FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-20380
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FIRST FEDERAL BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1341110
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
505 Market Street
Zanesville, Ohio 43701
--------------------- ----------
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (740) 453-0606
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
----- -----
As of April 30, 1999, the latest practicable date, 3,188,171 shares
of the registrant's common stock, no par value, were issued and
outstanding.
Page 1 of 13 Pages
FIRST FEDERAL BANCORP, INC.
INDEX
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PART I FINANCIAL INFORMATION PAGE
----
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION 12
SIGNATURES 13
PART I
------
FINANCIAL INFORMATION
---------------------
First Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
At March 31 At September 30
1999 1998
----------- ---------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 6,335,198 $ 4,957,155
Overnight deposits 11,825,000 13,375,000
------------------------------
Cash and cash equivalents $ 18,160,198 $ 18,332,155
Investment securities held to maturity (Fair value - $16,251,000 in
3/99 and $12,105,000 in 9/98) 16,310,139 12,092,484
Mortgage-backed securities held to maturity (Fair value - $1,149,000
in 3/99 and $1,252,000 in 9/98) 1,138,372 1,256,327
Loans receivable, net 166,498,417 169,622,791
Premises and equipment, net 7,137,116 7,347,715
Accrued interest receivable and other assets 5,261,939 4,850,905
------------------------------
Total Assets $214,506,181 $213,502,377
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $148,850,331 $147,688,662
Borrowed funds 46,989,817 47,995,988
Advances from borrowers for taxes and insurance 388,356 295,463
Accrued expenses and other liabilities 1,180,755 1,022,450
------------------------------
Total Liabilities $197,409,259 $197,002,563
------------------------------
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 $ 3,656,323 $ 3,656,323
Retained earnings 13,684,711 13,334,589
Treasury shares, 115,229 shares in 3/99 and 152,868 in 9/98 (244,112) (491,098)
------------------------------
Total Stockholders' Equity $ 17,096,922 $ 16,499,814
------------------------------
Total Liabilities and Stockholders' Equity $214,506,181 $213,502,377
==============================
</TABLE>
See Notes to the Consolidated Financial Statements.
First Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,418,922 $3,828,236 $6,932,575 $7,623,805
Interest on mortgage-backed securities 20,622 36,671 43,425 62,696
Interest on investment securities 361,902 103,975 518,545 202,662
Interest on other interest earning investments 177,746 23,405 383,547 56,496
-------------------------------------------------------
Total Interest Income 3,979,192 3,992,287 7,878,092 7,945,659
-------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,534,375 1,315,182 3,111,783 2,650,422
Interest on borrowed money 728,342 974,875 1,481,608 1,920,213
-------------------------------------------------------
Total Interest Expense 2,262,717 2,290,057 4,593,391 4,570,635
-------------------------------------------------------
Net Interest Income 1,716,475 1,702,230 3,284,701 3,375,024
Provision for Loan Losses 24,623 179,102 (46,886) 408,058
-------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 1,691,852 1,523,128 3,331,587 2,966,966
-------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 77,808 76,095 157,384 157,886
Gain on sale of loans 16,200 38,772 43,122 63,234
Dividends on FHLB stock 62,073 59,719 124,426 116,109
Other operating income 145,126 121,797 282,153 237,332
-------------------------------------------------------
Total Noninterest Income 301,207 296,383 607,085 574,561
-------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 635,740 574,239 1,207,236 1,026,968
Occupancy and equipment expense 223,396 211,060 449,799 407,062
Deposit insurance expense 36,047 34,825 71,819 69,112
Data processing expense 140,326 126,271 270,514 209,541
Advertising 54,743 55,182 106,999 119,167
Ohio franchise taxes 53,364 55,294 107,698 104,152
Other operating expenses 256,859 241,955 547,732 520,770
-------------------------------------------------------
Total Noninterest Expenses 1,400,475 1,298,826 2,761,797 2,456,772
-------------------------------------------------------
Income Before Income Taxes 592,584 520,685 1,176,875 1,084,755
Provision for Income Taxes 187,210 175,797 390,539 367,313
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Net Income $ 405,374 $ 344,888 $ 786,336 $ 717,442
=======================================================
EARNINGS PER SHARE
Basic $ .130 $ .110 $ .250 $ .230
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Diluted $ .120 $ .100 $ .230 $ .205
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WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
Basic 3,188,171 3,150,232 3,169,140 3,150,232
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Diluted 3,459,300 3,506,870 3,458,643 3,491,036
-------------------------------------------------------
DIVIDENDS DECLARED PER SHARE $ .040 $ .035 $ .075 $ .070
-------------------------------------------------------
</TABLE>
First Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
March 31
----------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 786,336 $ 717,442
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses (46,886) 408,058
Depreciation 288,458 263,456
Federal Home Loan Bank stock dividends (124,300) (116,000)
Amortization of net premiums (discounts) on investment securities (164,495) (12,648)
Mortgage loans originated for sale (4,781,809) (4,937,781)
Proceeds from sale of mortgage loans 4,685,559 5,012,256
Change in other assets and other liabilities (128,433) (616,436)
----------------------------
Net Cash Provided by Operating Activities 514,430 718,347
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 12,101,475 4,260,714
Purchases of investment securities/FHLB stock (16,154,635) (4,247,497)
Loans originated, net of principal repayments 3,161,010 (6,591,392)
Principal collected on mortgage-backed securities 117,955 77,370
Sale of real estate owned 106,500 128,290
Purchases of premises and equipment (77,859) (212,776)
----------------------------
Net Cash Used for Investing Activities (745,554) (6,585,291)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposit accounts 1,161,669 7,274,918
Net change in advance payments by borrowers for taxes and insurance 92,893 (10)
Net change in borrowed funds with original maturities of less than three months (1,006,171) 560,000
Dividends paid (253,548) (204,765)
Proceeds from exercise of options 64,324 0
----------------------------
Net Cash Provided by Financing Activities 59,167 7,630,143
----------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (171,957) 1,763,199
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,332,155 8,837,127
----------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $18,160,198 $10,600,326
============================
</TABLE>
FIRST FEDERAL BANCORP, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
---------------------
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-QSB. The
Form 10-QSB does not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements.
Only material changes in financial condition and results of operations are
discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations.
In the opinion of management, the condensed Consolidated Financial
Statements contain all adjustments necessary to present fairly the
financial condition of First Federal Bancorp, Inc. ("Bancorp"), as of March
31, 1999, and September 30, 1998, and the results of its operations for the
three and six months ended March 31, 1999, and 1998, and its cash flow for
the six months ended March, 1999 and 1998. The results of operations for
the interim periods reported herein are not necessarily indicative of
results of operations to be expected for the entire year.
2. Commitments
-----------
Outstanding commitments to originate mortgage loans and to sell mortgage
loans were $5,513,320 and $149,950 respectively, at March 31, 1999, and
$1,846,409 and $53,700 respectively at September 30, 1998.
3. Earnings and Dividends Per Common Share
---------------------------------------
Basic earnings per share is based on net income divided by the weighted
average number of shares outstanding during the period. Diluted earnings
per share shows the dilutive effect of additional common shares issuable
under stock options. 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.
4. Allowance for Losses on Loans
-----------------------------
Because some loans may not be repaid in full, an allowance for loan losses
is recorded. Increases to the allowance are recorded by a provision for
loan losses charged to expense. Estimating the risk of loss and the amount
of loss on any loan is necessarily subjective. Accordingly, the allowance
is maintained by management at a level considered adequate to cover
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 are evaluated individually for impairment. When analysis of
borrower operating results and financial condition indicates that
underlying cash flows of the borrower's business are not adequate to meet
its debt service requirements, the loan is evaluated for impairment. Loans
are generally moved to nonaccrual status when 90 days or more past due.
These loans are often also considered impaired. Impaired loans, or
portions thereof, are charged-off when deemed uncollectible. The nature of
disclosures for impaired loans is considered generally comparable to prior
nonaccrual and renegotiated loans and nonperforming and past-due asset
disclosures. The Savings Bank had no loans meeting the definition of
impaired during the quarter ended March 31, 1999, and the year ended
September 30, 1998.
5. Interest Income on Loans
------------------------
Interest on loans is accrued over the term of the loans based upon the
principal outstanding. Management reviews loans delinquent 90 days or more
to determine if the interest accrual should be discontinued. The carrying
value of impaired loans reflects cash payments, revised estimates of future
cash flows, and increases in the present value of expected cash flows due
to the passage of time. Cash payments representing interest income are
reported as such and other cash payments are reported as reductions in
carrying value. Increases or decreases in carrying value due to changes in
estimates of future payments or the passage of time are reported as
reductions or increases in bad debt expense.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- -------
First Federal Bancorp, Inc. ("Bancorp"), is a savings and loan holding
company that wholly owns First Federal Savings Bank of Eastern Ohio (the
"Savings Bank"). The Savings Bank is engaged in the savings and loan
business primarily in Central and Eastern Ohio. The Savings Bank is a
member of the Federal Home Loan Bank ("FHLB") of Cincinnati, and the
deposit accounts in the Savings Bank are insured up to the applicable
limits by the Federal Deposit Insurance Corporation in the Savings
Association Insurance Fund ("SAIF").
Note Regarding Forward-Looking Statements
- -----------------------------------------
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, First Federal's operations and
First Federal's actual results could differ significantly from those
discussed in the forward-looking statements. Some of the factors that
could cause or contribute to such differences are discussed herein but also
include changes in the economy and interest rates in the nation and First
Federal's market area generally. See Exhibit 99.1 hereto, which is
incorporated herein by reference.
Some of the forward-looking statements included herein are the statements
regarding the following:
1. Management's determination of the amount of loan loss allowance;
2. Management's belief that deposits will increase slightly during
fiscal year 1999;
3. Management's anticipation that no additional advances from the FHLB
will be necessary to fund loan originations;
4. Management's anticipation that some adjustable-rate loans will
reprice higher in fiscal year 1999 and the remainder will not reprice
substantially lower if interest rates remain relatively stable; and
5. Legislative changes with respect to the federal thrift charter.
Changes in Financial Condition from September 30, 1998 to March 31, 1999
- ------------------------------------------------------------------------
Total consolidated assets of Bancorp increased by $1.0 million, or .47%,
from $213.5 million at September 30, 1998, to $214.5 million at March 31,
1999. The increase is due primarily to an increase of $4.2 million in
investments held to maturity, offset by a decrease in loans receivable of
$3.1 million.
Total liquidity (consisting of cash and amounts due from depository
institutions, interest-bearing deposits in other banks, and investment
securities) was $34.5 million at March 31, 1999, which is an increase of
$4.0 million from September 30, 1998. The regulatory liquidity of the
Savings Bank was 17.18% at March 31, 1999 and 14.13% at September 30, 1998,
which was in excess of the minimum regulatory requirement of 4%. Funds are
available through FHLB advances to meet the Savings Bank's liquidity
requirement if necessary.
The loans receivable balance decreased $3.1 million for the six-month
period as the current trend of refinancing of mortgage loans resulted in a
decrease of outstanding loans.
As of March 31, 1999, the Savings Bank had borrowed funds from the FHLB in
the amount of $47.0 million at a weighted average rate of 6.35%. FHLB
advances decreased $1.0 million from $48.0 million at September 30, 1998.
Deposits increased by $1.2 million, or .79%, from $147.7 million at
September 30, 1998, to $148.9 million at March 31, 1999. Management
believes that the Savings Bank will experience a slight increase in
deposits during the current fiscal year. As the result of the decrease in
the SAIF premium cost, the Savings Bank can afford to pay depositors a
slightly higher rate while managing the cost of funds. FHLB advances have
increased in cost compared to deposits of a similar term. The Savings Bank
therefore plans to become more aggressive in promoting deposit products.
No assurance can be provided, however, that deposits will grow. Deposit
levels are affected by national, as well as local, interest rates and other
national and local economic circumstances.
The Savings Bank is subject to regulatory capital requirements established
by the Office of Thrift Supervision ("OTS"). The Savings Bank's capital
ratios were as follows at March 31, 1999.
<TABLE>
<CAPTION>
Amount Percent of
(In Thousands) Assets
-------------- ----------
<S> <C> <C>
Actual Tangible Capital $15,212 7.10%
Required Tangible Capital 3,212 1.50%
-----------------------
Excess Tangible Capital $12,000 5.60%
Actual Core Capital $15,212 7.10%
Required Core Capital 8,566 4.00%
-----------------------
Excess Core Capital $ 6,646 3.10%
Actual Risk Based Capital $16,500 12.17%
Required Risk Based Capital 10,850 8.00%
-----------------------
Excess Risk Based Capital $ 5,650 4.17%
</TABLE>
Management is not aware of any proposed regulations or recommendations by
the OTS that, if implemented, would have a material effect upon the Savings
Bank's capital.
In August 1996, Congress passed legislation repealing the reserve method of
accounting used by many thrifts to calculate their bad debt reserve for
federal income tax purposes and requiring any bad debt reserves taken after
1987, using the percentage of taxable income method, be included in future
taxable income of the association over a six-year period. A two-year delay
is permitted for institutions meeting a residential mortgage loan
origination test. At September 30, 1998, First Federal had approximately
$1.6 million in bad debt reserves subject to recapture for federal income
tax purposes. The deferred tax liability related to the recapture was
established in prior years, so First Federal's net income will not be
negatively affected by this legislation.
Year 2000 Considerations
- ------------------------
As with all financial institutions, First Federal's operations depend
almost entirely on computer systems. First Federal is addressing the
potential problems associated with the possibility that the computers that
control or operate First Federal's operating systems, facilities and
infrastructure may not be programmed to read four-digit date codes and,
upon arrival of the year 2000, may recognize the two-digit code "00" as the
year 1900, causing systems to fail to function or to generate erroneous
data. An overall plan, developed by the Year 2000 Committee, was approved
by the Board of Directors and put into effect in 1998. This plan is 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
will bring 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 is working with the vendors to assess their Y2K
readiness. Based upon an initial assessment, the Board of Directors
believes that with planned modifications to existing software and hardware
and planned conversions to new software and hardware, the third-party
vendors are taking the appropriate steps to ensure that critical systems
will function properly. The planned modifications and conversions should
be completed and tested by June 30, 1999.
If the modifications and conversions by third-party vendors and First
Federal are not completed on a timely basis or if they fail to function
properly, the operations and financial condition of First Federal could be
materially adversely affected. If testing reveals that any system critical
to continued business operation should fail, all internal and external
resources available will be directed toward correcting these systems.
First Federal's contingency plan, which continues to be developed, allows
for continued operations in the event of system failure. Current testing
of mission-critical systems started in the fourth quarter of 1998 and is
expected to continue through the second quarter of 1999. Testing includes
all core systems required for continued Bank operation and includes
interfaces with critical third-party vendors. At this time, testing has
not revealed any deficiencies in the remediated systems and all testing is
progressing as planned. 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 1.04% 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 also 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 Operating Results for the Three- and Six-Month
- ------------------------------------------------------------
Periods Ended March 31, 1999, and 1998
- --------------------------------------
Net interest income before provision for loan losses increased $14,245 for
the three-month comparative periods and decreased $90,323 for the
comparative six-month periods. Total interest decreased by $13,095 for the
three-month period and $67,567 for the six-month period ended March 31,
1999, compared to the same periods in 1998. The decrease is primarily due
to a decrease in the interest rate earned on mortgage loans and a decrease
in loans receivable as the result of the refinancing trend in the market.
The majority of the loans in the Savings Bank's portfolio are adjustable-
rate mortgage loans whose interest rates fluctuate with market interest
rates.
If interest rates remain relatively stable during fiscal year 1999, the
adjustable-rate mortgage loan portfolio will reprice at slightly higher
rates, as most loans originated during fiscal year 1998 were not initially
priced at the fully indexed interest rate. These loans will be repricing
upward at their first adjustment in fiscal year 1999 while the balance of
the adjustable-rate mortgage loan portfolio will not reprice substantially
lower during fiscal year 1999. No assurance can be provided, however, that
interest rates will remain stable. Interest rates are affected by general,
local and national economic conditions, the policies of various regulatory
authorities and other factors beyond the control of First Federal.
Interest expense decreased by $27,340 for the comparative three-month
period, as the result of decreases in interest rates of savings deposits at
First Federal and increased $22,756 for the comparative six-month period
ended March 31, 1999, as the result of increased savings balances at First
Federal.
Nonperforming and Delinquent Loans and Allowance for Loan Losses
- ----------------------------------------------------------------
Total nonaccrual loans and accruing loans that are 90 days past due were
$408,000 at March 31, 1999, which represents .25% of total loans. This was
a decrease of $70,000 from March 31, 1998.
There were no loans that are not currently classified as nonaccrual, 90
days past due or restructured but which may be so classified in the near
future because management has concerns as to the ability of the borrowers
to comply with repayment terms.
The Savings Bank maintains an allowance for losses on loans. The allowance
for losses on loans was $1,798,000 at March 31, 1999, compared to
$2,148,000 at March 31, 1998. During the six-month periods ended March 31,
1999, and March 31, 1998, the Savings Bank recorded no recoveries and
charge-offs of $197,000 and $76,000 respectively. Charge-offs increased
$121,000 due to the losses taken on the sale of repossessed cars. A
percentage of the outstanding loan balances is added or deducted from the
provision for loan losses as the loan portfolio increases and decreases.
During the six-month period ended March 31, 1999, the loan portfolio
decreased $3.1 million, which caused the provision for loan losses for the
period to decrease. The provisions for loan losses during the six-month
periods ended March 31, 1999, and 1998, were $(47,000) and $408,000
respectively.
Noninterest Income and Expense
- ------------------------------
Total noninterest income increased $5,000 for the three-month period and
$33,000 for the six-month period ended March 31, 1999, compared to the same
period in 1998. Dividends on FHLB stock increased $2,400 for the three-
month period and $8,300 for the six-month period ended March 31, 1999 due
an increase in FHLB stock held. Other income increased $23,000 for the
comparative three-month periods and $45,000 for the comparative six-month
periods due to a $17,000 increase in loan late charges and other loan fees
and an increase of $20,000 on ATM fees due to surcharging noncustomer use
of ATMs for the six-month periods.
Total noninterest expenses increased $102,000 for the three-month period
and $305,000 for the six-month period ended March 31, 1999, compared to the
same periods in 1998. Salaries and benefits increased $180,000 as a result
of an increase of $61,000 in retirement plan accrual costs for the six-
month period ended March 31, 1999, and an increase in salaries of $69,000.
Salaries increased due to the increase in staff for the comparative six-
month periods. Occupancy expense increased $43,000 for the six-month
period ended March 31, 1999; $25,000 of the increase was due to increased
depreciation on furniture and fixtures, and $17,000 of the increase was due
to increased costs for routine repairs and maintenance at branch offices.
Data processing costs increased $61,000 due to the costs associated with
the utilization of a networking system and the new check-imaging product.
The federal income tax provision increased $11,413 for the three-month
period and $23,226 for the six-month period ended March 31, 1999, compared
to the same period in 1998 due to an increase in pre-tax net income for the
period.
Impact of Inflation and Changing Prices
- ---------------------------------------
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles
("GAAP"), which require the measurement of financial position and results
of operations in terms of historical dollars without considering changes in
relative purchasing power of money over time because of inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of First Federal are monetary in nature. As a result, interest
rates have a more significant impact on First Federal's performance than
the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the
prices of goods and services.
Effect of Accounting Changes
- ----------------------------
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This Statement significantly
changes the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about reportable segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. SFAS 131 uses a "management approach" to
disclose financial and descriptive information about an enterprise's
reportable operating segments which is based on reporting information the
way management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, the Statement requires significantly more information to be
disclosed for each reportable segment than is presently being reported in
annual financial statements. The Statement also requires that selected
information be reported in interim financial statements. SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company does not anticipate that any further disclosures will be
necessary.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 amends the
disclosure requirements of SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination of
Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." This Statement standardizes the disclosure
requirements of SFAS No. 87 and No. 106 to the extent practicable and
recommends a parallel format for presenting information about pensions and
other postretirement benefits. The Statement does not change any of the
measurement or recognition provisions provided for in SFAS No. 87, No. 88
or No. 106. This Statement is effective for fiscal years beginning after
December 15, 1997. First Federal adopted SFAS No. 132 on October 1, 1998,
and required disclosures will be included beginning with the Company's 1999
Annual Report.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts. Under the standard, entities are
required to carry all derivative instruments in the statement of financial
position at fair value. The accounting for changes in the fair value (i.e.
gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, if so, on
the reason for holding it. If certain conditions are met, entities may
elect to designate a derivative instrument as a hedge of exposures to
changes in fair value, cash flows, or foreign currencies. If the hedged
exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the
effective portion of the gain or loss on the derivative instrument is
reported initially as a component of other comprehensive income (outside
earnings) and subsequently reclassified into earnings when the forecasted
transaction affects earnings. Any amounts excluded from the assessment of
hedge effectiveness as well as the ineffective portion of the gain or loss
are reported in earnings immediately. Accounting for foreign currency
hedges is similar to accounting for fair value and cash flow hedges. If
the derivative instrument is not designated as a hedge, the gain or loss is
recognized in earnings in the period of change. This Statement will not
have a material effect on the Company.
PART II
OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The annual meeting was held February 17, 1999. The following
Directors were elected to terms expiring in 2001.
For Withheld
--- --------
Ward D. Coffman, III 2,575,557 150,392
Robert D. Goodrich, II 2,575,557 150,392
Patrick L. Hennessey 2,575,557 150,392
Connie Ayres LaPlante 2,575,557 150,392
Those directors continuing their term were John C. Matesich, III;
Don R. Parkhill and J. William Plummer.
Two other matters were presented to the shareholders.
1. To approve the amendment to Bancorp's Articles of
Incorporation to increase the authorized number of common
shares from 4,000,000 to 9,000,000:
For 2,527,568 Against 180,381 Abstentions 18,000
--------- ------- ------
2. To ratify the selection of Crowe, Chizek and Company LLP as
the Auditors of Bancorp for the current fiscal year:
For 2,705,064 Against 400 Abstentions 20,485
--------- --- ------
ITEM 5. OTHER INFORMATION
-----------------
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Exhibit 3.1 The Articles of Incorporation 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.
Exhibit 3.2 The Amendment to the Articles of Incorporation of
Bancorp, filed as Exhibit 4a(1) to the 1994 S-8, is
incorporated herein by reference.
Exhibit 3.3 The Code of Regulations of 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.
Exhibit 3.4 The Amendment to the Code of Regulations of 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.
Exhibit 27 Financial Data Schedule
Exhibit 99.1 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995
No reports on Form 8-K were filed during the quarter for which
this report is filed.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 10, 1999 By: /s/ J. William Plummer
----------------------
J. William Plummer
President
Date: May 10, 1999 By: /s/ Connie Ayres LaPlante
-------------------------
Connie Ayres LaPlante
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-QSB.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 6,335
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,825
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 16,310
<INVESTMENTS-MARKET> 16,251
<LOANS> 166,498
<ALLOWANCE> 1,798
<TOTAL-ASSETS> 214,506
<DEPOSITS> 148,850
<SHORT-TERM> 17,000
<LIABILITIES-OTHER> 1,569
<LONG-TERM> 29,990
0
0
<COMMON> 3,656
<OTHER-SE> 13,441
<TOTAL-LIABILITIES-AND-EQUITY> 214,506
<INTEREST-LOAN> 3,419
<INTEREST-INVEST> 382
<INTEREST-OTHER> 178
<INTEREST-TOTAL> 3,979
<INTEREST-DEPOSIT> 1,535
<INTEREST-EXPENSE> 728
<INTEREST-INCOME-NET> 1,716
<LOAN-LOSSES> 25
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,400
<INCOME-PRETAX> 593
<INCOME-PRE-EXTRAORDINARY> 405
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 405
<EPS-PRIMARY> .13
<EPS-DILUTED> .12
<YIELD-ACTUAL> 3.49
<LOANS-NON> 408
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,904
<CHARGE-OFFS> 106
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,798
<ALLOWANCE-DOMESTIC> 1,448
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 350
</TABLE>
EXHIBIT 99.1
------------
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
----------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about their companies, so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those discussed in the
statement. First Federal Bancorp, Inc. ("Bancorp") desires to take
advantage of the "safe harbor" provisions of the Act. Certain information,
particularly information regarding future economic performance and finances
and plans and objectives of management, contained or incorporated by
reference in Bancorp's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 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
- -----------------------------------------------------------------------
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.
For several years, Congress has been considering various changes to
the bank and savings association charters, the activities in which banks and
savings associations and their holding companies and subsidiaries may engage
and the authority of various regulatory authorities over the financial
institutions and their holding companies and subsidiaries. Bancorp cannot
predict at this time whether and when Congress will actually adopt such
"financial modernization legislation" or in what form it will be adopted.
It is expected, however, that the range of activities in which banks and
their affiliated companies may engage will be expanded, and it is possible
that the range of activities in which Bancorp and First Federal may engage
will be restricted. It is not anticipated that the current activities of
Bancorp or First Federal will be materially affected by any such
legislation.
Legislation to recapitalize the SAIF, which was enacted in 1996,
provided that the SAIF and the Bank Insurance Fund (the "BIF") would be
merged if the federal savings association charter was eliminated. Although
the elimination of the federal savings association charter has not occurred
and is not now expected in the near future, Congress is still discussing the
merger of the SAIF and the BIF. Although the merger could be expected to
change the deposit insurance premiums paid by First Federal, the effect on
First Federal and Bancorp cannot be predicted at this time.
