applicable state securities law and the requirements of any stock exchange
upon which the Shares may then be listed. The inability of the Company to
obtain from any regulatory body or authority deemed by the Company's counsel
to be necessary for the lawful issuance and sale of any Shares hereunder
shall relieve the Company of any liability in respect of the non-issuance or
sale of such Shares. As a condition to the exercise of an Incentive Stock
Option, the Company may require the person exercising the Incentive Stock
Option to make such representations and warranties as may be necessary to
assure the availability of an exemption from the registration requirements
of federal or and state securities law.
18. Reservation of Shares. During the term of the Plan, the Company
will reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
19. Unsecured Obligation. No Participant under the Plan shall have
any interest in any fund or special asset of the Company by reason of the
Plan or the grant of any Incentive Stock Option to such Participant under
the Plan. No trust fund shall be created in connection with the Plan or any
grant of any Incentive Stock Option hereunder and there shall be no required
funding of amounts which may become payable to any Participant.
20. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the State of Ohio, except to the extent that
federal law shall be deemed to apply.
EXHIBIT 10.2
------------
FIRST FEDERAL BANCORP, INC.
1992 STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
1. Purpose of the Plan. The purpose of the First Federal Bancorp,
Inc., 1992 Stock Option Plan for Non-Employee Directors (hereinafter
referred to as the "Plan") is to retain the best available personnel as
directors of First Federal Bancorp, Inc., (hereinafter referred to as the
"Company") and the subsidiaries of the Company and to provide additional
incentives to the non-employee directors of the and any subsidiaries of the
Company. The stock options granted under the Plan are not intended to
qualify as "Incentive Stock Options", as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and are not intended
to be within the exemptive provision of Rule 16b-3 promulgated by the
Securities and Exchange Commission under the Securities and Exchange Act of
1934.
2. Definitions. As used in the Plan, the following terms have the
corresponding meaning:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as
amended.
(c) "Common Shares" means the Common Shares, with no par
value, of the Company.
(d) "Committee" means the Stock Option Committee appointed by
the Board in accordance with paragraph 4(a) of the Plan.
(e) "Company" means First Federal Bancorp, Inc.
(f) "Employee" means any person employed on a full-time basis
by the Company or any subsidiary of the Company.
(g) "Non-Employee Director" means a member of the Board or a
member of the Board of Directors of any subsidiary of the Company who
is not an Employee.
(h) "Option" means the right, granted pursuant to the Plan, to
purchase Shares.
(i) "Optioned Stock" means Common Shares subject to an Option
granted pursuant to the Plan.
(j) "Optionee" means any person who receives an Option.
(k) "Plan" means the First Federal Bancorp, Inc,. 1992 Stock
Option Plan for Non-Employee Directors.
(l) "Repurchase Right" means the right defined in Section 10
of the Plan.
(m) "Share" or Shares" means one or more Common Shares.
3. Shares Subject to the Plan. Except as otherwise required by the
provisions of Section 11 hereof, the aggregate number of Shares with respect
to which Options may be granted pursuant to the Plan shall not exceed three
and one-half percent (3.5%) of the Shares to be issued in connection with
the conversion of First Federal Savings Bank of Eastern Ohio from mutual to
stock form.
4. Administration.
(a) Stock Option Committee. The Plan shall be administered by
a Stock Option Committee appointed by the Board. The Committee shall
consist of two or more members of the Board.
(b) Powers of the Committee. (i) The Committee is authorized
to interpret the Plan and to prescribe, amend and rescind rules and
regulations relating to the Plan; to determine the form and content of
Options to be issued under the Plan; and to make such other
determinations necessary or advisable for the administration of the
Plan. The Committee shall have and may exercise such other power and
authority as may be delegated to it by the Board from time to time. A
majority of the entire Committee shall constitute a quorum and the
action of a majority of the members present at any meeting at which a
quorum is present shall be deemed the action of the Committee. In no
event may the Committee revoke outstanding Options without the consent
of he Optionee. The president of the Company and such other officers
as shall be designated by the Committee are hereby authorized to
execute instruments evidencing Options on behalf of the Company and to
cause them to be delivered to the Optionees. The construction and
interpretation of the Plan provisions are vested with the Committee,
in its absolute discretion, including without limitation the grant of
Options, eligibility and interpretation of Plan provisions. All such
decisions, determinations and interpretations shall be final,
conclusive and binding upon all parties having an interest in the
Plan.
5. Eligibility. Eligibility to participate in the Plan shall be
limited to Non-Employee Directors.
6. Term of Plan. The Plan shall continue in effect for a term of
ten (10) years from the Effective Date, unless earlier terminated pursuant
to Section 16.
7. Grant of Options. The grant of Options shall occur pursuant to
the following formula: the Committee shall grant an Option to purchase
1,800 Shares to each Non-Employee Director on the Effective Date; in
addition, the Committee shall grant an Option to purchase 1,800 shares to
each Non-Employee Director who was not a Director on the Effective Date, as
defined in Section 13 of the Plan, but is elected to the Board of Directors
subsequent to the Effective Date on the date of such election. The
foregoing notwithstanding, no Option shall be granted if such grant would
result in a violation or possible violation of federal or state securities
laws. Each Option granted pursuant to the Plan shall be evidenced by an
instrument and in such form as approved by the Committee.
8. Terms and Conditions of Options. Each and every Option granted
pursuant to the Plan shall the Plan shall comply with and be subject to the
following terms and conditions:
(a) Option Price. The price per Share at which each Option
granted under the Plan may be exercised shall be the fair market value
of the Common Shares at the time such Stock Option is granted. The
fair market value shall be determined as follows:
(i) If the Common Shares are traded otherwise than on a
national securities exchange at the time of the granting of an
Stock Option, then the price per share of the Optioned Stock
shall be the mean between the bid and asked price on the date
the Option is granted or, if there is no bid and asked price on
such date, then on the next prior business day on which there
was a bid and asked price.
(ii) If the Common Shares are listed on a national
securities exchange at the time of the granting of an Stock
Option, then the price per Share shall be the average of the
highest and lowest selling price on such exchange on the date
such Stock Option is granted or, if there were no sales on such
date, then on the next prior business day on which there was a
selling price.
(iii) In the case of an Optionee who owns Common Stock
representing more than ten percent (10%) of the outstanding
Common Shares at the time an Option is granted, the Option price
shall be one hundred and ten percent (110%) of the fair market
value of the Common Shares at the time the Option is granted.
(b) Payment. Full payment for each Share purchased upon
exercise of any Option granted under the Plan shall be made at the
time of exercise of each such Stock Option and shall be paid in cash,
Common Shares or a combination of cash and Common Shares. Common
Shares utilized in full or partial payment of the exercise price shall
be valued at fair market value at the date of exercise. The Company
shall accept full or partial payment in Common Shares only to the
extent permitted by applicable law. No Shares shall be issued until
full payment therefor has been received by the Company and no Optionee
shall have any of the rights of a shareholder of the Company until the
Shares are issued to such Optionee.
(c) Term of Option. The term of each Option granted pursuant
to the Plan shall be not more than ten (10) years from the date each
such Option is granted; provided, however, that, in the case of an
Optionee who owns a number of Shares representing more than ten
percent (10%) of the Common Shares outstanding at the time the Stock
Option is granted, the term of the Option shall not exceed five (5)
years.
(d) Holding Period. Any Option granted pursuant to the Plan
shall not be exercisable for a period of twelve months from the date
of grant of such Option or the date of shareholder approval of the
Plan, whichever is later.
(e) Exercise Generally. The Committee may impose such
conditions upon the right of an Optionee to exercise any Option
granted hereunder as long as such conditions are not inconsistent with
the terms of the Plan
(f) Transferability. Any Option granted pursuant to the Plan
shall be exercised during any Optionee's lifetime only by the Optionee
to whom such option is granted and shall not be assignable or
transferable other than by will or by the laws of descent and
distribution, or pursuant to a qualified domestic relations order.
(g) Limit on Grant. In no event shall one Optionee be granted
Options to purchase Shares in excess of twenty-five percent (25%) of
the aggregate Shares subject to the Plan as described in Section 3
hereof.
9. Effect of Death on Options. The terms and conditions of Options
relating to the effect of the death of an Optionee shall be such terms and
conditions as the Committee shall, in its sole discretion, determine at the
time of such death.
10. Right of Repurchase and Restrictions on Disposition. The
Committee, in its sole discretion, may include, as a term of any Option, the
right (herein referred to as the "Repurchase Right"), but not the
obligation, to repurchase all or any amount of the Shares acquired by an
Optionee pursuant to the exercise of any Such Options. The intent of the
Repurchase Right is to encourage the Optionee.to continue to serve on the
Board. The Repurchase Right shall provide for, among other terms, a
specified duration of the Repurchase Right, a specified price per Share to
be paid upon the exercise of the Repurchase Right and a restriction on the
disposition of the Shares by the Optionee during the period of the
Repurchase Right. The Repurchase Right may permit the Company to transfer
or assign such right to another party. The Company may exercise the
Repurchase Right only to the extent permitted by applicable law.
11. Recapitalization, Merger, Consolidation, Change in Control and
Similar Transactions.
(a) Adjustment. Subject to any required action by the
shareholders of the Company, the aggregate number of Shares for which
Options may be granted hereunder, the number of Shares covered by each
outstanding Option and the exercise price per Share of each such
Option shall all be proportionately adjusted for any increase or
decrease in the number of issued and outstanding Shares resulting from
a subdivision or consolidation of Shares or the payment of a stock
dividend (but only on the Common Shares) or any other increase or
decrease in the number of such Shares effected without the receipt of
consideration by the Company.
(b) Change in Control. All outstanding Options shall become
immediately exercisable in the event of a change in control or
imminent change in control of the Company, as determined by the
Committee. For purposes of this Section 11, "change in control" shall
mean: (i) the execution of an agreement for the sale of all, or a
material portion, of the assets of the Company; (ii) the execution of
an agreement for a merger or recapitalization of the Company or any
merger or recapitalization whereby the Company is not the surviving
entity; (iii) a change of control of the Company, as defined or
determined by the Office of Thrift Supervision (the "OTS"); or (iv)
the acquisition, directly or indirectly, of the beneficial ownership
(within the meaning of the term "beneficial ownership" as defined
under Section 13(d) of the Securities Exchange Act of 1934 and the
rules promulgated thereunder) of twenty-five percent (25%) or more of
the outstanding voting securities of the Company by any person, trust,
entity or group. For purposes of this Section 11, "imminent change in
control" shall refer to any offer or announcement, oral or written, by
any person or any persons acting as a group, to acquire control of the
Company as to which an application or notice has been filled with the
OTS and such application has been approved or such notice has not been
disapproved.
(c) Extraordinary Corporate Action. Subject to any required
action by the shareholders of the Company, in the event of any change
in control, recapitalization, merger, consolidation, exchange of
shares, spin-off, reorganization, tender offer, liquidation or other
extraordinary corporate action or event, the Committee, in its sole
discretion, shall have the power, before or subsequent to such action
or event, to:
(i) Adjust as appropriate the number of Shares subject
to each Option, the exercise price per Share and the
consideration to be given or received by the Company upon the
exercise of any outstanding Option, provided, however, such
adjustment shall be in compliance with the term of this Plan;
(ii) Cancel any or all previously granted Options;
provided, however, that appropriate consideration is paid to the
Optionee in connection therewith; and/or
(iii) Make such other adjustments in connection with the
Plan as the Committee, in its sole discretion, deems necessary,
desirable, appropriate or advisable; provided, however, such
adjustment shall be in compliance with the term of the Plan.
Except as expressly provided in section 11(a) and 11(b) hereof, no Optionee
shall have any rights by reason of the occurrence of any of the events
described in this Section 11.
(d) Acceleration. Subject to the limitation set forth in
Section 8(d) hereof, the Committee shall at all times have the power
to accelerate the exercise date of any Options previously granted
under the Plan.
12. Time of Granting Options. The date of grant of an Option under
the Plan shall be the Grant Date. Notice of such grant shall be given to
each Optionee within a reasonable time after the Grant Date.
13. Effective Date. The Effective Date of the Plan shall be the
date of the completion of the conversion of First Federal Savings Bank of
Eastern Ohio from mutual to stock form. Options may be granted prior to
ratification of the Plan by the shareholders if the exercise of such Options
is subject to such shareholder ratification.
14. Approval by Shareholders. This Plan shall be approved by the
shareholders of the Company within twelve (12) months before or after the
Effective Date.
15. Modification of Options. At any time and from time to time, the
Board may authorize the Committee to direct the execution of an instrument
providing for the modification of any outstanding Option; provided, however,
that no such modification, extension or renewal shall confer on the holder
of such Option any right or benefit which could not be conferred on such
holder by the grant of a new Option at such time and shall not materially
decrease the Optionee's benefits under the Option without the consent of the
holder of the Option, except as otherwise permitted under Section 16 hereof.
16. Amendment and Termination of the Plan.
(a) Amendment and Termination of the Plan by the Board. The
Board may alter, suspend or discontinue the Plan, except that no
action of the Board may increase (other than as provided in Section
11) the maximum number of Shares subject to Options granted under the
Plan, materially increase the benefits accruing to Optionees under the
Plan or materially modify the requirements for eligibility for
participation in the Plan unless such action of the Board shall be
approved or ratified by the shareholders of the Company.
(b) Change in Applicable Law. Notwithstanding any other
provision contained in the Plan, in the event of a change in any
federal or state law, rule or regulation which would make the exercise
of all or part of any previously granted Option unlawful or subject
the Company to any penalty, the Committee may restrict any such
exercise without the consent of the Optionee or other holder thereof
in order to comply with any such law, rule or regulation or to avoid
any such penalty.
( c) Amendment Once Every Six Months. In no event shall the
Plan be amended more than once every six (6) months, other than to
comport with changes in the Code, the Employee Retirement Income
Security Act, as amended, or the rules and regulations promulgated
thereunder.
17. Conditions Upon Issuance of Shares. Shares shall not be issued
with respect to any Option granted under the Plan unless the issuance and
delivery of such Shares shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
rules and regulations promulgated thereunder, any applicable state
securities law and the requirements of any stock exchange upon which the
Shares may then be listed. The inability of the Company to obtain from any
regulatory body or authority deemed by the Company's counsel to be necessary
for the lawful issuance and sale of any Shares hereunder shall relieve the
Company of any liability in respect of the non-issuance or sale of such
Shares. As a condition to the exercise of an Option, the Company may
require the person exercising the Option to make such representations and
warranties as may be necessary to assure the availability of an exemption
from the registration requirements of federal and state securities law.
18. Reservation of Shares. During the term of the Plan, the Company
will reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
19. Unsecured Obligation. No Participant under the Plan shall have
any interest in any fund or special asset of the Company by reason of the
Plan or the grant of any Option to such Optionee under the Plan. No trust
fund shall be created in connection with the Plan or any grant of any Option
hereunder and there shall be no required funding of amounts which may become
payable to any Participant.
20. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the State of Ohio, except to the extent that
federal law shall be deemed to apply.
EXHIBIT 10.3
------------
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this
"AGREEMENT"), entered into this 1st day of October, 1998, by and between
First Federal Bancorp, Inc., a savings and loan holding company incorporated
under Ohio law (hereinafter referred to as "Bancorp"), First Federal Savings
Bank of Eastern Ohio, a savings bank chartered under the laws of the United
States and a wholly-owned subsidiary of Bancorp (hereinafter referred to as
"First Federal"), and J. William Plummer, an individual (herein after
referred to as the "EMPLOYEE");
WITNESSETH:
WHEREAS, the EMPLOYEE is an employee of Bancorp and First Federal
(hereinafter collectively referred to as the "EMPLOYERS");
WHEREAS, as a result of the skill, knowledge and experience of the
EMPLOYEE, the Boards of Directors of the EMPLOYERS desire to retain the
services of the EMPLOYEE as the President and Chief Executive Officer of
each of the EMPLOYERS;
WHEREAS, the EMPLOYEE desires to continue to serve as the President
and Chief Executive Officer of each of the EMPLOYERS; and
WHEREAS, the EMPLOYEE and the EMPLOYERS desire to enter into this
Agreement to set forth the terms and conditions of the employment
relationship between the EMPLOYERS and the EMPLOYEE;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the EMPLOYERS and the EMPLOYEE hereby agree as follows:
1. Employment and Term. Upon the terms and subject to the conditions of
this AGREEMENT, the EMPLOYERS hereby employ the EMPLOYEE, and the EMPLOYEE
hereby accepts employment, as the President and Chief Executive Officer of
each of the EMPLOYERS. The term of this AGREEMENT shall commence on the
date hereof and shall end on September 30, 2001 (hereinafter referred to as
the "TERM"). In September of each year, the Boards of Directors of the
EMPLOYERS shall review the EMPLOYEE's performance and record the results of
such review in the minutes of the Board of Directors.
2. Duties of EMPLOYEE.
(a) General Duties and Responsibilities. As the President and Chief
Executive Officer of each of the EMPLOYERS, the EMPLOYEE shall perform
the duties and responsibilities customary for such offices to the best
of his ability and in accordance with the policies established by the
Boards of Directors of the EMPLOYERS and all applicable laws and
regulations. The EMPLOYEE shall perform such other duties not
inconsistent with his position as may be assigned to him from time to
time by the Boards of Directors of the EMPLOYERS; provided, however,
that the EMPLOYERS shall employ the EMPLOYEE during the TERM in a
senior executive capacity without diminishment of the importance or
prestige of his position.
(b) Devotion of Entire Time to the Business of the EMPLOYERS. The
EMPLOYEE shall devote his entire productive time, ability and
attention during normal business hours throughout the TERM to the
faithful performance of his duties under this AGREEMENT. The EMPLOYEE
shall not directly or indirectly render any services of a business,
commercial or professional nature to any person or organization
without the prior written consent of the Boards of Directors of the
EMPLOYERS; provided, however, that the EMPLOYEE shall not be precluded
from (i) vacations and other leave time in accordance with Section
3(e) hereof; (ii) reasonable participation in community, civic,
charitable or similar organizations; or (iii) the pursuit of personal
investments which do not interfere or conflict with the performance of
the EMPLOYEE's duties to the EMPLOYERS.
3. Compensation, Benefits and Reimbursements.
(a) Salary. The EMPLOYEE shall receive during the TERM an annual
salary payable in equal installments not less often than monthly. The
amount of such annual salary shall be $137,500.00 until changed by the
Boards of Directors of the EMPLOYERS in accordance with Section 3(b)
of this AGREEMENT.
(b) Annual Salary Review. In September of each year throughout the
TERM, the annual salary of the EMPLOYEE shall be reviewed by the
Boards of Directors of the EMPLOYERS and shall be set, effective
October 1, at an amount not less than $137,500.00, based upon the
EMPLOYEE's individual performance and the overall profitability and
financial condition of the EMPLOYERS (hereinafter referred to as the
"ANNUAL REVIEW"). The results of the ANNUAL REVIEW shall be reflected
in the minutes of the Boards of Directors of the EMPLOYERS.
(c) Expenses. In addition to any compensation received under
Section 3(a) or (b) of this AGREEMENT, the EMPLOYERS shall pay or
reimburse the EMPLOYEE for all reasonable travel, entertainment and
miscellaneous expenses incurred in connection with the performance of
his duties under this AGREEMENT. Such reimbursement shall be made in
accordance with the existing policies and procedures of the EMPLOYERS
pertaining to reimbursement of expenses to senior management
officials.
(d) Employee Benefit Program.
(i) During the TERM, the EMPLOYEE shall be entitled to
participate in all formally established employee benefit, bonus,
pension and profit-sharing plans and similar programs that are
maintained by the EMPLOYERS from time to time, including
programs in respect of group health, disability or life
insurance, reimbursement of membership fees in civic, social and
professional organizations and all employee benefit plans or
programs hereafter adopted in writing by the Boards of Directors
of the EMPLOYERS, for which senior management personnel are
eligible, including any employee stock ownership plan, stock
option plan or other stock benefit plan (hereinafter
collectively referred to as the "BENEFIT PLANS").
Notwithstanding the foregoing sentence, the EMPLOYERS may
discontinue or terminate at any time any such BENEFIT PLANS, now
existing or hereafter adopted, to the extent permitted by the
terms of such plans and shall not be required to compensate the
EMPLOYEE for such discontinuance or termination.
(ii) After the expiration of the TERM or the termination of the
employment of the employee for any reason other than JUST CAUSE
(as defined hereinafter), the EMPLOYERS shall provide a group
health insurance program in which the EMPLOYEE and his spouse
will be eligible to participate and which shall provide
substantially the same benefits as are available to retired
employees of the EMPLOYERS on the date of this AGREEMENT until
both the EMPLOYEE and his spouse become 65 years of age;
provided, however that all premiums for such program shall be
paid equally by the EMPLOYERS and the EMPLOYEE and/or his spouse
after the EMPLOYEE's retirement; provided further, however, that
the EMPLOYEE may only participate in such program for as long as
the EMPLOYERS elect in their sole discretion to make available
an employee group health insurance program which permits the
EMPLOYERS to make coverage available for retirees.
(e) Vacation and Sick Leave. The EMPLOYEE shall be entitled,
without loss of pay, to be absent voluntarily from the performance of
his duties under this AGREEMENT, subject to the following conditions:
(i) The EMPLOYEE shall be entitled to an annual vacation in
accordance with the policies periodically established by the
Boards of Directors of the EMPLOYERS for senior management
officials of the EMPLOYERS;
(ii) Vacation time shall be scheduled by the EMPLOYEE in a
reasonable manner. The EMPLOYEE shall not be entitled to
receive any additional compensation from the EMPLOYERS in the
event of his failure to take the full allotment of vacation time
during any one year. Vacation time accrued in any one year may
not be carried over into any succeeding year; and
(iii) The EMPLOYEE shall be entitled to annual sick leave as
established by the Boards of Directors of the EMPLOYERS for
senior management officials of the EMPLOYERS. In the event that
any sick leave time shall not have been used during any year,
such leave shall accrue to subsequent years; provided, however,
that the number of accrued days of sick leave shall not exceed
35 days.
4. Termination of Employment.
(a) General. In addition to the termination of the employment of
the EMPLOYEE upon the expiration of the TERM, the employment of the
EMPLOYEE shall terminate at any other time during the TERM upon the
delivery by the EMPLOYERS of written notice of employment termination
to the EMPLOYEE. Without limiting the generality of the foregoing
sentence, the following subparagraphs (i), (ii) and (iii) of this
Section 4(a) shall govern the obligations of the EMPLOYERS to the
EMPLOYEE upon the occurrence of the events described in such
subparagraphs:
(i) Termination for JUST CAUSE. In the event that the
EMPLOYERS terminate the employment of the EMPLOYEE during the
TERM because of the EMPLOYEE's failure to comply with the Human
Resources Policies of the EMPLOYERS or because of the EMPLOYEE's
personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure or
refusal to perform the duties and responsibilities assigned in
this AGREEMENT, willful violation of any law, rule, regulation
or final cease-and-desist order (other than traffic violations
or similar offenses), conviction of a felony or for fraud or
embezzlement, or material breach of any provision of this
AGREEMENT (hereinafter collectively referred to as "JUST
CAUSE"), the EMPLOYEE shall not receive, and shall have no right
to receive, any compensation or other benefits for any period
after such termination.
(ii) Termination after CHANGE OF CONTROL. In the event that,
before the expiration of the TERM and in connection with or
within one year of a CHANGE OF CONTROL (as defined hereinafter)
of either one of the EMPLOYERS, (A) the employment of the
EMPLOYEE is terminated for any reason other than JUST CAUSE
before the expiration of the TERM, (B) the present capacity or
circumstances in which the EMPLOYEE is employed is changed
before the expiration of the TERM, or (C) the EMPLOYEE's
responsibilities, authority, compensation or other benefits
provided under this AGREEMENT are materially reduced, then the
following shall occur:
(I) The EMPLOYERS shall promptly pay to the EMPLOYEE or
to his beneficiaries, dependents or estate an amount equal
to the sum of (1) the amount of compensation to which the
EMPLOYEE would be entitled for the remainder of the TERM
under this AGREEMENT, plus (2) the difference between (x)
the product of three, multiplied by the total compensation
paid to the EMPLOYEE for the immediately preceding
calendar year as set forth on the Form W-2 of the
EMPLOYEE, less (xx) the amount paid to the EMPLOYEE
pursuant to clause (1) of this subparagraph (I);
(II) The EMPLOYEE, his dependents, beneficiaries and
estate shall continue to be covered under all BENEFIT
PLANS of the EMPLOYERS at the EMPLOYERS' expense as if the
EMPLOYEE were still employed under this AGREEMENT until
the earliest of the expiration of the TERM or the date on
which the EMPLOYEE is included in another employer's
benefit plans as a full-time employee; and
(III) The EMPLOYEE shall not be required to mitigate the
amount of any payment provided for in this AGREEMENT by
seeking other employment or otherwise, nor shall any
amounts received from other employment or otherwise by the
EMPLOYEE offset in any manner the obligations of the
EMPLOYERS thereunder, except as specifically stated in
subparagraph (II).
In the event that payments pursuant to this subsection (ii)
would result in the imposition of a penalty tax pursuant to
Section 280G(b)(3) of the Internal Revenue Code of 1986, as
amended, and the regulations promulgated thereunder (hereinafter
collectively referred to as "SECTION 280G"), such payments shall
be reduced to the maximum amount which may be paid under SECTION
280G without exceeding such limits.
(iii) Termination Without CHANGE OF CONTROL. In the event that
the employment of the EMPLOYEE is terminated before the
expiration of the TERM for any reason other than JUST CAUSE or
in connection with or within one year of a CHANGE OF CONTROL,
the EMPLOYERS shall be obligated to continue (A) to pay on a
monthly basis to the EMPLOYEE, his designated beneficiaries or
his estate, his annual salary provided pursuant to Section 3(a)
or (b) of this AGREEMENT until the expiration of the TERM and
(B) to provide to the EMPLOYEE at the EMPLOYERS' expense,
health, life, disability, and other benefits substantially equal
to those being provided to the EMPLOYEE at the date of
termination of his employment until the earliest to occur of the
expiration of the TERM or the date the EMPLOYEE becomes employed
full-time by another employer. In the event that payments
pursuant to this subsection (iii) would result in the imposition
of a penalty tax pursuant to SECTION 280G, such payments shall
be reduced to the maximum amount which may be paid under SECTION
280G without exceeding those limits.
(b) Death of the EMPLOYEE. The TERM automatically terminates upon
the death of the EMPLOYEE. In the event of such death, the EMPLOYEE's
estate shall be entitled to receive the compensation due the EMPLOYEE
through the last day of the calendar month in which the death
occurred, except as otherwise specified herein.
(c) "Golden Parachute" Provision. Any payments made to the EMPLOYEE
pursuant to this AGREEMENT or otherwise are subject to and conditioned
upon their compliance with 12 U.S.C. [SECTION]1828(k) and any
regulations promulgated thereunder.
(d) Definition of "CHANGE OF CONTROL". A "CHANGE OF CONTROL" shall
be deemed to have occurred in the event that, at any time during the
TERM, either any person or entity obtains "conclusive control" of the
EMPLOYERS within the meaning of 12 C.F.R. [SECTION]574.4(a), or any
person or entity obtains "rebuttable control" within the meaning of 12
C.F.R. [SECTION]574.4(b) and has not rebutted control in accordance
with 12 C.F.R. [SECTION]574.4(c).
5. Special Regulatory Events. Notwithstanding Section 4 of this
AGREEMENT, the obligations of the EMPLOYERS to the EMPLOYEE shall be as
follows in the event of the following circumstances:
(a) If the EMPLOYEE is suspended and/or temporarily prohibited from
participating in the conduct of the EMPLOYERS' affairs by a notice
served under section 8(e)(3) or (g)(1) of the Federal Deposit
Insurance Act (hereinafter referred to as the "FDIA"), the EMPLOYERS'
obligations under this AGREEMENT shall be suspended as of the date of
service of such notice, unless stayed by appropriate proceedings. If
the charges in the notice are dismissed, the EMPLOYERS may, in their
discretion, pay the EMPLOYEE all or part of the compensation withheld
while the obligations in this AGREEMENT were suspended and reinstate,
in whole or in part, any of the obligations that were suspended.
(b) If the EMPLOYEE is removed and/or permanently prohibited from
participating in the conduct of the EMPLOYERS' affairs by an order
issued under Section 8(e)(4) or (g)(1) of the FDIA, all obligations of
the EMPLOYERS under this AGREEMENT shall terminate as of the effective
date of such order; provided, however, that vested rights of the
EMPLOYEE shall not be affected by such termination.
(c) If the EMPLOYERS are in default, as defined in section 3(x)(1)
of the FDIA, all obligations under this AGREEMENT shall terminate as
of the date of default; provided, however, that vested rights of the
EMPLOYEE shall not be affected.
(d) All obligations under this AGREEMENT shall be terminated, except
to the extent of a determination that the continuation of this
AGREEMENT is necessary for the continued operation of the EMPLOYERS,
(i) by the Director of the Office of Thrift Supervision (hereinafter
referred to as the "OTS"), or his or her designee at the time that the
Federal Deposit Insurance Corporation or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on
behalf of the EMPLOYERS under the authority contained in Section 13(c)
of the FDIA or (ii) by the Director of the OTS, or his or her
designee, at any time the Director of the OTS, or his or her designee,
approves a supervisory merger to resolve problems related to the
operation of the EMPLOYERS or when the EMPLOYERS are determined by the
Director of the OTS to be in an unsafe or unsound condition. No
vested rights of the EMPLOYEE shall be affected by any such action.
6. Consolidation, Merger or Sale of Assets. Nothing in this AGREEMENT
shall preclude the EMPLOYERS from consolidating with, merging into, or
transferring all, or substantially all, of their assets to another
corporation that assumes all of the EMPLOYERS' obligations and undertakings
hereunder. Upon such a consolidation, merger or transfer of assets, the
term "EMPLOYERS," as used herein, shall mean such other corporation or
entity, and this AGREEMENT shall continue in full force and effect.
7. Confidential Information. The EMPLOYEE acknowledges that during his
employment he will learn and have access to confidential information
regarding the EMPLOYERS and their customers and businesses. The EMPLOYEE
agrees and covenants not to disclose or use for his own benefit, or the
benefit of any other person or entity, any confidential information, unless
or until the EMPLOYERS consent to such disclosure or use or such information
becomes common knowledge in the industry or is otherwise legally in the
public domain. The EMPLOYEE shall not knowingly disclose or reveal to any
unauthorized person any confidential information relating to the EMPLOYERS,
their subsidiaries or affiliates, or to any of the businesses operated by
them, and the EMPLOYEE confirms that such information constitutes the
exclusive property of the EMPLOYERS. The EMPLOYEE shall not otherwise
knowingly act or conduct himself (a) to the material detriment of the
EMPLOYERS, their subsidiaries, or affiliates, or (b) in a manner which is
inimical or contrary to the interests of the EMPLOYERS.
8. Nonassignability. Neither this AGREEMENT nor any right or interest
hereunder shall be assignable by the EMPLOYEE, his beneficiaries, or legal
representatives without the EMPLOYERS' prior written consent; provided,
however, that nothing in this Section 8 shall preclude (a) the EMPLOYEE from
designating a beneficiary to receive any benefits payable hereunder upon his
death, or (b) the executors, administrators, or other legal representatives
of the EMPLOYEE or his estate from assigning any rights hereunder to the
person or persons entitled thereto.
9. No Attachment. Except as required by law, no right to receive payment
under this AGREEMENT shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge or hypothecation
or to execution, attachment, levy, or similar process of assignment by
operation of law, and any attempt, voluntary or involuntary, to effect any
such action shall be null, void and of no effect.
10. Binding Agreement. This AGREEMENT shall be binding upon, and inure to
the benefit of, the EMPLOYEE and the EMPLOYERS and their respective
permitted successors and assigns.
11. Amendment of AGREEMENT. This AGREEMENT may not be modified or
amended, except by an instrument in writing signed by the parties hereto.
12. Waiver. No term or condition of this AGREEMENT shall be deemed to
have been waived, nor shall there be an estoppel against the enforcement of
any provision of this AGREEMENT, except by written instrument of the party
charged with such waiver or estoppel. No such written waiver shall be
deemed a continuing waiver, unless specifically stated therein, and each
waiver shall operate only as to the specific term or condition waived and
shall not constitute a waiver of such term or condition for the future or as
to any act other than the act specifically waived.
13. Severability. If, for any reason, any provision of this AGREEMENT is
held invalid, such invalidity shall not affect the other provisions of this
AGREEMENT not held so invalid, and each such other provision shall, to the
full extent consistent with applicable law, continue in full force and
effect. If this AGREEMENT is held invalid or cannot be enforced, then any
prior AGREEMENT between the EMPLOYERS (or any predecessor thereof) and the
EMPLOYEE shall be deemed reinstated to the full extent permitted by law, as
if this AGREEMENT had not been executed.
14. Headings. The headings of the paragraphs herein are included solely
for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this AGREEMENT.
15. Governing Law. This AGREEMENT has been executed and delivered in the
State of Ohio and its validity, interpretation, performance, and enforcement
shall be governed by the laws of this State of Ohio, except to the extent
that federal law is governing.
16. Effect of Prior Agreements. This AGREEMENT contains the entire
understanding between the parties hereto and supersedes any prior employment
agreement between the EMPLOYERS or any predecessor of the EMPLOYERS and the
EMPLOYEE.
17. Notices. Any notice or other communication required or permitted
pursuant to this AGREEMENT shall be deemed delivered if such notice or
communication is in writing and is delivered personally or by facsimile
transmission or is deposited in the United States mail, postage prepaid,
addressed as follows:
If to Bancorp and/or First Federal:
First Federal Savings Bank of Eastern Ohio
Fifth & Market Streets
Zanesville, Ohio 43701
With copies to:
John C. Vorys, Esq.
Vorys, Sater, Seymour and Pease
Atrium Two, Suite 2100
221 East Fourth Street
Cincinnati, Ohio 45201-0236
If to the EMPLOYEE:
Mr. J. William Plummer
366 Broadview Avenue
Zanesville, Ohio 43701
IN WITNESS WHEREOF, each of the EMPLOYERS has caused this AGREEMENT to
be executed by its duly authorized officer, and the EMPLOYEE has signed this
AGREEMENT, each as of the day and year first above written.
Attest: FIRST FEDERAL BANCORP, INC.
/s/ Naomi B. Bankes By /s/ John C. Matesich, III
- ------------------------------ ----------------------------
John C. Matesich, III
----------------------------
its Chairman
------------------------
Attest: FIRST FEDERAL SAVINGS BANK
OF EASTERN OHIO
/s/ Naomi B. Bankes By /s/ John C. Matesich, III
- ------------------------------ ----------------------------
John C. Matesich, III
----------------------------
its Chairman
------------------------
Attest:
/s/ Naomi B. Bankes /s/ J. William Plummer
- ------------------------------ ----------------------------
J. William Plummer
EXHIBIT 10.4
------------
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this
"AGREEMENT"), entered into this 1st day of October, 1998, by and between
First Federal Bancorp, Inc., a savings and loan holding company incorporated
under Ohio law (hereinafter referred to as "Bancorp"), First Federal Savings
Bank of Eastern Ohio, a savings bank chartered under the laws of the United
States and a wholly-owned subsidiary of Bancorp (hereinafter referred to as
"First Federal"), and Connie Ayres LaPlante, an individual (herein after
referred to as the "EMPLOYEE");
WITNESSETH:
WHEREAS, the EMPLOYEE is an employee of Bancorp and First Federal
(hereinafter collectively referred to as the "EMPLOYERS");
WHEREAS, as a result of the skill, knowledge and experience of the
EMPLOYEE, the Boards of Directors of the EMPLOYERS desire to retain the
services of the EMPLOYEE as the Senior Vice President and Treasurer of each
of the EMPLOYERS;
WHEREAS, the EMPLOYEE desires to continue to serve as the Senior Vice
President and Treasurer of each of the EMPLOYERS; and
WHEREAS, the EMPLOYEE and the EMPLOYERS desire to enter into this
Agreement to set forth the terms and conditions of the employment
relationship between the EMPLOYERS and the EMPLOYEE;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the EMPLOYERS and the EMPLOYEE hereby agree as follows:
1. Employment and Term. Upon the terms and subject to the conditions of
this AGREEMENT, the EMPLOYERS hereby employ the EMPLOYEE, and the EMPLOYEE
hereby accepts employment, as the Senior Vice President and Treasurer of
each of the EMPLOYERS. The term of this AGREEMENT shall commence on the
date hereof and shall end on September 30, 2001 (hereinafter referred to as
the "TERM"). In September of each year, the Boards of Directors of the
EMPLOYERS shall review the EMPLOYEE's performance and record the results of
such review in the minutes of the Board of Directors.
2. Duties of EMPLOYEE.
(a) General Duties and Responsibilities. As the Senior Vice
President and Treasurer of each of the EMPLOYERS, the EMPLOYEE shall
perform the duties and responsibilities customary for such offices to
the best of her ability and in accordance with the policies
established by the Boards of Directors of the EMPLOYERS and all
applicable laws and regulations. The EMPLOYEE shall perform such
other duties not inconsistent with her position as may be assigned to
him from time to time by the Boards of Directors of the EMPLOYERS;
provided, however, that the EMPLOYERS shall employ the EMPLOYEE during
the TERM in a senior executive capacity without diminishment of the
importance or prestige of her position.
(b) Devotion of Entire Time to the Business of the EMPLOYERS. The
EMPLOYEE shall devote her entire productive time, ability and
attention during normal business hours throughout the TERM to the
faithful performance of her duties under this AGREEMENT. The EMPLOYEE
shall not directly or indirectly render any services of a business,
commercial or professional nature to any person or organization
without the prior written consent of the Boards of Directors of the
EMPLOYERS; provided, however, that the EMPLOYEE shall not be precluded
from (i) vacations and other leave time in accordance with Section
3(e) hereof; (ii) reasonable participation in community, civic,
charitable or similar organizations; or (iii) the pursuit of personal
investments which do not interfere or conflict with the performance of
the EMPLOYEE's duties to the EMPLOYERS.
3. Compensation, Benefits and Reimbursements.
(a) Salary. The EMPLOYEE shall receive during the TERM an annual
salary payable in equal installments not less often than monthly. The
amount of such annual salary shall be $92,700.00 until changed by the
Boards of Directors of the EMPLOYERS in accordance with Section 3(b)
of this AGREEMENT.
(b) Annual Salary Review. In September of each year throughout the
TERM, the annual salary of the EMPLOYEE shall be reviewed by the
Boards of Directors of the EMPLOYERS and shall be set, effective
October 1, at an amount not less than $92,700.00, based upon the
EMPLOYEE's individual performance and the overall profitability and
financial condition of the EMPLOYERS (hereinafter referred to as the
"ANNUAL REVIEW"). The results of the ANNUAL REVIEW shall be reflected
in the minutes of the Boards of Directors of the EMPLOYERS.
(c) Expenses. In addition to any compensation received under
Section 3(a) or (b) of this AGREEMENT, the EMPLOYERS shall pay or
reimburse the EMPLOYEE for all reasonable travel, entertainment and
miscellaneous expenses incurred in connection with the performance of
her duties under this AGREEMENT. Such reimbursement shall be made in
accordance with the existing policies and procedures of the EMPLOYERS
pertaining to reimbursement of expenses to senior management
officials.
(d) Employee Benefit Program.
(i) During the TERM, the EMPLOYEE shall be entitled to
participate in all formally established employee benefit, bonus,
pension and profit-sharing plans and similar programs that are
maintained by the EMPLOYERS from time to time, including
programs in respect of group health, disability or life
insurance, reimbursement of membership fees in civic, social and
professional organizations and all employee benefit plans or
programs hereafter adopted in writing by the Boards of Directors
of the EMPLOYERS, for which senior management personnel are
eligible, including any employee stock ownership plan, stock
option plan or other stock benefit plan (hereinafter
collectively referred to as the "BENEFIT PLANS").
Notwithstanding the foregoing sentence, the EMPLOYERS may
discontinue or terminate at any time any such BENEFIT PLANS, now
existing or hereafter adopted, to the extent permitted by the
terms of such plans and shall not be required to compensate the
EMPLOYEE for such discontinuance or termination.
(ii) After the expiration of the TERM or the termination of the
employment of the employee for any reason other than JUST CAUSE
(as defined hereinafter), the EMPLOYERS shall provide a group
health insurance program in which the EMPLOYEE and her spouse
will be eligible to participate and which shall provide
substantially the same benefits as are available to retired
employees of the EMPLOYERS on the date of this AGREEMENT until
both the EMPLOYEE and her spouse become 65 years of age;
provided, however that all premiums for such program shall be
paid equally by the EMPLOYERS and the EMPLOYEE and/or her spouse
after the EMPLOYEE's retirement; provided further, however, that
the EMPLOYEE may only participate in such program for as long as
the EMPLOYERS elect in their sole discretion to make available
an employee group health insurance program which permits the
EMPLOYERS to make coverage available for retirees.
(e) Vacation and Sick Leave. The EMPLOYEE shall be entitled,
without loss of pay, to be absent voluntarily from the performance of
her duties under this AGREEMENT, subject to the following conditions:
(i) The EMPLOYEE shall be entitled to an annual vacation in
accordance with the policies periodically established by the
Boards of Directors of the EMPLOYERS for senior management
officials of the EMPLOYERS;
(ii) Vacation time shall be scheduled by the EMPLOYEE in a
reasonable manner. The EMPLOYEE shall not be entitled to
receive any additional compensation from the EMPLOYERS in the
event of her failure to take the full allotment of vacation time
during any one year. Vacation time accrued in any one year may
not be carried over into any succeeding year; and
(iii) The EMPLOYEE shall be entitled to annual sick leave as
established by the Boards of Directors of the EMPLOYERS for
senior management officials of the EMPLOYERS. In the event that
any sick leave time shall not have been used during any year,
such leave shall accrue to subsequent years; provided, however,
that the number of accrued days of sick leave shall not exceed
35 days.
4. Termination of Employment.
(a) General. In addition to the termination of the employment of
the EMPLOYEE upon the expiration of the TERM, the employment of the
EMPLOYEE shall terminate at any other time during the TERM upon the
delivery by the EMPLOYERS of written notice of employment termination
to the EMPLOYEE. Without limiting the generality of the foregoing
sentence, the following subparagraphs (i), (ii) and (iii) of this
Section 4(a) shall govern the obligations of the EMPLOYERS to the
EMPLOYEE upon the occurrence of the events described in such
subparagraphs:
(i) Termination for JUST CAUSE. In the event that the
EMPLOYERS terminate the employment of the EMPLOYEE during the
TERM because of the EMPLOYEE's failure to comply with the Human
Resources Policies of the EMPLOYERS or because of the EMPLOYEE's
personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure or
refusal to perform the duties and responsibilities assigned in
this AGREEMENT, willful violation of any law, rule, regulation
or final cease-and-desist order (other than traffic violations
or similar offenses), conviction of a felony or for fraud or
embezzlement, or material breach of any provision of this
AGREEMENT (hereinafter collectively referred to as "JUST
CAUSE"), the EMPLOYEE shall not receive, and shall have no right
to receive, any compensation or other benefits for any period
after such termination.
(ii) Termination after CHANGE OF CONTROL. In the event that,
before the expiration of the TERM and in connection with or
within one year of a CHANGE OF CONTROL (as defined hereinafter)
of either one of the EMPLOYERS, (A) the employment of the
EMPLOYEE is terminated for any reason other than JUST CAUSE
before the expiration of the TERM, (B) the present capacity or
circumstances in which the EMPLOYEE is employed is changed
before the expiration of the TERM, or (C) the EMPLOYEE's
responsibilities, authority, compensation or other benefits
provided under this AGREEMENT are materially reduced, then the
following shall occur:
(I) The EMPLOYERS shall promptly pay to the EMPLOYEE or
to her beneficiaries, dependents or estate an amount equal
to the sum of (1) the amount of compensation to which the
EMPLOYEE would be entitled for the remainder of the TERM
under this AGREEMENT, plus (2) the difference between (x)
the product of three, multiplied by the total compensation
paid to the EMPLOYEE for the immediately preceding
calendar year as set forth on the Form W-2 of the
EMPLOYEE, less (xx) the amount paid to the EMPLOYEE
pursuant to clause (1) of this subparagraph (I);
(II) The EMPLOYEE, her dependents, beneficiaries and
estate shall continue to be covered under all BENEFIT
PLANS of the EMPLOYERS at the EMPLOYERS' expense as if the
EMPLOYEE were still employed under this AGREEMENT until
the earliest of the expiration of the TERM or the date on
which the EMPLOYEE is included in another employer's
benefit plans as a full-time employee; and
(III) The EMPLOYEE shall not be required to mitigate the
amount of any payment provided for in this AGREEMENT by
seeking other employment or otherwise, nor shall any
amounts received from other employment or otherwise by the
EMPLOYEE offset in any manner the obligations of the
EMPLOYERS thereunder, except as specifically stated in
subparagraph (II).
In the event that payments pursuant to this subsection (ii)
would result in the imposition of a penalty tax pursuant to
Section 280G(b)(3) of the Internal Revenue Code of 1986, as
amended, and the regulations promulgated thereunder (hereinafter
collectively referred to as "SECTION 280G"), such payments shall
be reduced to the maximum amount which may be paid under SECTION
280G without exceeding such limits.
(iii) Termination Without CHANGE OF CONTROL. In the event that
the employment of the EMPLOYEE is terminated before the
expiration of the TERM for any reason other than JUST CAUSE or
in connection with or within one year of a CHANGE OF CONTROL,
the EMPLOYERS shall be obligated to continue (A) to pay on a
monthly basis to the EMPLOYEE, her designated beneficiaries or
her estate, her annual salary provided pursuant to Section 3(a)
or (b) of this AGREEMENT until the expiration of the TERM and
(B) to provide to the EMPLOYEE at the EMPLOYERS' expense,
health, life, disability, and other benefits substantially equal
to those being provided to the EMPLOYEE at the date of
termination of her employment until the earliest to occur of the
expiration of the TERM or the date the EMPLOYEE becomes employed
full-time by another employer. In the event that payments
pursuant to this subsection (iii) would result in the imposition
of a penalty tax pursuant to SECTION 280G, such payments shall
be reduced to the maximum amount which may be paid under SECTION
280G without exceeding those limits.
(b) Death of the EMPLOYEE. The TERM automatically terminates upon
the death of the EMPLOYEE. In the event of such death, the EMPLOYEE's
estate shall be entitled to receive the compensation due the EMPLOYEE
through the last day of the calendar month in which the death
occurred, except as otherwise specified herein.
(c) "Golden Parachute" Provision. Any payments made to the EMPLOYEE
pursuant to this AGREEMENT or otherwise are subject to and conditioned
upon their compliance with 12 U.S.C. [SECTION]1828(k) and any
regulations promulgated thereunder.
(d) Definition of "CHANGE OF CONTROL". A "CHANGE OF CONTROL" shall
be deemed to have occurred in the event that, at any time during the
TERM, either any person or entity obtains "conclusive control" of the
EMPLOYERS within the meaning of 12 C.F.R. [SECTION]574.4(a), or any
person or entity obtains "rebuttable control" within the meaning of 12
C.F.R. [SECTION]574.4(b) and has not rebutted control in accordance
with 12 C.F.R. [SECTION]574.4(c).
5. Special Regulatory Events. Notwithstanding Section 4 of this
AGREEMENT, the obligations of the EMPLOYERS to the EMPLOYEE shall be as
follows in the event of the following circumstances:
(a) If the EMPLOYEE is suspended and/or temporarily prohibited from
participating in the conduct of the EMPLOYERS' affairs by a notice
served under section 8(e)(3) or (g)(1) of the Federal Deposit
Insurance Act (hereinafter referred to as the "FDIA"), the EMPLOYERS'
obligations under this AGREEMENT shall be suspended as of the date of
service of such notice, unless stayed by appropriate proceedings. If
the charges in the notice are dismissed, the EMPLOYERS may, in their
discretion, pay the EMPLOYEE all or part of the compensation withheld
while the obligations in this AGREEMENT were suspended and reinstate,
in whole or in part, any of the obligations that were suspended.
(b) If the EMPLOYEE is removed and/or permanently prohibited from
participating in the conduct of the EMPLOYERS' affairs by an order
issued under Section 8(e)(4) or (g)(1) of the FDIA, all obligations of
the EMPLOYERS under this AGREEMENT shall terminate as of the effective
date of such order; provided, however, that vested rights of the
EMPLOYEE shall not be affected by such termination.
(c) If the EMPLOYERS are in default, as defined in section 3(x)(1)
of the FDIA, all obligations under this AGREEMENT shall terminate as
of the date of default; provided, however, that vested rights of the
EMPLOYEE shall not be affected.
(d) All obligations under this AGREEMENT shall be terminated, except
to the extent of a determination that the continuation of this
AGREEMENT is necessary for the continued operation of the EMPLOYERS,
(i) by the Director of the Office of Thrift Supervision (hereinafter
referred to as the "OTS"), or his or her designee at the time that the
Federal Deposit Insurance Corporation or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on
behalf of the EMPLOYERS under the authority contained in Section 13(c)
of the FDIA or (ii) by the Director of the OTS, or his or her
designee, at any time the Director of the OTS, or his or her designee,
approves a supervisory merger to resolve problems related to the
operation of the EMPLOYERS or when the EMPLOYERS are determined by the
Director of the OTS to be in an unsafe or unsound condition. No
vested rights of the EMPLOYEE shall be affected by any such action.
6. Consolidation, Merger or Sale of Assets. Nothing in this AGREEMENT
shall preclude the EMPLOYERS from consolidating with, merging into, or
transferring all, or substantially all, of their assets to another
corporation that assumes all of the EMPLOYERS' obligations and undertakings
hereunder. Upon such a consolidation, merger or transfer of assets, the
term "EMPLOYERS," as used herein, shall mean such other corporation or
entity, and this AGREEMENT shall continue in full force and effect.
7. Confidential Information. The EMPLOYEE acknowledges that during her
employment she will learn and have access to confidential information
regarding the EMPLOYERS and their customers and businesses. The EMPLOYEE
agrees and covenants not to disclose or use for her own benefit, or the
benefit of any other person or entity, any confidential information, unless
or until the EMPLOYERS consent to such disclosure or use or such information
becomes common knowledge in the industry or is otherwise legally in the
public domain. The EMPLOYEE shall not knowingly disclose or reveal to any
unauthorized person any confidential information relating to the EMPLOYERS,
their subsidiaries or affiliates, or to any of the businesses operated by
them, and the EMPLOYEE confirms that such information constitutes the
exclusive property of the EMPLOYERS. The EMPLOYEE shall not otherwise
knowingly act or conduct himself (a) to the material detriment of the
EMPLOYERS, their subsidiaries, or affiliates, or (b) in a manner which is
inimical or contrary to the interests of the EMPLOYERS.
8. Nonassignability. Neither this AGREEMENT nor any right or interest
hereunder shall be assignable by the EMPLOYEE, her beneficiaries, or legal
representatives without the EMPLOYERS' prior written consent; provided,
however, that nothing in this Section 8 shall preclude (a) the EMPLOYEE from
designating a beneficiary to receive any benefits payable hereunder upon her
death, or (b) the executors, administrators, or other legal representatives
of the EMPLOYEE or her estate from assigning any rights hereunder to the
person or persons entitled thereto.
9. No Attachment. Except as required by law, no right to receive payment
under this AGREEMENT shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge or hypothecation
or to execution, attachment, levy, or similar process of assignment by
operation of law, and any attempt, voluntary or involuntary, to effect any
such action shall be null, void and of no effect.
10. Binding Agreement. This AGREEMENT shall be binding upon, and inure to
the benefit of, the EMPLOYEE and the EMPLOYERS and their respective
permitted successors and assigns.
11. Amendment of AGREEMENT. This AGREEMENT may not be modified or
amended, except by an instrument in writing signed by the parties hereto.
12. Waiver. No term or condition of this AGREEMENT shall be deemed to
have been waived, nor shall there be an estoppel against the enforcement of
any provision of this AGREEMENT, except by written instrument of the party
charged with such waiver or estoppel. No such written waiver shall be
deemed a continuing waiver, unless specifically stated therein, and each
waiver shall operate only as to the specific term or condition waived and
shall not constitute a waiver of such term or condition for the future or as
to any act other than the act specifically waived.
13. Severability. If, for any reason, any provision of this AGREEMENT is
held invalid, such invalidity shall not affect the other provisions of this
AGREEMENT not held so invalid, and each such other provision shall, to the
full extent consistent with applicable law, continue in full force and
effect. If this AGREEMENT is held invalid or cannot be enforced, then any
prior AGREEMENT between the EMPLOYERS (or any predecessor thereof) and the
EMPLOYEE shall be deemed reinstated to the full extent permitted by law, as
if this AGREEMENT had not been executed.
14. Headings. The headings of the paragraphs herein are included solely
for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this AGREEMENT.
15. Governing Law. This AGREEMENT has been executed and delivered in the
State of Ohio and its validity, interpretation, performance, and enforcement
shall be governed by the laws of this State of Ohio, except to the extent
that federal law is governing.
16. Effect of Prior Agreements. This AGREEMENT contains the entire
understanding between the parties hereto and supersedes any prior employment
agreement between the EMPLOYERS or any predecessor of the EMPLOYERS and the
EMPLOYEE.
17. Notices. Any notice or other communication required or permitted
pursuant to this AGREEMENT shall be deemed delivered if such notice or
communication is in writing and is delivered personally or by facsimile
transmission or is deposited in the United States mail, postage prepaid,
addressed as follows:
If to Bancorp and/or First Federal:
First Federal Savings Bank of Eastern Ohio
Fifth & Market Streets
Zanesville, Ohio 43701
With copies to:
John C. Vorys, Esq.
Vorys, Sater, Seymour and Pease
Atrium Two, Suite 2100
221 East Fourth Street
Cincinnati, Ohio 45201-0236
If to the EMPLOYEE:
Mrs. Connie Ayres LaPlante
826 Convers Ave.
Zanesville, Ohio 43701
IN WITNESS WHEREOF, each of the EMPLOYERS has caused this AGREEMENT to
be executed by its duly authorized officer, and the EMPLOYEE has signed this
AGREEMENT, each as of the day and year first above written.
Attest: FIRST FEDERAL BANCORP, INC.
/s/ Naomi B. Bankes By /s/ J. William Plummer
- ------------------------------ ----------------------------
J. William Plummer
----------------------------
its President/CEO
------------------------
Attest: FIRST FEDERAL SAVINGS BANK
OF EASTERN OHIO
/s/ Naomi B. Bankes By /s/ J. William Plummer
- ------------------------------ ----------------------------
J. William Plummer
----------------------------
its President/CEO
------------------------
Attest:
/s/ Naomi B. Bankes /s/ Connie Ayres LaPlante
- ------------------------------ ----------------------------
Connie Ayres LaPlante
EXHIBIT 21
Subsidiaries of First Federal Bancorp, Inc.
First Federal Savings Bank of Eastern Ohio
Chartered in Ohio
EXHIBIT 23
CROWE CHIZEK
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated October 30,
1998 on the consolidated financial statements of First Federal Bancorp,
Inc., as of September 30, 1998 and 1997 and for each of the three years in
the period ended September 30, 1998 which report and financial statements
are contained in the Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1998, in the Registration Statements on Form S-8 previously
filed by First Federal Bancorp, Inc., on December 9, 1998, July 17, 1995 and
February 1, 1994.
/s/ Crowe, Chizek and Company LLP
-------------------------------------
Crowe, Chizek and Company LLP
December 28, 1998
Columbus, Ohio
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 4,957
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 13,375
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 13,349
<INVESTMENTS-MARKET> 13,357
<LOANS> 169,623
<ALLOWANCE> 2,042
<TOTAL-ASSETS> 213,502
<DEPOSITS> 147,689
<SHORT-TERM> 11,907
<LIABILITIES-OTHER> 1,318
<LONG-TERM> 36,089
0
0
<COMMON> 3,656
<OTHER-SE> 12,843
<TOTAL-LIABILITIES-AND-EQUITY> 213,502
<INTEREST-LOAN> 15,041
<INTEREST-INVEST> 543
<INTEREST-OTHER> 202
<INTEREST-TOTAL> 15,786
<INTEREST-DEPOSIT> 5,623
<INTEREST-EXPENSE> 9,139
<INTEREST-INCOME-NET> 6,647
<LOAN-LOSSES> 681
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,216
<INCOME-PRETAX> 1,987
<INCOME-PRE-EXTRAORDINARY> 1,329
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,329
<EPS-PRIMARY> .42
<EPS-DILUTED> .38
<YIELD-ACTUAL> 3.52
<LOANS-NON> 627
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,816
<CHARGE-OFFS> 455
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,042
<ALLOWANCE-DOMESTIC> 0
<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 Annual Report on Form 10-KSB for fiscal year 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, which
are not readily predictable. The size of financial institutions competing
with First Federal is likely to increase as a result of changes in statutes
and regulations eliminating various restrictions on interstate and inter-
industry branching and acquisitions. Such increased competition may have an
adverse effect upon Bancorp.
Legislation and Regulation that may Adversely Affect Bancorp's Earnings
- -----------------------------------------------------------------------
First Federal is subject to extensive regulation by the Office of
Thrift Supervision (the "OTS") and the Federal Deposit Insurance Corporation
(the "FDIC") and is periodically examined by such regulatory agencies to
test compliance with various regulatory requirements. As a savings and loan
holding company, Bancorp is also subject to regulation and examination by
the OTS. Such supervision and regulation of First Federal and Bancorp are
intended primarily for the protection of depositors and not for the
maximization of shareholder value and may affect the ability of the company
to engage in various business activities. The assessments, filing fees and
other costs associated with reports, examinations and other regulatory
matters are significant and may have an adverse effect on Bancorp's net
earnings.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance of members of the Bank Insurance Fund (the "BIF") and
the Savings Association Insurance Fund (the "SAIF"). The FDIC has
established a risk-based assessment system for both SAIF and BIF members.
Under such system, assessments may vary depending on the risk the
institution poses to its deposit insurance fund. Such risk level is
determined by reference to the institution's capital level and the FDIC's
level of supervisory concern about the institution.
The recapitalization plan also provides for the merger of the SAIF and
BIF effective January 1, 1999, assuming there are no savings associations
under federal law. Under separate proposed legislation, Congress is
considering the elimination of the federal thrift charter and the separate
federal regulation of thrifts. As a result, First Federal would have to
convert to a different financial institution charter. In addition, First
Federal would be regulated under federal law as a bank and would, therefore,
become subject to the more restrictive activity limitations imposed on
national banks. Moreover, Bancorp might become subject to more restrictive
holding company requirements, including activity limits and capital
requirements similar to those imposed on First Federal. Bancorp cannot
predict the impact of the conversion of First Federal to, or regulation of
Federal as, a bank until the legislation requiring such change is enacted.
