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, 2000 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
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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 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
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Securities registered under Section 12(g) of the Exchange Act:
Common shares, without par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes 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
$18,060,307.
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,
2000, was $12,867,379.
3,113,321 of the registrant's common shares were issued and
outstanding on November 30, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
The following sections of the definitive Proxy Statement for the 2001
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 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, 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 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 lending activity includes 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; and 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 $207.0 million at September 30, 2000, and
constituted 87.41% 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>
September 30,
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ----------------- ----------------- -----------------
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 $104,166 49.42% $ 96,358 51.58% $ 96,856 55.99% $102,723 58.04% $ 99,496 59.57%
Multifamily
(over 4 units) 8,191 3.89 8,693 4.65 8,735 5.05 9,692 5.47 9,176 5.49
Construction 6,403 3.04 12,127 6.49 4,459 2.58 3,082 1.74 6,582 3.94
Nonresidential
real estate 14,941 7.09 12,692 6.80 10,620 6.14 9,799 5.54 8,505 5.09
Consumer Loans
Automobile 51,737 24.55 38,752 20.75 35,861 20.73 36,267 20.49 30,376 18.19
Home equity 8,752 4.15 6,807 3.65 6,287 3.63 4,652 2.63 3,767 2.25
Home improvement 175 .08 215 .12 323 .19 464 .26 662 .40
Deposit account 305 .14 338 .18 467 .27 422 .24 484 .29
Other secured 9,828 4.66 7,475 4.00 6,813 3.94 7,237 4.09 5,799 3.47
Unsecured 860 .41 715 .38 670 .39 517 .29 515 .31
Commercial 5,407 2.57 2,623 1.40 1,892 1.09 2,137 1.21 1,663 1.00
----------------------------------------------------------------------------------------------------
Total loans $210,765 100.00% $186,795 100.00% $172,983 100.00% $176,992 100.00% $167,025 100.00%
Less:
Undisbursed loans
in process 2,484 6,495 1,485 1,374 5,105
Net deferred
origination fees
(costs) and
amortized discounts (596) (470) (167) (225) 11
Allowance
for loan losses 1,828 1,821 2,042 1,816 1,611
----------------------------------------------------------------------------------------------------
Total loans-net $207,049 $178,949 $169,623 $174,027 $160,298
====================================================================================================
</TABLE>
Loan Maturity Schedule. The following table sets forth certain
information at September 30, 2000, 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,
-----------------------------------------
2002 to
2001 2005 >2005 Total
---- ------- ----- -----
(In thousands)
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
-----------------
Real Estate - Construction $ - $ - $ - $ -
Commercial - - - -
-----------------------------------------
$ - $ - $ - $ -
=========================================
Adjustable-Rate Loans:
----------------------
Real Estate - Construction $ 669 $ - $5,734 $ 6,403
Commercial 5,407 - - 5,407
-----------------------------------------
$6,076 $ - $5,734 $11,810
=========================================
Total Fixed and Adjustable-Rate Loans:
--------------------------------------
Real Estate - Construction $ 669 $ - $5,734 $ 6,403
Commercial 5,407 - - 5,407
-----------------------------------------
$6,076 $ - $5,734 $11,810
=========================================
</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 one-to-four 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 that 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, 2000 were
originated prior to 1981. See "Loan Originations, Purchases and Sales."
During fiscal year 2000, First Federal retained $.7 million of the $1.9
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 $110.6 million at September 30, 2000, and
represented 52.46% 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 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, 2000, loans secured by multifamily properties totaled
approximately $8.1 million, or 3.89% 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, 2000.
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 only interest for the first six months while the residence is being
constructed. At September 30, 2000, a total of $6.4 million, or
approximately 3.04%, 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, 2000.
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. The adjustment frequency and limits
and the interest rate margins over the referenced index vary by loan.
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."
At September 30, 2000, First Federal had a total of $14.9 million, or
7.09% of loans, invested in nonresidential real estate loans, the largest of
which had a balance of $1.5 million. There were no nonresidential real
estate loans delinquent at September 30, 2000.
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 2000, approximately 61% 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, 2000, automobile loans totaled approximately $51.7
million, or 24.55% of total loans. This is an increase from $38.8 million,
or 20.75% of total loans, as of September 30, 1999.
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 $8.8 million, or 4.15% 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.
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, 2000, First Federal had approximately $71.7 million,
or 33.99% 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. Consumer loans with aggregate
balances of $788,000 were delinquent at September 30, 2000.
Commercial Loans. Commercial loans totaled $5.4 million at September
30, 2000. First Federal has new and used car floor-planning programs for
four local car dealers totaling $5.0 million at September 30, 2000. The
floor-plan loans are secured by the title of the cars. 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. Commercial lending
entails significant risks. Such loans are subject to greater risk of default
periods of adverse economic conditions. Because such loans are secured by
inventory, accounts receivable and other non-real estate assets, the
collateral may not be sufficient to ensure full payment of the loan in the
event of a default. The risk of default on such loans may be more sensitive
to adverse economic conditions. First Federal attempts to minimize such
risks through prudent underwriting practices. There were no commercial loans
delinquent at September 30, 2000.
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 $252,700 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
2000, $1.3 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,
--------------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans originated:
Adjustable-rate:
Real estate:
One-to-four family (1) $ 31,530 $38,007 $24,608
Multifamily - - -
Nonresidential 462 750 1,015
Consumer (4) 22,834 12,523 11,784
--------------------------------
Total adjustable-rate loans $ 54,826 $51,280 $37,407
--------------------------------
Fixed-rate
Real estate:
One-to-four family (1) $ 1,868 $14,022 $20,917
Multifamily - - 1,000
Nonresidential 610 1,700 -
Consumer 45,547 29,976 25,632
--------------------------------
Total fixed-rate loans $ 48,025 $45,698 $47,549
--------------------------------
Total loans originated $102,851 $96,978 $84,956
Loans sold 1,213 5,146 10,336
--------------------------------
Principal repayments (2) 77,668 78,020 78,629
--------------------------------
Total reductions 78,881 83,166 88,965
--------------------------------
Change in other items-net (3) 4,130 (4,486) (395)
--------------------------------
Net increase (decrease) $ 28,100 $ 9,326 $(4,404)
================================
<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
$2.7 million to any one borrower at September 30, 2000. The largest amount
First Federal had outstanding to one borrower was $2.6 million. Such loan
was secured by non-residential real estate and was current at September 30,
2000. 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,
----------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
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 $ 975 0.47% $ 344 0.19% $1,177 0.68%
60 to 89 days 0 0.00 135 0.08 210 0.12
90 or more days 0 0.00 194 0.11 541 0.31
------------------------------------------------------------------------
Total delinquent real estate loans $ 975 0.47 $ 673 0.38 $1,928 1.11
------------------------------------------------------------------------
Consumer loans delinquent for:
30 to 59 days 422 0.20 381 0.21 641 0.37
60 to 89 days 149 0.07 166 0.09 238 0.14
90 or more days 217 0.10 214 0.12 234 0.13
------------------------------------------------------------------------
Total delinquent consumer loans 788 0.38 761 0.42 1,113 0.64
------------------------------------------------------------------------
Total delinquent loans $1,763 0.85% $1,434 0.80% $3,041 1.75%
========================================================================
</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,
--------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual
basis:(1)
Real estate:
Residential $ 0 $ 130 $ 610 $ 368 $ 211
Nonresidential 0 0 0 0 0
Consumer 37 100 17 74 175
-------------------------------------------------
Total nonaccrual loans $ 37 $ 230 $ 627 $ 442 $ 386
-------------------------------------------------
Accruing loans which are contractually
past due 90 days or more:(1)
Real estate:
Residential $ 0 $ 64 $ 0 $ 111 $ 126
Nonresidential 0 0 0 0 0
Consumer 0 0 0 0 0
-------------------------------------------------
Total accruing loans which are
90 days past due $ 0 $ 64 $ 0 $ 111 $ 126
-------------------------------------------------
Total nonaccrual loans and accruing
loans which are 90 days past due $ 37 $ 294 $ 627 $ 553 $ 512
=================================================
Percentage of total loans 0.02% 0.16% 0.37% 0.31% 0.31%
-------------------------------------------------
Other nonperforming assets - net $ 0 $ 0 $ 0 $ 0 $ 0
=================================================
<FN>
--------------------
<F1> Net of specific valuation allowance.
</FN>
</TABLE>
During the year ended September 30, 2000, $22,642 of interest income
would have been recorded on nonaccruing loans had such loans been accruing
and $14,491 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,
------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Classified assets
Substandard $486 $1,531 $1,846
Doubtful - - -
Loss 472 508 725
------------------------
Total classified assets $958 $2,039 $2,571
========================
</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,
--------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,821 $2,042 $1,816 $1,611 $1,499
Charge-offs
Mortgage loans - - - - -
Consumer loans (197) (497) (738) (28) (28)
--------------------------------------------------
Total charge-offs (197) (497) (738) (28) (28)
--------------------------------------------------
Recoveries
Mortgage loans - - - - -
Consumer loans 43 94 283 11 9
--------------------------------------------------
Total recoveries 43 94 283 11 9
--------------------------------------------------
Net (charge-offs) recoveries (154) (403) (455) (17) (19)
--------------------------------------------------
Provision for loss 161 182 681 222 131
--------------------------------------------------
Balance at end of period $1,828 $1,821 $2,042 $1,816 $1,611
==================================================
Ratio of net (charge-offs) recoveries to
average loans outstanding (0.07)% (0.24)% (0.26)% (0.01)% (0.01)%
==================================================
</TABLE>
First Federal classified no loans meeting the definition of impaired
during the years ended September 30, 2000 and 1999.
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,
2000 1999 1998 1997 1996
-------------------- -------------------- -------------------- -------------------- --------------------
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 $ 479 63.44% $ 572 69.52% $ 600 69.73% $ 548 70.79% $ 521 74.05%
Consumer loans 976 33.99 881 29.08 1,073 29.18 797 28.00 623 24.95
Commercial loans 23 2.57 18 1.40 19 1.09 21 1.21 17 1.00
Unallocated 350 - 350 - 350 - 450 - 450 -
-------------------------------------------------------------------------------------------------------------
Total $1,828 100.00% $1,821 100.00% $2,042 100.00% $1,816 100.00% $1,611 100.00%
=============================================================================================================
</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 First Federal's loan loss allowance is based on its
historical five-year average loss experience for various types of mortgage
and consumer loans that are not classified assets, the level of classified
assets, general economic conditions and other variables. 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, 2000, First Federal had no assets classified "doubtful." First
Federal's loan loss allowance at September 30, 2000 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 4.75% and 6% 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,
----------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
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 $10,502 92.30% $ 9,544 89.41% $11,907 89.20%
Obligations of State and
political subdivisions 137 1.20 162 1.52 185 1.39
-------------------------------------------------------------------------
Total investment securities 10,639 93.50 9,706 90.93 12,092 90.59
-------------------------------------------------------------------------
Mortgage-backed securities 739 6.50 969 9.07 1,256 9.41
-------------------------------------------------------------------------
Total investment securities and
mortgage-backed securities $11,378 100.00% $10,675 100.00% $13,348 100.00%
=========================================================================
Average remaining life of
investment securities and
mortgage-backed securities 1.39 years 1.73 years .95 years
Adjusted weighted average
maturity of investment securities 4.6 months 2.9 months 1.7 months
</TABLE>
The composition and maturities of First Federal's investment
securities and mortgage-backed securities are indicated in the following
table:
<TABLE>
<CAPTION>
At September 30, 2000
---------------------------------------------------------------------------------------
Total investment
Less than 1 to 5 5 to 10 Over securities
1 year years years 10 years ---------------------------
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 $10,502 $ - $ - $ - $10,502 $10,499
Obligation of States and
political subdivisions - 107 30 - 137 137
Mortgage-backed securities - - 56 683 739 739
-----------------------------------------------------------------------------------
Total investment securities and
mortgage-backed securities $10,502 $ 107 $ 86 $ 683 $11,378 $11,375
===================================================================================
Weighted average yield 6.25% 6.50% 7.94% 6.04% 6.29% -
<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,
--------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- --------------------------
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 $ 6,466 4% $ 4,631 3% $ 4,446 4%
Money market 29,030 18 31,132 22 28,872 19
Passbook and statement savings accounts 21,173 13 24,737 17 25,668 17
--------------------------------------------------------------------------------
Total transaction accounts 56,669 35 60,500 42 58,986 40
--------------------------------------------------------------------------------
Certificates of deposit:
Negotiated-rate certificates 24,706 16 7,811 5 6,070 4
Money-market certificates:
3 to 6 months 4,082 3 11,342 8 12,462 8
12 to 23 months 59,428 37 51,324 35 44,656 30
2 to 2-1/2 years 6,044 4 6,672 5 6,741 5
3 to 3-1/2 years 2,760 2 1,408 1 12,736 9
4 to 4-1/2 years 507 - 463 - 184 -
5 years and greater 4,188 3 5,251 4 5,458 4
--------------------------------------------------------------------------------
Total certificates of deposit 101,715 65 84,271 58 88,307 60
--------------------------------------------------------------------------------
Christmas club and other
noninterest-bearing accounts 336 - 349 - 396 -
--------------------------------------------------------------------------------
Total deposits $158,720 100% $145,120 100% $147,689 100%
================================================================================
</TABLE>
The following table presents the amount and remaining maturities of
time deposits at September 30, 2000:
<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 $75,899 $23,172 $2,399 $ 245 $101,715
Weighted average rate 6.22% 6.61% 6.48% 7.54% 6.32%
</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, 2000, and September 30, 1999:
<TABLE>
<CAPTION>
Maturity At September 30, 2000 At September 30, 1999
-------- --------------------- ---------------------
(Dollars in thousands)
<S> <C> <C>
Three months or less $ 2,135 $ 5,404
Over 3 months to 6 months 5,483 4,336
Over 6 months to 12 months 12,124 3,812
Over twelve months 4,214 2,285
--------------------------------
Total $23,956 $15,837
================================
</TABLE>
The following table presents First Federal's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30
--------------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $145,120 $147,689 $126,635
Deposits 595,992 505,458 480,298
Withdrawals (586,635) (512,344) (463,413)
Interest credited 4,243 4,317 4,169
--------------------------------
Ending balance $158,720 $145,120 $147,689
================================
Net increase (decrease) in
deposits $ 13,600 $ (2,569) $ 21,054
--------------------------------
Percent increase (decrease) in
deposits 9.37% (1.74)% 16.63%
</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 the maximum amount of advances. 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, 2000, 1999 and 1998, and the
average aggregate balances of FHLB advances outstanding during the years
ended September 30, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
At or for the
year ended September 30
-----------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of FHLB advances
outstanding during period $66,682 $47,996 $65,460
Average amount of FHLB advances
outstanding during period $56,683 $45,368 $56,400
Amount of FHLB advances outstanding
at end of period $58,205 $45,568 $47,996
Weighted average interest cost of
FHLB advances during period based
on month-end balances 6.31% 6.21% 6.23%
</TABLE>
First Federal had $29.2 million of variable-rate advances with
original maturities of less than 90 days at September 30, 2000. Fixed-rate
long-term advances with a 6.44% weighted average rate consisted of the
following by scheduled maturity:
<TABLE>
<CAPTION>
As of September 30, 2000
------------------------
Weighted
Amount Average Rate
------ ------------
<S> <C> <C>
One year or less $11,000 6.10%
More than one year through 3 years $ 7,000 6.59%
More than 3 years through 5 years $ 5,000 6.78%
More than 5 years through 10 years $ 5,970 6.64%
</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,
---------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- ----------------------------- -----------------------------
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) $194,335 $15,953 8.21% $167,912 $14,073 8.38% $175,846 $15,041 8.55%
Mortgage-backed securities 849 60 7.08 1,131 80 7.07 1,346 101 7.50
Interest-bearing deposits in
FHLB 1 0 - 10,432 359 3.44 3,903 202 5.17
Investment securities 15,687 979 6.26 18,084 1,126 6.23 11,492 683 5.94
------------------- ------------------- --------------------
Total interest-earning assets $210,872 $16,992 8.06 $197,559 $15,638 7.92 $192,587 $16,027 8.32
=================== =================== ====================
Noninterest-earning assets:
Cash 5,366 6,166 7,342
REO (3) (3) 20
Fixed assets 6,650 7,036 7,286
Other assets 1,275 1,179 1,914
-------- -------- --------
Total assets $224,160 $211,937 $209,149
======== ======== ========
Interest-bearing liabilities:
Certificates of deposit $ 89,952 $ 5,191 5.77 $ 87,534 $ 4,802 5.49 $ 78,349 $ 4,374 5.58
Passbook accounts 22,983 343 1.49 25,714 418 1.63 25,769 564 2.19
NOW accounts 31,012 679 2.19 30,675 625 2.04 27,519 685 2.49
FHLB advances 56,683 3,574 6.31 45,368 2,817 6.21 56,400 3,516 6.23
------------------- ------------------- --------------------
Total interest-bearing
liabilities $200,630 $ 9,787 4.88 $189,291 $ 8,662 4.57 $188,037 $ 9,139 4.86
=================== =================== ====================
Noninterest-bearing liabilities:
Noninterest-bearing NOW
accounts 6,862 6,436 5,433
Other liabilities 936 833 1,059
Shareholders' equity 15,732 15,377 14,620
-------- -------- --------
Total liabilities and equity $224,160 $211,937 $209,149
======== ======== ========
Net interest income; interest
rate spread $ 7,205 3.18 $ 6,976 3.35 $ 6,888 3.46
======= ======= =======
Net interest yield (2) 3.42 3.53 3.58
Average interest-earning
assets to average interest-
bearing liabilities 105.10% 104.37% 102.42%
<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 that 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%, 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, 2000, 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, 2000
----------------------
Change in Interest Rate $ Change % Change
(Basis Points) In NPV in NPV
----------------------- -------- --------
(Dollars in thousands)
<S> <C> <C>
+300 $(2,681) (13)%
+200 $(1,318) (7)%
+100 $ (414) (2)%
0 0 0
-100 $ (140) (1)%
-200 $ (382) (2)%
-300 $ (291) (1)%
</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,
---------------------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998 1998 vs. 1997
------------------------- ------------------------- -------------------------
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 $2,158 $(278) $1,880 $(672) $(296) $(968) $ 834 $ (67) $ 767
Mortgage-backed securities (20) (0) (20) (15) (6) (21) (14) 2 (12)
Investment securities (917) 411 (506) 674 (74) 600 221 20 241
----------------------------------------------------------------------------------------
Total interest income $1,221 $ 133 $1,354 $ (13) $(376) $(389) $1,041 $ (45) $ 996
========================================================================================
Interest expense attributable to:
Deposits $ 1 $ 367 $ 368 $(208) $ 430 $ 222 $ 113 $ 368 $ 481
FHLB advances 711 46 757 (688) (11) (699) 373 255 628
----------------------------------------------------------------------------------------
Total interest expense $ 712 $ 413 $1,125 $(896) $ 419 $(477) $ 486 $ 623 $1,109
========================================================================================
Increase (decrease) in net
interest income $ 509 $(280) $ 229 $ 883 $(795) $ 88 $ 555 $(668) $ (113)
========================================================================================
</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 that have offices in Muskingum County, First
Federal ranks approximately fourth in deposit share with 12.93% of the
savings market as of June 30, 2000, 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 2000 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, 2000, First Federal had 64 full-time employees and
20 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 is 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, 2000:
<TABLE>
<CAPTION>
At September 30, 2000
---------------------
Percent
Amount of assets
------ ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital $16,478 6.96%
Tangible capital requirement 3,549 1.50
-------------------
Excess $12,929 5.46%
===================
Core capital $16,478 6.96%
Core capital requirement (1) 9,463 4.00
-------------------
Excess $ 7,015 2.96%
===================
Total capital $17,733 11.34%
Risk-based capital requirement 12,505 8.00
-------------------
Excess $ 5,228 3.34%
===================
<FN>
--------------------
<F1> Although the general required minimum core capital is 4.00%, savings
associations that meet certain requirements may be permitted to
maintain minimum core capital of 3.00%.
</FN>
</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, 2000 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, 2000, 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,
2000, 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, 2000.
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, 2000.
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, 2000, 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
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.
Gramm-Leach-Bliley Act
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 $42.8 million (subject to an exemption of up to $5.5 million), and
that an initial reserve of 10% be maintained against that portion of total
net transaction accounts in excess of $42.8 million. These percentages are
subject to adjustment by the FRB. At September 30, 2000, 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 became voluntary 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
$4,071,200 at September 30, 2000.
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.
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 1997. 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, 2000, 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, 2000, 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 $168,000 from fiscal
1999 to fiscal 2000 due in part to an inadvertant underaccrual of deferred
Federal income tax of $60,000. The effective tax rate for fiscal 2000 was
36.12% compared to 33.10% for fiscal year 1999. The effective tax rate for
fiscal 2000 without the under accrual was 33.74%.
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 2000 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 1.3% of
First Federal's book net worth determined in accordance with generally
accepted accounting principles. 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,
2000, 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 $4,347,936
Branch Offices:
990 Military Road
Zanesville, Ohio 43701 Owned 1975 5,000 372,906
2810 Maysville Pike
South Zanesville, Ohio 43701 Owned 1994 2,050 422,348
55 East Main Street
Roseville, Ohio 43777 Owned 1990 2,394 142,693
639 Main Street
Coshocton, Ohio 43812 Owned 1982 4,310 97,947
132 Main Street
Newcomerstown, Ohio 43832 Owned 1984 2,128 4,552
Other Properties:
995 & 1003 Beverly Avenue
Zanesville, Ohio 43701 Owned 1994 1,284 57,785
<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 $6.4 million at September 30, 2000.
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, 2000 and 1999.
<TABLE>
<CAPTION>
09/00 06/00 03/00 12/99 09/99 06/99 03/99 12/98
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend Declared $0.040 $0.040 $0.040 $0.040 $0.040 $0.040 $ 0.040 $ 0.040
High Bid During Quarter 6.438 6.500 9.000 7.625 8.688 9.750 10.750 12.750
Low Bid During Quarter 5.500 5.500 5.750 6.000 6.875 7.500 8.500 10.000
Last Bid Of Quarter 6.000 6.000 6.500 7.375 7.125 7.750 9.875 10.500
</TABLE>
The foregoing quotations reflect interdealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions.
Bancorp had 3,113,321 common shares outstanding and held of record by
approximately 605 stockholders as of November 30, 2000. Bancorp's common
shares are traded in The Nasdaq SmallCap Market 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 its conversion to stock form who maintain a
savings account at First Federal 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, 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, and gains on sales of loans. The gains on sales of loans
are 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 2001;
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, which are held in
portfolio rather than being sold, 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 2001 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 remain stable; and
8. Management's expectation that a significant portion of the
certificates of deposit at First Federal maturing in fiscal year
2001 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 -------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $236,877 $209,860 $213,502 $203,703 $184,467
Mortgage-backed securities 739 969 1,256 1,438 1,661
Loans receivable - net 207,049 178,949 169,623 174,027 160,298
Federal funds sold and
other short-term investments 0 25 13,375 1,600 3,175
Interest-bearing deposits in other
financial institutions 1,386 2,497 0 0 0
Investment securities and FHLB stock 14,711 13,496 15,629 10,545 6,478
Deposits 158,720 145,120 147,689 126,635 130,072
Borrowed funds 58,205 45,568 47,996 59,805 37,970
Stockholders' equity 18,118 17,652 16,500 15,626 13,998
Number of:
Real estate loans outstanding 2,634 2,713 2,833 2,972 3,008
Consumer loans outstanding 7,836 6,769 6,485 5,994 5,189
Deposit accounts 18,898 19,786 21,085 20,349 20,312
Full service offices 6 6 6 6 6
Summary of operations 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Total interest income $ 16,992 $ 15,639 $ 16,027 $ 15,031 $ 13,749
Total interest expense 9,787 8,662 9,139 8,031 7,099
------------------------------------------------------------
Net interest income 7,205 6,977 6,888 7,000 6,650
Provision for loan losses 161 182 681 222 131
------------------------------------------------------------
Net interest income after
provision for loan losses 7,044 6,795 6,207 6,778 6,519
Noninterest income 1,068 974 997 919 752
Noninterest expense 5,581 5,515 5,216 4,753 5,092
------------------------------------------------------------
Income before federal income tax 2,531 2,254 1,988 2,944 2,179
Provision for federal income taxes 914 746 659 971 745
------------------------------------------------------------
Net income $ 1,617 $ 1,508 $ 1,329 $ 1,973 $ 1,434
------------------------------------------------------------
Basic earnings per share $ .51 $ .47 $ .42 $ .63 $ .46
------------------------------------------------------------
Fully diluted earnings per share $ .48 $ .44 $ .38 $ .57 $ .42
------------------------------------------------------------
Cash dividend declared per share $ 0.16 $ 0.16 $ 0.14 $ 0.12 $ 0.105
Weighted average common and
common equivalent shares (1)
Basic 3,168,193 3,176,462 3,150,532 3,143,452 3,143,452
Fully diluted 3,377,400 3,395,617 3,505,014 3,456,014 3,433,030
<FN>
--------------------
<F1> On each of November 6, 1996, and June 3, 1998, the Board of Directors
declared a stock dividend in the nature of a 2-for-1 stock split. All
earnings and dividends per share disclosures have been restated to
reflect these stock dividends.
</FN>
</TABLE>
<TABLE>
<CAPTION>
At or for the
year ended September 30,
---------------------------------------------------
Key Operating Ratios 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<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 3.21% 3.29% 3.21% 3.61% 3.78%
Average interest rate spread 3.18% 3.35 3.46 3.77 3.99
Net interest yield (net interest
income divided by average interest-
earning assets) 3.42 3.53 3.58 3.91 4.11
Return on stockholders' equity (1) 9.03 8.83 8.23 13.36 10.65
Return on assets (2) .72 .71 .64 1.02 .81
Average interest-earning assets to
average interest-bearing liabilities 105.10 104.37 102.42 103.03 102.79
Stockholders' equity to total assets at
end of period 7.65 8.41 7.73 7.67 7.59
Average stockholders' equity to average
total assets 7.99 8.05 7.72 7.61 7.65
Dividend payout 31.37 34.04 33.33 19.05 22.83
Nonperforming assets ratio (total
nonperforming assets divided by
total assets) at end of period (3) .02 .11 .29 .27 .28
Loan loss allowance to net
loans outstanding at end of period .88 1.01 1.20 1.04 1.00
<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 increased to $236.9 million at September
30, 2000, from $209.9 million at September 30, 1999. The increase in assets
is the result of an increase in net loans receivable of $28.1 million, or
15.70%, from $178.9 million at September 30, 1999, to $207.0 million at
September 30, 2000. The increase in loans receivable was comprised of an
increase in residential real estate loans of $5.8 million, $2.2 million in
non-residential real estate loans, a $13.0 million increase in consumer
automobile loans, a $2.8 million increase in commercial loans and a $4.4
million 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.
Investment securities increased $703,000 and interest-bearing deposits
in other financial institutions decreased $1.1 million to retain the level
of securities available for liquidity. See "Liquidity and Capital
Resources." Accrued interest receivable increased $234,000 to $1.4 million
at September 30, 2000. FHLB stock increased $281,100.
The allowance for loan losses remained stable from $1,821,000 at
September 30, 1999, to $1,828,000 at September 30, 2000. Management
maintained the provision for loan losses as a result of delinquencies on
loans remaining stable at $1.4 million. Total nonaccrual loans and accruing
loans that are 90 days past due decreased from $294,000 to $37,000. 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 increased by $13.6 million, or 9.37%, from $145.1 million at
September 30, 1999, to $158.7 million at September 30, 2000. The increase is
primarily due to the increase in certificate of deposit accounts at
September 30, 2000. The balance of such deposits increased $17.4 million to
$101.7 million at September 30, 2000, from $84.3 million at September 30,
1999. At September 30, 2000, FHLB advances totaled $58.2 million, an
increase of $12.6 million from the $45.6 million of advances outstanding at
September 30, 1999. Management believes that deposits will increase slightly
during fiscal year 2001 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 $18.1 million, or 7.65% of total assets, at
September 30, 2000, compared to $17.7 million, or 8.41% of total assets, at
September 30, 1999. The increase was attributable to $1.6 million in net
income for the 2000 fiscal year, less $505,000 in dividends declared and
paid, less $668,000 to purchase in the open market over the course of the
year 100,000 shares of Bancorp's stock, and proceeds from exercised options
of $21,400.
Comparison of the Years Ended
September 30, 2000 and 1999
First Federal reported net income for the 2000 fiscal year of
approximately $1.6 million, compared to $1.5 million in fiscal year 1999.
The most significant changes from 1999 to 2000 were the increase in net
interest income of $229,000 and the decrease in the provision for loan
losses of $21,000, an increase in noninterest expense of $66,000 and an
increase in federal income tax expense of $168,000.
Net interest income increased by $229,000 in fiscal year 2000 compared
to fiscal year 1999. Interest income increased $1.4 million during fiscal
year 2000 from $15.6 million during fiscal year 1999. This increase was a
result of the average mortgage loan balance in 2000 being higher than the
average mortgage loan balance in 1999. 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 2001, the
adjustable-rate mortgage loan portfolio will reprice at slightly higher
rates, as most loans originated during fiscal year 2000 were not initially
priced at the fully indexed interest rate. These loans will be repricing
upward at their first adjustment in fiscal year 2001 while the balance of
the adjustable-rate mortgage loan portfolio will not reprice substantially
lower during fiscal year 2001. 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 2000 increased $1.1 million from $8.7 million during
fiscal year 1999. Included in interest expense for 2000 is approximately
$3.6 million of interest on borrowed funds. The increase in interest expense
on borrowed funds is the result of increased FHLB advances and higher
interest rates on the advances. The increase in interest expense on deposits
is the result of increased savings balances and higher interest rates on
certificates of deposits.
First Federal's average interest rate spread decreased from 3.35% in
fiscal 1999 to 3.18% in fiscal 2000 because the average rate First Federal
is paying on interest-bearing liabilities increased more than the average
rate First Federal is earning on interest-earning assets.
The provision for loan losses was $161,000 in the 2000 fiscal year, a
decrease of $21,000 from the 1999 fiscal year. Total delinquencies were $1.8
million at September 30, 2000, of which $.8 million were on consumer loans
and $1.4 million at September 30, 1999, of which $.7 million were on
consumer loans. Total nonaccrual loans and accruing loans that are 90 days
past due decreased from $294,000 to $37,000.
Noninterest income increased for fiscal year 2000 by $94,000 from
fiscal 1999. This is a result of a decrease of $36,000 in gains on loans
sold, due to the retention of fixed-rate loans in the loan portfolio, and an
increase in other income of $80,000 and an increase of $50,000 in service
charges on deposit accounts.
Noninterest expenses increased by approximately $66,000 from fiscal
1999 to fiscal 2000. The increase is attributable to a $41,000 decrease in
data processing costs at the data processor as a refund of previous
overcharges of $80,000 was received. In addition, salaries and benefits
increased $28,000, mainly due to an increase in entry-level wages and normal
pay increases. Occupancy expense increased $35,000, mainly due to increased
depreciation of $16,000, increased repairs and maintenance of $44,000 and
was offset by a decrease in furniture and fixture expense of $24,000. Other
operating expenses increased $24,000. This was due to hiring consultants to
determine our market image and the alternatives for a data processor.
The federal income tax provision increased by $168,000 from fiscal
1999 to fiscal 2000 due in part to an inadvertant underaccrual of deferred
federal income tax of $60,000. The effective tax rate was 36.12% for fiscal
year 2000 and 33.10% for 1999. The effective tax rate for fiscal year 2000
without the underaccrual was 33.74%.
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 $89,000 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 $89,000 in fiscal year 1999 compared
to fiscal year 1998. Interest income decreased $388,000 during fiscal year
1999 from $16.0 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. 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 deposit.
First Federal's average interest rate spread decreased from 3.46% in
fiscal 1998 to 3.35% 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 $23,000 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 servicing
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 data processor 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 was 33.10% and
1998 was 33.14%.
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 2000,
the automobile loans increased to $51.7 million from $38.8 million in fiscal
year 1999. 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 (2)% at September 30, 2000.
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 4.83% at September 30, 2000. 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, 2000, 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 fiscal year 2001 from loan and mortgage-backed securities repayments,
investment security maturities, increased savings balances and FHLB advances
to meet expected loan demand. At September 30, 2000, First Federal had
outstanding commitments to originate loans of $10.7 million, unfunded lines-
of-credit totaling $9.3 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, 2000, totaled $75.9
million. Management believes that a significant portion of the amounts
maturing during 2001 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,
-------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net cash provided by operating activities $ 2,405 $ 1,538 $ 2,118
Net cash used in investing (28,017) (9,236) (1,364)
Net cash provided by financing activities 25,069 (5,254) 8,741
-------------------------------
(Decrease) Increase in cash and cash equivalents (543) (12,952) 9,495
Cash and cash equivalents at beginning of year 5,380 18,332 8,837
-------------------------------
Cash and cash equivalents at end of year $ 4,837 $ 5,380 $18,332
===============================
</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, 2000.
<TABLE>
<CAPTION>
Percent
Amount of assets
------ ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital $16,478 6.96%
Tangible capital requirement 3,549 1.50
-------------------
Excess $12,929 5.46%
===================
Core capital $16,478 6.96%
Core capital requirement (1) 9,463 4.00
-------------------
Excess $ 7,015 2.96%
===================
Total risk-based capital $17,733 11.34%
Risk-based capital requirement 12,505 8.00
-------------------
Excess $ 5,228 3.34%
===================
<FN>
--------------------
<F1> Although the general required minimum core capital is 4.00%, savings
associations that meet certain requirements may be permitted to
maintain minimum core capital of 3.00%.
</FN>
</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, was effective for fiscal years
beginning after June 15, 2000. This Statement had no material effect on the
Company.
Item 7. Financial Statements.
FIRST FEDERAL BANCORP,
INC. AND SUBSIDIARY
Consolidated Financial Statements
September 30, 2000 and 1999
FIRST FEDERAL BANCORP, INC. AND SUBSIDIARY
Table of Contents
Page
----------------------------------------------------------------------
Independent Auditor's Report 1
Financial Statements
Consolidated balance sheet 2
Consolidated statement of income 3
Consolidated statement of stockholders' equity 4
Consolidated statement of cash flows 5
Notes to consolidated financial statements 6
Independent Auditor's Report
To the Stockholders and
Board of Directors
First Federal Bancorp, Inc.
Zanesville, Ohio
We have audited the accompanying consolidated balance sheet of First Federal
Bancorp, Inc. and subsidiary as of September 30, 2000, and the related
consolidated statements of income, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
The consolidated financial statements of First Federal Bancorp, Inc. as of
and for the two year period ended September 30, 1999 were audited by other
auditors whose opinion dated October 15, 1999, was unqualified.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that 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 the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above
present fairly, in all material respects, the consolidated financial
position of First Federal Bancorp, Inc. and subsidiary as of September 30,
2000, and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
/s/ Olive LLP
-------------
Olive LLP
Cincinnati, Ohio
October 26, 2000
FIRST FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30 2000 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 4,837,402 $ 5,355,233
Interest-bearing demand deposits 25,000
----------------------------
Cash and cash equivalents 4,837,402 5,380,233
Interest-bearing deposits 1,386,000 2,497,030
Investment securities held to maturity (fair value of $11,375,000
and $10,673,000) 11,377,928 10,674,856
Loans, net of allowance for loan losses
of $1,828,000 and $1,821,000 207,048,507 178,949,202
Premises and equipment 6,498,446 6,978,793
Federal Home Loan Bank stock 4,071,200 3,790,100
Interest receivable 1,353,849 1,118,855
Other assets 303,271 470,739
----------------------------
Total assets $236,876,603 $209,859,808
============================
Liabilities
Deposits $158,720,119 $145,120,096
Short-term FHLB advances 29,235,000 9,585,000
Long-term debt 28,970,160 35,983,460
Interest payable 625,943 456,789
Other liabilities 1,207,687 1,062,195
----------------------------
Total liabilities 218,758,909 192,207,540
----------------------------
Commitments and contingencies
Stockholders' Equity
Preferred stock, $100 par value
Authorized - 1,000,000 shares, no shares issued and outstanding
Common stock, no par value
Authorized - 9,000,000 shares
Issued - 3,303,400 shares
Outstanding - 3,113,321 and 3,196,171 shares 3,736,076 3,736,076
Retained earnings 15,345,127 14,268,057
Treasury shares - 190,079 and 107,229 shares (963,509) (351,865)
----------------------------
Total stockholders' equity 18,117,694 17,652,268
----------------------------
Total liabilities and stockholders' equity $236,876,603 $209,859,808
============================
</TABLE>
See notes to consolidated financial statements.
FIRST FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended September 30 2000 1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans receivable $15,953,381 $14,073,473 $15,040,568
Investment securities 967,478 1,206,303 784,509
Deposits with financial institutions 71,541 359,018 202,064
-----------------------------------------
Total interest income 16,992,400 15,638,794 16,027,141
-----------------------------------------
Interest Expense
Deposits 6,212,303 5,844,591 5,622,884
Borrowings 3,574,233 2,817,425 3,516,457
-----------------------------------------
Total interest expense 9,786,536 8,662,016 9,139,341
-----------------------------------------
Net Interest Income 7,205,864 6,976,778 6,887,800
Provision for loan losses 160,874 181,853 680,757
-----------------------------------------
Net Interest Income After Provision for Loan Losses 7,044,990 6,794,925 6,207,043
-----------------------------------------
Other Income
Service charges on deposit accounts 401,775 351,951 324,836
Net gains on loan sales 13,326 49,233 158,540
Other income 652,806 572,481 513,101
-----------------------------------------
Total other income 1,067,907 973,665 996,477
-----------------------------------------
Other Expenses
Salaries and employee benefits 2,414,641 2,386,681 2,200,042
Occupancy and equipment expenses 941,796 906,345 814,220
Data processing fees 530,145 570,840 466,186
Deposit insurance expense 98,373 142,681 139,818
Advertising 293,302 227,385 248,505
Ohio Franchise taxes 211,648 213,231 215,209
Other expenses 1,091,535 1,067,828 1,132,402
-----------------------------------------
Total other expenses 5,581,440 5,514,991 5,216,382
-----------------------------------------
Income Before Income Tax 2,531,457 2,253,599 1,987,138
Income tax expense 914,316 745,979 658,594
-----------------------------------------
Net Income $ 1,617,141 $ 1,507,620 $ 1,328,544
=========================================
Basic Earnings per Share $ .51 $ .47 $ .42
=========================================
Diluted Earnings per Share $ .48 $ .44 $ .38
=========================================
</TABLE>
See notes to consolidated financial statements.
FIRST FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Common Retained Treasury
Stock Earnings Stock Total
------ -------- -------- -----
<S> <C> <C> <C> <C>
Balances, October 1, 1997 $3,656,323 $12,461,620 $(492,082) $15,625,861
Net income 1,328,544 1,328,544
Cash dividends ($.14 per share) (456,803) (456,803)
Sale of treasury stock from exercise of options 1,228 984 2,212
------------------------------------------------------
Balances, September 30, 1998 3,656,323 13,334,589 (491,098) 16,499,814
Net income 1,507,620 1,507,620
Cash dividends ($.16 per share) (498,723) (498,723)
Sale of treasury stock from exercise of options 79,753 (75,429) 139,233 143,557
------------------------------------------------------
Balances, September 30, 1999 3,736,076 14,268,057 (351,865) 17,652,268
Net income 1,617,141 1,617,141
Cash dividends ($.16 per share) (505,215) (505,215)
Purchase of treasury stock (667,938) (667,938)
Sale of treasury stock from exercise of options (34,856) 56,294 21,438
------------------------------------------------------
Balances, September 30, 2000 $3,736,076 $15,345,127 $(963,509) $18,117,694
======================================================
</TABLE>
See notes to consolidated financial statements.
FIRST FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended September 30 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 1,617,141 $ 1,507,620 $ 1,328,544
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses 160,874 181,853 680,757
Depreciation and amortization 596,297 581,030 537,603
Deferred income tax 45,000 112,204 (89,968)
Investment securities amortization (accretion), net (137,520) (240,918) (63,061)
FHLB stock dividend (281,100) (256,100) (241,000)
Net change in
Mortgage loans held for sale 11,902 54,000 85,075
Other assets and other liabilities 392,566 (401,687) (119,616)
--------------------------------------------
Net cash provided by operating activities 2,405,160 1,538,002 2,118,334
--------------------------------------------
Investing Activities
Net change in interest-bearing deposits 1,111,030 (2,497,030)
Purchase of FHLB stock (251,100)
Purchases of securities held to maturity (14,967,016) (20,203,768) (12,845,646)
Proceeds from maturities of securities held to maturity 14,401,464 23,118,641 8,501,138
Net change in loans (28,712,889) (9,849,851) 3,196,745
Purchases of premises and equipment (115,950) (211,530) (383,621)
Proceeds from sales and payments received on
real estate owned and repossessed assets 266,125 407,623 417,991
--------------------------------------------
Net cash used by investing activities (28,017,236) (9,235,915) (1,364,493)
--------------------------------------------
Financing Activities
Net change in
Deposits 13,600,023 (2,568,566) 21,054,092
Advance payments by borrowers for taxes and insurance (15,763) 115,863 (80,813)
Short-term borrowings 19,650,000 (29,809,012)
Proceeds of long-term debt 23,960,000 21,000,000
Repayment of long-term debt (7,013,300) (26,387,528) (3,000,000)
Cash dividends (505,215) (517,335) (425,292)
Purchase of stock (667,938)
Proceeds from exercise of options 21,438 143,557 2,212
--------------------------------------------
Net cash provided (used) by financing activities 25,069,245 (5,254,009) 8,741,187
--------------------------------------------
Net Change in Cash and Cash Equivalents (542,831) (12,951,922) 9,495,028
Cash and Cash Equivalents, Beginning of Year 5,380,233 18,332,155 8,837,127
--------------------------------------------
Cash and Cash Equivalents, End of Year $ 4,837,402 $ 5,380,233 $ 18,332,155
============================================
Additional Cash Flows Information
Interest paid $ 9,617,382 $ 8,721,301 $ 9,053,106
Income tax paid 765,000 537,000 875,000
Transfer of loan balances to real estate owned and repossessed assets 440,808 341,587 441,261
</TABLE>
See notes to consolidated financial statements.
FIRST FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
NOTE 1 - Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of First Federal Bancorp, Inc.
("Company") and its wholly owned subsidiary, First Federal Savings Bank of
Eastern Ohio ("Bank"), conform to generally accepted accounting principles
and reporting practices followed by the thrift industry. The more
significant of the policies are described below.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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. Actual results could differ from those estimates.
The Company is a unitary savings and loan holding company whose principal
activity is the ownership and management of the Bank. The Bank operates
under a federal thrift charter and provides full banking services in a
single significant business segment. As a federally-chartered thrift, the
Bank is subject to regulation by the Office of Thrift Supervision, and the
Federal Deposit Insurance Corporation.
The Bank generates commercial, mortgage and consumer loans and receives
deposits from customers located primarily in east central Ohio. The Bank's
loans are generally secured by specific items of collateral, including real
property, consumer assets and business assets.
Consolidation - The consolidated financial statements include the accounts
of the Company and Bank after elimination of all material intercompany
transactions.
Investment Securities - Debt securities are classified as held to maturity
when the Company has the positive intent and ability to hold the securities
to maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity and marketable equity
securities are classified as available for sale. Securities available for
sale are carried at fair value with unrealized gains and losses reported
separately in accumulated other comprehensive income, net of tax. The
Company currently has no available-for-sale securities.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net
security gains (losses). Gains and losses on sales of securities are
determined on the specific-identification method.
Loans held for sale are carried at the lower of aggregate cost or market.
Market is determined using the aggregate method. Net unrealized losses, if
any, are recognized through a valuation allowance by charges to income based
on the difference between estimated sales proceeds and aggregate cost.
Loans are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. The accrual of interest on
impaired loans is discontinued when, in management's opinion, the borrower
may be unable to meet payments as they become due. When interest accrual is
discontinued, all unpaid accrued interest is reversed when considered
uncollectible. Interest income is subsequently recognized only to the extent
cash payments are received. Certain loan fees and direct costs are being
deferred and amortized as an adjustment of yield on the loans.
Allowance for loan losses is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience,
changes in the composition of the portfolio, the current condition and
amount of loans outstanding, and the probability of collecting all amounts
due. Impaired loans are measured by the present value of expected future
cash flows, or the fair value of the collateral of the loan, if collateral
dependent.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on
the estimated useful lives of the assets. Maintenance and repairs are
expensed as incurred while major additions and improvements are capitalized.
Gains and losses on dispositions are included in current operations.
Federal Home Loan Bank stock is a required investment for institutions that
are members of the Federal Home Loan Bank system. The required investment in
the common stock is based on a predetermined formula.
Foreclosed assets are carried at the lower of cost or fair value less
estimated selling costs. When foreclosed assets are acquired, any required
adjustment is charged to the allowance for loan losses. All subsequent
activity is included in current operations.
Treasury stock is stated at cost. Cost is determined by the first-in, first-
out method.
Stock options are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for and will continue to account for stock option
grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, and, accordingly, recognizes no compensation expense for the
stock option grants.
Income tax in the consolidated statement of income includes deferred income
tax provisions or benefits for all significant temporary differences in
recognizing income and expenses for financial reporting and income tax
purposes. The Company files consolidated income tax returns with its
subsidiary.
Earnings per share have been computed based upon the weighted average common
shares and potential common shares outstanding during each year.
Reclassifications of certain amounts in the 1999 and 1998 consolidated
financial statements have been made to conform to the 2000 presentation.
NOTE 2 - Restriction on Cash and Due From Banks
The Bank is required to maintain reserve funds in cash and/or on deposit
with the Federal Reserve Bank. The reserve required at September 30, 2000,
was $845,000.
NOTE 3 - Investment Securities
<TABLE>
<CAPTION>
2000
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
September 30 Cost Gains Losses Value
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity
Federal agencies $10,502 $ 3 $ (6) $10,499
Mortgage-backed securities 739 5 (5) 739
Other securities 137 137
-----------------------------------------------
Total investment securities $11,378 $ 8 $(11) $11,375
===============================================
<CAPTION>
1999
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
September 30 Cost Gains Losses Value
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity
Federal agencies $ 9,544 $(13) $ 9,531
Mortgage-backed securities 969 $16 (5) 980
Other securities 162 162
---------------------------------------------
Total investment securities $10,675 $16 $(18) $10,673
=============================================
</TABLE>
The amortized cost and fair value of securities held to maturity at
September 30, 2000, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because issuers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- -----
<S> <C> <C>
Within one year $10,502 $10,499
One to five years 107 107
Five to ten years 30 30
--------------------
10,639 10,636
Mortgage-backed securities 739 739
--------------------
Totals $11,378 $11,375
====================
</TABLE>
Securities with a carrying value of $5,068,000 and $6,545,000 were pledged
at September 30, 2000 and 1999 to secure certain deposits and for other
purposes as permitted or required by law.
There were no sales of securities held to maturity.
NOTE 4 - Loans and Allowance
<TABLE>
<CAPTION>
September 30 2000 1999
---------------------------------------------------------------
<S> <C> <C>
Real estate loans
One-to-four family residential $104,166 $ 96,358
Multi-family 8,191 8,693
Nonresidential 14,941 12,692
Construction loans 6,403 12,127
Consumer and other loans
Automobile 51,737 38,752
Loans on deposit accounts 305 338
Home equity, education and other 19,615 15,212
Commercial loans 5,407 2,623
--------------------
210,765 186,795
Deferred loan costs 596 470
Undisbursed portion of loans in process (2,484) (6,495)
Allowance for loan losses (1,828) (1,821)
--------------------
Total loans $207,049 $178,949
====================
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30 2000 1999 1998
-------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses
Balances, October 1 $1,821 $2,042 $1,816
Provision for losses 161 182 681
Recoveries on loans 43 94 283
Loans charged off (197) (497) (738)
--------------------------
Balances, September 30 $1,828 $1,821 $2,042
==========================
</TABLE>
NOTE 5 - Premises and Equipment
<TABLE>
<CAPTION>
September 30 2000 1999
----------------------------------------------
<S> <C> <C>
Land and improvements $ 776 $ 833
Buildings 6,564 6,513
Equipment 2,920 2,904
--------------------
Total cost 10,260 10,250
Accumulated depreciation (3,762) (3,271)
--------------------
Net $ 6,498 $ 6,979
====================
</TABLE>
NOTE 6 - Deposits
<TABLE>
<CAPTION>
September 30 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Demand deposits $ 35,496 $ 35,763
Savings deposits 21,509 25,086
Certificates and other time deposits of $100,000 or more 23,956 15,837
Other certificates and time deposits 77,759 68,434
--------------------
Total deposits $158,720 $145,120
====================
</TABLE>
<TABLE>
<S> <C>
Certificates and other time deposits maturing
in years ending September 30
2001 $ 75,899
2002 20,519
2003 2,653
2004 705
2005 1,694
Thereafter 245
--------
$101,715
========
</TABLE>
NOTE 7 - Long-Term Debt
Long-term debt consists solely of fixed-rate (5.77% to 6.90%) Federal Home
Loan Bank (FHLB) advances.
The Federal Home Loan Bank advances are secured by first-mortgage loans and
FHLB stock totaling $82,648,000. Advances are subject to restrictions or
penalties in the event of prepayment.
<TABLE>
<S> <C>
Maturities in years ending September 30
2001 $11,000
2002 1,000
2003 6,000
2004 1,000
2005 4,000
Thereafter 5,970
-------
$28,970
=======
</TABLE>
NOTE 8 - Loan Servicing
Loans serviced for others are not included in the accompanying consolidated
balance sheet. The unpaid principal balances of loans serviced for others
totaled $20,191,000; $22,393,000; and $21,319,000 at September 30, 2000,
1999, and 1998.
Mortgage servicing rights at September 30, 2000 and 1999 and activity for
capitalized mortgage servicing rights for 2000, 1999, and 1998 are not
material.
NOTE 9 - Income Tax
<TABLE>
<CAPTION>
Year Ended September 30 2000 1999 1998
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense
Currently payable $869 $634 $749
Deferred 45 112 (90)
--------------------
Total income tax expense $914 $746 $659
====================
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $861 $766 $676
Other 53 (20) (17)
--------------------
Actual tax expense $914 $746 $659
====================
</TABLE>
A cumulative net deferred tax liability is included in other liabilities.
The components of the liability are as follows:
<TABLE>
<CAPTION>
September 30 2000 1999
---------------------------------------------------
<S> <C> <C>
Assets
Allowance for loan losses $ 363 $ 323
Accrued vacation and sick pay 39 35
Pensions and employee benefits 20 37
Other 3 3
---------------
Total assets 425 398
---------------
Liabilities
Depreciation (189) (189)
FHLB stock dividends (585) (496)
Loan fees (17) (31)
Other (7) (10)
---------------
Total liabilities (798) (726)
---------------
$(373) $(328)
===============
</TABLE>
Retained earnings include approximately $1,111,000 for which no deferred
income tax liability has been recognized. This amount represents an
allocation of income to bad debt deductions as of December 31, 1987 for tax
purposes only. Reduction of amounts so allocated for purposes other than tax
bad debt losses or adjustments arising from carryback of net operating
losses would create income for tax purposes only, which income would be
subject to the then-current corporate income tax rate. The unrecorded
deferred income tax liability on the above amounts was approximately
$549,000.
NOTE 10 - Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, which are not
included in the accompanying financial statements. The Banks' exposure to
credit loss in the event of nonperformance by the other party to the
financial instruments for commitments to extend credit and standby letters
of credit is represented by the contractual or notional amount of those
instruments. The Bank uses the same credit policies in making such
commitments as it does for instruments that are included in the consolidated
balance sheet.
Financial instruments whose contract amount represents credit risk as of
September 30, 2000 and 1999 include commitments to extend credit of
$20,027,000 and $18,274,000.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Banks upon extension of
credit, is based on management's credit evaluation. Collateral held varies
but may include accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
The Company and subsidiary are also subject to claims and lawsuits which
arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate resolution of such claims and
lawsuits will not have a material adverse effect on the consolidated
financial position of the Company.
NOTE 11 - Dividend and Capital Restrictions
Without prior approval, current regulations allow the Bank to pay dividends
to the Company not exceeding net income (as defined) for the current year
plus retained net income for the previous two calendar years. The Bank
normally restricts dividends to a lesser amount because of the need to
maintain an adequate capital structure. At September 30, 2000, total
stockholders' equity of the Bank was $16,649,000, of which approximately
$2,304,000 was potentially available for distribution to the Company.
NOTE 12 - Regulatory Capital
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies and is assigned to a capital category. The
assigned capital category is largely determined by three ratios that are
calculated according to the regulations: total risk adjusted capital, Tier 1
capital, and Tier 1 leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and
off-balance sheet exposures of the entity. The capital category assigned to
an entity can also be affected by qualitative judgments made by regulatory
agencies about the risk inherent in the entity's activities that are not
part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from
well capitalized to critically undercapitalized. Classification of a bank in
any of the undercapitalized categories can result in actions by regulators
that could have a material effect on a bank's operations. At September 30,
2000 and 1999, the Bank is categorized as well capitalized and met all
applicable capital adequacy requirements. There are no conditions or events
since September 30, 2000 that management believes have changed the Bank's
classification.
<TABLE>
<CAPTION>
Required for Adequate To Be Well
Actual Capital(1) Capitalized(1)
---------------- --------------------- ----------------
September 30 Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 2000
Total risk-based capital(1) (to risk-weighted assets) $17,733 11.34% $12,505 8.0% $15,631 10.0%
Tier 1 capital(1) (to risk-weighted assets) 16,478 10.54% 6,252 4.0% 9,379 6.0%
Core capital(1) (to adjusted total assets) 16,478 6.96% 7,098 3.0% 11,829 5.0%
Core capital(1) (to adjusted tangible assets) 16,478 6.96% 4,732 2.0% N/A
Tangible capital(1) (to adjusted total assets) 16,478 6.96% 3,549 1.5% N/A
As of September 30, 1999
Total risk-based capital(1) (to risk-weighted assets) $16,990 12.95% $10,493 8.0% $13,157 10.0%
Tier 1 capital(1) (to risk-weighted assets) 15,634 11.92% 5,246 4.0% 7,869 6.0%
Core capital(1) (to adjusted total assets) 15,634 7.45% 6,293 3.0% 10,488 5.0%
Core capital(1) (to adjusted tangible assets) 15,634 7.45% 4,195 2.0% N/A
Tangible capital(1) (to adjusted total assets) 15,634 7.45% 3,147 1.5% N/A
<FN>
--------------------
<F1> As defined by regulatory agencies
</FN>
</TABLE>
NOTE 13 - Employee Benefit Plans
The Company's defined-benefit pension plan covers substantially all of its
employees. The following table sets forth the plan's funded status and
amounts recognized in the consolidated financial statements:
<TABLE>
<CAPTION>
September 30 2000 1999
----------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $1,043 $1,368
Service cost 56 74
Interest cost 80 92
Actuarial gain 86 (471)
Benefits paid (20) (20)
-----------------
Benefit obligation at end of year 1,245 1,043
-----------------
Change in plan assets
Fair value of plan assets at beginning of year 1,172 1,149
Actual return on plan assets (3) (18)
Employer contribution 121 62
Benefits paid (20) (20)
-----------------
Fair value of plan assets at end of year 1,270 1,173
-----------------
Funded status 25 130
Unrecognized net actuarial loss 21 (130)
Unrecognized transition liability 10 11
-----------------
Prepaid benefit cost $ 56 $ 11
=================
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30 2000 1999 1998
--------------------------------------------------------------------------
<S> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 56 $ 74 $ 73
Interest cost 80 92 92
Expected return on plan assets 3 17 (95)
Net amortization and deferral (64) (69) 53
------------------------
Net periodic benefit cost $ 75 $114 $123
========================
Assumptions used in the accounting were:
Discount rate 7.72% 7.72% 6.74%
Rate of increase in compensation 4.00% 4.00% 4.00%
Expected long-term rate of return on assets 5.00% 5.00% 5.00%
</TABLE>
NOTE 14 - Related Party Transactions
The Bank has entered into transactions with certain directors, executive
officers, significant stockholders and their affiliates or associates
(related parties). Such transactions were made in the ordinary course of
business on substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the same time for comparable
transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other
unfavorable features
The aggregate amount of loans, as defined, to such related parties were as
follows:
<TABLE>
<S> <C>
Balances, October 1, 2000 $1,470
Changes in composition of related parties (253)
New loans, including renewals 140
Payments, etc., including renewals (199)
------
Balances, September 30, 2000 $1,158
======
</TABLE>
Deposits from related parties held by the Banks at September 30, 2000 and
1999 totaled $847,000 and $530,000.
NOTE 15 - Stock Option Plan
The Company has five stock option plans, three Incentive Stock Option Plans
for Officers and Key Employees and two Stock Option Plans for Non-employee
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 non-employee
directors. Options expire 10 years after the date of grant and are issued at
the market price of the Company's stock on the date of grant; therefore, no
compensation expense was recognized. 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.
Although the Company has elected to follow APB No. 25, SFAS No. 123 requires
pro forma disclosures of net income and earnings per share as if the Company
had accounted for its employee stock options under that Statement. The fair
value of each option grant was estimated on the grant date using an option-
pricing model with the following assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
--------------------------------
<S> <C> <C> <C>
Risk-free interest rates 6.50% 5.21% 6.24%
Dividend yields 2.91% 1.35% 1.44%
Volatility factors of expected market price of common stock 27.00% 5.76% 5.42%
Weighted-average expected life of the options 10 years 10 years 10 years
</TABLE>
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the
options' vesting period. The pro forma effect on net income and earnings per
share of this statement are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------------------------
<S> <C> <C> <C> <C>
Net income As reported $1,617 $1,508 $1,329
Pro forma 1,606 1,408 1,229
Basic earnings per share As reported .51 .47 .42
Pro forma .51 .44 .39
Diluted earnings per share As reported .48 .44 .38
Pro forma .48 .41 .35
</TABLE>
The following is a summary of the status of the Company's stock option plan
and changes in that plan as of and for the years ended September 30, 2000,
1999 and 1998.
<TABLE>
<CAPTION>
Year Ended September 30 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 460,546 $3.72 504,660 $ 3.50 469,560 $2.97
Granted 6,100 5.50 2,740 11.88 40,100 9.96
Exercised (17,150) 1.25 (45,639) 1.63 (300) 7.38
Forfeited/expired (4,670) 7.10 (1,215) 9.32 (4,700) 5.42
---------------------------------------------------------------------
Outstanding, end of year 444,826 3.39 460,546 3.72 504,660 3.50
=====================================================================
Options exercisable at year end 439,426 3.37 458,221 3.67 500,760 2.52
Weighted-average fair value of options
granted during the year 1.88 3.34 3.63
</TABLE>
As of September 30, 2000, the options outstanding and exercisable are as
follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------ -------------------
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Range of Prices Number Life (Months) Number Price
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1.25 to $2.50 162,500 21.56 162,500 $ 1.26
$2.51 to $5.00 226,280 54.72 226,280 3.60
$5.01 to $7.50 15,391 82.56 9,991 6.33
$7.51 to $10.00 38,700 86.01 38,700 9.96
$10.01 to $12.50 1,955 97.15 1,955 11.88
------- -------
444,826 46.48 439,426 3.37
======= =======
</TABLE>
NOTE 16 - Earnings Per Share
Earnings per share (EPS) were computed as follows:
<TABLE>
<CAPTION>
Year Ended September 30, 2000
-------------------------------------
Weighted Per-Share
Income Average Shares Amount
-------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common stockholders $1,617 3,168,193 $.51
Effect of Dilutive Securities
Stock options 209,207
---------
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions $1,617 3,377,400 $.48
===================================
</TABLE>
Options to purchase 42,746 shares of common stock at $9.77 per share were
outstanding at September 30, 2000, but were not included in the computation
of diluted EPS because the options' exercise price was greater than the
average market price of the common shares.
<TABLE>
<CAPTION>
Year Ended September 30, 1999
-------------------------------------
Weighted Per-Share
Income Average Shares Amount
-------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common stockholders $1,508 3,176,462 $.47
Effect of Dilutive Securities
Stock options 219,155
---------
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions $1,508 3,395,617 $.44
===================================
<CAPTION>
Year Ended September 30, 1998
-------------------------------------
Weighted Per-Share
Income Average Shares Amount
-------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common stockholders $1,329 3,150,532 $.42
Effect of Dilutive Securities
Stock options 354,482
---------
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions $1,329 3,505,014 $.38
===================================
</TABLE>
NOTE 17 - Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash and Cash Equivalents - The fair value of cash and cash equivalents
approximates carrying value.
Interest-bearing Time Deposits - The fair value of interest-bearing time
deposits approximates carrying value.
Securities and Mortgage-backed Securities - Fair values are based on quoted
market prices.
Loans - For both short-term loans and variable-rate loans that reprice
frequently and with no significant change in credit risk, fair values are
based on carrying values. The fair values for certain mortgage loans,
including one-to-four family residential, are based on quoted market prices
of similar loans sold in conjunction with securitization transactions,
adjusted for differences in loan characteristics. The fair value for other
loans is estimated using discounted cash flow analyses using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality.
Interest Receivable/Payable - The fair values of interest receivable/payable
approximate carrying values.
FHLB Stock - Fair value of FHLB stock is based on the price at which it may
be resold to the FHLB.
Deposits - The fair values of noninterest-bearing, interest-bearing demand
and savings accounts are equal to the amount payable on demand at the
balance sheet date. The carrying amounts for variable rate, fixed-term
certificates of deposit approximate their fair values at the balance sheet
date. Fair values for fixed-rate certificates of deposit are estimated using
a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on such time deposits.
Short-term Borrowings - The carrying amounts approximate fair value.
Long-term Debt - The fair value of these borrowings are estimated using a
discounted cash flow calculation, based on current rates for similar debt.
Off-Balance Sheet Commitments - Commitments include commitments to purchase
and originate mortgage loans, commitments to sell mortgage loans, and
standby letters of credit and are generally of a short-term nature. The fair
value of such commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
2000 1999
-------------------- --------------------
Carrying Fair Carrying Fair
September 30 Amount Value Amount Value
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 4,837 $ 4,837 $ 5,380 $ 5,380
Interest-bearing deposits 1,386 1,386 2,497 2,497
Investment securities held to maturity 11,378 11,375 10,675 10,673
Loans including loans held for sale, net 207,049 205,962 178,949 180,569
Interest receivable 1,354 1,354 1,119 1,119
Stock in FHLB 4,071 4,071 3,790 3,790
Liabilities
Deposits 158,720 159,111 145,120 145,387
Short-term borrowings 29,235 29,235 9,585 9,585
Long-term debt 28,970 28,980 35,983 35,911
Interest payable 626 626 457 457
</TABLE>
NOTE 18 - Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
<TABLE>
<CAPTION>
Condensed Balance Sheet
September 30 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Assets
Deposits with subsidiary $ 283 $ 1,132
Commercial loans 1,296 793
Investment in common stock of subsidiary 16,649 15,782
Other assets 37 99
-------------------
Total assets $18,265 $17,806
===================
Liabilities
Other liabilities $ 147 $ 154
-------------------
Stockholders' Equity 18,118 17,652
-------------------
Total liabilities and stockholders' equity $18,265 $17,806
===================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Income
Year Ended September 30 2000 1999 1998
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from subsidiary $ 750 $ 600 $ 600
Interest income 137 113 108
--------------------------
Total income 887 713 708
Expenses
Other expenses 137 125 117
--------------------------
Income before equity in undistributed income of subsidiary 750 588 591
Equity in undistributed income of subsidiary 867 920 738
--------------------------
Net Income $1,617 $1,508 $1,329
==========================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
Year Ended September 30 2000 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $1,617 $1,508 $1,329
Equity in undistributed income of subsidiary (867) (920) (738)
Net change in other assets and liabilities 5 19 11
--------------------------
Net cash provided by operating activities 805 607 602
--------------------------
Investing Activities
Proceeds from maturities of securities 250
Net change in loans (503) (533) 603
--------------------------
Net cash provided (used) by investing activities (503) (533) 853
--------------------------
Financing Activities
Proceeds from exercise of options 22 74 2
Purchase of treasury stock (668)
Dividends paid (505) (517) (425)
--------------------------
Net cash used by financing activities (1,151) (443) (423)
--------------------------
Net Change in Cash and Cash Equivalents (849) (369) 1,032
Cash and Cash Equivalents at Beginning of Year 1,132 1,501 469
--------------------------
Cash and Cash Equivalents at End of Year $ 283 $1,132 $1,501
==========================
</TABLE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
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 LLP was engaged to audit Bancorp's financial
statements for the fiscal year ended Spetember 30, 2000. The decision to
change auditors was based upon a belief that Olive LLP 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.
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
2001 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 47 Secretary
Connie Ayres LaPlante 44 Treasurer
John C. Matesich, III 57 Chairman of the Board
J. William Plummer 55 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 44 Treasurer and
Senior Vice President
John C. Matesich, III 57 Chairman of the Board
J. William Plummer 55 President and
Chief Executive Officer
Larry W. Snode 51 Secretary and
Senior Vice President -
Operations
Thomas N. Sulens 49 Senior Vice President -
Lending
John W. Imes 38 Senior Vice President -
Chief Lending Officer
<FN>
--------------------
<F1> There are no family relationships among the executive officers of
Bancorp or First Federal.
<F2> As of December 15, 2000.
</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
Commercial/Small Business Lending for First Federal. Mr. Sulens commenced
employment with First Federal in 1973.
John W. Imes is the Senior Vice President in charge of Lending for
First Federal. Mr. Imes commenced employment with First Federal in 2000.
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 Auditor - Olive LLP
Consent of Auditor - Crowe Chizek and Company, LLP
Item 27. Financial Data Schedule
Item 99 Report of Independent Auditors
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 20, 2000 Date December 20, 2000
----------------------------- ------------------------------
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 20, 2000 Date December 20, 2000
----------------------------- ------------------------------
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 20, 2000 Date December 20, 2000
----------------------------- ------------------------------
By /s/ Patrick L. Hennessey
--------------------------------
Patrick L. Hennessey
Director
Date December 20, 2000
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 Articles
Incorporation of First Federal of Incorporation of Bancorp,
Bancorp, Inc. 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 of
Regulations of First Federal Regulations of Bancorp filed
Bancorp, Inc. 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, Inc.
1992 Stock Option Plan for 1992 Stock Option Plan for
Officers and Key Employees 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, Inc.
1992 Stock Option Plan for 1992 Stock Option Plan for
Non-Employee Directors 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, Inc.
1994 Stock Option Plan for 1994 Stock Option Plan for
Officers and Key Employees 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, Inc.
1994 Stock Option Plan for 1994 Stock Option Plan for
Non-Employee Directors 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, Inc.
1997 Performance Stock Option 1997 Performance Stock Option
Plan for Senior Executive Plan for Senior Executive
Officers and Outside Directors 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.
23.1 Consent of Auditor - Olive LLP
23.2 Consent of Auditor - Crowe
Chizek & Co. LLP
27 Financial Data Schedule
99 Report of Independent Auditors
99.1 Proxy Statement for the 2001 Incorporated by reference to
Annual Meeting of Shareholders the Definitive Proxy Statement
of First Federal Bancorp, Inc. for the 2001 Annual Meeting of
Shareholders, to be filed.
99.2 Safe Harbor Under the Private
Securities Litigation Reform
Act of 1995
