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, 1999
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.
---------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1341110
---- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
505 Market Street, Zanesville, Ohio 43701
--------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code:
(740) 453-0606
--------------
Securities registered under Section 12(b) of the Exchange Act:
None
----
Securities registered under Section 12(g) of the Exchange Act:
Common shares, without par value
--------------------------------
(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
$16,612,459.
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,
1999, was $17,386,567.
3,196,171 of the registrant's common shares were issued and
outstanding on November 30, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
The following sections of the definitive Proxy Statement for the 2000
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: Ratification of Selection of Auditors;
3. Compensation of Executive Officers and Directors; and
4. 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 $178.9 million at September
30, 1999, and constituted 85.27% 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,
------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- ------------------- ------------------- --------------------
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
Real Estate Loans
One-to-four
family $ 96,358 51.58% $ 96,856 55.99% $102,723 58.04% $ 99,496 59.57% $ 97,347 62.55%
Multifamily
(over 4 units) 8,693 4.65 8,735 5.05 9,692 5.47 9,176 5.49 8,265 5.31
Construction 12,127 6.49 4,459 2.58 3,082 1.74 6,582 3.94 3,601 2.31
Nonresidential
real estate 12,692 6.80 10,620 6.14 9,799 5.54 8,505 5.09 7,285 4.68
Consumer Loans
Automobile 38,752 20.75 35,861 20.73 36,267 20.49 30,376 18.19 26,767 17.20
Home equity 6,807 3.65 6,287 3.63 4,652 2.63 3,767 2.25 4,136 2.66
Home improvement 215 .12 323 .19 464 .26 662 .40 818 .52
Deposit account 338 .18 467 .27 422 .24 484 .29 298 .19
Education - - - - - - - - 31 .02
Other secured 7,476 4.00 6,813 3.94 7,237 4.09 5,799 3.47 5,210 3.35
Unsecured 715 .38 670 .39 517 .29 515 .31 339 .22
Commercial 2,622 1.40 1,892 1.09 2,137 1.21 1,663 1.00 1,544 .99
----------------------------------------------------------------------------------------------------------
Total loans $186,795 100.00% $172,983 100.00% $176,992 100.00% $167,025 100.00% $155,641 100.00%
Less:
Undisbursed loans
in process 6,495 1,485 1,374 5,105 2,274
Net deferred
origination fees
(costs) and
amortized discounts (470) (167) (225) 11 124
Allowance
for loan losses 1,821 2,042 1,816 1,611 1,499
-------- -------- -------- -------- --------
Total loans-net $178,949 $169,623 $174,027 $160,298 $151,744
======== ======== ======== ======== ========
</TABLE>
Loan Maturity Schedule. The following table sets forth certain
information at September 30, 1999, 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,
-----------------------------------------
2001 to After
2000 2004 2004 Total
---- ------- ----- -----
(In thousands)
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real Estate - Construction $ - $ - $ - $ -
Commercial - - - -
------------------------------------------
$ - $ - $ - $ -
==========================================
Adjustable-Rate Loans:
Real Estate - Construction $ 506 $ - $11,621 $12,127
Commercial 2,622 - - 2,622
------------------------------------------
$3,128 $ - $11,621 $14,749
==========================================
Total Fixed and Adjustable-Rate Loans:
Real Estate - Construction $ 506 $ - $11,621 $12,127
Commercial 2,622 - - 2,622
------------------------------------------
$3,128 $ - $11,621 $14,749
==========================================
</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, selected 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, 1999 were
originated prior to 1981. See "Loan Originations, Purchases and Sales."
During fiscal year 1999, First Federal retained $10.6 million of the $14.0
million fixed-rate residential real estate loans it originated during the
year. 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 $108.5 million at September 30, 1999, and
represented 58.07% of total 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, 1999, loans secured by multifamily properties totaled
approximately $8.7 million, or 4.65% of total loans, the largest of which
had a balance of $1.6 million. There were no multifamily real estate loans
delinquent or included in classified assets at September 30, 1999.
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, 1999, a total of $12.1 million, or
approximately 6.49%, 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. There were
no construction loans delinquent at September 30, 1999.
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, 1999 was equal to
71.9% of total capital at such date.
At September 30, 1999, First Federal had a total of $12.7 million
invested in nonresidential real estate loans, the largest of which had a
balance of $1.3 million. There were no nonresidential real estate loans
delinquent at September 30, 1999. Such loans comprised approximately 6.80%
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 1999, approximately 87% 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, 1999, automobile loans totaled approximately $38.8
million, or 20.75% of total loans. This is an increase from $35.9 million,
or 20.73% of total loans as of September 30, 1998.
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 $6.8 million, or 3.65% 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, 1999, First Federal had approximately $54.3 million,
or 29.08% 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 $761,000 delinquent at September 30, 1999.
Commercial Loans. Commercial loans totaled $2.6 million. First
Federal has new and used car floor-planning programs for two local car
dealers with a balance of $1.9 million and $298,000 at September 30, 1999.
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 $240,000 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. 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
1999, $10.6 million of 15-year fixed-rate loans were retained for the
portfolio.
The following table presents First Federal's mortgage loan
origination, purchase and sale activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans originated:
Adjustable-rate:
Real estate:
One-to-four family (1) $38,007 $24,608 $27,087
Multifamily - - 1,022
Nonresidential 750 1,015 663
Consumer (4) 12,523 11,784 8,123
---------------------------------
Total adjustable-rate loans $51,280 $37,407 $36,895
---------------------------------
Fixed-rate:
Real estate:
One-to-four family (1) $14,022 $20,917 $ 6,789
Multifamily - 1,000 -
Nonresidential 1,700 - 437
Consumer 29,976 25,632 28,993
---------------------------------
Total fixed-rate loans $45,698 $47,549 $36,219
---------------------------------
Total loans originated $96,978 $84,956 $73,114
=================================
Loans sold 5,146 10,336 5,215
---------------------------------
Principal repayments (2) 78,020 78,629 57,932
---------------------------------
Total reductions 83,166 88,965 63,147
=================================
Change in other items - net (3) (4,486) (395) 3,762
---------------------------------
Net increase (decrease) $ 9,326 $(4,404) $13,729
=================================
<FN>
______________________________
<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.
</FN>
</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
$2.5 million to any one borrower at September 30, 1999. The largest amount
First Federal had outstanding to one borrower was $1.3 million. Such loan
was secured by non-residential real estate and was current at September 30,
1999. 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,
------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
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 $ 344 0.19% $1,177 0.68% $1,906 1.08%
60 to 89 days 135 0.08 210 0.12 172 0.10
90 or more days 194 0.11 541 0.31 399 0.22
--------------------------------------------------------------
Total delinquent real estate loans $ 673 0.38 $1,928 1.11 $2,477 1.40
--------------------------------------------------------------
Consumer loans delinquent for:
30 to 59 days 381 0.21 641 0.37 511 0.29
60 to 89 days 166 0.09 238 0.14 305 0.17
90 or more days 214 0.12 234 0.13 384 0.22
--------------------------------------------------------------
Total delinquent consumer loans 761 0.42 1,113 0.64 1,200 0.68
--------------------------------------------------------------
Total delinquent loans $1,434 0.80% $3,041 1.75% $3,677 2.08%
==============================================================
</TABLE>
Each consumer loan that 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 that are 90 days or more past
due and other nonperforming assets as of the dates indicated:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual
basis:(1)
Real estate:
Residential $130 $610 $368 $211 $264
Nonresidential 0 0 0 0 0
Consumer 100 17 74 175 96
--------------------------------------------
Total nonaccrual loans $230 $627 $442 $386 $360
--------------------------------------------
Accruing loans which are contractually
past due 90 days or more:(1)
Real estate:
Residential $ 64 $ 0 $111 $126 $178
Nonresidential 0 0 0 0 0
Consumer 0 0 0 0 0
--------------------------------------------
Total accruing loans which are
90 days past due $ 64 $ 0 $111 $126 $178
--------------------------------------------
Total nonaccrual loans and accruing
loans which are 90 days past due $294 $627 $553 $512 $538
============================================
Percentage of total loans 0.16% 0.37% 0.31% 0.31% 0.35%
============================================
Other nonperforming assets - net $ 0 $ 0 $ 0 $ 0 $ 0
============================================
<FN>
____________________
<F1> Net of specific valuation allowance.
</FN>
</TABLE>
During the year ended September 30, 1999, $46,772 of interest income
would have been recorded on nonaccruing loans had such loans been accruing
and $31,536 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,
------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Classified assets
Substandard $1,531 $1,846 $1,144
Doubtful - - -
Loss 508 725 346
------------------------------
Total classified assets $2,039 $2,571 $1,490
==============================
</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,
------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $2,042 $1,816 $1,611 $1,499 $1,021
Charge-offs
Mortgage loans - - - - (1)
Consumer loans (403) (455) (28) (28) (30)
------------------------------------------------------
Total charge-offs (403) (455) (28) (28) (31)
------------------------------------------------------
Recoveries
Mortgage loans - - - - 438
Consumer loans - - 11 9 11
------------------------------------------------------
Total recoveries - - 11 9 449
------------------------------------------------------
Net (charge-offs) recoveries (403) (455) (17) (19) 418
------------------------------------------------------
Provision for loss 182 681 222 131 60
------------------------------------------------------
Balance at end of period $1,821 $2,042 $1,816 $1,611 $1,499
======================================================
Ratio of net (charge-offs) recoveries to
average loans outstanding (0.24)% (0.26)% (0.01)% (0.01)% 0.28%
======================================================
</TABLE>
First Federal classified no loans meeting the definition of impaired
during the years ended September 30, 1999 and 1998.
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,
-------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- ------------------- ------------------- -------------------
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 $ 572 69.52% $ 600 69.73% $ 548 70.79% $ 521 74.05% $ 566 74.85%
Consumer loans 881 29.08 1,073 29.18 797 28.00 623 24.95 483 24.16
Commercial loans 18 1.40 19 1.09 21 1.21 17 1.00 15 0.99
Unallocated 350 - 350 - 450 - 450 - 435 -
----------------------------------------------------------------------------------------------------
Total $1,821 100.00% $2,042 100.00% $1,816 100.00% $1,611 100.00% $1,499 100.00%
====================================================================================================
</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, 1999, First Federal had no
assets classified "doubtful." First Federal's loan loss allowance at
September 30, 1999 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,
--------------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- -----------------------
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 $ 9,544 89.41% $11,907 89.20% $7,296 81.60%
Obligations of State and
political subdivisions 162 1.52 185 1.39 207 2.32
-----------------------------------------------------------------------------
Total investment securities 9,706 90.93 12,092 90.59 7,503 83.92
-----------------------------------------------------------------------------
Mortgage-backed securities 969 9.07 1,256 9.41 1,438 16.08
-----------------------------------------------------------------------------
Total investment securities and
mortgage-backed securities $10,675 100.00% $13,348 100.00% $8,941 100.00%
=============================================================================
Average remaining life of
investment securities and
mortgage-backed securities 1.73 years .95 years 2.92 years
Adjusted weighted average
maturity of investment securities 2.9 months 1.7 months 3.7 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, 1999
-----------------------------------------------------------------------------
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 $9,544 $ - $ - $ - $ 9,544 $ 9,531
Obligation of States and
political subdivisions - - 162 - 162 162
Mortgage-backed securities - - 83 886 969 980
-------------------------------------------------------------------------
Total investment securities and
mortgage-backed securities $9,544 $ - $245 $886 $10,675 $10,673
=========================================================================
Weighted average yield 5.08% - 7.29% 6.77% 5.27% -
<FN>
Note: Yields on tax-exempt securities are adjusted on a tax-equivalent
basis.
</FN>
</TABLE>
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,
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
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 $ 4,631 3% $ 4,446 4% $ 4,214 3%
Money market 31,132 22 28,872 19 24,299 19
Passbook and statement savings accounts 24,737 17 25,668 17 25,747 20
---------------------------------------------------------------------
Total transaction accounts 60,500 42 58,986 40 54,260 42
---------------------------------------------------------------------
Certificates of deposit:
Negotiated-rate certificates 7,811 5 6,070 4 4,587 4
Money-market certificates:
3 to 6 months 11,342 8 12,462 8 5,873 5
12 to 23 months 51,324 35 44,656 30 28,104 23
2 to 21/2 years 6,672 5 6,741 5 7,882 6
3 to 31/2 years 1,408 1 12,736 9 20,382 16
4 to 41/2 years 463 - 184 - 204 -
5 years and greater 5,251 4 5,458 4 4,968 4
---------------------------------------------------------------------
Total certificates of deposit 84,271 58 88,307 60 72,000 58
---------------------------------------------------------------------
Christmas club and other
noninterest-bearing accounts 349 - 396 - 375 -
---------------------------------------------------------------------
Total deposits $145,120 100% $147,689 100% $126,635 100%
=====================================================================
</TABLE>
The following table presents the amount and remaining maturities of
time deposits at September 30, 1999:
<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 $66,640 $15,973 $1,378 $280 $84,271
Weighted average rate 5.34% 5.05% 5.80% 7.56% 5.30%
</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, 1999, and September 30, 1998:
<TABLE>
<CAPTION>
Maturity At September 30, 1999 At September 30, 1998
-------- --------------------- ---------------------
(Dollars in thousands)
<S> <C> <C>
Three months or less $ 5,404 $ 2,104
Over 3 months to 6 months 4,336 2,688
Over 6 months to 12 months 3,812 6,508
Over twelve months 2,285 5,154
----------------------------------
Total $15,837 $16,454
==================================
</TABLE>
The following table presents First Federal's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30
--------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $147,689 $126,635 $130,072
Deposits 505,458 480,298 382,506
Withdrawals 512,344 (463,413) (389,873)
Interest credited 4,317 4,169 3,930
------------------------------------
Ending balance $145,120 $147,689 $126,635
====================================
Net increase (decrease) in
deposits $ (2,569) $ 21,054 $ (3,437)
------------------------------------
Percent increase (decrease) in
deposits (1.74)% 16.63% (2.64)%
</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, 1999, 1998 and 1997, and the
average aggregate balances of FHLB advances outstanding during the years
ended September 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
At or for the
year ended September 30
------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of FHLB advances
outstanding during period $47,996 $65,460 $59,805
Average amount of FHLB advances
outstanding during period $45,368 $56,400 $50,260
Amount of FHLB advances outstanding
at end of period $45,568 $47,996 $59,805
Weighted average interest cost of
FHLB advances during period based
on month-end balances 6.21% 6.23% 5.75%
</TABLE>
First Federal had $9.6 million variable-rate advances with original
maturities of less than 90 days at September 30, 1999. 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, 1999
------------------------
Weighted
Amount Average Rate
------ ------------
<S> <C> <C>
One year or less $ 7,000 6.28%
More than one year through 3 years $12,000 6.13%
More than 3 years through 5 years $ 7,000 6.60%
More than 5 years through 10 years $ 9,983 6.70%
</TABLE>
The following table sets forth certain information relating to First
Federal's average balance sheet information and reflects the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of interest-
earning assets or interest-bearing liabilities, respectively, for the
periods presented. Average balances are derived from month-end balances,
which include nonaccruing loans in the loan portfolio net of the allowance
for loss. Management does not believe that the use of month-end balances
instead of daily balances has caused any material difference in the
information presented. Yields on tax-exempt assets have been computed on a
fully tax-exempt basis assuming a tax rate of 34%.
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ -------------------------------
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) $167,912 $14,073 8.38% $175,846 $15,041 8.55% $166,185 $14,274 8.59%
Mortgage-backed securities 1,131 80 7.07 1,346 101 7.50 1,538 113 7.35
Interest-bearing deposits in
FHLB 10,432 359 3.44 3,903 202 5.17 3,047 163 5.35
Investment securities 14,294 870 6.09 7,958 442 5.57 5,196 304 5.85
------------------- ------------------- -------------------
Total interest-earning assets $193,769 $15,382 7.94 $189,053 $15,786 8.35 $175,966 $14,854 8.44
=================== =================== ===================
Noninterest-earning assets:
Cash 6,166 7,342 6,470
REO (3) 20 16
Fixed assets 7,036 7,286 7,114
Other assets 4,969 5,448 4,529
-------- -------- --------
Total assets $211,937 $209,149 $194,095
======== ======== ========
Interest-bearing liabilities:
Certificates of deposit $ 87,534 $ 4,802 5.49 $ 78,349 $ 4,374 5.58 $ 72,942 $ 3,968 5.44
Passbook accounts 25,714 418 1.63 25,769 564 2.19 27,461 670 2.44
NOW accounts 30,675 625 2.04 27,519 685 2.49 23,316 504 2.16
FHLB advances 45,368 2,817 6.21 56,400 3,516 6.23 50,260 2,888 5.75
------------------- ------------------- -------------------
Total interest-bearing
liabilities $189,291 $ 8,662 4.57 $188,037 $ 9,139 4.86 $173,979 $ 8,030 4.62
=================== =================== ===================
Noninterest-bearing liabilities:
Noninterest-bearing NOW
accounts 6,436 5,433 4,357
Other liabilities 833 1,059 2,269
Shareholders' equity 15,377 14,620 13,490
-------- -------- --------
Total liabilities and equity $211,937 $209,149 $194,095
======== ======== ========
Net interest income; interest
rate spread $ 6,720 3.37 $ 6,647 3.49 $ 6,824 3.82
======= ======= =======
Net interest yield (2) 3.47 3.52 3.87
Average interest-earning
assets to average interest-
bearing liabilities 102.37% 100.54% 102.62%
<FN>
_____________________________
<F1> Includes nonaccrual loans.
<F2> Net interest yield is net interest income divided by average interest-
earning assets.
</FN>
</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, 1999, 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, 1999
-----------------------
Change in Interest Rate $ Change % Change
(Basis Points) In NPV in NPV
----------------------- -------- --------
(Dollars in thousands)
<S> <C> <C>
+300 $(2,949) (15)%
+200 $(1,470) (7)%
+100 $ (449) (2)%
0 0 0
-100 $ (56) 0%
-200 $ 36 0%
-300 $ 453 2%
</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 negatively
affected. 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 positively affected.
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,
------------------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997 1997 vs. 1996
---------------------------- ---------------------------- -----------------------------
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 $(672) $(296) $(968) $ 834 $ (67) $ 767 $1,106 $ 15 $1,121
Mortgage-backed securities (15) (6) (21) (14) 2 (12) (10) 18 8
Investment securities 635 (50) 585 196 (19) 177 91 3 94
-----------------------------------------------------------------------------------------------
Total interest income $ (52) $(352) $(404) $1,016 $ (84) $ 932 $1,187 $ 36 $1,223
==============================================================================================
Interest expense attributable to:
Deposits $(208) $ 430 $ 222 $ 113 $ 368 $ 481 $ (142) $(130) $ (272)
FHLB advances (688) (11) (699) 373 255 628 1,140 63 1,203
-----------------------------------------------------------------------------------------------
Total interest expense $(896) $ 419 $(477) $ 486 $ 623 $1,109 $ 998 $ (67) $ 931
==============================================================================================
Increase (decrease) in net
interest income $ 830 $(757) $ 73 $ 530 $(707) $ (177) $ 189 $ 103 $ 292
==============================================================================================
</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 12.93% of the
savings market as of June 30, 1998, and ranks third in residential real
estate originations for purchase of residential property with 12.16% of the
mortgage loan originations for the first eight months of the 1999 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, 1999, First Federal had 56 full-time employees and
17 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.
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, 1999:
<TABLE>
<CAPTION>
At September 30, 1999
---------------------------
Percent
Amount of assets
------ ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital $15,634 7.45%
Tangible capital requirement 3,147 1.50
------------------------
Excess $12,487 5.95%
========================
Core capital $15,634 7.45%
Core capital requirement 8,391 4.00
------------------------
Excess $ 7,243 3.45%
========================
Total capital $16,990 12.95%
Risk-based capital requirement 10,493 8.00
------------------------
Excess $ 6,497 4.95%
========================
</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 4.0% of adjusted total assets, except for institutions
with the highest examination rating and acceptable levels of risk, 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 adopted an interest rate risk component to the risk-based
capital requirement. Pursuant to that requirement, each savings association
must 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. 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, 1999 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, 1999, 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,
1999, 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, 1999.
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, 1999.
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, 1999, 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 1999 are $.064 per $100
in deposits and may never be reduced below the level set for healthy BIF
institutions.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act makes sweeping changes in the financial
services in which various types of financial institutions may engage. The
Glass-Steagall Act, which had generally prevented banks from affiliating
with securities and insurance firms, was repealed. A new "financial holding
company," which owns only well capitalized and well managed depository
institutions, will be permitted to engage in a variety of financial
activities, including insurance and securities underwriting and agency
activities.
The GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999, including Bancorp, to continue to engage in all
activities that they were permitted to engage in prior to the enactment of
the Act. Such activities are essentially unlimited, provided that the
thrift subsidiary remains a qualified thrift lender. Any thrift holding
company formed after May 4, 1999, will be subject to the same restrictions
as a multiple thrift holding company. In addition, a unitary thrift holding
company in existence on May 4, 1999, may be sold only to a financial holding
company engaged in activities permissible for multiple savings and loan
holding companies.
The GLB Act is not expected to have a material effect on the
activities in which Bancorp and First Federal currently engage, except to
the extent that competition with other types of financial institutions may
increase as they engage in activities not permitted prior to enactment of
the GLB Act.
FRB Regulations
Reserve Requirements. FRB regulations require savings associations to
maintain reserves against their transaction accounts (primarily NOW
accounts) and non-personal time deposits. Such regulations generally
require that reserves of 3% be maintained against deposits in transaction
accounts up to $44.3 million (subject to an exemption of up to $5 million),
and that an initial reserve of 10% be maintained against that portion of
total net transaction accounts in excess of $44.3 million. These
percentages are subject to adjustment by the FRB. At September 30, 1999,
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 currently are required to be
members of a FHLB, although membership will become volontary in May of 2000.
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 First Federal's aggregate outstanding principal loan
balance 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
$3,790,100 at September 30, 1999.
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, 1999 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 1995. 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, 1999, First Federal's "pre-1988 reserves" for tax purposes
totaled approximately $1.6 million. First Federal believes it has
approximately $8.8 million of accumulated earnings and profits for tax
purposes as of September 30, 1999, 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 increased by $87,000 from fiscal 1998
to fiscal 1999. The effective tax rate for fiscal 1999 was 33.1% compared
to 33.1% for fiscal year 1998.
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 are exempt from the Ohio net worth tax for
years beginning after December 31, 1998 if certain conditions are met.
Bancorp meets 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 is 1.4% of the book net worth and for tax
years thereafter the tax is 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,
1999, 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 $4,534,767
Branch Offices:
990 Military Road
Zanesville, Ohio 43701 Owned 1975 5,000 382,359
2810 Maysville Pike
South Zanesville, Ohio 43701 Owned 1994 2,050 435,104
55 East Main Street
Roseville, Ohio 43777 Owned 1990 2,394 159,688
639 Main Street
Coshocton, Ohio 43812 Owned 1982 4,310 105,081
132 Main Street
Newcomerstown, Ohio 43832 Owned 1984 2,128 4,625
Other Properties:
995 & 1003 Beverly Avenue
Zanesville, Ohio 43701 Owned 1994 1,284 64,625
<FN>
______________________
<F1> Net book value amounts are for land, buildings and improvements.
</FN>
</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 $6,855,296 million at September 30,
1999. 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 years ended
September 30, 1999 and 1998.
<TABLE>
<CAPTION>
09/99 06/99 03/99 12/98 09/98 06/98 03/98 12/97
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend Declared $0.040 $0.040 $ 0.040 $ 0.040 $ 0.035 $ 0.035 $ 0.035 $ 0.035
High Bid During Quarter 8.688 9.750 10.750 12.750 14.500 13.625 12.875 10.750
Low Bid During Quarter 6.875 7.500 8.500 10.000 9.750 11.875 10.125 9.375
Last Bid Of Quarter 7.125 7.750 9.875 10.500 11.250 13.625 12.875 10.5625
</TABLE>
On 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 3,196,171 common shares outstanding and held of record by approximately
602 stockholders as of November 30, 1999. Bancorp's common shares are
traded in The Nasdaq SmallCap Market(R) under the symbol of FFBZ.
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 to certain federal income tax considerations, OTS
regulations impose limitations on the payment of dividends and other capital
distributions by savings associations. Under OTS regulations applicable to
converted savings associations, the Bank is not permitted to pay a cash
dividend on its common shares if its regulatory capital would, as a result
of payment of such dividend, be reduced below the amount required for the
Liquidation Account (the account established for the purpose of granting a
limited priority claim on the assets of the Bank in the event of complete
liquidation to those members of the Bank before the Conversion who maintain
a savings account at the Bank after the Conversion), or applicable
regulatory capital requirements prescribed by the OTS.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (1) if the
proposed distribution would cause total distributions for that calendar year
to exceed net income for that year to date plus the savings association's
retained net income for the preceding two years; (2) if the savings
association will not be at least adequately capitalized following the
capital distribution; (3) if the proposed distribution would violate a
prohibition contained in any applicable statute, regulation or agreement
between the savings association and the OTS (or the FDIC), or a condition
imposed on the savings association in an OTS-approved application or notice;
or, (4) if the savings association has not received certain favorable
examination ratings from the OTS. If a savings association subsidiary of a
holding company is not required to file an application, it must file a
notice with the OTS.
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 and home improvement loans, and
secured and unsecured lines-of-credit, and commercial loans. 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 2000;
3. Management's anticipation that loan demand will remain stable;
but that the mortgage loan portfolio will increase as higher
interest rates make adjustable mortgages that are held in
portfolio more attractive;
4. Management's anticipation that advances from the FHLB will
increase to fund loan originations;
5. Management's anticipation that adjustable-rate loans will
reprice higher in fiscal year 2000 if interest rates remain
relatively stable;
6. Legislative changes with respect to the activities of financial
institutions;
7. Management's expectation that the amount of its consumer loans
will increase; and
8. Management's expectation that a significant portion of the
certificates of deposit at First Federal maturing in fiscal year
2000 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 ------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $209,860 $213,502 $203,703 $184,467 $171,624
Mortgage-backed securities 969 1,256 1,438 1,661 1,889
Loans receivable - net 178,949 169,623 174,027 160,298 151,744
Federal funds sold and
other short-term investments 25 13,375 1,600 3,175 975
Interest-bearing deposits in other
financial institutions 2,497 0 0 0 0
Investment securities and FHLB stock 13,496 15,629 10,545 6,478 6,502
Deposits 145,120 147,689 126,635 130,072 129,267
Borrowed funds 45,568 47,996 59,805 37,970 27,600
Stockholders' equity 17,652 16,500 15,626 13,998 12,745
Number of:
Real estate loans outstanding 2,713 2,833 2,972 3,008 2,675
Consumer loans outstanding 6,769 6,485 5,994 5,189 4,938
Deposit accounts 19,786 21,085 20,349 20,312 20,750
Full service offices 6 6 6 6 6
Summary of operations 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Total interest income $ 15,383 $ 15,786 $ 14,854 $ 13,630 $ 12,205
Total interest expense 8,662 9,139 8,031 7,099 6,452
----------------------------------------------------------------
Net interest income 6,721 6,647 6,823 6,531 5,753
Provision for loan losses 182 681 222 131 60
----------------------------------------------------------------
Net interest income after
provision for loan losses 6,539 5,966 6,601 6,400 5,693
Noninterest income 1,230 1,238 1,096 871 766
Noninterest expense 5,515 5,216 4,753 5,092 4,062
----------------------------------------------------------------
Income before federal income tax and
cumulative effect of a change in
accounting method 2,254 1,988 2,944 2,179 2,397
Provision for federal income taxes 746 659 971 745 802
----------------------------------------------------------------
Net income $ 1,508 $ 1,329 $ 1,973 $ 1,434 $ 1,595
================================================================
Basic earnings per share $ .47 $ .42 $ .63 $ .46 $ .51
================================================================
Fully diluted earnings per share $ .44 $ .38 $ .57 $ .42 $ .48
================================================================
Cash dividend declared per share $ 0.16 $ 0.14 $ 0.12 $ 0.105 $ 0.09
Weighted average common and
common equivalent shares (1)
Basic 3,176,586 3,150,532 3,143,452 3,143,452 3,138,232
Fully diluted 3,395,617 3,505,014 3,456,014 3,433,030 3,321,340
<FN>
______________________________
<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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
At or for the
year ended September 30,
--------------------------------------------------------
Key Operating Ratios 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<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 3.17% 3.18% 3.52% 3.71% 3.48%
Average interest rate spread 3.37 3.49 3.82 3.92 3.54
Net interest yield (net interest
income divided by average interest-
earning assets) 3.47 3.52 3.87 4.04 3.70
Return on stockholders' equity (1) 8.83 8.23 13.36 10.65 13.14
Return on assets (2) .71 .64 1.02 .81 .96
Average interest-earning assets to
average interest-bearing liabilities 102.37 100.54 102.62 102.79 103.90
Stockholders' equity to total assets at
end of period 8.41 7.73 7.67 7.59 7.43
Average stockholders' equity to average
total assets 8.05 7.72 7.61 7.65 7.33
Dividend payout 34.04 33.33 19.05 22.83 17.65
Nonperforming assets ratio (total
nonperforming assets divided by
total assets) at end of period (3) .11 .29 .27 .28 .31
General valuation allowance to net
loans outstanding at end of period 0.73 0.84 0.74 0.75 0.76
<FN>
___________________________
<F1> Net income divided by average stockholders' equity.
<F2> Net income divided by average total assets.
<F3> 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.
</FN>
</TABLE>
Financial Condition Data
Total assets of First Federal decreased to $209.9 million at September
30, 1999, from $213.5 million at September 30, 1998. The decrease in assets
is the result primarily of a decrease in overnight deposits from $13.4
million to $25,000, offset by an increase in net loans receivable of $9.3
million, or 5.50%, from $169.6 million at September 30, 1998, to $178.9
million at September 30, 1999. The increase in loans receivable was
comprised of an increase in residential real estate loans of $7.1 million, a
$2.9 million increase in consumer automobile loans, a $730,000 increase in
commercial loans and a $991,000 increase in other consumer loans. The
increase in residential loans was due to an increased volume in loans
originated. The increase in consumer auto loans was also due to an
increased volume in loans originated.
The increase in loans receivable was funded largely by a decrease in
cash and cash equivalents of $12.9 million to $5.4 million at September 30,
1999. Investment securities decreased $2.4 million and interest-bearing
deposits in other financial institutions increased $2.5 million to retain
the level of securities available for liquidity. See "Liquidity and Capital
Resources." Mortgage-backed securities decreased by $287,000, or 22.87%,
during the 1999 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
$273,000 to $1.6 million at September 30, 1999. FHLB stock increased
$256,100.
The allowance for loan losses decreased by $221,000 from $2,042,000 at
September 30, 1998, to $1,821,000 at September 30, 1999. Management
decreased the provision for loan losses as a result of delinquencies on
loans declining from $3.0 million to $1.4 million. Total nonaccrual loans
and accruing loans that are 90 days past due decreased from $627,000 to
$294,000. First Federal reviews on a quarterly 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 consumer loans, if any, may decrease in value more rapidly than the
outstanding balance of the loan.
Deposits decreased by $2.6 million, or 1.74%, from $147.7 million at
September 30, 1998, to $145.1 million at September 30, 1999. The decrease
is primarily due to the decrease in certificate of deposit accounts at
September 30, 1999. The balance of such deposits decreased $4.0 million to
$84.3 million at September 30, 1999, from $88.3 million at September 30,
1998. At September 30, 1999, FHLB advances totaled $45.6 million, a
decrease of $2.4 million from the $48.0 million of advances outstanding at
September 30, 1998. Management believes that deposits will increase
slightly during fiscal year 2000 and that it will 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 $17.7 million, or 8.41% of total assets, at
September 30, 1999, compared to $16.5 million, or 7.73% of total assets, at
September 30, 1998. The increase was attributable to $1.5 million in net
income for the 1999 fiscal year, $499,000 in dividends declared, and
proceeds from exercised options tax-effected of $144,000.
Comparison of the Years Ended
September 30, 1999 and 1998
First Federal reported net income for the 1999 fiscal year of
approximately $1.5 million, compared to $1.3 million in fiscal year 1998.
The most significant changes from 1998 to 1999 were the increase in net
interest income of $74,000 and the decrease in the provision for loan losses
of $499,000 and an increase in noninterest expense of $299,000.
Net interest income increased by $74,000 in fiscal year 1999 compared
to fiscal year 1998. Interest income decreased $403,000 during fiscal year
1999 from $15.8 million during fiscal year 1998. This decrease was a result
of the average mortgage loan balance in 1999 being lower than the average
mortgage loan balance in 1998. 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 2000, the
adjustable-rate mortgage loan portfolio will reprice at slightly higher
rates, as most loans originated during fiscal year 1999 were not initially
priced at the fully indexed interest rate. These loans will be repricing
upward at their first adjustment in fiscal year 2000 while the balance of
the adjustable-rate mortgage loan portfolio will not reprice substantially
lower during fiscal year 2000. 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 1999 decreased $477,000 from $9.1 million during
fiscal year 1998. Included in interest expense for 1999 is approximately
$2.8 million of interest on borrowed funds. The decrease in interest
expense on borrowed funds is the result of decreased FHLB advances and lower
interest rates on the advances. The increase in interest expense on
deposits is the result of higher interest rates on certificates of deposits.
First Federal's average interest rate spread decreased from 3.49% in
fiscal 1998 to 3.37% in fiscal 1999 because the average rate First Federal
is earning on interest-earning assets decreased more than the average rate
First Federal is paying on interest-bearing liabilities.
The provision for loan losses was $182,000 in the 1999 fiscal year, a
decrease of $499,000 from the 1998 fiscal year. Management decreased the
provision for loan losses as a result of delinquencies on loans declining
from $3.0 million to $1.4 million. Total nonaccrual loans and accruing
loans that are 90 days past due decreased from $627,000 to $294,000.
Noninterest income decreased for fiscal year 1999 by $7,700 from
fiscal 1998. This is a result of a decrease of $109,000 in the gain on
loans sold, due to the retention of fixed-rate loans in the loan portfolio,
and an increase in other income of $59,000 and an increase of $27,000 in
service charges on deposit accounts.
Noninterest expenses increased by approximately $299,000 from fiscal
1998 to fiscal 1999. The increase is attributable to a $105,000 increase in
data processing costs at the Service Bureau as new services such as imaging
and networking were added. In addition, salaries and benefits increased
$187,000, mainly due to an increase in entry-level wages and normal pay
increases. Occupancy expense increased $92,000 mainly due to increased
depreciation of $43,000, increased repairs and maintenance of $24,000 and
increased furniture and fixture expense of $24,000. Other operating
expenses decreased $65,000. This was the result of not having the
approximately $120,000 expense of outside consultants who assisted in
identifying ways in which the Bank processes could be conducted more
efficiently and manners in which the Bank's products could be made more
profitable. This decrease was offset by increased postage expense of
$21,000 and courier services of $14,000.
The federal income tax provision increased by $87,000 from fiscal 1998
to fiscal 1999. The effective tax rate for fiscal year 1999 and 1998 was
33.10%.
Year 2000 Considerations
As with all financial institutions, First Federal's operations depend
almost entirely on computer systems. First Federal has addressed 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. An
overall plan, developed by the Year 2000 Committee, was approved by the
Board of Directors and put into effect in 1998. This plan called for a
step-by-step process of awareness, assessment, remediation and testing of
hardware, software and embedded systems, as well as a customer awareness
program, contingency plan and business continuity plan.
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 incorporate technology
that 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
has brought most PCs into compliance. The Savings Bank has used its current
internal staffing with little reliance on outside resources. Major vendors
have provided remediated software. First Federal believes that any
additional Y2K costs will be immaterial.
First Federal has no software that is internally developed and 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 has been working with the vendors to assess their
Y2K readiness and believes that the third-party vendors are taking the
appropriate steps to ensure that critical systems will function properly.
Testing of mission-critical systems started in the fourth quarter of 1998
and was completed by June 30, 1999. Testing included all core systems
required for continued Bank operation and included interfaces with critical
third-party vendors. Testing has not revealed any deficiencies in the
remediated systems.
If the modifications and conversions by third-party vendors and First
Federal fail to function properly, the operations and financial condition of
First Federal could be materially adversely affected. First Federal's
contingency plan, which continues to be developed, allows for continued
operations in the event of system failure. First Federal has a concern in
the case where there is possible interruption of electrical power, which is
certainly a concern that all businesses face due to the interdependencies
within the nation's power grid. First Federal has developed plans for
manually processing core operations.
First Federal has a plan in place to educate our personnel and to
inform our customers of the Year 2000 issue. Brochures have been
distributed to customers and are readily available upon request.
First Federal may experience increases in problem loans and credit
losses in the event that borrowers or major employers in our area fail to
prepare properly for Y2K. First Federal has contacted major borrowers to
assess their awareness and status regarding their year 2000 compliance,
although loans to commercial borrowers constitute only 1.40% of the loan
portfolio. First Federal faces the risk of loss of deposits and consequent
liquidity problems should Bank customers lose confidence in the Savings Bank
in particular, or the banking system in general, and choose to withdraw
their funds. Customers who experience cash flow problems due to their own
lack of year 2000 preparedness could fund their cash shortfall by
withdrawing their deposits from the Company, thereby causing liquidity
problems. First Federal intends to increase its cash reserves during the
final months of 1999 and take any other steps deemed necessary to meet
liquidity needs. 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, 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. 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.
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 paid on deposits and borrowings increasing more than the average
rate First Federal was 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 was 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 was 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.
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
1999, the automobile loans increased to $38.9 million from $35.9 million in
fiscal year 1998. 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
(7)% and 0% at September 30, 1999.
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 6.49% at September 30, 1999. 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, 1999, cash provided by
operating activities, overnight deposits, mortgage-backed securities
repayments, and loan repayments were used to fund deposit maturities and
withdrawals, repay borrowings, 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 2000 from loan and mortgage-backed securities repayments, investment
security maturities, increased savings balances and FHLB advances to meet
expected loan demand. At September 30, 1999, First Federal had outstanding
commitments to originate loans of $3,327,100, unfunded lines-of-credit
totaling $6.9 million (a significant portion of which normally remains
unfunded) and $0 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, 1999, totaled $66.6 million. Management
believes that a significant portion of the amounts maturing during 2000 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,
--------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net cash provided by operating activities $ 1,538 $ 2,118 $ 1,760
Net cash used in investing (9,236) (1,364) (18,982)
Net cash provided by financing activities (5,254) 8,741 17,897
------------------------------------
(Decrease) Increase in cash and cash equivalents (12,952) 9,495 675
Cash and cash equivalents at beginning of year 18,332 8,837 8,162
------------------------------------
Cash and cash equivalents at end of year $ 5,380 $ 18,332 $ 8,837
====================================
</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, 1999.
<TABLE>
<CAPTION>
Percent
Amount of assets
------ ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital $15,634 7.45%
Tangible capital requirement 3,147 1.50
-------------------
Excess $12,487 5.95%
===================
Core capital $15,634 7.45%
Core capital requirement 8,391 4.00
-------------------
Excess $ 7,243 3.45%
===================
Total risk-based capital $16,990 12.95%
Risk-based capital requirement 10,493 8.00
-------------------
Excess $ 6,497 4.95%
===================
</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 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. SFAS No. 133, as amended,
is effective for fiscal years beginning after June 15, 2000. This Statement
will not have a material effect on the Company.
Change of Auditors
Upon the recommendation of the Audit Committee and the approval of the
Board of Directors of Bancorp, Crowe Chizek and Company LLP ("Crowe Chizek")
was dismissed as Bancorp's independent public auditors on December 17, 1999.
On the same date, Olive was engaged to audit Bancorp's financial statements
for the fiscal year ended September 30, 2000. The decision to change
auditors was based upon a belief that Olive could serve Bancorp's needs more
efficiently and responsively than Crowe Chizek.
The report of Crowe Chizek on the financial statements for the fiscal
years ended September 30, 1999, and September 30, 1998, contained no adverse
opinion or disclaimer of opinion, nor was it modified as to uncertainty,
audit scope or accounting principles. There has not been any disagreement
between Bancorp and Crowe Chizek on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
Item 7. Financial Statements.
FIRST FEDERAL BANCORP, INC.
Zanesville, Ohio
September 30, 1999
CONTENTS
REPORT OF INDEPENDENT AUDITORS 37
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 38
CONSOLIDATED STATEMENTS OF INCOME 39
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 40
CONSOLIDATED STATEMENTS OF CASH FLOWS 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 43
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, 1999 and 1998,
and related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1999.
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 the 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, 1999 and 1998, and results of its
operations and its cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
Columbus, Ohio
October 15, 1999
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 5,355,233 $ 4,957,155
Overnight deposits 25,000 13,375,000
------------------------------
Cash and cash equivalents 5,380,233 18,332,155
Interest-bearing deposits in other financial institutions 2,497,030 -
Securities held to maturity (Fair value - $9,693,000 in 1999
and $12,105,000 in 1998) 9,705,812 12,092,484
Mortgage-backed securities held to maturity (Fair value -
$980,000 in 1999 and $1,252,000 in 1998) 969,044 1,256,327
Loans receivable, net 178,949,202 169,622,791
Federal Home Loan Bank stock 3,790,100 3,534,000
Premises and equipment, net 6,978,793 7,347,715
Accrued interest receivable and other assets 1,589,594 1,316,905
------------------------------
Total assets $209,859,808 $213,502,377
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $145,120,096 $147,688,662
Borrowed funds 45,568,460 47,995,988
Advances from borrowers for taxes and insurance 411,326 295,463
Accrued expenses and other liabilities 1,107,658 1,022,450
------------------------------
Total liabilities 192,207,540 197,002,563
------------------------------
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; 9,000,000 shares
authorized; 3,303,400 shares issued; 3,196,171 shares
outstanding in 1999 and 3,150,532 shares
outstanding in 1998 3,736,076 3,656,323
Retained earnings 14,268,057 13,334,589
Treasury shares, 107,229 shares in 1999 and
152,868 shares in 1998, at cost (351,865) (491,098)
------------------------------
Total stockholders' equity 17,652,268 16,499,814
------------------------------
Total liabilities and stockholders' equity $209,859,808 $213,502,377
==============================
</TABLE>
See accompanying notes to consolidated financial statements.
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income
Interest and fees on loans $14,073,473 $15,040,568 $14,273,365
Interest on securities 950,014 543,359 417,158
Other interest income 359,018 202,064 163,389
---------------------------------------------
Total interest income 15,382,505 15,785,991 14,853,912
---------------------------------------------
Interest expense
Interest on deposits 5,844,591 5,622,884 5,142,179
Interest on borrowed funds 2,817,425 3,516,457 2,888,430
---------------------------------------------
Total interest expense 8,662,016 9,139,341 8,030,609
---------------------------------------------
Net interest income 6,720,489 6,646,650 6,823,303
Provision for loan losses 181,853 680,757 222,268
---------------------------------------------
Net interest income after provision for
loan losses 6,538,636 5,965,893 6,601,035
---------------------------------------------
Noninterest income
Service charges on deposit accounts 351,951 324,836 310,308
Gain on sale of loans 49,233 158,540 67,624
Dividends on FHLB stock 256,289 241,150 177,456
Other operating income 572,481 513,101 540,487
---------------------------------------------
Total noninterest income 1,229,954 1,237,627 1,095,875
---------------------------------------------
Noninterest expense
Salaries and employee benefits 2,386,681 2,200,042 2,031,085
Occupancy and equipment expense 906,345 814,220 758,537
Deposit insurance expense 142,681 139,818 174,218
Data processing expense 570,840 466,186 328,213
Advertising 227,385 248,505 267,088
Ohio franchise taxes 213,231 215,209 192,511
Other operating expenses 1,067,828 1,132,402 1,000,983
Total noninterest expense 5,514,991 5,216,382 4,752,635
Income before income taxes 2,253,599 1,987,138 2,944,275
Provision for income taxes 745,979 658,594 971,697
---------------------------------------------
Net income $ 1,507,620 $ 1,328,544 $ 1,972,578
=============================================
Basic earnings per share $ .47 $ .42 $ .63
=============================================
Diluted earnings per share $ .44 $ .38 $ .57
=============================================
</TABLE>
See accompanying notes to consolidated financial statements.
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Total
Common Retained Treasury Stockholders'
Stock Earnings Stock Equity
------ -------- -------- -------------
<S> <C> <C> <C> <C>
Balance, October 1, 1996 $3,656,323 $10,876,921 $(535,395) $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 10,000 shares 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 300 shares of treasury
stock from exercise of options 1,228 984 2,212
------------------------------------------------------------
Balance, September 30, 1998 3,656,323 13,334,589 (491,098) 16,499,814
Dividends declared, $.16 per share (498,723) (498,723)
Net income for the year ended
September 30, 1999 1,507,620 1,507,620
Sale of 45,639 shares of treasury
stock from exercise of options 79,753 (75,429) 139,233 143,557
------------------------------------------------------------
Balance, September 30, 1999 $3,736,076 $14,268,057 $(351,865) $17,652,268
============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
FIRST FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,507,620 $ 1,328,544 $ 1,972,578
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and intangible amortization 581,030 537,603 472,846
Net amortization (accretion) on securities (240,918) (63,061) (63,517)
Provision for loan losses 181,853 680,757 222,268
Deferred taxes 112,204 (89,968) 159,930
Net change in mortgage loans originated for sale 54,000 85,075 (1,726)
FHLB stock dividend (256,100) (241,000) (177,200)
Changes in other assets and other liabilities (401,687) (119,616) (825,594)
------------------------------------------------
Net cash from operating activities 1,538,002 2,118,334 1,759,585
------------------------------------------------
Cash flows from investing activities
Purchase of FHLB stock - (251,100) (1,111,800)
Purchase of interest-bearing deposits
in other financial institutions (2,497,030) - -
Purchase of securities (20,203,768) (12,845,646) (8,980,101)
Proceeds from maturities of securities 22,831,358 8,319,785 6,265,325
Principal collected on mortgage-backed securities 287,283 181,353 223,337
Loans made to customers, net of principal repayments (9,849,851) 3,196,745 (14,068,321)
Proceeds from sales and payments received
on real estate owned and repossessed assets 407,623 417,991 110,701
Purchases of premises and equipment (211,530) (383,621) (1,420,669)
------------------------------------------------
Net cash from investing activities (9,235,915) (1,364,493) (18,981,528)
------------------------------------------------
Cash flows from financing activities
Net change in deposit accounts (2,568,566) 21,054,092 (3,437,046)
Net change in short-term FHLB advances - (29,809,012) 7,835,000
Proceeds from long-term FHLB advances 23,960,000 21,000,000 17,000,000
Repayment of long-term FHLB advances (26,387,528) (3,000,000) (3,000,000)
Net change in advance payments by
borrowers for taxes and insurance 115,863 (80,813) (164,458)
Cash dividends paid (517,335) (425,292) (369,264)
Proceeds from exercise of options 143,557 2,212 32,850
------------------------------------------------
Net cash from financing activities (5,254,009) 8,741,187 17,897,082
------------------------------------------------
Net change in cash and cash equivalents (12,951,922) 9,495,028 675,139
Cash and cash equivalents at beginning of year 18,332,155 8,837,127 8,161,988
------------------------------------------------
Cash and cash equivalents at end of year $ 5,380,233 $ 18,332,155 $ 8,837,127
================================================
Supplemental disclosures of cash flow information
Cash paid during the year:
Interest on deposits and borrowings $ 8,721,301 $ 9,053,106 $ 8,034,416
Income taxes 537,000 875,000 850,000
Noncash transactions:
Transfer of loan balances to real
estate owned and repossessed assets $ 341,587 $ 441,261 $ 108,541
</TABLE>
See accompanying notes to consolidated financial statements.
FIRST FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
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 53% of the Company's loan portfolio, 21% is made
up of automobile loans, 19% is made up of multi-family, nonresidential and
construction mortgage loans and the remaining 7% 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 the 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 currently 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.
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: 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Basic earnings per share 3,176,586 3,150,532 3,143,452
Diluted earnings per share 3,395,617 3,505,014 3,456,014
</TABLE>
Reclassifications: Certain reclassifications have been made to the 1998 and
1997 financial statements to be comparable to the 1999 presentation.
NOTE 2 - SECURITIES
The amortized cost and estimated fair value of securities held to maturity
are as follows at September 30:
<TABLE>
<CAPTION>
1 9 9 9
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Treasury
and agency securities $ 9,543,935 $ 71 $(13,006) $ 9,531,000
Other debt securities 161,877 123 162,000
----------------------------------------------------------
Total 9,705,812 194 (13,006) 9,693,000
Mortgage-backed securities 969,044 15,505 (4,549) 980,000
----------------------------------------------------------
$10,674,856 $15,699 $(17,555) $10,673,000
==========================================================
<CAPTION>
1 9 9 8
------------------------------------------------------
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
==========================================================
</TABLE>
The amortized cost and estimated fair value of debt securities held to
maturity at September 30, 1999, 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 $ 9,543,935 $ 9,531,000
Due after five through ten years 161,877 162,000
Mortgage-backed securities 969,044 980,000
----------------------------
$10,674,856 $10,673,000
============================
</TABLE>
No debt securities were sold for fiscal years ending September 30, 1999,
1998 or 1997.
At September 30, 1999 and 1998, $6,545,000 and $4,125,000 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>
1999 1998
---- ----
<S> <C> <C>
Real estate loans
One- to four-family residences $ 96,357,771 $ 96,856,082
Multifamily 8,693,472 8,734,898
Nonresidential 12,692,100 10,620,454
Construction loans 12,127,162 4,459,100
------------------------------
129,870,505 120,670,534
Less
Undisbursed portion of loans in process 6,495,020 1,485,402
Net deferred loan origination fees 149,100 414,950
------------------------------
Total real estate loans 123,226,305 118,770,182
------------------------------
Consumer and other loans
Automobile 38,752,043 35,861,551
Loans on deposit accounts 337,679 466,721
Home equity, education and other 15,212,195 14,092,671
Commercial loans 2,622,710 1,891,737
------------------------------
56,924,627 52,312,680
Net deferred loan origination costs 619,190 581,929
------------------------------
Total consumer and other loans 57,543,817 52,894,609
------------------------------
Total loans 180,770,202 171,664,791
Less allowance for loan losses 1,821,000 2,042,000
------------------------------
$178,949,202 $169,622,791
==============================
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $2,042,000 $1,816,000 $1,611,000
Provision charged to income 181,853 680,757 222,268
Net charge-offs (402,853) (454,757) (17,268)
------------------------------------------
Balance at end of year $1,821,000 $2,042,000 $1,816,000
==========================================
</TABLE>
Impaired loans are not material at September 30, 1999 and 1998 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, 1999, 1998 and 1997 were
approximately $22,393,000, $21,319,000 and $14,730,000. Mortgage servicing
rights at September 30, 1999 and 1998 and activity for capitalized mortgage
servicing rights for 1999, 1998 and 1997 are not material.
In the ordinary course of business, the Bank has granted loans to certain
officers, directors and their related interests. 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, 1998 $ 988,372
Additions 433,000
Repayments (20,342)
----------
Balance at September 30, 1999 $1,470,176
==========
</TABLE>
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment consists of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land and improvements $ 833,285 $ 776,939
Office buildings and leasehold improvements 6,513,047 6,513,048
Furniture, fixtures and equipment 2,903,712 2,804,818
----------------------------
Total 10,250,044 10,094,805
Accumulated depreciation 3,271,251 2,747,090
----------------------------
$ 6,978,793 $ 7,347,715
============================
</TABLE>
Depreciation expense was $580,452, $537,089 and $462,707 for the years ended
September 30, 1999, 1998 and 1997.
NOTE 5 - DEPOSITS
Deposits at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Noninterest-bearing checking $ 4,631,204 $ 4,446,098
Christmas club and other noninterest-bearing 349,040 396,118
------------------------------
Total noninterest-bearing 4,980,244 4,842,216
------------------------------
Money market checking 31,132,051 28,872,047
Passbook and statement savings 24,736,486 25,667,771
Negotiated-rate certificates of deposit 7,811,493 6,070,120
Fixed-rate certificates of deposit 76,459,822 82,236,508
------------------------------
Total interest-bearing 140,139,852 142,846,446
------------------------------
Total deposits $145,120,096 $147,688,662
==============================
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $15,837,000 and $16,454,000 at September 30,
1999 and 1998. Deposits greater than $100,000 are not insured by the
Federal Deposit Insurance Corporation (FDIC).
At September 30, 1999, scheduled maturities of certificates of deposit are
as follows for the year ending September 30:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
2000 $66,639,741
2001 14,343,114
2002 1,630,288
2003 1,085,761
2004 292,688
Thereafter 279,723
-----------
$84,271,315
===========
</TABLE>
NOTE 6 - BORROWED FUNDS
Borrowed funds consist solely of Federal Home Loan Bank (FHLB) advances.
Fixed-rate long-term advances (ranging from 5.62% to 6.90%) consist of the
following at September 30, 1999, by scheduled maturity:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
2000 $16,585,000
2001 11,000,000
2002 1,000,000
2003 6,000,000
2004 1,000,000
Thereafter 9,983,460
-----------
$45,568,460
===========
</TABLE>
At September 30, 1999, $3,790,000 of FHLB stock and $68,353,000 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,
1999, the Company could borrow up to $75,802,000.
NOTE 7 - FEDERAL INCOME TAXES
The provision for federal income taxes for the years ended September 30
consists of the following components:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current federal income taxes $633,775 $748,562 $811,767
Deferred federal income tax
expense (benefit) 112,204 (89,968) 159,930
------------------------------------
$745,979 $658,594 $971,697
====================================
</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>
1999 1998 1997
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Income tax computed
at the statutory rate $766,224 34.0% $675,627 34.0% $1,001,054 34.0%
Tax effect of
miscellaneous items (20,245) (0.9) (17,033) (1.1) (29,357) (1.2)
----------------------------------------------------------------------
$745,979 33.1% $658,594 32.9% $ 971,697 32.8%
======================================================================
</TABLE>
The following are sources of gross deferred tax assets and liabilities as of
September 30:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Items giving rise to deferred tax assets:
Allowance for loan losses in excess of tax reserve $ 323,225 $ 339,182 $ 262,342
Pension expense 36,697 16,620 17,462
Accrued vacation and sick pay 34,986 34,986 34,986
Gain on sale of real estate owned 16,954
Other 2,624 15,856 22,341
---------------------------------------
Gross deferred tax asset 397,532 406,644 354,085
---------------------------------------
Items giving rise to deferred tax liabilities:
Deferred loan fees (31,067) (95,903)
FHLB stock dividends (495,965) (408,891) (326,951)
Depreciation (188,835) (201,449) (221,360)
Amortization of certificate of deposit premium (9,573) (11,826) (14,078)
Other (182) (1,465)
---------------------------------------
Gross deferred tax liability (725,440) (622,348) (659,757)
---------------------------------------
Net deferred tax liability $(327,908) $(215,704) $(305,672)
=======================================
</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 was delayed until the
first taxable year beginning after December 31, 1997, provided the
institution met certain residential lending requirements. At September 30,
1999, the Bank had approximately $870,000 in bad debt reserves subject to
recapture for federal income tax purposes. The deferred tax liability
related to the recapture has been previously established.
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, 1999,
the Company had commitments to make loans and unfunded lines of credit (at
market rates) of approximately $8,018,000, excluding loans in process.
$6,606,000 were variable-rate and $1,412,000 were fixed-rate commitments.
The fixed-rate commitments had interest rates ranging from 7.74% to 18.00%.
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 form 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, 1999 and 1998, the Company was required to have $839,000
and $796,000 on deposit with the Federal Reserve Bank or as cash on hand.
These reserves do not earn interest.
NOTE 9 - CAPITAL STANDARDS
The Bank is subject to various regulatory capital requirements. Failure to
meet minimum capital requirements can initiate certain mandatory or
discretionary actions by regulators that could have a direct material effect
on the Bank's financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines using the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's requirements are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
At September 30, the Bank's actual capital levels and minimum required
levels (in thousands) were:
<TABLE>
<CAPTION>
Minimum
Requirement
Minimum To Be Well
Requirement Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1999
Total Capital (to risk
weighted assets) $16,990 12.95% $10,493 8.00% $13,116 10.00%
Tier I (Core) Capital
(to risk weighted assets) $15,634 11.92% $ 5,246 4.00% $ 7,869 6.00%
Tier I (Core) Capital
(to adjusted total assets) $15,634 7.45% $ 8,391 4.00% $10,488 5.00%
1998
Total Capital (to risk
weighted assets) $16,147 11.86% $10,890 8.00% $13,612 10.00%
Tier I (Core) Capital
(to risk weighted assets) $14,717 10.81% $ 5,445 4.00% $ 8,167 6.00%
Tier I (Core) Capital
(to adjusted total assets) $14,717 6.87% $ 8,563 4.00% $10,704 5.00%
</TABLE>
Retained earnings at September 30, 1999 and 1998 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, 1999 and 1998 was approximately $549,000. The Bank
at year-end 1999 and 1998 was categorized as well capitalized.
NOTE 10 - DIVIDENDS
Regulations of the Office of Thrift Supervision (the "OTS") limit the amount
of dividends and other capital distributions that may be paid by a savings
institution without prior approval of the OTS. The regulatory restriction
is based on a three-tired system with the greatest flexibility being
afforded to well-capitalized (Tier 1) institutions. The Bank is currently a
Tier 1 institution. Accordingly, the Bank can make, without prior
regulatory approval, distributions during a calendar year up to 100% of its
retained net income for the calendar year-to-date plus retained net income
for the previous two calendar years (less any dividends previously paid) as
long as the Bank would remain well-capitalized, as defined in the OTS prompt
corrective-action regulations, following the proposed distribution.
Accordingly, at September 30, 1999, approximately $1,881,000 of the Bank's
retained earnings was potentially available for distribution to the Company.
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 that encompasses future
salary levels and participants' years of service and cash surrender value of
insurance policies. The components of pension expense and related actuarial
assumptions were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost $ 73,599 $ 72,610 $ 62,396
Interest cost 91,579 92,639 80,369
Return on plan assets 18,391 (95,081) (86,240)
Net amortization and deferral (69,333) 53,056 49,964
------------------------------------
Net pension cost $114,236 $123,224 $106,489
====================================
Discount rate on benefit obligation 7.72% 6.74% 7.40%
Rate of compensation increase 4.00 4.00 4.00
Expected long-term rate of return on
assets 5.00 5.00 5.00
</TABLE>
Information about the pension plan was as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Change in benefit obligation
Beginning benefit obligation $1,368,294 $1,251,878
Service cost 73,599 72,610
Interest cost 91,579 92,639
Actuarial (gain) loss (471,186) 30,406
Benefits paid (19,559) (79,239)
--------------------------
Ending benefit obligation 1,042,727 1,368,294
Change in plan assets, at fair value
Beginning plan assets 1,148,857 962,230
Actual return (18,391) 95,091
Employer contributions 61,862 170,785
Benefits paid (19,559) (79,239)
--------------------------
Ending plan assets 1,172,769 1,148,857
Funded status 130,042 (219,437)
Unrecognized net actuarial gain (loss) (130,557) 270,028
Unrecognized net transition liability 11,239 12,507
--------------------------
Prepaid benefit cost $ 10,724 $ 63,098
==========================
</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, three Incentive Stock Option Plans
for Officers and Key Employees and two Stock Option Plans for Nonemployee
Directors, that were approved by the Board of Directors and were ratified by
the Company's shareholders at the annual meetings in February 1993, February
1995 and February 1997. The number of options authorized under the plans
for granting to officers and key employees is 464,540. In addition 287,624
options are authorized under the plans for granting to nonemployee
directors. Options expire 10 years after the date of grant and are issued
at market value. For the plans ratified in February 1993, eligible officers
and directors are able to exercise options awarded to them one year after
the grant date. For the other plans, eligible officers and directors are
able to exercise options awarded to them immediately after the grant date.
Options outstanding and exercisable under the plans at year 1999 are as
follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------- -----------------
Weighted Average Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Number Life (Months) Number Price
- --------------- ------ ---------------- ------ --------
<S> <C> <C> <C> <C>
$ 1.25 to $ 2.50 178,050 33.35 178,050 1.25
$ 2.51 to $ 5.00 194,400 65.13 194,400 3.37
$ 5.01 to $ 7.50 12,591 80.53 12,591 6.36
$ 7.51 to $10.00 73,180 86.09 73,180 9.92
$10.01 to $12.50 2,325 109.18 - -
-------------------------------------------
460,546 56.82 458,221 3.67
</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 1999, 1998 and 1997 respectively: risk-free
interest rates of 5.21%, 6.24% and 5.70%; dividend yields of 1.35%, 1.44%
and 2.44%; 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income as reported $1,507,620 $1,328,544 $1,972,578
Pro forma net income 1,407,641 1,229,000 1,938,000
Earnings per share as reported
Basic $ .47 $ .42 $ .63
Diluted .44 .38 .57
Pro forma earnings per share
Basic .44 .39 .61
Diluted .41 .35 .56
</TABLE>
A summary of the Company's stock option activity and related information for
stock options follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- -------------------- --------------------
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of year 504,660 $ 3.50 469,560 $2.97 471,960 $2.90
Granted 2,740 11.88 40,100 9.96 9,200 7.38
Exercised (45,639) 1.63 (300) 7.38 (10,000) 3.37
Forfeited (1,215) 9.32 (4,700) 5.42 (1,600) 7.38
------- ------- -------
Outstanding end of year 460,546 3.72 504,660 3.50 469,560 2.97
Exercisable end of year 458,221 3.67 500,760 2.52 461,960 1.85
Weighted average fair value
of options granted during year 3.34 3.63 3.40
</TABLE>
NOTE 13 - 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>
1999 1998
-------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amounts Fair Value Amounts Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 5,380,233 $ 5,380,000 $ 18,332,155 $ 18,332,000
Interest-bearing deposits 2,497,030 2,497,000 - -
Securities held to maturity 9,705,812 9,693,000 12,092,484 12,105,000
Mortgage-backed securities 969,044 980,000 1,256,327 1,252,000
FHLB stock 3,790,100 3,790,000 3,534,000 3,534,000
Loans, net 178,949,202 180,569,000 169,622,791 171,102,000
Accrued interest receivable 1,112,407 1,112,000 1,144,313 1,144,000
Financial liabilities
Demand and savings deposits (60,848,781) (60,849,000) (59,382,034) (59,382,000)
Certificates of deposit (84,271,315) (84,538,000) (88,306,628) (89,022,000)
Borrowed funds (45,568,460) (45,496,000) (47,995,988) (49,005,000)
Advances from borrowers for
taxes and insurance (411,326) (411,000) (295,463) (295,000)
Accrued interest payable (456,791) (457,000) (516,076) (516,000)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of September 30, 1999 and 1998. The estimated fair
values for cash and cash equivalents, interest-bearing deposits, 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, 1999 and 1998, 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, 1999 and 1998, 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, 1999 or 1998, 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, 1999 and 1998 should not necessarily be considered to apply at
subsequent dates.
NOTE 14 - PARENT COMPANY
Condensed financial information of First Federal Bancorp, Inc. as of
September 30 is as follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Deposits with subsidiary $ 1,132,338 $ 1,501,025
Commercial loans 792,425 259,215
Other assets 99,343 21,702
Investment in subsidiary, at equity in
underlying value of net assets 15,781,905 14,861,986
----------------------------
Total assets $17,806,011 $16,643,928
============================
LIABILITIES
Other liabilities $ 153,743 $ 144,114
STOCKHOLDERS' EQUITY 17,652,268 16,499,814
----------------------------
Total liabilities and stockholders'
equity $17,806,011 $16,643,928
============================
</TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend income $ 600,000 $ 600,000 $ 550,000
Equity in undistributed
income of subsidiary 919,919 737,419 1,444,617
Interest income 112,531 108,114 90,729
------------------------------------------
Total income 1,632,450 1,445,533 2,085,346
Other expenses 124,830 116,989 112,768
------------------------------------------
Net income $1,507,620 $1,328,544 $1,972,578
==========================================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income $1,507,620 $1,328,544 $1,972,578
Amortization/(accretion)
of securities - 103 (694)
Equity in undistributed
income of subsidiary (919,919) (737,419) (1,444,617)
Net change in other assets
and liabilities (309,273) 10,737 (6,625)
------------------------------------------
Net cash provided by
operating activities 278,428 601,965 520,642
------------------------------------------
Investing activities
Proceeds from maturities of
securities - 250,000 -
Loans made to customers, net
of principal repayments 533,210 602,517 (598,933)
------------------------------------------
Net cash provided/(used)
by investing activities 533,210 852,517 (598,933)
------------------------------------------
Financing activities
Proceeds from exercise of
options 74,384 2,212 32,850
Dividends paid (517,335) (425,292) (369,264)
------------------------------------------
Net cash used by
financing activities (442,951) (423,080) (336,414)
------------------------------------------
Net change in cash and
cash equivalents 368,687 1,031,402 (414,705)
Cash and cash equivalents
at beginning of year 1,501,025 469,623 884,328
------------------------------------------
Cash and cash equivalents at
end of year $1,132,338 $1,501,025 $ 469,623
==========================================
</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
2000 Annual Meeting of Shareholders of First Federal Bancorp, Inc. (the
"Proxy Statement"), under the captions "Proposal One: Election of
Directors" and "Voting Securities and Ownership of Certain Beneficial Owners
and Management" is incorporated herein by reference.
The following table presents certain information in respect of the
executive officers of Bancorp:
<TABLE>
<CAPTION>
Name(1) Age(2) Position
------- ------ --------
<S> <C> <C>
Ward D. Coffman, III 46 Secretary
Connie Ayres LaPlante 43 Treasurer
John C. Matesich, III 56 Chairman of the Board
J. William Plummer 54 President
</TABLE>
The following table presents certain information in respect of the
executive officers of First Federal:
<TABLE>
<CAPTION>
Name(1) Age(2) Position
------- ------ --------
<S> <C> <C>
Connie Ayres LaPlante 43 Treasurer and Senior Vice President
John C. Matesich, III 56 Chairman of the Board
J. William Plummer 54 President and Chief Executive
Officer
Larry W. Snode 50 Secretary and
Senior Vice President - Operations
Thomas N. Sulens 48 Senior Vice President - Lending
<FN>
____________________________
<F1> There are no family relationships among the executive officers of
Bancorp or First Federal.
<F2> As of December 15, 1999.
</FN>
</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 15, 1999 Date December 15, 1999
-------------------------------- -------------------------------
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 15, 1999 Date December 15, 1999
-------------------------------- -------------------------------
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 15, 1999 Date December 15, 1999
-------------------------------- -------------------------------
By /s/ Patrick L. Hennessey
------------------------------
Patrick L. Hennessey
Director
Date December 15, 1999
--------------------------------
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Articles of Incorporation of The Articles of Incorporation
First Federal Bancorp, Inc. of First Federal 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 The Amendment to the
Incorporation of First Federal Articles of Incorporation
Bancorp, Inc. of Bancorp, filed as Exhibit
4a(1) to the 1994 S-8, is
incorporated herein by
reference.
3.3 Code of Regulations of First The Code of Regulations of
Federal Bancorp, Inc. Bancorp 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.
3.4 Amendment to the Code of The Amendment to the Code
Regulations of First Federal of Regulations of Bancorp
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. The First Federal Bancorp,
1992 Stock Option Plan for Inc. 1992 Stock Option Plan
Officers and Key Employees for Officers and Key
Employees, included as
Exhibit 10.1 to Bancorp's
Form 10-KSB filed with the
SEC on December 28, 1998, is
incorporated herein by
reference.
10.2 First Federal Bancorp, Inc. The First Federal Bancorp,
1992 Stock Option Plan for Inc. 1992 Stock Option Plan
Non-Employee Directors for Non-Employee Directors
included as Exhibit 10.2 to
Bancorp's Form 10-KSB filed
with the SEC on December 28,
1998, is incorporated herein
by reference.
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. The First Federal Bancorp,
1994 Stock Option Plan for Inc. 1994 Stock Option Plan
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. The First Federal Bancorp,
1994 Stock Option Plan for Inc. 1994 Stock Option Plan
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. The First Federal Bancorp,
1997 Performance Stock Option Inc. 1997 Performance Stock
Plan for Senior Executive Option Plan for Senior
Officers and Outside Directors Executive Officers and
Outside 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 2000 Incorporated by reference to
Annual Meeting of Shareholders the Definitive Proxy
of First Federal Bancorp, Inc. Statement for the 2000 Annual
Meeting of Shareholders, to
be filed.
99.2 Safe Harbor Under the Private
Securities Litigation Reform
Act of 1995
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this
"AGREEMENT"), entered into this 1st day of October, 1999, 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, 2002 (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 $145,848.00 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 $145,848.00, 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.
(1) 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 Sign] 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 sign] 574.4(a), or
any person or entity obtains "rebuttable control" within the meaning
of 12 C.F.R. [section sign] 574.4(b) and has not rebutted control in
accordance with 12 C.F.R. [section sign] 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 by /s/ J. William Plummer
- ------------------- ----------------------
J. William Plummer
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this
"AGREEMENT"), entered into this 1st day of October, 1999, 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, 2002 (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 $97,333.00 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 $97,333.00, 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 Sign] 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 sign] 574.4(a), or
any person or entity obtains "rebuttable control" within the meaning
of 12 C.F.R. [section sign] 574.4(b) and has not rebutted control in
accordance with 12 C.F.R. [section sign] 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 by /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
Firstfedco Agency, Inc.
(Subsidiary of 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 15,
1999 on the consolidated financial statements of First Federal Bancorp,
Inc., as of September 30, 1999 and 1998 and for each of the three years in
the period ended September 30, 1999 which report and financial statements
are contained in the Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1999, 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 29, 1999
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
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-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 5,355
<INT-BEARING-DEPOSITS> 2,497
<FED-FUNDS-SOLD> 25
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 10,675
<INVESTMENTS-MARKET> 10,673
<LOANS> 178,949
<ALLOWANCE> 1,821
<TOTAL-ASSETS> 209,860
<DEPOSITS> 145,120
<SHORT-TERM> 16,585
<LIABILITIES-OTHER> 1,519
<LONG-TERM> 28,983
0
0
<COMMON> 3,736
<OTHER-SE> 13,916
<TOTAL-LIABILITIES-AND-EQUITY> 209,860
<INTEREST-LOAN> 14,074
<INTEREST-INVEST> 950
<INTEREST-OTHER> 359
<INTEREST-TOTAL> 15,383
<INTEREST-DEPOSIT> 5,845
<INTEREST-EXPENSE> 8,662
<INTEREST-INCOME-NET> 6,720
<LOAN-LOSSES> 182
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,515
<INCOME-PRETAX> 2,254
<INCOME-PRE-EXTRAORDINARY> 1,508
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,508
<EPS-BASIC> .47
<EPS-DILUTED> .44
<YIELD-ACTUAL> 3.47
<LOANS-NON> 294
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,042
<CHARGE-OFFS> 403
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,821
<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 1999 is
forward-looking. In some cases, information regarding certain important
factors that could cause actual results of operations or outcomes of other
events to differ materially from any such forward-looking statement appear
together with such statement. In addition, forward-looking statements are
subject to other risks and uncertainties affecting the financial
institutions industry, including, but not limited to, the following:
Interest Rate Risk
- ------------------
Bancorp's operating results are dependent to a significant degree on
its net interest income, which is the difference between interest income
from loans, investments and other interest-earning assets and interest
expense on deposits, borrowings and other interest-bearing liabilities. The
interest income and interest expense of Bancorp change as the interest rates
on interest-earning assets and interest-bearing liabilities change.
Interest rates may change because of general economic conditions, the
policies of various regulatory authorities and other factors beyond
Bancorp's control. In a rising interest rate environment, loans tend to
prepay slowly and new loans at higher rates increase slowly, while interest
paid on deposits increases rapidly because the terms to maturity of deposits
tend to be shorter than the terms to maturity or prepayment of loans. Such
differences in the adjustment of interest rates on assets and liabilities
may negatively affect Bancorp's income.
Possible Inadequacy of the Allowance for Loan Losses
- ----------------------------------------------------
Bancorp maintains an allowance for loan losses based upon a number of
relevant factors, including, but not limited to, trends in the level of
nonperforming assets and classified loans, current and anticipated economic
conditions in the primary lending area, past loss experience, possible
losses arising from specific problem loans and changes in the composition of
the loan portfolio. While the Board of Directors of Bancorp believes that
it uses the best information available to determine the allowance for loan
losses, unforeseen market conditions could result in material adjustments,
and net earnings could be significantly adversely affected if circumstances
differ substantially from the assumptions used in making the final
determination.
Loans not secured by one- to four-family residential real estate are
generally considered to involve greater risk of loss than loans secured by
one- to four-family residential real estate due, in part, to the effects of
general economic conditions. The repayment of multifamily residential and
nonresidential real estate loans generally depends upon the cash flow from
the operation of the property, which may be negatively affected by national
and local economic conditions. Construction loans may also be negatively
affected by such economic conditions, particularly loans made to developers
who do not have a buyer for a property before the loan is made. The risk of
default on consumer loans increases during periods of recession, high
unemployment and other adverse economic conditions. When consumers have
trouble paying their bills, they are more likely to pay mortgage loans than
consumer loans. In addition, the collateral securing such loans, if any,
may decrease in value more rapidly than the outstanding balance of the loan.
Competition
- -----------
First Federal Savings Bank of Eastern Ohio ("First Federal") competes
for deposits with other savings associations, commercial banks and credit
unions and issuers of commercial paper and other securities, such as shares
in money market mutual funds. The primary factors in competing for deposits
are interest rates and convenience of office location. In making loans,
First Federal competes with other savings associations, commercial banks,
consumer finance companies, credit unions, leasing companies, mortgage
companies and other lenders. Competition is affected by, among other
things, the general availability of lendable funds, general and local
economic conditions, current interest rate levels and other factors that are
not readily predictable. The size of financial institutions competing with
First Federal is likely to increase as a result of changes in statutes and
regulations eliminating various restrictions on interstate and inter-
industry branching and acquisitions. Such increased competition may have an
adverse effect upon Bancorp.
Legislation and Regulation that may Adversely Affect Bancorp's Earnings
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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.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act makes sweeping changes in the financial
services in which various types of financial institutions may engage. The
Glass-Steagall Act, which had generally prevented banks from affiliating
with securities and insurance firms, was repealed. A new "financial holding
company," which owns only well capitalized and well managed depository
institutions, will be permitted to engage in a variety of financial
activities, including insurance and securities underwriting and agency
activities.
The GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999, including Bancorp, to continue to engage in all
activities that they were permitted to engage in prior to the enactment of
the Act. Such activities are essentially unlimited, provided that the
thrift subsidiary remains a qualified thrift lender. Any thrift holding
company formed after May 4, 1999, will be subject to the same restrictions
as a multiple thrift holding company. In addition, a unitary thrift holding
company in existence on May 4, 1999, may be sold only to a financial holding
company engaged in activities permissible for multiple savings and loan
holding companies.
The GLB Act is not expected to have a material effect on the
activities in which Bancorp and First Federal currently engage, except to
the extent that competition with other types of financial institutions may
increase as they engage in activities not permitted prior to enactment of
the GLB Act.
