UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________
Commission file number 0-22034
WOOD BANCORP, INC.
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(Name of small business issuer as specified in its charter)
Delaware 34-1742860
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
124 East Court, Bowling Green, Ohio 43402-2259
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (419) 352-3502
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(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 issuer was required to file such reports), and (2) has
been subject to such requirements for the past 90 days. YES [ X ] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, 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. [ ]
State the issuer's revenues for its most recent fiscal year:
$14,692,111.
<PAGE>
The aggregate market value of the voting and non-voting common equity
held by non-affiliates, computed by reference to the average of the bid and
asked prices of such common equity on the Nasdaq Stock Market as of September
23, 1998, was $28.4 million. (The exclusion from such amount of the market value
of the shares owned by any person shall not be deemed an admission by the
registrant that such person is an affiliate of the registrant.)
As of September 23, 1998, there were issued and outstanding 2,684,740
shares of the Registrant's Common Stock (including 106,718 shares of restricted
stock issued pursuant to the Registrant's Recognition and Retention Plan).
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal
year ended June 30, 1998.
Part III of Form 10-KSB - Proxy Statement for 1998 Annual Meeting of
Stockholders.
Transitional Small Business Disclosure Format: YES [ ] NO [ X ]
<PAGE>
PART I
Item 1. Description of Business
General
Wood Bancorp, Inc. (the "Company") is a Delaware corporation which was
formed at the direction of First Federal Bank ("First Federal" or the "Bank") in
May 1993 for the purpose of becoming the savings and loan holding company of
First Federal (the "Conversion"). At June 30, 1998, the Company had total assets
of $166.1 million, deposits of $130.1 million, and shareholders' equity of $22.6
million. All references to the Company at or before August 31, 1993 refer to
First Federal.
First Federal is a federally chartered stock savings and loan
association headquartered in Bowling Green, Ohio. First Federal was originally
organized in 1923 as a state chartered savings institution and, in 1937,
converted to a federal savings and loan association. First Federal has been, and
intends to continue to be, a community-oriented financial institution offering a
variety of financial services to meet the needs of the communities it serves.
The Bank attracts deposits from the general public and uses such deposits,
together with borrowings and other funds, to originate one- to four-family
residential mortgage loans and short-term consumer loans. The Bank also
originates residential construction loans in its market area and commercial
loans and loans secured by multi-family and non-residential real estate. At June
30, 1998, substantially all of the Bank's real estate mortgage loans (excluding
mortgage-backed securities) and consumer loans were secured by properties or
collateral located in northwest Ohio. See generally "Lending Activities."
The Bank also invests in mortgage-backed securities, most of which are
insured or guaranteed by federal agencies as well as securities issued by the
U.S. government or agencies thereof. See "Investment Activities."
Like all federally chartered savings associations, First Federal's
operations are regulated by the Office of Thrift Supervision (the "OTS"). First
Federal is a member of the Federal Home Loan Bank System ("FHLB System") and a
stockholder in the Federal Home Loan Bank ("FHLB") of Cincinnati. The Bank is
also a member of the Savings Association Insurance Fund ("SAIF") and its deposit
accounts are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC"). See "Regulation."
The Bank's revenues are derived primarily from interest on mortgage
loans, consumer and commercial loans, securities, including mortgage-backed
securities, income from service charges, and gain on sales of loans. The Bank
does not originate loans to fund leveraged buyouts, has no loans to foreign
corporations or governments and is not engaged in land development or
construction activities through joint ventures or subsidiaries.
The Bank offers a variety of deposit accounts having a wide range of
interest rates and terms, which generally include passbook accounts, NOW, money
market checking and regular checking accounts, and certificate accounts with
terms of 91 days to 60 months. The Bank primarily solicits deposits in its
primary market area and does not accept brokered deposits. However, in June
1997, the Bank began using a national listing service to attract additional
deposits.
<PAGE>
Forward-Looking Statements
When used in this Form 10-KSB and in future filings by the Company with
the Securities and Exchange Commission (the "SEC"), in the Company's press
releases or other public or shareholder communications, and in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake--and specifically declines any
obligation--to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Impact of Year 2000
As the year 2000 approaches, significant concerns have been expressed
with respect to the ability of existing computer software programs and operating
systems to function properly with respect to data containing dates in the year
2000 and thereafter. Many existing applications were designed to accommodate
only a two digit year (e.g., 1998 is reflected a "98"). Any of the applications
using a two digit year may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in mistakes, errors or system failures,
which may have a material effect upon the operations of the Company. Due to the
fact that rapid and accurate data processing is essential to operations, the
Company is working to resolve the potential impact of the "Year 2000" issue.
The Company has conducted a comprehensive review of its computer
systems to identify applications that could be affected by the "Year 2000"
issue, and has been in contact with third party vendors to resolve this issue.
Additionally, to prevent potential credit quality issues, management has
supplied information to the Company's commerical loan customers to make them
aware of possible "Year 2000" problems.
While the Company is currently working with its third party vendors to
resolve this issue, no assurance can be given that such third-party vendors will
be "Year 2000" complaint. Management believes that such vendors are taking
appropriate steps to address the issues on a timely basis. If the Company or its
third-party vendor are unable to become a "Year 2000" complaint, the Company may
experience significant data processing delays, mistakes or failures. These
delays, mistakes or failures could have a significant adverse impact on the
financial condition and results of operations of the Company. Management is
prepared to hire temporary help to complete manual processes or to be utilized
as couriers should the need arise. Nevertheless, based on current costs spent
addressing the "Year 2000" issue, the Company does not believe that the cost of
addressing this issue in the future will be a material event.
<PAGE>
Management believes that appropriate actions have been taken to
evaluate the "Year 2000" risks and to implement procedures necessary to address
those risks. Management is also developing a formal contingency plan that
outlines possible courses of actions that would be followed should the company
encounter computer processing or general operational problems arising from the
"Year 2000" issue.
Market Area
The main office of the Bank is located in Bowling Green, Ohio, which is
located in Wood County, Ohio. The Bank operates seven offices: two in Bowling
Green, and one in each of Grand Rapids, North Baltimore, Rossford, Woodville and
Pemberville. All branches are located in Wood County with the exception of the
Woodville branch, which is located four miles from Wood County in Sandusky
County, Ohio. The Bank considers Wood County its primary market area.
Wood County is located in northwest Ohio. Toledo, Ohio, 20 miles to the
north, is a major midwest industrial city with a commercial airport served by
major airlines and several commuter affiliates. Wood County has a mixed
agricultural and industrial economy. Wood County is also the home of Bowling
Green State University, a four-year public undergraduate and graduate
institution.
The executive offices of the Company are located at 124 East Court
Street, Bowling Green, Ohio 43402-2259 and its telephone number is (419)
352-3502. Unless the context otherwise requires, all references herein to the
Bank or the Company include the Company and the Bank on a consolidated basis.
Lending Activities
General. Historically, the Bank primarily originated fixed-rate, one-
to four-family mortgage loans. In the early 1980s, the Bank began to focus on
the origination of adjustable-rate one- to four-family mortgage ("ARM") loans
and short-term consumer and other loans for retention in its portfolio, in order
to increase the percentage of loans with more frequent repricing or shorter
maturities, and in some cases higher yields, than fixed-rate, one- to
four-family mortgage loans. While the Bank's current loan portfolio consists
mainly of ARM loans and short-term consumer loans, in 1993 the Bank began to
originate fixed-rate mortgage loans in response to customer demand. Under First
Federal's current policy, virtually all fixed-rate loans are sold in the
secondary market. See also "- One- to Four-Family Residential Mortgage Lending"
and "Originations, Purchases, Sales and Servicing of Loans."
The Bank also originates consumer (including automobile), commercial
and multi-family real estate, commercial business, and residential construction
loans in its primary market area. At June 30, 1998, the Bank's net loan
portfolio totaled $135.6 million.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank could have invested in any one real estate
project is generally the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation - Federal Regulation of Savings Associations." At June
30, 1998, the maximum amount which the Bank could have lent to any one borrower
and the borrower's related entities was approximately $2.1 million. At June 30,
1998, the Bank had one loan relationship with an outstanding balance to any one
<PAGE>
borrower (or related entities) in excess of this amount. The principal balance
for this relationship was approximately $2.1 million at June 30, 1998. The Bank
was in compliance with its loans-to-one-borrower limitation at August 1, 1998,
after principal repayments were made on the loan for July and income of the Bank
for July increased the loans-to-one-borrower limitation. The Bank may
discontinue, adjust or create new lending programs to respond to its needs and
to competitive factors.
<PAGE>
Loan Portfolio Composition. The following information presents the
composition of the Bank's loan portfolio in dollar amounts and in percentages
(before deductions for loans in process, net deferred loan origination fees and
allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family................ $ 87,924 62.55% $ 93,538 69.63 % $ 85,387 73.43%
Secured by other properties(1)..... 10,578 7.52 7,296 5.43 4,813 4.14
Construction....................... 6,403 4.55 4,516 3.36 6,397 5.50
Home equity........................ 10,679 7.60 8,335 6.20 4,112 3.54
--------- ------ --------- ------ -------- ------
Total real estate loans........ 115,584 82.22 113,685 84.62 100,709 86.61
Other Loans:
Consumer Loans:
Automobile........................ 7,667 5.45 7,696 5.73 7,013 6.03
Other............................. 6,858 4.88 4,925 3.67 4,462 3.84
--------- ------ --------- ------ -------- ------
Total consumer loans........... 14,525 10.33 12,621 9.40 11,475 9.87
--------- ------ --------- ------ -------- ------
Commercial business loans.......... 10,463 7.45 8,035 5.98 4,098 3.52
--------- ------ --------- ------ -------- ------
Total other loans.............. 24,988 17.78 20,656 15.38 15,573 13.39
--------- ------ --------- ------ -------- ------
Total loans.................... 140,572 100.00% 134,341 100.00% 116,282 100.00%
--------- ====== -------- ====== -------- ======
Less:
Loans in process................... 4,105 2,246 4,104
Net deferred loan origination fees. 195 201 209
Allowance for losses............... 654 576 513
-------- -------- --------
Total loans receivable, net.... $135,618 $131,318 $111,456
======== ======== ========
</TABLE>
(1)Includes multi-family, commercial real estate, land lot and
agricultural loans.
<PAGE>
The following table shows the composition of the Bank's loan portfolio
by fixed and adjustable rates at the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family............... $ 9,983 7.10% $ 9,892 7.37% $ 13,355 11.48%
Secured by other properties(1).... 1,007 0.71 703 .52 2,198 1.89
---------- ------ ------- ------ ------- ------
Total........................... 10,990 7.81 10,595 7.89 15,553 13.37
Home equity and consumer.......... 14,284 10.16 12,842 9.56 11,965 10.29
Commercial business............... 3,387 2.41 3,363 2.50 3,181 2.74
---------- ------ ------- ------ ------- ------
Total fixed-rate loans.......... 28,661 20.38 26,800 19.95 30,699 26.40
Adjustable-Rate Loans:
Real estate:
One- to four-family............... 77,941 55.45 83,646 62.26 72,032 61.95
Secured by other properties(1).... 9,571 6.81 6,593 4.91 2,615 2.25
Construction...................... 6,403 4.55 4,516 3.36 6,397 5.50
---------- ------ ------- ------ ------- ------
Total........................... 93,915 66.81 94,755 70.53 81,044 69.70
Home equity and consumer.......... 10,920 7.77 8,114 6.04 3,622 3.11
Commercial business............... 7,076 5.04 4,672 3.48 917 .79
---------- ------ ------- ------ ------- ------
Total adjustable-rate loans..... 111,911 79.62 107,541 80.05 85,583 73.60
---------- ------ ------- ------ ------- ------
Total loans..................... 140,572 100.00% 134,341 100.00% 116,282 100.00%
--------- ====== ------- ====== -------- ======
Less:
Loans in process................... 4,105 2,246 4,104
Net deferred loan origination fees. 195 201 209
Allowance for loan losses.......... 654 576 513
--------- -------- --------
Total loans receivable, net..... $135,618 $131,318 $111,456
======== ======== ========
</TABLE>
(1) Includes multi-family, commercial real estate, land lot and
agricultural loans.
<PAGE>
The following schedule sets forth certain information at June 30, 1998
regarding the net dollar amount of loans maturing in First Federal's portfolio,
based on contractual terms to maturity. The schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Due During
Years Ending Consumer on(2) on(2)
June 30, Real Estate(1)(4) Commercial Construction(2) and Other on(2) Total
-------- ----------------- ---------- --------------- --------------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
1999(3)..................... $ 48 $ 3,337 $ 6,403 $ 4,405 $14,193
2000........................ 318 2,008 --- 1,623 3,949
2001........................ 722 765 --- 2,471 3,958
2002 and 2003............... 1,454 2,217 --- 5,266 8,937
2004 to 2013 ............... 34,290 2,136 --- 720 37,146
2014 and following.......... 72,349 --- --- 40 72,389
------- ------- ------- -------- --------
$109,181 $10,463 $ 6,403 $14,525 $140,572
======= ======= ======= ======= ========
</TABLE>
- ------------
(1) Includes one- to four-family, multi-family, commercial real estate, land
lot, agricultural and home equity loans.
(2) Construction loans are written for a nine month construction period, with
interest only payments due monthly. At the end of the construction period
the loan automatically converts to a monthly payment, 30-year permanent
loan.
(3) Includes demand loans, loans having no stated maturity and overdraft loans.
(4) Home equity loans totaling $10.7 million do not have a stated payment. The
borrower is billed 1% of the outstanding balance monthly.
At June 30, 1998, the total amount of loans due after June 30, 1999
which have predetermined interest rates was $24.6 million, while the total
amount of loans due after such date which have floating or adjustable interest
rates was $101.8 million.
One- to Four-Family Residential Mortgage Lending. Residential loan
originations of this type are generated by the Bank's marketing efforts, its
present customers, walk-in customers and referrals from real estate agents and
builders. The Bank focuses its lending efforts primarily on the origination of
loans secured by first mortgages on owner-occupied, one- to four-family
residences. At June 30, 1998, the Bank's one- to four-family residential
mortgage loans totaled approximately $87.9 million, or approximately 62.6% of
the Bank's total gross loan portfolio. Of this portfolio, approximately $6.4
million constituted loans secured by one- to four-family residential property
that is rented.
The Bank currently offers fixed-rate or ARM payment loans. The Bank's
one- to four-family residential mortgage originations are secured by property
located in its market and surrounding areas.
<PAGE>
The Bank currently offers one and three year ARM loans with an interest
rate margin over the one and three year Treasury rates. These loans provide for
a 200 basis point cap on any adjustment date and a lifetime cap of 600 basis
points over the initial rate. The Bank's ARMs do not permit negative
amortization of principal. The Bank qualifies one year ARM borrowers on the
maximum second year rate and three year ARM borrowers on the initial rate plus
100 basis points.
Interest rates charged on fixed-rate and adjustable-rate one- to
four-family mortgage loans are competitively priced according to market
conditions. Residential loans generally do not include prepayment penalties.
During the last three fiscal years, the Bank has not purchased any loans. See
"Originations, Purchases, Sales and Servicing of Loans."
In underwriting one- to four-family residential real estate loans,
First Federal evaluates both the borrower's ability to make monthly payments and
the value of the property securing the loan. Currently, virtually all properties
securing real estate loans made by First Federal are appraised by independent
fee appraisers approved and qualified by the Board of Directors. First Federal
generally requires borrowers to obtain an attorney's title opinion or title
insurance, and fire and property insurance (including flood insurance, if
necessary) in an amount not less than the amount of the loan. Real estate loans
originated by the Bank generally contain an option "due on sale" clause allowing
the Bank the option to declare the unpaid principal balance due and payable upon
the sale of the security property.
Consumer Lending. First Federal offers a variety of secured consumer
loans, including automobile and truck, motorcycle, boat and recreational
vehicle, home equity, home improvement loans and loans secured by savings
deposits. In addition, First Federal offers other secured and unsecured consumer
loans, including an overdraft checking line-of-credit. The Bank currently
originates substantially all of its consumer loans in its primary market area
and surrounding areas. The Bank originates consumer loans primarily on a direct
basis, by extending credit directly to the borrower. Indirect loans, such as
those involving the purchase of loan contracts from retailers of goods or
services which have extended credit to their customers, are also made, to a
lesser extent. Typically, automobile loans are made for up to 60 months for new
vehicles, and up to 48 months for used vehicles. Used vehicle lending
predominates over new vehicle lending. Almost all consumer loans are made on a
fixed-rate basis, except for home equity loans, which are either fixed-rate or
tied to one year Treasury rates.
Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured
or are secured by rapidly depreciable assets, such as automobiles. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. In addition, consumer
loan collections are dependent on the borrower's continuing financial stability,
and thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. Consumer loan terms also vary according to the type and value of
collateral, length of contract and creditworthiness of the borrower. At June 30,
1998, $260,000, or approximately 1.79% of the consumer loan portfolio, was
delinquent 30 days or more. There can be no assurance that delinquencies will
not increase in the future.
<PAGE>
At June 30, 1998, the Bank's consumer loan portfolio totaled $14.5
million, or 10.3% of its gross loan portfolio. Of the consumer loan portfolio at
June 30, 1998, approximately 93.53% were short- and intermediate-term,
fixed-rate loans and 6.47% were adjustable-rate loans.
The largest component of First Federal's consumer loan portfolio
consists of automobile loans. At June 30, 1998, automobile loans totaled $7.7
million, or approximately 52.78% and 5.45%, of the Bank's consumer and gross
loan portfolios, respectively.
Loans secured by deposit accounts at the Bank are generally originated
for up to 90% of the account balance with a hold placed on the account
restricting the withdrawal of the account balance. The interest rate on such
loans is from 100 to 300 basis points above the deposit contract rate.
The underwriting standards employed by the Bank for consumer loans
include an application, a determination of the applicant's payment history on
other debts and an assessment of ability to meet existing obligations and
payments on the proposed loan. Although creditworthiness of the applicant is a
primary consideration, the underwriting process also includes a comparison of
the value of the security, if any, in relation to the proposed loan amount.
Construction Lending. The Bank engages in construction lending to
individuals for the construction of their residences as well as to builders for
the construction of single-family homes and other types of real estate in the
Bank's primary market area and surrounding areas. At June 30, 1998, the Bank had
$6.4 million of gross construction loans, most of which were to borrowers who
intended to live in the properties upon completion of construction. Currently
all of the Bank's construction loans have adjustable rates of interest.
Construction loans for residences are structured as permanent loans
with interest only payable for up to the first nine months during the
construction phase. Construction loans are underwritten pursuant to the same
guidelines used for originating permanent real estate loans.
Construction lending is generally considered to involve a higher level
of credit risk than permanent one- to four-family residential lending, due to
the concentration of principal in a limited number of loans and borrowers and/or
the effects of general economic conditions on development projects, real estate
developers, managers or homebuilders. In addition, the nature of these loans is
such that they are more difficult to evaluate and monitor. The Bank's risk of
loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value upon completion of the project and the
estimated cost (including interest) of the project. If the estimate of value
proves to be inaccurate, the Bank may be confronted, at or prior to the maturity
of the loan, with a project having a value which is insufficient to assure full
repayment. When loan payments become due, borrowers may experience cash flow
from the property which is not adequate to service total debt. In such cases,
the Bank may be required to modify the terms of the loan. The Bank has not
experienced a loss on this portfolio during the last three years.
Commercial and Multi-Family Real Estate Lending. The Bank has also
engaged in limited commercial and multi-family real estate lending in the Wood
County market area. At June 30, 1998, all of the Bank's commercial and
multi-family real estate loan portfolio was secured by properties located in
Ohio, except for one loan valued at $1,237,258, secured by a nursing home in
Indiana.
<PAGE>
Loans secured by commercial and multi-family real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy. If the
cash flow from the project is reduced (for example, if leases are not obtained
or renewed), the borrower's ability to repay the loan may be impaired.
The Bank's commercial and multi-family real estate loan portfolio is
secured primarily by apartment buildings and, to a lesser extent, office
buildings, hotels, restaurants, retail stores, multi-family real estate and
churches. Commercial and multi-family real estate loans generally have terms
that do not exceed 25 years. The Bank has a variety of rate adjustment features
and other terms in its commercial and multi-family real estate loan portfolio.
Generally, the loans are made in amounts up to 75% of the appraised value of the
security property. Commercial real estate loans provide for a margin over a
designated index which is generally the one year Treasury bill rate. The Bank
currently analyzes the financial condition of the borrower, the borrower's
credit history, and the reliability and predictability of the cash flow
generated by the property securing the loan. In addition to the collateral
securing the loan, the Bank generally requires personal guaranties of the
borrowers. Appraisals on properties securing commercial real estate loans
originated by the Bank are performed by independent appraisers.
Commercial Business Lending. The Bank also originates commercial
business loans. At June 30, 1998, approximately $10.5 million, or 7.45% of the
Bank's total gross loan portfolio, was comprised of commercial business loans.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself (which, in turn, is likely to be dependent upon the general economic
environment). The Bank's commercial business loans are usually, but not always,
secured by real estate or business assets. However, the collateral securing the
loans may depreciate over time, may be difficult to appraise and may fluctuate
in value based on the success of the business. At June 30, 1998, $203,000, or
approximately 1.94%, of the commercial business loan portfolio was delinquent 30
days or more.
First Federal's commercial business lending policy includes credit file
documentation and analysis of the borrower's character, capacity to repay the
loan, the adequacy of the borrower's capital and collateral as well as an
evaluation of conditions affecting the borrower. Analysis of the borrower's
past, present and future cash flows is also an important aspect of First
Federal's current credit analysis. Nonetheless, there are generally increased
credit risks associated with commercial business lending.
Management anticipates that this segment of the Bank's portfolio, which
consists of inventory, receivable and working capital loans, may increase over
the foreseeable future to levels approximating ten percent of total gross loans
outstanding.
<PAGE>
Originations, Purchases, Sales and Servicing of Loans
Real estate loans are generally originated by First Federal's staff of
salaried loan officers. The Bank presently has three commission-based loan
officers as part of its effort to increase loan origination volume. Loan
applications are taken and processed in the branches and main office of the
Bank.
While the Bank originates both adjustable-rate and fixed-rate loans,
its ability to originate loans is dependent upon the relative customer demand
for loans in its market. Demand is affected by the interest rate environment.
In fiscal 1998, the Bank originated $91.9 million of loans, compared to
$71.4 million in fiscal 1997. In fiscal 1998, $51.5 million of loans were repaid
compared with $39.2 million in 1997.
When loans are sold by the Bank, the Bank retains the responsibility
for collecting and remitting loan payments, making certain that real estate tax
payments are made on behalf of borrowers, and otherwise servicing the loans. The
Bank receives a servicing fee for performing these services. The servicing fee
is recognized as income over the life of the loans. The Bank services mortgage
loans that it originated and sold amounting to approximately $60.1 million at
June 30, 1998. See also Note 6 of the Notes to Consolidated Financial Statements
in the Annual Report to Stockholders filed herewith as Exhibit 13 (the "Annual
Report").
In periods of economic uncertainty, the Bank's ability to originate
large dollar volumes of real estate loans may be substantially reduced or
restricted, with a resultant decrease in related loan origination fees, other
fee income and operating earnings. In addition, the Bank's ability to sell loans
may substantially decrease as potential buyers (principally government agencies)
reduce their purchasing activities. The Bank will make fixed-rate loans for sale
in the secondary market as demand dictates.
<PAGE>
The following table shows the loan origination, purchase and repayment
activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable-rate ...................... $ 39,512 $ 46,948 $ 29,597
Fixed-rate ........................... 52,368 24,455 31,005
-------- -------- --------
Total loans originated ....... 91,880 71,403 60,602
Purchases:
Total loans purchased ................ -- -- --
Sales and Repayments:
Total loans sold ..................... 34,155 14,183 18,497
Principal repayments ................. 51,492 39,161 38,785
-------- -------- --------
Total increase ............... 6,233 18,059 3,320
(Increase) decrease in other items,
net ................................. (1,933) 1,803 (2,681)
-------- -------- --------
Net increase ................. $ 4,300 $ 19,862 $ 639
======== ======== ========
</TABLE>
Non-Performing Assets and Classified Assets
Generally, when a borrower fails to make a required payment on real
estate secured loans and consumer loans within 20 days after the payment is due,
the Bank institutes collection procedures by mailing a computer generated
delinquency notice. The customer is contacted again, by notice or telephone,
when the payment is 30 days past due and 60 days past due. In most cases,
delinquencies are cured promptly; however, if a loan secured by real estate or
other collateral has been delinquent for more than 60 days, a final letter is
sent demanding payment. The customer is requested to acknowledge the status of
the loan and to make arrangements to bring the loan current. If satisfactory
arrangements are not made, a personal visit may be made to initiate repossession
on collateral for consumer loans. At 90 days past due, a 30-day foreclosure
notice is sent, and if the loan is 120 days overdue, unless satisfactory
arrangements have been made, immediate repossession or foreclosure procedures
will commence.
<PAGE>
The following table sets forth information concerning delinquent
mortgage and other loans at June 30, 1998. The amounts presented represent the
total remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent For:
----------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
----------------------------------------------------------------------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family ....... 41 $1,791 2.0% 7 $ 226 0.3% 4 $ 198 0.2%
Home equity ............... 40 573 5.4 3 38 0.4 -- -- --
Secured by other properties 2 47 0.4 -- -- -- -- -- --
Commercial ................... 6 193 1.8 -- -- -- 1 10 0.1
Consumer ..................... 31 174 1.2 13 49 0.3 8 36 0.2
------ ------ --- ---- ------ --- --- ------ ---
Total ................... 120 $2,778 2.0% 23 $ 313 0.2% 13 $ 244 0.2%
====== ====== === ==== ====== === === ====== ===
</TABLE>
There were no delinquent construction loans at June 30, 1998. The ratio
of delinquent loans to total loans was 2.4% at June 30, 1998.
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets in the Bank's loan portfolio. Loans are placed on non-accrual status when
the collection of principal and/or interest become seriously doubtful.
Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------
1998 1997 1996
-------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family ............................. $-- $-- $--
Secured by other ................................ -- -- 28
Construction .................................... -- -- --
Consumer ........................................ -- -- 2
Commercial business ............................. -- -- --
---- ---- ----
Total ........................................ -- -- 30
---- ---- ----
Accruing loans delinquent more than 90 days:
One- to four-family ............................. 198 330 116
Secured by other ................................ -- -- 39
Construction .................................... -- -- --
Consumer ........................................ 36 17 30
Commercial business ............................. 10 24 --
---- ---- ----
Total ........................................ 244 371 185
---- ---- ----
Foreclosed assets:
One- to four-family ............................. -- -- --
Secured by other ................................ 30 30 30
Construction .................................... -- -- --
Consumer ........................................ -- -- --
Commercial business ............................. -- -- --
---- ---- ----
Total ........................................ 30 30 30
---- ---- ----
Total non-performing assets(1) .................... $274 $401 $245
==== ==== ====
Total as a percentage of total
assets ........................................... 0.16% 0.24% 0.17%
==== ==== ====
</TABLE>
- ------------
(1) In addition, the Bank had one troubled debt restructuring at June
30, 1996 with a balance at those dates of $62,524.
For the year ended June 30, 1998 gross interest income which would have
been recorded had the non-accruing loans and troubled debt restructuring been
current in accordance with their original terms amounted to $0. None of such
amount was included in interest income on such loans for the year ended June 30,
1998.
<PAGE>
As of June 30, 1998, there were no other loans not included on the
table or discussed above where known information about the possible credit
problems of borrowers caused management to have doubts as to the ability of the
borrower to comply with present loan repayment terms and which may result in
disclosure of such loans in the future.
Classified Assets. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
OTS to be of lesser quality as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings association will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When a savings association classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings association classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An association's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the association's District Director at the regional OTS
office, who may order the establishment of additional general or specific loss
allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews the loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations. On the basis of
management's review of its assets, at June 30, 1998, the Bank had classified a
total of $737,029 of its assets as substandard, none as doubtful and $32,154 as
loss.
At June 30, 1998, total classified assets comprised $769,183, or 3.41%
of the Company's capital, or 0.46% of the Company's total assets.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan allowance.
<PAGE>
Real estate properties acquired through foreclosure are recorded at
fair value, less estimated costs to sell. If fair value at the date of
foreclosure is lower than the balance of the related loan, the difference will
be charged-off to the allowance at the time of transfer. Valuations are
periodically updated by management and if the value declines, a specific
provision for losses on such property is established by a charge to operations.
Although management believes that it uses the best information
available to determine the allowances, 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. Future additions to the Bank's allowances will be the result of
periodic loan, property and collateral reviews and thus cannot be predicted in
advance. At June 30, 1998, the Bank had a total allowance for loan losses of
$654,350 or 0.48% of total loans receivable, before the allowance for loan
losses. See also Notes 1 and 4 of the Notes to Consolidated Financial Statements
in the Annual Report.
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------
1998 1997 1996
---- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period ............. $576 $513 $409
Charge-offs:
One- to four-family ...................... -- -- --
Secured by other properties .............. -- 58 --
Construction ............................. -- -- --
Consumer and commercial .................. 53 32 17
---- ---- ----
Total charge-offs ..................... 53 90 17
---- ---- ----
Recoveries:
One- to four-family ...................... -- -- --
Secured by other properties .............. -- 23 --
Construction ............................. -- -- --
Consumer and commercial .................. 11 10 1
---- ---- ----
Total recoveries ...................... 11 33 1
---- ---- ----
Net charge-offs ............................ 42 57 16
Additions charged to operations ............ 120 120 120
---- ---- ----
Balance at end of period ................... $654 $576 $513
==== ==== ====
Ratio of net charge-offs during the
period to average loans outstanding
during the period ......................... .03% .05% .02%
==== ==== ====
Ratio of allowance to non-performing
loans ..................................... 268.11% 155.26% 238.60%
====== ====== ======
</TABLE>
<PAGE>
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family................ $100 62.55% $100 69.63% $102 73.43%
Secured by other properties........ 178 7.52 160 5.43 191 4.14
Construction....................... --- 4.55 --- 3.36 --- 5.50
Home equity........................ 27 7.60 21 6.20 10 3.54
Consumer........................... 127 10.33 128 9.40 88 9.87
Commercial business................ 131 7.45 120 5.98 82 3.52
Unallocated........................ 91 --- 47 --- 40 ----
---- ------ --- ------ ---- ------
Total......................... $654 100.00% $576 100.00% $513 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
Investment Activities
First Federal must maintain minimum levels of investments that qualify
as liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has maintained its
liquid assets above the minimum requirements imposed by the OTS regulations and
at a level believed adequate to meet requirements of normal daily activities,
repayment of maturing debt and potential deposit outflows. The Bank's investment
policy objective in this regard currently sets the Bank's desired liquidity
between 6% and 12%. As of June 30, 1998, the Bank's liquidity ratio (liquid
assets as a percentage of net withdrawable savings deposits and current
borrowings) was 15.48%. See "Regulation Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank, as set by the Investment
Committee, is to invest funds among various categories of investments and
maturities based upon the Bank's need for liquidity, to achieve the proper
balance between its desire to minimize risk and maximize yield, to provide
collateral for borrowings, and to fulfill the Bank's asset/liability management
policies.
<PAGE>
Securities. At June 30, 1998, the Company's cash and cash equivalents
totaled $5.2 million, or 3.1% of its total assets, and securities, including
mortgage-backed securities (includes a $1.5 million investment in the common
stock of the FHLB of Cincinnati in order to satisfy the requirement for
membership in such institution) totaled $20.7 million, or 12.4% of its total
assets. It is the Bank's general policy to purchase securities which are U.S.
government securities and federal agency obligations, state and local government
obligations, commercial paper, mutual funds, interest-bearing deposits in other
institutions, and overnight federal funds. See also Notes 1 and 3 to Notes to
Consolidated Financial Statements in the Annual Report.
OTS regulations restrict investments in corporate debt and equity
securities by the Bank. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Bank's unimpaired capital and unimpaired surplus as defined by federal
regulations, which totaled approximately $2.1 million as of June 30, 1998, plus
an additional 10% if the investments are fully secured by readily marketable
collateral. See "Regulation - Federal Regulation of Savings Associations" for a
discussion of additional restrictions on the Bank's investment activities.
<PAGE>
The following table sets forth the composition of the Bank's securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest bearing time deposits in
other financial institutions ... $ 731 100.00% $ 2,229 100.00% $ 78 100.00%
====== ======= ====== ====== ======= ======
Securities available for sale:
U.S. Treasury securities ..... $ 766 3.71% $ 693 2.84% $ 839 3.13%
Mutual funds ................. 2,779 13.44 2,716 11.13 2,625 9.78
Mortgage-backed securities ... 8,234 39.83 8,844 36.26 9,648 35.94
U.S. Government agency step up
bonds ....................... 299 1.45 791 3.24 1,499 5.58
Equity securities ............ 40 0.20 40 0.16 40 0.15
Municipal bonds .............. 172 0.83 -- -- -- --
U.S. Government agency
securities ................. 6,873 33.25 9,909 40.62 10,883 40.54
------- ------ ------- ------ ------- ------
Subtotal ................... 19,163 92.71 22,993 94.25 25,534 95.12
------- ------ ------- ------ ------- ------
FHLB stock ..................... 1,508 7.29 1,403 5.75 1,309 4.88
------- ------ ------- ------ ------- ------
Total securities and FHLB stock .. $20,671 100.00% $24,396 100.00% $26,843 100.00%
======= ====== ======= ======= ======= ======
Average remaining life of
U.S. Treasury securities, U.S.
Government Agency securities, and
Municipal Bonds................... 4.7 years 5.5 years 5.3 years
</TABLE>
- ------------------
See also Note 3 of the Notes to Consolidated Financial Statements in the
Annual Report.
<PAGE>
The composition and maturities of the securities portfolio, excluding
FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
At June 30, 1998
-------------------------------------------------
Amortized Estimated Weighted
Cost Market Value Average Yield
---- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C>
Available for sale:
Due in one year or less................... $ 1,300 $ 1,295 4.57%
Due after one through
five years............................... 3,178 3,307 7.03
Due after five years
through ten years........................ 3,499 3,508 7.16
Mortgage-backed securities................ 8,199 8,234 6.56
Mutual funds.............................. 2,855 2,779 5.10
Equity securities......................... 40 40 6.50
-------- --------- ----
Total investment
securities available for sale.......... $19,071 $19,163 6.41%
======== ========= ====
</TABLE>
The Bank's portfolio at June 30, 1998 contained no securities of any
issuer with an aggregate book value in excess of the Bank's retained earnings,
excluding those securities issued by the U.S. government or its agencies.
Mortgage-Backed Securities. First Federal has a portfolio of
mortgage-backed securities which it holds as available for sale. Such
mortgage-backed securities can serve as collateral for borrowings and, through
repayments, as a source of liquidity. For information regarding the carrying and
market values of First Federal's mortgage-backed securities portfolio, see Note
3 of the Notes to Consolidated Financial Statements in the Annual Report. Under
the Bank's risk-based capital requirement, mortgage-backed securities have a
risk weight of 20% (or 0% in the case of GNMA securities) in contrast to the 50%
risk weight carried by residential loans. See "Regulation--Regulatory Capital
Requirements."
Consistent with the Bank's asset/liability policy, most of the Bank's
mortgage-backed securities carry adjustable interest rates.
Sources of Funds
General. The Bank's primary sources of funds are deposits, borrowings,
amortization and repayment of loan principal (including interest earned on
mortgage-backed securities), interest earned on or maturation of securities and
short-term investments, and funds provided from operations. FHLB advances have
been used to compensate for seasonal reductions in deposits or deposit inflows
at less than projected levels, and will be used on a longer-term basis to
support expanded lending activities.
<PAGE>
Deposits. First Federal offers a variety of deposit accounts having a
wide range of interest rates and terms. The Bank's deposits consist of passbook
savings accounts, NOW accounts, money market checking, individual retirement
accounts, Christmas and vacation club accounts, and certificate accounts
generally ranging in terms from 91 days to 60 months. The Bank primarily
solicits deposits from its market area. However, in June 1997, the Bank began
using a national rate listing service to attract additional deposits. The Bank
relies primarily on competitive pricing policies, advertising and customer
service to attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.
The variety of deposit accounts offered by the Bank has allowed it to
be competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Bank has become more susceptible to short-term fluctuations
in deposit flows, as customers have become more interest rate conscious. The
Bank endeavors to manage the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its passbook savings, NOW accounts and money
market checking are relatively stable sources of deposits.
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance ................ $120,546 $115,830 $104,845
Deposits ....................... 453,212 380,868 310,235
Withdrawals .................... 448,866 380,743 303,783
Interest credited .............. 5,195 4,591 4,533
-------- -------- --------
Ending balance ................. $130,087 $120,546 $115,830
======== ======== ========
Net increase (decrease) ........ $ 9,541 $ 4,716 $ 10,985
======== ======== ========
Percent increase (decrease) .... 7.91% 4.07% 10.48%
======== ======== ========
</TABLE>
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank at the dates
indicated. See also Note 7 of the Notes to Consolidated Financial Statements in
the Annual Report.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------
1998 1997 1996
---------------------- --------------------- -----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Demand and NOW Accounts(1) $ 16,922 13.01% $ 15,119 12.54% $ 13,605 11.74%
Passbook Accounts ........ 21,306 16.38 21,307 17.68 20,117 17.37
Money Market Accounts .... 21,421 16.46 19,944 16.54 22,008 19.00
-------- ----- -------- ----- --------- -----
Total Non-Certificates ... 59,649 45.85 56,370 46.76 55,730 48.11
-------- ----- -------- ----- --------- -----
Certificates:
0.00 - 3 99% 40 0.03 168 .14 473 .41
4.00 - 5 99% 55,049 42.32 52,469 43.53 49,998 43.16
6.00 - 7 99% 15,344 11.79 11,526 9.56 9,611 8.30
8.00 - 9 99% 5 0.01 13 .01 18 .02
-------- ----- -------- ----- --------- -----
Total Certificates ....... 70,438 54.15 64,176 53.24 60,100 51.89
-------- ----- -------- ----- --------- -----
$130,087 100.00% $120,546 100.00% $115,830 100.00%
======== ====== ======== ====== ======== ======
Total Deposits ...........
</TABLE>
- -----------------------------
(1) Includes non-interest bearing deposits of $1,500,731, $1,033,148, and
$928,463 at June 30, 1998, 1997 and 1996, respectively.
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 1998.
<TABLE>
<CAPTION>
Maturity
------------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- -----
(Dollars in Thousands)
Certificates of deposit less
<S> <C> <C> <C> <C> <C>
than $100,000............................. $12,891 $8,872 $18,445 $22,392 $62,600
Certificates of deposit of
$100,000 or more.......................... 1,870 957 2,188 2,161 7,176
Public funds(1)............................ 180 300 --- 182 662
---------- ---------- ------------ ---------- ----------
Total certificates of deposit.............. $14,941 $10,129 $20,633 $24,735 $70,438
======= ======= ======= ======= =======
</TABLE>
(1) Deposits from governmental and other public entities.
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings when they are a less costly
source of funds, can be invested at a positive interest rate spread or when the
Bank desires additional capacity to fund loan demand or meet other liquidity
needs.
First Federal's borrowings historically have consisted of advances from
the FHLB of Cincinnati upon the security of a blanket collateral agreement of a
percentage of unencumbered loans. Such advances can be made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances........................................ $22,775 $26,792 $11,045
Average Balance:
FHLB advances........................................ $16,661 $19,706 $ 6,868
</TABLE>
<PAGE>
Subsidiary Activities
As a federally chartered savings institution, First Federal is
permitted by OTS regulations to invest up to 2% of its assets, or $3.3 million
at June 30, 1998, in the stock of, or loans to, service corporation
subsidiaries. In July 1995, First Federal organized a service corporation
subsidiary, Wood Service Corp., Inc., which offers financial planning services
and related products, including mutual funds and annuities, through an agreement
with a third party. As of June 30, 1998, First Federal's investment in Wood
Service Corp., Inc. was $12,256. In addition to investments in service
corporations, federal associations are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities which a federal
association may engage in directly.
Regulation
General. First Federal is a federally chartered savings and loan
association and, accordingly, First Federal is subject to broad federal
regulation and oversight extending to all its operations. First Federal is a
member of the FHLB of Cincinnati and is subject to certain limited regulation by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board").
First Federal is a member of the Savings Association Insurance Fund ("SAIF") and
the deposits of First Federal are insured by the FDIC. As a result, the FDIC has
certain regulatory and examination authority over First Federal.
As the savings and loan holding company of First Federal, the Company
also is subject to OTS regulation and oversight. The purpose of the regulation
of the Company and other holding companies is to protect subsidiary savings
associations.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS, as the Bank's
primary federal regulator and chartering authority, and the FDIC, as the insurer
of its deposits, have extensive authority over the operations of savings
associations. As part of this authority, First Federal is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS examination of First Federal was performed as
of March 31, 1996 and the last regular FDIC examination of First Federal was
performed jointly with the OTS as of December 31, 1992. The OTS and FDIC have
entered into a joint examination agreement which provides for joint examinations
by the FDIC with the OTS unless compelling reasons otherwise dictate. When these
examinations are conducted by the OTS and the FDIC, the examiners may require
First Federal to provide for higher general or specific loan loss reserves.
Financial institutions in various regions of the United States have been called
upon by examiners to write down assets and to establish increased levels of
reserves, primarily as a result of perceived weaknesses in real estate values
and a more restrictive regulatory climate.
All savings associations are subject to a semi-annual assessment, based
upon the savings association's total assets, to fund the operations of the OTS.
The general assessment, to be paid on a semi-annual basis, is computed upon the
savings association's total assets, as reported in the association's latest
quarterly thrift financial report. First Federal's OTS assessment for the fiscal
year ended June 30, 1998 was $48,630.
<PAGE>
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including First Federal and the
Company. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS and the FDIC is required.
In addition, the investment, lending and branching authority of First
Federal is prescribed by federal laws, and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings association are also generally authorized
to branch nationwide. First Federal is in compliance with the noted
restrictions.
First Federal's permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
June 30, 1998, First Federal's lending limit under this restriction was $2.1
million. At June 30, 1998, the Bank had one loan relationship with an
outstanding balance to any one borrower (or related entities) in excess of this
amount. The principal balance for this relationship was approximately $2.1
million at June 30, 1998. The Bank was in compliance with its
loans-to-one-borrower limitation at August 1, 1998, after principal repayments
were made on its largest loan for July and income of the Bank for July increased
the loans-to-one-borrower limitation. The Bank may discontinue, adjust or create
new lending programs to respond to its needs and to competitive factors.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan.
Failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action.
Insurance of Accounts and Regulation by the FDIC. First Federal is a
member of the SAIF, which is administered by the FDIC. Deposits are insured up
to applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings associations, after giving the OTS
an opportunity to take such action, and may terminate the deposit insurance if
it determines that the institution has engaged in unsafe or unsound practices,
or is in an unsafe or unsound condition.
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The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from .00% to .27% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., those with a core
capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted
assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital
ratio of at least 10%) and considered healthy pay the lowest premium while
institutions that are less than adequately capitalized (i.e., those with core or
Tier 1 risk-based capital ratios of less than 4% or a risk-based capital ratio
of less than 8%) and considered of substantial supervisory concern pay the
highest premium. Risk classification of all insured institutions will be made by
the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
Effective January 1, 1997, the premium schedule for BIF and SAIF
insured institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980s, equal to approximately 6.48 basis points for each $100 in domestic
deposits, while BIF-insured institutions pay an assessment equal to
approximately 1.52 basis points for each $100 in domestic deposits. The
assessment is expected to be reduced to 2.43 basis points no later than January
1, 2000, when BIF insured institutions fully participate in the assessment.
These assessments, which may be revised based upon the level of BIF and SAIF
deposits will continue until the bonds mature in the year 2017.
Regulatory Capital Requirements. Federally insured savings
associations, such as First Federal, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At June 30, 1998 the Bank had no intangible assets subject to
these tests.
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The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries, the debt and equity investments in such subsidiaries are deducted
from assets and capital. The Bank's service corporation is an includable
subsidiary. See "Subsidiary Activities" above.
At June 30, 1998, First Federal had tangible capital of $13.9 million,
or 8.47% of adjusted total assets, which is approximately $11.4 million above
the minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including supervisory goodwill (which is phased-out
over a five-year period), and a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions of FDICIA
discussed below, however, a savings association must maintain a core capital
ratio of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio. At June 30,
1998, First Federal had no intangibles which were subject to these tests.
At June 30, 1998, First Federal had core capital equal to $13.9
million, or 8.47% of adjusted total assets, which is $9.0 million above the
minimum leverage ratio requirement of 3% in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. At
June 30, 1998, First Federal had $622,000 of general loss reserves, which was
less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio (these
items were excluded on a sliding scale through June 30, 1994, after which they
must be excluded in their entirety) and reciprocal holdings of qualifying
capital instruments. First Federal had no such exclusions from capital and
assets at June 30, 1998.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by FNMA or FHLMC.
OTS regulations also require that savings associations with more than
normal interest rate risk exposure deduct from its total capital, for purposes
of determining compliance with such requirement, an amount equal to 50% of its
interest-rate risk exposure multiplied by the present value of its assets. This
<PAGE>
exposure is a measure of the potential decline in the net portfolio value of a
savings association, greater than 2% of the present value of its assets, based
upon a hypothetical 200 basis point increase or decrease in interest rates
(whichever results in a greater decline). Net portfolio value is the present
value of expected cash flows from assets, liabilities and off-balance sheet
contracts. The rule will not become effective until the OTS evaluates the
process by which savings associations may appeal an interest rate risk deduction
determination. It is uncertain as to when this evaluation may be completed. Any
savings association with less than $300 million in assets and a total risk-based
capital ratio in excess of 12% is exempt from this requirement unless the OTS
determines otherwise. At the present time, the proposal is not expected to have
a material impact on the Association.
On June 30, 1998, First Federal had total risk-based capital of $14.5
million (including $13.9 million in core capital and $622,000 in qualifying
supplementary capital) and risk-weighted assets of $107.7 million (including no
converted off-balance sheet assets); or total capital of 13.45% of risk-weighted
assets. This amount was $5.9 million above the 8% requirement in effect on that
date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
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The imposition by the OTS or the FDIC of any of these measures on the
Association may have a substantial adverse effect on its operations and
profitability.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions or requirements on associations with
respect to their ability to pay dividends or make other distributions of
capital. OTS regulations prohibit an association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
capital of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with its mutual
to stock conversion.
The OTS utilizes a three-tiered approach to permit associations, based
on their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account (see "- Regulatory Capital
Requirements").
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. First Federal meets the
requirements for a Tier 1 association and has not been notified of a need for
more than normal supervision. Tier 2 associations, which are associations that
before and after the proposed distribution meet their current minimum capital
requirements, may make capital distributions of up to 75% of net income over the
most recent four quarter period.
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of the Company, First Federal will also be
required to give the OTS 30 days' notice prior to declaring any dividend on its
stock. The OTS may object to the distribution during that 30-day period based on
safety and soundness concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations. Under the proposal a savings
association may make a capital distribution without notice to the OTS (unless it
is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2
rating, is not in troubled condition (as defined by regulation) and would remain
adequately capitalized (as defined in the OTS prompt corrective action
regulations) following the proposed distribution. Savings associations that
would remain adequately capitalized following the proposed distribution but do
not meet the other noted requirements must notify the OTS 30 days prior to
declaring a capital distribution. The OTS stated it will generally regard as
<PAGE>
permissible that amount of capital distributions that do not exceed 50% of the
institution's excess regulatory capital plus net income to date during the
calendar year. A savings association may not make a capital distribution without
prior approval of the OTS and the FDIC if it is undercapitalized before, or as a
result of, such a distribution. As under the current rule, the OTS may object to
a capital distribution if it would constitute an unsafe or unsound practice. No
assurance may be given as to whether or in what form the regulations may be
adopted.
Liquidity. All savings associations, including First Federal, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. For a discussion of
what the Bank includes in liquid assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." This liquid asset ratio requirement may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings flows
of all savings associations. At the present time, the minimum liquid asset ratio
is 5%.
Penalties may be imposed upon associations for violations of the liquid
asset ratio requirement. At June 30, 1998, First Federal was in compliance with
the requirement, with an overall liquid asset ratio of 15.48%.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. First Federal is in compliance with
these amended rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test. All savings associations, including First
Federal, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. Such assets primarily consist of residential
housing related loans and investments. At June 30, 1998, First Federal met the
test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
<PAGE>
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of First Federal, to assess
the institution's record of meeting the credit needs of its community and to
take such record into account in its evaluation of certain applications, such as
a merger or the establishment of a branch by First Federal. An unsatisfactory
rating may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, First Federal may be required to devote additional funds
for investment and lending in its local community. First Federal was examined
for CRA compliance as of November 4, 1996 and received a rating of satisfactory.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to affiliates, are
restricted to a percentage of the association's capital. Affiliates of First
Federal include the Company and any company which is under common control with
First Federal. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of most affiliates.
Certain transactions with directors, officers and controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
<PAGE>
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If First Federal fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Company must register as, and will become
subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "- Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1998, First Federal was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. First Federal is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs, that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
<PAGE>
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the board of directors of the FHLB, which
are subject to the oversight of the Federal Housing Finance Board. All advances
from the FHLB are required to be fully secured by sufficient collateral as
determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, First Federal is required to purchase and maintain stock
in the FHLB of Cincinnati. At June 30, 1998, First Federal had $1.5 million in
FHLB stock, which was in compliance with this requirement. In past years, First
Federal has received substantial dividends on its FHLB stock. Over the past five
fiscal years such dividends have averaged 6.52% and were 7.25% for fiscal year
1998.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of First Federal's FHLB stock may result in a corresponding
reduction in First Federal's capital.
For the year ended June 30, 1998, dividends paid by the FHLB of
Cincinnati to First Federal totaled $104,528, which constitute a $9,771 increase
over the amount of dividends received in fiscal year 1997. The $26,768 dividend
received for the quarter ended June 30, 1998 reflects an annualized rate of
7.25% which was the same rate paid for the quarter ended June 30, 1997.
Federal and State Taxation
Savings associations such as the Bank, that meet certain conditions
prescribed by the Code, are permitted to establish reserves for bad debts and to
make annual additions thereto which may, within specified formula limits, be
taken as a deduction in computing taxable income for federal income tax
purposes. The amount of the bad debt reserve deduction was computed under the
experience method. Under the experience method, the bad debt reserve deduction
is an amount determined under a formula based generally upon the bad debts
actually sustained by the savings association over a period of years.
In August 1996, legislation was enacted that repealed the percentage of
taxable income method used by many thrifts, including the Bank, to calculate
their bad debt reserve for federal income tax purposes. As a result, small
thrifts such as the Bank must recapture that portion of the reserve that exceeds
the amount that could have been taken under the experience method for tax years
beginning after December 31, 1987. The recapture will occur over a six-year
period, the commencement of which will be delayed until the first taxable year
beginning after December 31, 1997, provided the institution meets certain
residential lending requirements. At June 30, 1998, the Bank had approximately
$631,000 in bad debt reserves subject to recapture for federal income tax
purposes. The deferred tax liability related to the recapture has been
previously established so there will be no effect on future net income.
<PAGE>
In addition to the regular income tax, corporations, including savings
associations such as the Company generally are subject to a 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. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.
A portion of the Bank's reserves for losses on loans may not, without
adverse tax consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of June 30, 1998, the portion of the Bank's reserves subject to this
treatment for tax purposes totaled approximately $2.3 million.
The Company and the Bank filed consolidated federal income tax returns
on a fiscal year basis using the accrual method of accounting. The Company has
been audited by the IRS, or the statute of limitations for assessment has
closed, with respect to federal income tax returns through June 30, 1994. With
respect to years examined by the IRS, either all deficiencies have been
satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Company) would not result in a deficiency which could have a
material adverse effect on the financial condition of the Company.
Ohio Taxation. The Bank conducts its business in Ohio and consequently
is subject to the Ohio corporate franchise tax. A financial institution subject
to the Ohio corporate franchise tax levied by the Ohio Revised Code pays a tax
equal to 0.014 times its apportioned net worth. The apportionment factor
consists of a gross receipts factor, determined by reference to the total
receipts of the financial institution from all sources, a property factor,
determined by reference to the net book value of all loans and fixed assets
owned by the financial institution and a payroll factor.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware. The Company
also files an Ohio franchise tax return and pays tax on its Ohio taxable income.
Competition
First Federal faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other commercial banks, savings associations,
credit unions and mortgage bankers making loans secured by real estate located
in the Bank's market area. Commercial banks and finance companies provide
vigorous competition in consumer lending. The Bank competes for real estate and
other loans principally on the basis of the quality of services it provides to
borrowers, interest rates and loan fees it charges, and the types of loans it
originates.
<PAGE>
The Bank attracts most of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located; therefore, competition for those deposits is principally from other
commercial banks, savings associations and credit unions located in the same
communities. The Bank competes for these deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours, and convenient
branch locations with interbranch deposit and withdrawal privileges at each.
The Bank's primary market area is Wood County. There are nine
commercial banks and two savings associations, other than First Federal, and six
credit unions which compete for deposits and loans in Wood County.
Executive Officers of the Company and the Bank
Certain information with respect to the executive officer of the
Company and/or the Bank who is not also a director, at June 30, 1998, is set
forth below.
David A. Weaks. Mr. Weaks, age 52, has been a Vice President of the
Bank since 1975 and Vice President of the Company since its formation in May
1993. His primary responsibilities include overall administration of the Bank's
savings and marketing operations, and human resources department. Mr. Weaks also
oversees the Bank's liability activities and is responsible for overall
supervision of office services and property management for the Bank.
John H. Bick. Mr. Bick, age 49, is Vice President of Lending and
Operations and is also an Executive Officer of the Company. He is responsible
for all facets of lending, loan processing and new product development. Mr. Bick
began his career in banking at a community bank in Amsterdam, Ohio in 1977. He
received his MBA from the Universisity of Steubenville and has taught
accounting, financing and other bank related subjects in local colleges for a
number of years.
Employees
At June 30, 1998, the Bank had a total of 49 employees, including 5
part-time employees. The Bank's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
Item 2. Description of Property
The Bank conducts its business at its main office and six other
locations in its primary market area. The following table sets forth information
relating to each of the Bank's offices as of June 30, 1998.
The Bank owns all of its offices as of June 30, 1998, except for the
Pemberville, Ohio branch, which leases its space in the local IGA. The total net
book value of the Bank's premises and equipment (including land, building and
leasehold improvements and furniture, fixtures and equipment) at June 30, 1998
was $2.4 million. See Note 5 of Notes to Consolidated Financial Statements in
the Annual Report.
<PAGE>
<TABLE>
<CAPTION>
Total
Approximate Square Net Book Value at
Date Acquired Footage June 30, 1998
------------- ------- -------------
Location
<S> <C> <C> <C>
Main Office:
124 E. Court Street, Bowling Green, Ohio 1968 10,208 $153,337
Branch Offices:
601 Superior Street, Rossford, OH 1976 2,844 100,218
125 W. Main Street, Woodville, OH 1979 4,458 141,771
201 S. Main Street, N. Baltimore, OH 1984 2,430 115,754
525 W. Wooster Street, Bowling Green, OH 1985 980 38,553
24215 Front Street, Grand Rapids, OH 1986 925 ---
130/134 E. Court Street(1), Bowling Green, OH 1980 2,850 ---
</TABLE>
- ------------------
(1) The property the Bank owns at 130/134 E. Court Street, Bowling Green,
Ohio, was purchased for future development. It currently contains an
older frame house built in the 1880s and a small one-story brick office
building. Both of these structures have been fully depreciated. The
property is rented, with current gross income of $1,125 per month. The
Bank also owns land for future development at 525 W. Wooster Street,
Bowling Green, Ohio, 629 W/S Boundary, Perrysburg, Ohio, and SR 20,
Perrysburg, Ohio.
First Federal believes that its current facilities, while adequate to
meet its present needs, are not adequate to meet its needs in the foreseeable
future. The Bank is considering alternatives to expand its facilities. The Bank
has purchased land located behind and adjacent to its 525 West Wooster Street
office. First Federal is currently considering construction of a new branch. The
Bank also acquired two parcels of land in Perrysburg, Ohio for possible branch
offices and opened an office in Pemberville, Ohio in July 1997. The Pemberville
location is a leased office inside a grocery store.
The Bank maintains an outside service bureau for depositor and borrower
customer information. The net book value of the data processing and computer
equipment utilized by the Bank at June 30, 1998 was approximately $188,020.
Item 3. Legal Proceedings
First Federal is involved from time to time as plaintiff or defendant
in various legal actions arising in the normal course of its business. While the
ultimate outcome of these proceedings cannot be predicted with certainty, it is
the opinion of management, after consultation with counsel representing First
Federal in the proceedings, that the resolution of these proceedings should not
have a material adverse effect on First Federal's financial position or results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1998.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The information provided under the captions "Dividends" and "Market
Information" on page 49 of the attached 1998 Annual Report to Stockholders is
herein incorporated by reference.
Item 6. Management's Discussion and Analysis and Selected Financial data
Pages 2 through 17 of the attached 1998 Annual Report to Stockholders
is herein incorporated by reference.
Item 7. Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended June 30, 1998, is incorporated by reference in
this Annual Report on Form 10-KSB as Exhibit 13.
Annual Report Section Pages in Annual Report
- --------------------- ----------------------
Report of Independent Auditors 18
Consolidated Balance Sheets
(June 30, 1998 and 1997) 19
Consolidated Statements of Income
(Years Ended June 30, 1998, 1997 and 1996) 20
Consolidated Statements of Changes in
Shareholders' Equity (Years Ended
June 30, 1998, 1997, and 1996) 21-23
Consolidated Statements of Cash Flows
(Years Ended June 30, 1998, 1997, and 1996) 24-25
Notes to Consolidated Financial Statements 26-48
All schedules are omitted as the required information is not applicable or is
contained in the notes to the consolidated financial statements.
With the exception of the aforementioned information, the Corporation's
Annual Report to Stockholders for the year ended June 30, 1998 is not deemed
filed as part of this Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors
Information concerning Directors of the Company is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1998, a copy of which will be filed not later than
120 days after the close of fiscal year.
Executive Officers
Information regarding the business experience of each executive officer
of the Company and/or the Bank who is not also a director contained in Part I of
this Form 10-KSB is incorporated herein by reference.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1998, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1998, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1998, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Reference to
Prior Filing
or Exhibit
Regulation Number
S-K Exhibit Attached
Number Document Hereto
------ -------- ------
2 Plan of acquisition, reorganization, None
arrangement, liquidation, or succession
3(a) Articles of Incorporation *
3(b) By-Laws *
4 Instruments defining the rights of *
security holders, including debentures
9 Voting Trust Agreement None
10 Material Contracts
(a) 1993 Stock Option and Incentive Plan *
(b) Recognition and Retention Plan *
(c) Employment Agreements *
11 Statement re: computation of per share earnings None
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders 13
16 Letter on change in certifying accountants None
18 Letter on change in accounting principles None
21 Subsidiaries of the Registrant 21
22 Published report regarding
matters submitted to vote None
23 Consents of Experts and Counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
99 Additional exhibits None
- ----------------
* Filed as exhibits to the Company's Form S-1 registration statement
filed on May 28, 1993 (File No. 33-63594) pursuant to Section 5 of the
Securities Act of 1933. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of Regulation S-B.
(b) Reports on Form 8-K
During the quarter ended June 30, 1998, the Company did not file any
Current Reports on Form 8-K.
<PAGE>
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.
WOOD BANCORP, INC.
Date: September ___, 1998 By: /s/ Richard L. Gordley
----------------------
Richard L. Gordley
President, Chief Executive
Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Richard L. Gordley /s/ David L. Nagel
- ---------------------- ------------------
Richard L. Gordley, President, David L. Nagel, Executive Vice
Chief Executive Officer and President, Chief Financial Officer,
Director (Principal Executive Secretary and Director (Principal
and Operating Officer) Financial and Accounting Officer)
Date: September ____, 1998 Date: September ____, 1998
/s/ Robert E. Spitler /s/ Michael A. Miesle
- --------------------- ---------------------
Robert E. Spitler Michael A. Miesle, Director
Chairman of the Board
Date: September ____, 1998 Date: September ____, 1998
/s/ Dale L. Myers /s/ Randal R. Huber
- ----------------- -------------------
Dale L. Myers, Director Randal R. Huber, Director
Date: September ____, 1998 Date: September ____, 1998
<PAGE>
<PAGE>
Index to Exhibits
Exhibit
Number
------
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
23 Consent of Crowe, Chizek and Company
27 Financial Data Schedule
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Letter to Shareholders............................................ 1
Selected Consolidated Financial and Other Data................... 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 4
Report of Independent Auditors................................... 18
Consolidated Financial Statements and Notes...................... 19
Shareholder Information.......................................... 49
Directors and Executive Officers................................. 50
- --------------------------------------------------------------------------------
ANNUAL MEETING
- --------------------------------------------------------------------------------
The annual Meeting of Shareholders is scheduled for October 20, 1998, at 1:00
p.m., at Bowling Green Country Club located at 923 Fairview Avenue, Bowling
Green, Ohio.
<PAGE>
To Our Shareholders:
Fiscal 1998 was a record year for Wood Bancorp, Inc. and First Federal Bank.
Significant improvement was realized in all aspects of our business and we
continue to see excellent results from our strategy to be the community bank in
our markets. In August, 1993, our depositors invested $10.6 million with us in
hopes of obtaining a fair return on their investment. Wood Bancorp value on
NASDAQ reached over $71 million during the past fiscal year and we are most
pleased with acceptance of our company by the marketplace.
Earnings improved to a record $2,369,190 and our return on average assets
averaged a record 1.43 per cent for the year. Loan quality improved and remains
well above the average of our peers. Our associates charged with generating and
processing quality assets did an excellent job in fiscal 1998. Total loan volume
increased to $91.9 million for 1998, a 28.7 per cent increase over volume in
fiscal 1997 and more than 129 per cent over volume in 1995, our first full year
as a public company. For the calendar year of 1997, Toledo's newspaper, The
Blade, recognized Wood Bancorp as Northwest Ohio's best performing publicly held
company with a total return to shareholders of 111 per cent.
Continuing our community banking theme, First Federal Bank launched Generations
Gold, a value added checking account program. This common partnership between
our affiliate First Federal Bank and over 275 local merchants rewards our
checking customers with discounts on items they purchase daily. In addition,
shopping dollars remain at home to help local merchants remain viable and
profitable. This program is yet another example of our local bank supporting
local businesses for a better community.
The delivery of financial services continues to become less personal in today's
consolidation of our industry. We stay committed to our strategy to focus on
customers by developing products and services that enhance their lives and our
communities. We believe in our approach to customers and remain steadfast in our
quest to take business from the competition and to be the best in our markets.
To that end, our associates deserve the credit for our success in 1998.
While 1998 will rank as our all time best performance, it is now history and we
will not rest on past performance. Thank you for your continued support.
Sincerely,
Robert E. Spitler Richard L. Gordley
Chairman of the Board President and Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
At June 30,
----------------------------------------------------------------
(In Thousands)
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ....................... $166,150 $163,918 $146,249 $135,081 $124,375
Cash and cash equivalents .......... 5,187 2,915 2,637 2,821 1,870
Repurchase agreement ............... 2,500
Securities available for sale ...... 10,929 14,149 15,886 3,178 3,106
Mortgage-backed securities available
for sale ......................... 8,234 8,844 9,648 5,751 6,315
Securities held to maturity ........ 7,251 6,531
Mortgage-backed securities held
to maturity ...................... 1,454 1,690
Loans, net ......................... 135,618 131,318 111,456 110,817 100,505
Deposits ........................... 130,086 120,546 115,830 104,845 100,388
Advances from Federal Home
Loan Bank ........................ 11,923 21,775 9,316 9,576 4,853
Shareholders' equity ............... 22,551 20,166 20,122 19,614 18,241
<CAPTION>
For the Year Ended June 30,
----------------------------------------------------------------
(In Thousands)
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income .............. $ 13,581 $ 12,635 $ 11,085 $ 9,647 $ 8,063
Total interest expense ............. 6,501 6,107 5,289 4,395 3,835
-------- -------- -------- -------- --------
Net interest income ........... 7,080 6,528 5,796 5,252 4,228
Provision for loan losses .......... 120 120 120 60 51
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses ... 6,960 6,408 5,676 5,192 4,177
Noninterest income:
Service charges ............... 319 282 227 208 207
Securities gains, net ......... 13 5 4
Gain on sale of loans ......... 651 199 105 25 1
Other ......................... 128 104 127 84 96
-------- -------- -------- -------- --------
Total noninterest income .. 1,111 585 459 322 308
Total noninterest expense .......... 4,283 4,371 3,473 3,276 2,903
-------- -------- -------- -------- --------
Income before income taxes ......... 3,788 2,622 2,662 2,238 1,582
Income tax expenses ................ 1,419 947 994 737 504
Cumulative effect of change in
accounting for income taxes ...... 40
-------- -------- -------- -------- --------
Net income ......................... $ 2,369 $ 1,675 $ 1,668 $ 1,501 $ 1,118
======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Basic earnings per share (1) ....... $ .91 $ .62 $ .60 $ .54 $ .32
Diluted earnings per share (1) ..... .86 .59 .57 .52 .32
Dividends per share ................ .33 .20 .12 .11 .05
Dividend payout ratio .............. 36.01% 32.52% 20.20% 19.73% 17.72%
</TABLE>
- --------------------------------------------------------------------------------
(1) Does not include earnings prior to August 31, 1993, the date of the
consummation of the mutual to stock conversion.
2.
<PAGE>
<TABLE>
<CAPTION>
As of or for the Year Ended June 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets:
Before SAIF assessment 1.43% 1.34% 1.20% 1.16% 0.90%
After SAIF assessment 1.43 1.07 1.20 1.16 0.90
Interest rate spread information:
Average during year 3.94 3.70 3.66 3.69 3.21
End of year 3.80 3.54 3.46 3.37 3.13
Net interest margin (1) 4.42 4.26 4.26 4.19 3.57
Ratio of noninterest expense to
average total assets 2.58 2.78 2.49 2.53 2.34
Return on equity:
Before SAIF assessment 11.12 10.25 8.33 7.93 6.77
After SAIF assessment 11.12 8.25 8.33 7.93 6.77
Asset Quality Ratios:
Nonperforming assets to total
assets 0.14% 0.24% 0.17% 0.24% 0.11%
Allowance for loan losses to non-
performing loans(2) 273.78 155.26 238.60 126.08 257.35
Capital Ratios:
Shareholders' equity to total
assets 13.57% 12.30% 13.76% 14.52% 14.67%
Average shareholders' equity
to average assets 12.86 12.92 14.36 14.63 13.31
Ratio of average interest-earning
assets to average interest-bearing
liabilities 111.18 113.78 115.33 114.33 111.04
Number of offices (3) 7 6 6 6 6
</TABLE>
- --------------------------------------------------------------------------------
(1) Net interest income divided by average interest-earning assets.
(2) Nonperforming loans consist of nonaccruing loans and accruing loans which
are past due 90 or more days.
(3) Includes two limited-service offices in 1998.
3.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following is management's analysis of Wood Bancorp, Inc. ("Company")
financial condition and results of operations as of and for the year ended June
30, 1998, compared to prior years. This discussion is designed to provide a more
comprehensive review of the operating results and financial position than could
be obtained from an examination of the financial statements alone. This analysis
should be read in conjunction with the consolidated financial statements and
related footnotes and the selected financial data included elsewhere in this
report.
Forward Looking Statements
When used in this discussion or future filings by the Company with the
Securities and Exchange Commission, or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project," "believe" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, changes in levels of market interest rates, credit risks of lending
activities and competitive and regulatory factors, could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected.
The Company is not aware of any trends, events or uncertainties that will have
or are reasonably likely to have a material effect on its liquidity, capital
resources or operations except as discussed herein. The Company is not aware of
any current recommendations by regulatory authorities that would have such
effect if implemented.
The Company does not undertake, and specifically disclaims, any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect occurrence of anticipated or unanticipated
events or circumstances after the date of such statements.
The Company was formed as part of the conversion of First Federal Bank ("Bank")
from a mutual to a stock savings bank, which was completed on August 31, 1993
("Conversion"). In the Conversion, 2,998,125 shares of the Company's $.01 par
value common stock, as adjusted for the July 1996, July 1997 and January 1998
stock splits, were sold to the public for an aggregate gross consideration of
$10,660,000. The Company retained approximately 50% of the net proceeds and used
the remainder to purchase all of the outstanding stock of the Bank. This
discussion should be read in conjunction with the consolidated financial
statements and accompanying Notes included elsewhere in this report.
4.
<PAGE>
The Company's results of operations are dependent on net interest income, which
is the difference ("spread") between the interest income earned on its loans,
securities, and other interest-earning assets and its cost of funds, consisting
of interest paid on its deposits and borrowed money. The interest rate spread is
affected by regulatory, economic and competitive factors that influence interest
rates, loan demand and deposit flows. The Company's net income is also affected
by, among other things, loan fee income, provisions for loan losses, service
charges, gains on sales of loans, operating expenses and franchise and income
taxes. The Company's revenues are derived primarily from interest on mortgage
loans, consumer loans, commercial loans and securities, as well as income from
service charges and gains on loan sales. The Company's operating expenses
principally consist of employee compensation and benefits, occupancy, data
processing, federal deposit insurance premiums and other general and
administrative expenses. The Company's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
The main office of the Company and the Bank is located in Bowling Green, Ohio,
which is located in Wood County, Ohio. The Bank operates seven offices: two in
Bowling Green, and one each in Grand Rapids, North Baltimore, Rossford,
Pemberville and Woodville. All branches are located in Wood County with the
exception of the Woodville office which is located four miles from Wood County
in Sandusky County, Ohio. The Bank considers Wood County its primary market
area. In 1998, the Bank purchased land in Perrysburg, Ohio for the Company's
eighth office which is currently under construction. In June, 1995, the Bank
purchased land adjacent to its Bowling Green West office for possible expansion
at this location.
The Bank has been, and intends to continue to be, a community oriented financial
institution offering a variety of financial services to meet the needs of the
communities it serves. The Bank attracts deposits from the public and uses such
deposits, together with borrowings and other funds, to originate one- to
four-family residential mortgage loans and short-term consumer loans. To a
lesser extent, the Bank also originates residential construction loans in its
market area, home equity loans, a limited amount of commercial business loans
and loans secured by multi-family and non-residential real estate. The Bank's
deposits are insured up to the maximum allowable amount by the Federal Deposit
Insurance Corporation ("FDIC") in the Savings Association Insurance Fund
("SAIF"). The Bank also invests in mortgage-backed securities, most of which are
insured or guaranteed by federal agencies, as well as securities issued by the
U.S. Government or agencies thereof. In July 1995, First Federal organized a
service corporation subsidiary, Wood Service Corp., Inc., which offers financial
planning services and related products, including mutual funds and annuities,
through an agreement with a third party. Revenues of Wood Service Corp., Inc.
were not significant for the fiscal years ended June 30, 1998, 1997 and 1996.
Financial Condition
Total assets of the Company were $166.1 million at June 30, 1998, compared to
$163.9 million at June 30, 1997, representing an increase of $2.2 million, or
1.4%. The growth was primarily attributable to increases in loans, offset by
decreases in securities. The increase was primarily
5.
<PAGE>
funded by increases in deposits. The changes in the consolidated balance sheets
and the factors that caused the changes are discussed below.
Securities. Total securities decreased $3.8 million, or 16.7%, from $23.0
million at June 30, 1997 to $19.2 million at June 30, 1998. The decrease was the
result of the Company investing funds obtained through maturities of securities
to fund loans and repay FHLB advances.
At June 30, 1998, the Company's mortgage-backed securities portfolio classified
as available for sale was comprised primarily of agency-issued adjustable rate
securities. The net unrealized gains on these investments totaled $35,000 at
June 30, 1998. Management's strategy emphasizes investment in securities
guaranteed by the U.S. Government and its agencies in order to minimize credit
risk. The investment strategy also includes purchasing variable rate
mortgage-backed security products with monthly and annually adjusting interest
rates in order to minimize interest rate risk. These securities provide the
Company a continued cash flow stream through principal paydowns and help reduce
the Company's exposure to interest rate risk. See also Note 3 of the Notes to
Consolidated Financial Statements.
At June 30, 1998, CMOs and REMICs comprised $4.7 million of the total $8.2
million mortgage-backed securities portfolio with all but $49,000 issued by
government agencies. The Company does not consider these securities high risk
and does not expect loss of principal.
Loans. Loans increased from $131.3 million at June 30, 1997 to $135.6 million at
June 30, 1998. Average loans comprised 85.1% of average interest-earning assets
in 1998 compared to 81.6% in 1997. During the period, a significant portion of
the new loan originations were fixed rate loans which were sold to the secondary
market. The sale of these fixed rate loan originations corresponds to the Bank's
policy of selling virtually all fixed rate loan originations in the secondary
market, while maintaining variable rate loans in the Bank's portfolio.
The Bank originated $66.5 million in mortgages during fiscal 1998, of which
$32.1 million were refinancing transactions. This compares with $44.3 million in
mortgages originated in fiscal 1997, of which $14.3 million were refinancing
transactions. The Bank maintained $32.3 million of the 1998 loan originations in
portfolio, while the remaining $34.2 million were sold to the secondary market.
Consumer and other loans increased $4.3 million, or 21.0%, from $20.7 million at
June 30, 1997 to $25.0 million at June 30, 1998. The increases were primarily
due to management's increased emphasis on originating commercial and other
loans, which resulted in a $2.4 million increase in commercial loans and a $1.9
million increase in automobile and other loans. At June 30, 1998, commercial
loans comprised 41.9% of consumer and other loans. See also Notes 4 and 10 of
the Notes to Consolidated Financial Statements.
Deposits and Borrowings. The Company's deposits are obtained primarily from
individuals and businesses in its market area. Total deposits increased $9.5
million, or 7.9%, from $120.5 million at June 30, 1997 to $130.1 million at June
30, 1998. The growth was primarily in certificates of deposits, which increased
$6.3 million during the period.
FHLB advances decreased by $9.9 million during the period, bringing the total
balance from $21.8 million at June 30, 1997 to $11.9 million at June 30, 1998.
The Company intends to
6.
<PAGE>
continue using FHLB advances, as needed, to fund loan growth. As of June 30,
1998, the Company had the ability of borrow an additional $28.6 million from the
FHLB. See also Note 8 of the Notes to Consolidated Financial Statements.
Comparison of Results of Operations for the Years Ended June 30, 1998 and 1997
General. Net income increased $694,000 to $2,369,000 for 1998 from $1,675,000
for 1997. The Company experienced a return on average assets of 1.43% in 1998
compared to 1.07% in 1997, while return on average shareholders' equity for the
same periods was 11.12% and 8.25%. The primary factors contributing to the
increase in net income were an increase in net interest income of $551,000, the
impact of a 1997 special assessment levied by the Federal Deposit Insurance
Corporation upon institutions with deposits insured by the SAIF and an increase
in gains from sales of loans partially offset by increases in salaries and
benefits, occupancy and equipment and data processing expenses. See also Note 11
of the Notes to Consolidated Financial Statements.
Net Interest Income. Net interest income is the largest component of the
Company's net income, and consists of the difference between interest income
generated on interest-earnings assets and interest expense incurred on
interest-bearing liabilities. Net interest income is primarily affected by the
volumes, interest rates and composition of interest-earning assets and
interest-bearing liabilities.
Net interest income increased $551,000, or 8.4%, from $6.5 million in 1997 to
$7.1 million in fiscal 1998. The primary component of this change was a $1.2
million, or 11.4%, increase in interest income on loans. The increase in
interest income on loans consisted of a $923,000 increase due to increased
average volume in the loan portfolio and $307,000 increase due to increasing
average interest rates. The increase in interest income of $946,000 was
partially offset by an $394,000, or 6.5%, increase in interest expense,
primarily on deposits.
Average loans outstanding during fiscal 1998 increased $10.5 million, or 8.4%,
compared to fiscal 1997, while average securities decreased $6.2 million, or
24.4%, compared to the prior year. In fiscal 1998, the Company experienced an
increase in the yield on assets of twenty-four basis points. The net interest
margin increased 16 basis points. The Company's average interest rate spread
increased from 3.70% in 1997 to 3.94% in 1998.
The tables appearing elsewhere in this report provide a more detailed analysis
of the changes in average balances, yields/rates and net interest income
identifying that portion of change in average volume versus that portion due to
change in average rates. See "Average Balances, Interest Rates and Yields,"
"Rate/Volume Analysis of Net Interest Income" and "Weighted Average Yields."
Provision for Loan Losses. The provision for loan losses is based on
management's regular review of the loan portfolio, which considers factors such
as past experience, prevailing general economic conditions and considerations
applicable to specific loans, such as the ability of the borrower to repay the
loan and the estimated value of the underlying collateral, as well as changes in
the size and growth of the loan portfolio. Management believes the allowance for
loan losses is adequate to absorb reasonably foreseeable losses inherent in the
loan portfolio;
7.
<PAGE>
however, future additions to the allowance may be necessary based on changes in
economic conditions.
The provision for loan losses remained constant at $120,000 for 1998 and 1997.
At June 30, 1998, the allowance for loan losses represented .48% of loans, net
of unearned and deferred income, compared to .44% at June 30, 1997.
Noninterest Income. The Company experienced a $526,000, or 90.0%, increase in
noninterest income during 1998. The increase was primarily due to increases in
loan sale gains. The Company originated $34.2 million of loans for sale in the
secondary market during 1998 compared to $14.2 million in 1997.
Noninterest Expense. Noninterest expense decreased $88,000 or 2.0%, primarily
due to the SAIF assessment paid in 1997. Salaries and benefits increased
$448,000 for 1998, compared to 1997. Of that increase, $216,000 was related to
additional personnel added for loan production and annual salary reviews, and
$232,000 was related to costs associated with the ESOP plan due to increases in
the Company's stock price. Occupancy and equipment expense increased $94,000 or
24.7% due to an additional office in 1998. Data processing expense increased
$111,000 or 35.8% due to additional services and restructuring of telephone line
charges.
Income Taxes. The provision for income taxes totaled $1,419,000 in fiscal 1998
compared to $947,000 in fiscal 1997. See also Note 8 of the Notes to the
Consolidated Financial Statements.
Comparison of Results of Operations for the Years Ended June 30, 1997 and 1996
General. Net income remained relatively constant at $1.7 million for 1997 and
1996. This includes the $443,000 after tax impact of a 1997 special assessment
levied by the Federal Deposit Insurance Corporation upon institutions with
deposits insured by the SAIF. The Company experienced a return on average assets
of 1.07% in 1997 compared to 1.20% in 1996, while return on average
shareholders' equity for the same periods was 8.25% and 8.33%, respectively.
Excluding the SAIF assessment, the Company would have reported net income of
$2.1 million, an increase of $450,000, or 27.0%, over 1996. The primary factor
contributing to the increase in net income, excluding the SAIF assessment, was
an increase in net interest income of $732,000.
Net Interest Income. Net interest income increased approximately $732,000, or
12.6%, from $5.8 million in 1996 to $6.5 million in fiscal 1997. The primary
component of this change was a $1.3 million, or 14.1%, increase in interest
income on loans. The increase in interest income on loans consisted of a
$1,392,000 increase due to a higher average loan portfolio and $59,000 decrease
due to a lower average interest rate. The increase in interest income of
$1,550,000 was partially offset by an $818,000, or 15.5%, increase in interest
expense, primarily on FHLB borrowings.
Average loans outstanding during fiscal 1997 increased $16.1 million, or 14.8%,
compared to fiscal 1996, while average securities increased $4.8 million, or
23.0%, compared to the prior year. In fiscal 1997, the Company experienced
increases in yield on assets and cost of liabilities of nine and five basis
points, respectively, resulting in the $1,550,000 increase in interest income
and $818,000 increase in interest expense. Net interest margin, however,
remained constant at
8.
<PAGE>
4.26%. The Company's average interest rate spread increased slightly from 3.66%
in 1996 to 3.70% in 1997.
Provision for Loan Losses. The provision for loan losses remained constant at
$120,000 for 1997 and 1996. At June 30, 1997, the allowance for loan losses
represented .44% of loans, net of unearned and deferred income, compared to .46%
at June 30, 1996.
Noninterest Income. The Company experienced a $125,000, or 27.3%, increase in
noninterest income during 1997. The increase was primarily due to increases in
loan sale gains related to the adoption of Statement of Financial Accounting
Standards No. 122, which requires lenders who sell or securitize originated
loans and retain the servicing rights to recognize as separate assets the rights
to service mortgage loans for others. See also Note 1 of the Notes to
Consolidated Financial Statements.
Noninterest Expense. Noninterest expense increased $898,000, or 25.8%, primarily
due to the SAIF assessment and increased salaries and benefits expense. Salaries
and benefits increased $196,000, or 11.1%, for 1997, compared to 1996. Of that
increase, $136,000 was related to additional personnel added for loan production
and annual salary reviews, and $60,000 was related to costs associated with the
ESOP plan.
Income Taxes. The provision for income taxes totaled $947,000 in fiscal 1997
compared to $994,000 in fiscal 1996. See also Note 8 of the Notes to the
Consolidated Financial Statements.
9.
<PAGE>
Average Balances, Interest Rates and Yields. The following table presents for
the periods indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed in both dollars and
rates. Average balances for both 1998 and 1997 are derived from daily balances.
Nonaccrual loans have been included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- ----------- -------- ----------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $ 135,436 $ 12,034 8.89% $ 124,973 $ 10,804 8.65%
Securities (2) 11,721 745 6.36 16,211 1,071 6.57
Mortgage-backed
securities (2) 7,578 558 6.50 9,320 604 6.41
FHLB deposits 1,548 83 5.33 353 20 5.77
Interest-bearing cash
accounts 867 28 3.24 646 21 3.26
Other interest-earning
assets 534 29 5.50 255 20 7.72
FHLB stock 1,442 104 7.25 1,343 95 7.05
----------- ----------- -------- ----------- ----------- -------
Total interest-earnings
assets 159,126 13,581 8.48 153,101 12,635 8.24
Interest-bearing liabilities:
Money market 21,062 875 4.15 20,602 852 4.13
Savings deposits 20,192 556 2.75 19,598 535 2.73
NOW 16,305 203 1.25 12,858 222 1.72
Time deposits 68,588 3,879 5.66 61,557 3,349 5.44
FHLB borrowings 16,661 981 5.89 19,706 1,143 5.80
Other borrowings 252 7 2.78 240 6 2.48
----------- ----------- -------- ----------- ----------- -------
Total interest-bearing
liabilities 143,060 6,501 4.54 134,561 6,107 4.54
----------- ----------- -------- ----------- ----------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 7,080 $ 6,528
=========== ===========
Net interest rate spread 3.94% 3.70%
======== =======
Net earning assets $ 16,066 $ 18,540
=========== ===========
Net yield on average
interest-earning assets 4.42% 4.26%
Average interest-earning
assets to average interest-
bearing liabilities 111.23% 113.78%
</TABLE>
- ---------------------
(1) Calculated net of deferred loan origination fees, loans in process and the
allowance for loan losses.
(2) Average balance is computed using the carrying value of securities. The
average yield has been computed using the average amortized cost balance
for available for sale securities.
10.
<PAGE>
Rate/Volume Analysis of Net Interest Income. The following table presents the
dollar amount of changes in interest income and interest expense for major
components of interest-earning assets and interest-bearing liabilities. It
distinguishes between the increase or decrease related to changes in balances
and/or changes in interest rates. For each category of interest-earning assets
and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (changes in volume multiplied by old rate)
and (ii) changes in rate (changes in rate multiplied by old volume). For
purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
----------------------------------------- ----------------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 923 $ 307 $ 1,230 $ 1,392 $ (59) $ 1,333
Securities (287) (39) (326) 305 74 379
Mortgage-backed securities (48) 2 (46) 16 11 27
FHLB deposits 64 (1) 63 (182) 15 (167)
Interest-bearing cash accounts 7 7 (10) (3) (13)
Other interest-earning assets 17 (8) 9 (25) 9 (16)
FHLB stock 7 2 9 6 1 7
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning
assets $ 683 $ 263 946 $ 1,502 $ 48 1,550
=========== =========== =========== ===========
Interest-bearing liabilities:
Money market $ 19 $ 4 23 $ 76 $ (57) 19
Savings deposits 16 5 21 (16) (26) (42)
NOW 51 (70) (19) 16 (19) (3)
Time deposits 394 136 530 90 18 108
FHLB borrowings (179) 17 (162) 745 (10) 735
Other borrowings 1 1 1 1
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities $ 301 $ 93 394 $ 912 $ (94) 818
=========== =========== ----------- =========== =========== -----------
Net interest income $ 552 $ 732
=========== ===========
</TABLE>
11.
<PAGE>
Weighted Average Yields. The following table sets forth the weighted average
yields earned on the Company's interest-earning assets, the weighted average
interest rates paid on its interest-bearing liabilities and the interest rate
spread between the average yields earned and rates paid at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------
1998 1997
---- ----
<S> <C> <C>
Weighted average yield on:
Loans receivable 8.53% 8.46%
Mortgage-backed securities 6.56 6.52
Securities 6.30 6.87
Other interest-earning assets 4.77 5.97
Combined weighted average yield
on interest-earning assets 8.24 8.12
Weighted average rate paid on:
Savings deposits 2.75 2.75
NOW deposits 0.86 1.68
Money market accounts 4.22 4.05
Time deposits 5.66 5.60
Borrowings 5.97 5.88
Combined weighted average rate
paid on interest-bearing liabilities 4.44 4.58
Spread 3.80 3.54
</TABLE>
Asset/Liability Management
The Company's asset/liability management strategy emphasizes the retention of
adjustable rate loans and mortgage-backed securities in its portfolio in order
to reduce the effective maturity of its assets. In addition, the Bank originates
other loans, specifically consumer and commercial loans, with shorter terms to
maturity or which reprice more frequently than do long-term fixed rate mortgage
loans, yet provide a positive margin over the Company's cost of funds. Under the
Bank's current policy, virtually all fixed rate mortgage loans are sold in the
secondary market. At June 30, 1998 and 1997, fixed rate loans totaled $28.7
million, or 20.4% and $26.8 million, or 20.0%, of the Company's gross loan
portfolio. At such dates, adjustable rate loans totaled $111.9 million, or 79.6%
and $107.5 million, or 80.0%, of the Company's gross loan portfolio.
As part of its effort to monitor and manage interest rate risk, the Bank uses
the "net portfolio value" ("NPV") methodology adopted by the OTS as part of its
capital regulations. Although the Bank is not currently subject to 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%, application of
NPV methodology may illustrate the Bank's interest rate risk.
12.
<PAGE>
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 and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV that would
result from a theoretical basis point (1 basis point equals 0.01%) change in
market interest rates. The OTS considers an institution to be subject to
interest-rate risk if the NPV would decrease by more than 2% of the present
value of the institution's assets with either an increase or a decrease in
market rates.
At June 30, 1998, 2% of the present value of the Bank's assets was $3,368,000.
The interest rate risk of a 200 basis point increase in market interest rates
(which was greater than the interest rate risk of a 200 basis point decrease)
was $284,000 at June 30, 1998, which was less than 2% of the present value of
the Bank's assets.
First Federal's asset/liability management strategy dictates acceptable limits
on the amounts of change in NPV given certain changes in interest rates.
Presented below, as of June 30, 1998 is an OTS analysis of First Federal's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts in the yield curve, in 100 basis point increments, up and down
300 basis points and compared to Bank policy limits. OTS assumptions are used in
calculating the amounts in this table.
<TABLE>
<CAPTION>
Changes in Actual at June 30, 1998
Interest Rates Bank Limit As Measured by OTS
(Basis Points) % Change $ Change % Change
-------------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
+300 60% $ (1,272) (6.89)%
+200 40 (284) (1.54)
+100 15 175 0.95
0 0 --- ---
-100 15 (123) (0.67)
-200 40 (194) (1.05)
-300 60 180 0.98
</TABLE>
Management has structured its assets and liabilities to attempt to lessen
exposure to interest rate risk. In case of a 300 basis point change in interest
rates, First Federal would experience a 0.98% increase in NPV in a declining
interest rate environment and a 6.89% decrease in a rising interest-rate
environment. During periods of rising interest rates, the value of monetary
assets and monetary liabilities generally decline. Conversely, during periods of
falling interest rates, the value of monetary assets and liabilities generally
increase. However, the amount of change in value of specific assets and
liabilities due to changes in interest rates is not the same in a rising
interest rate environment as in a falling interest rate environment (i.e., the
amount of value increase under a specific interest rate decrease may not equal
the amount of value decrease under an identical interest rate increase).
In evaluating the Bank's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. In addition, the interest rates on certain
13.
<PAGE>
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. Furthermore, in the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their debt may decrease in case of an interest rate increase.
Therefore, the actual effect of changing interest rates may differ from that
presented in the foregoing table.
Liquidity and Capital Resources
Liquidity. The Company's liquidity, primarily represented by cash equivalents,
is a result of its operating, investing and financing activities. These
activities are summarized below for the years ended June 30, 1998, 1997 and
1996.
<TABLE>
<CAPTION>
Year Ended June 30,
(In Thousands)
1998 1997 1996
<S> <C> <C> <C>
Net income ............................ $ 2,369 $ 1,675 $ 1,668
Adjustments to reconcile net income
to net cash from operating activities 561 943 (62)
-------- -------- --------
Net cash from operating activities .... 2,930 2,618 1,606
Net cash used in investing activities . 424 (17,505) (11,239)
Net cash from financing activities .... (1,082) 15,165 9,449
-------- -------- --------
Net change in cash and cash equivalents 2,272 278 (184)
Cash and cash equivalents at beginning
of period ........................... 2,915 2,637 2,821
-------- -------- --------
Cash and cash equivalents at end
of period ........................... $ 5,187 $ 2,915 $ 2,637
======== ======== ========
</TABLE>
The Company's principal sources of funds are deposits, loan repayments,
maturities of securities and other funds provided by operations. The Company
also has the ability to borrow from the FHLB. While scheduled loan repayments
and maturing securities are relatively predictable, deposit flows and early loan
prepayments are more influenced by interest rates, general economic conditions
and competition. The Company maintains investments in liquid assets based upon
management's assessment of (1) need for funds, (2) expected deposit flows, (3)
yields available on short-term liquid assets and (4) objectives of the
asset/liability management program.
OTS regulations presently require the Bank to maintain an average daily balance
of investments in U.S. Treasury, federal agency obligations and other
investments in an amount equal to 4% of the sum of the Bank's average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. The liquidity requirement, which may be changed from time to time by
the OTS to reflect changing economic conditions, is intended to provide a source
of relatively liquid funds on which the Bank may rely, if necessary, to fund
deposit withdrawals or other short-term funding needs. At June 30, 1998, the
Bank's regulatory liquidity was 15.48% The Company considers its liquidity and
capital reserves sufficient to
14.
<PAGE>
meet its outstanding short- and long-term needs. See Note 10 of the Notes to
Consolidated Financial Statements.
Capital Resources. The Bank is required by regulations to meet certain minimum
capital requirements, which must be generally as stringent as the requirements
established for commercial banks. Current capital requirements call for tangible
capital of 1.5% of adjusted total assets, core capital (which, for the Bank,
consists solely of tangible capital) of 3.0% of adjusted total assets and
risk-based capital (which, for the Bank, consists of core capital and general
valuation allowances) of 8.0% of risk-weighted assets (assets are weighted at
percentage levels ranging from 0% to 100% depending on their relative risk). The
following table indicates that the requirement for core capital is 4.0% because
that is the level that the OTS prompt corrective action regulations require to
be considered adequately capitalized.
The following table summarizes the Bank's capital amounts (in thousands) and the
ratios required by law at June 30, 1998.
<TABLE>
<CAPTION>
Required Actual Required
Amount Amount Excess Ratio Ratio
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Tangible capital to
adjusted total assets $13,871 $ 2,455 $11,416 8.47% 1.50%
Core capital to
adjusted total assets 13,871 6,548 7,323 8.47 4.00
Core capital to risk
weighted assets ..... 13,871 4,309 9,562 12.88 4.00
Total capital to risk
weighted assets ..... 14,493 8,618 5,875 13.45 8.00
</TABLE>
Accounting Standards
Recent pronouncements by the Financial Accounting Standards Board ("FASB") may
have an impact on financial statements issued in subsequent periods. Set forth
below are summaries of such pronouncements.
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" - SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. It does not require a specific format for that financial statement
but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the
15.
<PAGE>
equity section of a statement of financial position. SFAS No. 130 will be
effective in fiscal 1999 and is not expected to have a significant impact on the
Company's financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" - SFAS No. 131 changes the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about reportable
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 uses a "management approach"
to disclose financial and descriptive information about an enterprise's
reportable operating segments which is based on reporting information the way
that management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements. SFAS No. 131 also requires selected information to be reported in
interim financial statements. SFAS No. 131 will be effective in fiscal 1999 and
is not expected to have a significant impact on the Company's financial
statements.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" - SFAS No. 132 amends the disclosure requirements of previous pension
and other postretirement benefit accounting standards by requiring additional
disclosures about such plans as well as eliminating some disclosures no longer
considered useful. SFAS No. 132 also allows greater aggregation of disclosures
for employers with multiple defined benefit plans. Non-public companies are
subject to reduced disclosure requirements, although such entities may elect to
follow the full disclosure requirements of SFAS No. 132. SFAS No. 132 will be
effective in fiscal 1999 and is not expected to have a significant impact on the
Company's financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" -
SFAS No. 133 requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. SFAS No.
133 does not allow hedging of a security which is classified as held to
maturity. Upon adoption of SFAS No. 133, companies may reclassify any security
from held to maturity to available for sale if they wish to be able to hedge the
security in the future. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999 with early adoption encouraged for any fiscal quarter
beginning July 1, 1998 or later, with no retroactive application. Management
does not expect the adoption of SFAS No. 133 to have a significant impact on the
Company's financial statements.
Impact on Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial
16.
<PAGE>
position and results of operations primarily in terms of historical dollars
without considering changes in the relative purchasing power of money over time
due to inflation. Unlike most industrial companies, most of the assets and
liabilities of the Company are monetary in nature. Therefore, interest rates
have a more significant impact on a financial institution'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. The liquidity, maturity structure and quality of the Company assets
and liabilities are critical to the maintenance of acceptable performance
levels.
Year 2000 Issue
The Company's lending and deposit activities are almost entirely dependent on
computer systems which process and record transactions, although the Company can
effectively operate with manual systems for brief periods when its electronic
systems malfunction or cannot be accessed. The Company uses the services of a
nationally recognized data processing service bureau that specializes in data
processing for financial institutions. In addition to its basic operating
activities, the Company's facilities and infrastructure, such as security
systems and communications equipment, are dependent to varying degrees on
computer systems.
The Company is aware of the potential Year 2000 related problems that may affect
the computers that control or operate the Company's operating systems,
facilities and infrastructure. In 1997, the Company began the process of
identifying any Year 2000 related problems that may be experienced by its
computer operated or dependent systems. The Company has contacted the companies
that supply or service the Company's computer operated or dependent systems to
obtain confirmation that each system that is material to the operations of the
Company is either currently Year 2000 compliant or is expected to be Year 2000
compliant. With respect to systems that cannot presently be confirmed as Year
2000 compliant, the Company will continue to work with the appropriate supplier
or servicer to ensure that all such systems will be rendered compliant in a
timely manner, with minimal expense to the Company or disruption of the
Company's operations. If, by the end of 1998, any of the Company's suppliers or
servicers are unable to certify Year 2000 compliance with respect to any
systems, the failure of which would have a material adverse effect on the
Company's operations, financial condition or results, the Company would then
have sufficient time to identify and contract with suppliers and servicers who
are able to certify Year 2000 compliance. The expense of such a change in
suppliers or servicers is not expected to be material to the Company.
In addition to possible expense related to its own systems, the Company could
incur losses if loan payments are delayed due to Year 2000 problems affecting
any of the Company's significant borrowers or impairing the payroll systems of
large employers in the Company's primary market area. The Company has contacted
all commercial loan customers informing them of the year 2000 problems. Because
the Company's loan portfolio is highly diversified with regard to individual
borrowers and types of businesses and the Company's primary market area is not
significantly dependent on one employer or industry, the Company does not expect
any significant or prolonged Year 2000 related difficulties that will affect net
earnings or cash flow. At this time, however, the expense that may be incurred
by the Company in connection with Year 2000 issues cannot be determined.
17.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Wood Bancorp, Inc.
Bowling Green, Ohio
We have audited the accompanying consolidated balance sheets of Wood Bancorp,
Inc. as of June 30, 1998 and 1997, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of the three
years in the period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wood Bancorp, Inc.
as of June 30, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 1998 in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Columbus, Ohio
July 31, 1998
18.
<PAGE>
<TABLE>
<CAPTION>
WOOD BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1997
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks ...................................... $ 4,786,582 $ 2,844,578
Federal funds sold ........................................... 400,000 70,000
------------- -------------
Cash and cash equivalents ................................ 5,186,582 2,914,578
Interest-bearing time deposits in other financial institutions 731,398 2,229,104
Securities available for sale ................................ 10,928,948 14,148,537
Mortgage-backed securities available for sale ................ 8,234,190 8,844,333
Loans, net ................................................... 135,617,811 131,317,923
Office properties and equipment, net ......................... 2,433,618 1,860,331
Federal Home Loan Bank stock ................................. 1,507,600 1,403,200
Accrued interest receivable .................................. 847,379 853,736
Other assets ................................................. 662,119 346,100
------------- -------------
Total assets ........................................ $ 166,149,645 $ 163,917,842
============= =============
LIABILITIES
Deposits $ ................................................... 130,086,695 $ 120,546,079
Federal Home Loan Bank advances .............................. 11,922,708 21,775,306
Accrued interest payable ..................................... 143,758 193,166
Other liabilities ............................................ 1,445,505 1,237,711
------------- -------------
Total liabilities ........................................ 143,598,666 143,752,262
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized,
no shares issued or outstanding
Common stock, $.01 par value, 5,000,000 shares authorized,
3,107,065 shares issued in 1998, 1,657,347 shares issued
in 1997 .................................................... 31,071 16,573
Additional paid-in capital ................................... 11,412,177 10,884,182
Retained earnings-substantially restricted ................... 14,294,514 12,805,953
Treasury stock at cost, 438,313 shares in 1998,
244,886 shares in 1997 ..................................... (3,033,704) (3,130,066)
Unearned employee stock ownership plan shares ................ (198,442) (301,741)
Unearned recognition and retention plan shares ............... (15,234) (30,977)
Net unrealized gain(loss) on available for sale securities,
net of tax ................................................ 60,597 (78,344)
------------- -------------
Total shareholders' equity ............................... 22,550,979 20,165,580
------------- -------------
Total liabilities and shareholders' equity .......... $ 166,149,645 $ 163,917,842
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
19.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Interest income
Loans, including fees ................. $ 12,033,516 $ 10,804,173 $ 9,471,271
Securities ............................ 745,108 1,070,865 691,907
Mortgage-backed and related securities 557,664 604,152 576,583
FHLB deposits ......................... 82,557 20,365 187,556
Other ................................. 162,023 135,505 157,591
------------ ------------ ------------
Total interest income ............. 13,580,868 12,635,060 11,084,908
Interest expense
Deposits .............................. 5,512,630 4,957,409 4,875,161
FHLB borrowings ....................... 981,008 1,143,352 408,071
Other ................................. 7,413 5,974 5,361
------------ ------------ ------------
Total interest expense ............ 6,501,051 6,106,735 5,288,593
------------ ------------ ------------
Net interest income ........................ 7,079,817 6,528,325 5,796,315
Provision for loan losses .................. 120,000 120,000 120,000
------------ ------------ ------------
Net interest income after provision for loan
losses ................................... 6,959,817 6,408,325 5,676,315
Noninterest income
Service charges ....................... 318,944 282,447 227,099
Security gains ........................ 13,226 (461)
Net gains from sale of loans .......... 650,953 199,162 105,039
Other ................................. 128,120 103,686 127,395
------------ ------------ ------------
Total noninterest income .......... 1,111,243 584,834 459,533
Noninterest expense
Salaries and benefits ................. 2,420,230 1,972,201 1,775,920
Occupancy and equipment ............... 473,141 379,551 346,669
Data processing ....................... 415,352 305,852 269,794
Insurance ............................. 113,202 864,479 284,642
Franchise taxes ....................... 211,577 228,574 250,077
Advertising and promotional ........... 145,160 159,718 142,754
Other ................................. 504,458 460,864 403,563
------------ ------------ ------------
Total noninterest expense ......... 4,283,120 4,371,239 3,473,419
------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income before income tax ................... 3,787,940 2,621,920 2,662,429
Income tax expense ......................... 1,418,750 946,525 994,150
------------ ------------ ------------
Net income ................................. $ 2,369,190 $ 1,675,395 $ 1,668,279
============ ============ ============
Basic earnings per common share ............ $ .91 $ .62 $ .60
============ ============ ============
Diluted earnings per common share .......... $ .86 $ .59 $ .57
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
20.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended June 30, 1998, 1997 and 1996
Additional Unearned
Common Paid-in Retained Treasury ESOP Unearned
Stock Capital Earnings Stock Shares RRP Shares
----- ------- -------- ----- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1995 $ 11,039 $ 10,577,639 $ 10,363,525 $ (738,204) $ (521,781) $ (101,345)
Commitment to release employee stock
ownership plan shares 84,690 112,620
Compensation expense with respect to
recognition and retention plan 58,784
Tax benefit related to recognition and
retention plan 23,704
Purchase of treasury stock (960,925)
Stock options exercised (6,379) 27,638
Change in unrealized gain (loss) on securities
available for sale
Net income for the year ended June 30, 1996 1,668,279
Cash dividends - $.12 per share (336,958)
--------- ------------- ------------- ---------- ---------- ----------
Balance at June 30, 1996 $ 11,039 $ 10,686,033 $ 11,688,467 $(1,671,491) $ (409,161) $ (42,561)
========= ============= ============= =========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unrealized Gain
(Loss) on
Securities Total
Available Shareholders'
for Sale Equity
-------- ------
<S> <C> <C>
Balance at July 1, 1995 $ 23,425 $ 19,614,298
Commitment to release employee stock
ownership plan shares 197,310
Compensation expense with respect to
recognition and retention plan 58,784
Tax benefit related to recognition and
retention plan 23,704
Purchase of treasury stock (960,925)
Stock options exercised 21,259
Change in unrealized gain (loss) on securities
available for sale (163,753) (163,753)
Net income for the year ended June 30, 1996 1,668,279
Cash dividends - $.12 per share (336,958)
--------- --------------
Balance at June 30, 1996 $(140,328) $ 20,121,998
========= ==============
</TABLE>
(Continued)
21.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
Years ended June 30, 1998, 1997 and 1996
Additional Unearned
Common Paid-in Retained Treasury ESOP Unearned
Stock Capital Earnings Stock Shares RRP Shares
----- ------- -------- ----- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ 11,039 $ 10,686,033 $ 11,688,467 $ (1,671,491) $ (409,161) $ (42,561)
Commitment to release employee stock
ownership plan shares 150,012 107,420
Compensation expense with respect to
recognition and retention plan 34,834
Tax benefit related to recognition and
retention plan 24,902
Purchase of treasury stock (1,491,300)
Stock options exercised (7,546) 32,725
Change in unrealized gain (loss) on securities
available for sale
Stock split effected in the form a stock dividends 5,519 (5,519)
Shares issued with respect to recognition
and retention plan 15 23,235 (23,250)
Net income for the year ended June 30, 1997 1,675,395
Cash dividends - $.20 per share (544,844)
-------- ------------- ------------ ------------ ---------- ---------
Balance at June 30, 1997 $ 16,573 $ 10,884,182 $ 12,805,953 $ (3,130,066) $ (301,741) $ (30,977)
======== ============= ============ ============ ========== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unrealized Gain
(Loss) on
Securities Total
Available Shareholders'
for Sale Equity
-------- ------
<S> <C> <C>
Balance at June 30, 1996 $ (140,328) $ 20,121,998
Commitment to release employee stock
ownership plan shares 257,432
Compensation expense with respect to
recognition and retention plan 34,834
Tax benefit related to recognition and
retention plan 24,902
Purchase of treasury stock (1,491,300)
Stock options exercised 25,179
Change in unrealized gain (loss) on securities
available for sale 61,984 61,984
Stock split effected in the form a stock dividends
Shares issued with respect to recognition
and retention plan
Net income for the year ended June 30, 1997 1,675,395
Cash dividends - $.20 per share (544,844)
---------- --------------
Balance at June 30, 1997 $ (78,344) $ 20,165,580
========== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
22.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
Years ended June 30, 1998, 1997 and 1996
Additional Unearned
Common Paid-in Retained Treasury ESOP Unearned
Stock Capital Earnings Stock Shares RRP Shares
----- ------- -------- ----- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $ 16,573 $ 10,884,182 $ 12,805,953 $(3,130,066) $ (301,741) $ (30,977)
Commitment to release employee stock
ownership plan shares 386,427 103,299
Compensation expense with respect to
recognition and retention plan 15,743
Tax benefit related to recognition and
retention plan 104,125
Tax benefit related to nonqualified stock options
exercised 37,443
Stock options exercised (13,104) 96,362
Change in unrealized gain (loss) on securities
available for sale
Stock splits effected in the form of stock
dividends 14,498 (14,498)
Net income for the year ended June 30, 1998 2,369,190
Cash dividends - $.33 per share (853,027)
--------- ------------- ------------- ---------- ---------- ----------
Balance at June 30, 1998 $ 31,071 $ 11,412,177 $ 14,294,514 $(3,033,704) $ (198,442) $ (15,234)
========= ============= ============= =========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unrealized Gain
(Loss) on
Securities Total
Available Shareholders'
for Sale Equity
-------- ------
<S> <C> <C>
Balance at June 30, 1997 $ (78,344) $ 20,165,580
Commitment to release employee stock
ownership plan shares 489,726
Compensation expense with respect to
recognition and retention plan 15,743
Tax benefit related to recognition and
retention plan 104,125
Tax benefit related to nonqualified stock options
exercised 37,443
Stock options exercised 83,258
Change in unrealized gain (loss) on securities
available for sale 138,941 138,941
Stock splits effected in the form of stock
dividends
Net income for the year ended June 30, 1998 2,369,190
Cash dividends - $.33 per share (853,027)
--------- --------------
Balance at June 30, 1998 $ 60,597 $ 22,550,979
========= ==============
</TABLE>
(Continued)
23.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income .................................... $ 2,369,190 $ 1,675,395 $ 1,668,279
Adjustments to reconcile net income to net
cash from operating activities
Depreciation .............................. 201,110 131,122 115,493
Gain on loan sales ........................ (650,953) (199,162) (105,039)
Gain on sale of real estate owned ......... (5,601)
Loans originated for sale ................. (34,155,386) (14,182,540) (18,497,220)
Proceeds from sale of loans ............... 34,464,785 14,234,957 18,602,259
Provision for loan losses ................. 120,000 120,000 120,000
Net accretion ............................. (70,049) (117,999) (36,775)
Security gains ............................ (13,226) 461
FHLB stock dividends ...................... (104,400) (94,600) (87,700)
Amortization of mortgage servicing rights . 55,921 8,089
RRP compensation expense .................. 15,743 34,834 58,784
Tax benefit realized on vesting of RRP
shares and exercise of nonqualified
stock options ........................... 141,568 24,902 23,704
ESOP expense .............................. 489,726 257,432 197,310
Change in
Interest receivable .................. 6,357 (37,235) (209,577)
Other assets ......................... (30,386) 351,716 (258,867)
Income taxes payable ................. 101,754 (35,191) (32,335)
Other liabilities .................... (76,470) 256,606 (23,015)
Interest payable ..................... (49,408) 103,954 (9,836)
Deferred loan fees ................... 5,314 (8,074) (454)
Deferred taxes ....................... 110,933 92,731 81,554
------------ ------------ ------------
Net cash from operating activities 2,926,522 2,617,398 1,606,565
Cash flows from investing activities
Net change in interest-bearing time deposits
in other financial institutions ............. 1,497,706 (2,151,389) 274,686
Securities available for sale
Proceeds from sales ....................... 1,050,000
Proceeds from maturities and calls ........ 6,750,000 5,220,000 713,481
Purchases ................................. (3,393,320) (4,300,000) (10,177,915)
Proceeds from principal payments on
mortgage-backed securities .............. 766,845 782,565 1,341,966
</TABLE>
See accompanying notes to consolidated financial statements.
24.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended June 30, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from investing activities (continued)
Securities held to maturity
Proceeds from maturities and calls ...... $ 500,000
Purchases ............................... (662,944)
Proceeds from principal payments on
mortgage-backed securities ............ 174,342
Net increase in loans ...................... $ (4,451,158) $(19,973,557) (758,798)
Proceeds from sale of real estate owned .... 31,557
Properties and equipment expenditures, net . (774,397) (632,419) (143,354)
Purchases of repurchase agreements ......... (5,000,000)
Proceeds from repurchase agreements ........ 2,500,000 2,500,000
------------ ------------ ------------
Net cash from investing activities ...... 427,233 (17,504,800) (11,238,536)
Cash flows from financing activities
Net change in deposits ..................... 9,540,616 4,716,188 10,985,291
Proceeds from FHLB borrowings .............. 2,000,000 24,150,000 8,500,000
Repayment of FHLB borrowings ............... (11,852,598) (11,690,639) (8,759,883)
Proceeds from issuance of stock ............ 83,258 25,179 21,259
Cash dividends paid ........................ (853,027) (544,844) (336,958)
Purchase of treasury stock ................. (1,491,300) (960,925)
------------ ------------ ------------
Net cash from financing activities ...... (1,081,751) 15,164,584 9,448,784
------------ ------------ ------------
Net change in cash and cash equivalents .......... 2,272,004 277,182 (183,187)
Cash and cash equivalents at beginning
of year ........................................ 2,914,578 2,637,396 2,820,583
------------ ------------ ------------
Cash and cash equivalents at end of year ......... $ 5,186,582 $ 2,914,578 $ 2,637,396
============ ============ ============
Supplemental disclosures of cash flow
information
Cash paid during the year for
Interest ................................ $ 6,556,760 $ 6,002,781 $ 5,298,429
Income taxes ............................ 1,268,000 842,850 860,682
Noncash activities
Transfer securities to available for sale 8,705,534
Transfer from loans to real estate owned 25,956
</TABLE>
See accompanying notes to consolidated financial statements.
25.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy: The consolidated financial statements include the accounts
of Wood Bancorp, Inc. (the "Company") and its wholly owned subsidiary, First
Federal Bank (the "Bank"). All significant intercompany transactions and
balances have been eliminated.
Nature of Operations: The Company is engaged in the business of banking with
operations conducted through its main office and six branches located in Bowling
Green, Ohio, and neighboring communities. These communities are the source of
substantially all of the Company's deposit and loan activities. The majority of
the Company's income is derived from one- to four-family residential real estate
loans.
Use of Estimates: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided. Future
results could differ from current estimates. Areas involving the use of
management's estimates and assumptions which are particularly subject to change
include the allowance for loan losses, the realization of deferred tax assets,
fair value of financial instruments and status of contingencies.
Cash Reserves: At June 30, 1998 and 1997, the Company was required to have
$382,000 and $342,000 on deposit with the Federal Reserve Bank, or as cash on
hand. These reserves do not earn interest.
Securities: Securities are classified as held to maturity, available for sale,
and trading categories. Held to maturity securities are those that the Company
has the positive intent and ability to hold to maturity, and are reported at
amortized cost. Available for sale securities are those, which the Company may
decide to sell if needed for liquidity, asset-liability management, or other
reasons. Available for sale securities are reported at fair value, with
unrealized gains or losses included as a separate component of equity, net of
tax.
Realized gains or losses on sales are determined based on the amortized cost of
the specific security sold. Amortization of premiums and accretion of discounts
are computed under the level-yield method and are recognized as adjustments to
interest income. Prepayment activity on mortgage-backed securities is affected
primarily by changes in interest rates. Yields on mortgage-backed securities are
adjusted as prepayments occur through changes to premium amortization or
discount accretion.
Loans: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs, the allowance for loan losses and loans in process.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term.
(Continued)
26.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage loans originated by the Bank and intended for sale in the secondary
market are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized in a valuation allowance by a
charge to income. To mitigate the interest rate risk associated with loans held
for sale, management obtains fixed secondary market purchase commitments for
these loans. No loans were held for sale at June 30, 1998 and 1997.
In July 1996, the Company adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which requires companies that engage in mortgage banking
activities to recognize as separate assets rights to service mortgage loans for
others. The servicing asset is amortized in proportion to, and over the period
of, estimated net servicing revenues. Impairment of mortgage servicing rights is
periodically assessed based on the estimated fair value of those rights. SFAS
No. 122 was applied prospectively to servicing rights arising from loans sold by
the Company after July 1, 1996, and did not materially impact the Company's
financial statements. SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," was adopted by the Company
in 1998. This statement supersedes SFAS No. 122 relative to loan servicing
rights, but only marginally modifies the accounting and disclosure requirements
described by SFAS No. 122. SFAS No. 125 also impacts the accounting treatment
for certain other transfers of assets and liabilities and did not materially
affect the Company's 1998 financial statements.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days. Payments received on such loans are
reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer and credit card loans, and on an
individual basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so the loan is reported, net, at the present value of
estimated future cash flows using the loan's existing rate or at the fair value
of collateral if repayment is expected solely from the collateral. Loans are
evaluated for impairment when payments are delayed, typically 90 days or more,
or when it is probable that not all principal and interest amounts will be
collected according to the original terms of the loan.
(Continued)
27.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate Owned: Real estate owned, other than that which is used in the
normal course of business, is recorded at fair value less estimated costs to
sell. For real estate acquired through foreclosure, any initial loss is recorded
as a charge to the allowance for loan losses before being transferred to real
estate owned. Any subsequent reduction in fair value is recognized in a
valuation allowance by charges to income.
Office Properties and Equipment: Office properties and equipment are stated at
cost less accumulated depreciation. Depreciation is computed based on both the
straight-line method and the accelerated method over the estimated useful lives
of the respective properties and equipment. Maintenance and repairs are expensed
and major improvements are capitalized.
Profit Sharing Plan: The Company maintains a profit sharing plan for
substantially all employees. Annual contributions to the plan are determined by
the Board of Directors. Expense related to the profit-sharing plan was $136,000,
$101,000 and $101,000 for the years ended June 30, 1998, 1997 and 1996.
Income Taxes: Income tax expense is the sum of current-year income of tax due or
refundable and the change in deferred tax assets and liabilities. Deferred tax
assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to this amount expected to be realized.
Stock Compensation: Expense for employee compensation under stock option plans
is reported only if options are granted below market price at grant date. Pro
forma disclosures of net income and earnings per share are provided as if the
fair value method were used for stock-based compensation.
Concentrations of Credit Risk: The Bank grants residential, consumer and
commercial loans to customers located primarily in Wood and surrounding counties
in Ohio. Real estate mortgage loans make up approximately 82% of the Company's
loan portfolio and the remaining 18% are made up of consumer and commercial
loans. The Bank, in the normal course of business, makes commitments to make
loans that are not reflected in the financial statements. These commitments are
discussed in Note 10.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on- and off-balance sheet
financial instruments do not include the value of anticipated future business or
the values of assets and liabilities not considered financial instruments.
(Continued)
28.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Statement of Cash Flows: For purposes of this statement, cash and cash
equivalents are defined to include the Company's cash on hand, due from banks
and federal funds sold. The Company reports net cash flows for customer loan
transactions, deposit transactions and interest-bearing deposits made with other
financial institutions.
Earnings Per Common Share: Basic and diluted earnings per common share are
computed under a new accounting standard effective beginning with the quarter
ended December 31, 1997. All prior earnings per common share amounts have been
restated to be comparable. Basic earnings per common share is based on the net
income divided by the weighted average number of common shares outstanding
during the period. ESOP shares are considered outstanding for earnings per
common share calculations as they are committed to be released; unearned shares
are not considered outstanding. Recognition and retention plan ("RRP") shares
are considered outstanding for earnings per common share calculations as they
become vested. Diluted earnings per common share shows the dilutive effect of
additional potential common shares issuable under stock options and nonvested
shares issued under the RRP. On June 18, 1996, the Board of Directors declared a
three-for-two stock split effected in the form of a 50% stock dividend payable
on July 29, 1996. On July 1, 1997, the Board of Directors declared a
three-for-two stock split effected in the form of a 50% stock dividend payable
on July 29, 1997. On January 5, 1998, the Board of Directors declared a
five-for-four stock split effected in the form of a 25% stock dividend payable
on January 29, 1998. Stock dividends in excess of 20% are reported by
transferring the par value of the stock issued from retained earnings to common
stock. Stock dividends for 20% or less are reported by transferring the market
value, as of the ex-dividend date, of the stock issued from retained earnings to
common stock and additional paid-in capital. Fractional share amounts are paid
in cash with a reduction in retained earnings. All share and per share data have
been retroactively adjusted to reflect the stock splits.
Financial Statement Presentation: Certain items in the 1997 and 1996 financial
statements have been reclassified to correspond with the 1998 presentation.
(Continued)
29.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
A reconciliation of the numerators and denominators used in the computation of
the basic earnings per common share and diluted earnings per common share is
presented below:
<TABLE>
<CAPTION>
Year ended June 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Basic Earnings Per Common Share
Numerator
Net income ........................... $ 2,369,190 $ 1,675,395 $ 1,668,279
=========== =========== ===========
Denominator
Weighted average common shares
outstanding ........................ 2,656,990 2,768,442 2,913,126
Less: Average unallocated ESOP shares (53,113) (81,866) (112,078)
Less: Average nonvested RRP shares .. (1,828) (5,545) (11,970)
----------- ----------- -----------
Weighted average common shares
outstanding for basis earnings per
common share ....................... 2,602,049 2,681,031 2,789,078
=========== =========== ===========
Basic earnings per common share ........ $ .91 $ .62 $ .60
=========== =========== ===========
<CAPTION>
Year ended June 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Diluted Earnings Per Common Share
Numerator
Net income ........................... $ 2,369,190 $ 1,675,395 $ 1,668,279
=========== =========== ===========
Denominator
Weighted average common shares
outstanding for basic earnings per
common share ....................... 2,602,049 2,681,032 2,789,078
Add: Dilutive effects of average
nonvested RRP shares ................ 111 1,107 5,624
Add: Dilutive effects of assumed
exercises of stock options ......... 154,663 135,138 107,102
----------- ----------- -----------
Weighted average common shares
and dilutive potential common
shares outstanding ................. 2,756,823 2,817,277 2,901,804
=========== =========== ===========
Diluted earnings per common share ...... $ .86 $ .59 $ .57
=========== =========== ===========
</TABLE>
(Continued)
30.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 2 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(Continued)
Stock options for 3,375 shares of common stock, granted during the year ended
June 30, 1998, were not considered in computing diluted earnings per common
share for the year ended June 30, 1998 because they were antidilutive.
NOTE 3 - SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair values
of securities at June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
-------------------------------1998------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ------------ ------------ ----------------
<S> <C> <C> <C>
Available for sale
U.S. Treasury securities $ 606,158 $ 159,742 $ 765,900
U.S. Government agencies 7,199,395 14,510 $ 41,729 7,172,176
Mutual funds and equity
securities 2,894,447 4,035 79,659 2,818,823
Municipal bonds 172,049 172,049
--------------- ------------ ------------ ----------------
10,872,049 178,287 121,388 10,928,948
Mortgage-backed securities 8,199,276 104,007 69,093 8,234,190
--------------- ------------ ------------ ----------------
Total securities
available for sale $ 19,071,325 $ 282,294 $ 190,481 $ 19,163,138
=============== ============ ============ ================
<CAPTION>
------------------------------1997-------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury securities $ 540,627 $ 152,073 $ 692,700
U.S. Government agencies 10,772,708 23,327 $ 95,899 10,700,136
Mutual funds and equity
securities 2,821,306 276 65,881 2,755,701
--------------- ------------ ------------ ----------------
14,134,641 175,676 161,780 14,148,537
Mortgage-backed securities 8,976,932 47,396 179,995 8,844,333
--------------- ------------ ------------ ----------------
Total securities
available for sale $ 23,111,573 $ 223,072 $ 341,775 $ 22,992,870
=============== ============ ============ ================
</TABLE>
(Continued)
31.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 3 - SECURITIES (Continued)
The amortized cost and estimated fair value of securities at June 30, 1998, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
----------- -----------
<S> <C> <C>
Available for sale
Due in one year or less ................... $ 1,299,954 $ 1,295,170
Due after one year through five years ..... 3,178,460 3,307,352
Due after five years through ten years .... 3,499,188 3,507,603
----------- -----------
7,977,602 8,110,125
Mortgage-backed securities ................ 8,199,276 8,234,190
Mutual funds and equity securities ........ 2,894,447 2,818,823
----------- -----------
$19,071,325 $19,163,138
=========== ===========
</TABLE>
No securities were sold during the year ended June 30, 1998 Securities called or
settled by the issuer during 1998 resulted in gross gains of $13,226. Proceeds
from the sale of securities for the year ended June 30, 1997 were $1,050,000,
resulting in gross losses of $2,410. Securities called or settled by the issuer
during 1997 resulted in gross gains of $1,949. No securities were sold during
1996.
Securities with carrying values of $1,527,000 and $500,000 as of June 30, 1998
and 1997, were pledged to secure public deposits and for other purposes as
required or permitted by law.
(Continued)
32.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 4 - LOANS
Loans were as follows at June 30:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Real estate mortgage loans (principally conventional)
Principal balances
Secured by one- to four- family residences . $ 87,923,561 $ 93,537,749
Secured by other properties ................ 10,578,260 7,295,761
Construction ............................... 6,403,535 4,515,950
Home equity ................................ 10,679,082 8,334,481
------------ ------------
115,584,438 113,683,941
Less:
Loans in process ........................... 4,105,037 2,245,571
Net deferred loan origination fees ......... 195,346 200,660
------------ ------------
Total real estate mortgage loans ....... 111,284,055 111,237,710
Consumer and other loans
Principal balances
Automobile ................................. 7,666,776 7,695,651
Commercial ................................. 10,463,418 8,035,167
Other ...................................... 6,857,912 4,925,380
------------ ------------
Total consumer and other loans ......... 24,988,106 20,656,198
------------ ------------
136,272,161 131,893,908
Allowance for loan losses ........................... 654,350 575,985
------------ ------------
Loans, net .......................................... $135,617,811 $131,317,923
============ ============
</TABLE>
A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period .... $ 575,985 $ 513,367 $ 409,706
Provision for loan losses ......... 120,000 120,000 120,000
Recoveries ........................ 11,675 33,097 1,111
Charge-offs ....................... (53,310) (90,479) (17,450)
--------- --------- ---------
Balance at end of period .......... $ 654,350 $ 575,985 $ 513,367
========= ========= =========
</TABLE>
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
(Continued)
33.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 4 - LOANS (Continued)
There were no nonaccrual loans at June 30, 1998 and 1997. Interest not
recognized on nonaccrual loans totaled approximately $0, $2,000 and $3,000 for
the years ended June 30, 1998, 1997 and 1996. Impaired loans were insignificant
at June 30, 1998 and 1997 and during the fiscal years ended June 30, 1998, 1997
and 1996.
In the course of its business, the Bank has granted loans to executive officers,
directors, and their related business interests. A summary of related party loan
activity, for loans aggregating $60,000 or more to any one related party, is as
follows for the year ended June 30:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Balance at beginning of period ........... $ 582,502 $ 510,521
New loans ................................ 203,355 268,100
Repayments ............................... (34,973) (196,119)
Other change ............................. (51,795)
--------- ---------
Balance at end of period ................. $ 699,089 $ 582,502
========= =========
</TABLE>
Other change represents the inclusion or exclusion of loans to executive
officers, directors and their related business interests due to loans in the
aggregate exceeding or not exceeding $60,000 at the beginning or end of the
period.
NOTE 5 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land ......................................... $ 809,541 $ 605,879
Buildings and improvements ................... 2,130,106 1,892,967
Furniture and equipment ...................... 754,511 979,019
Construction in process ...................... 152,413 78,150
---------- ----------
Total cost ................................... 3,846,571 3,556,015
Accumulated depreciation ..................... 1,412,953 1,695,684
---------- ----------
Office properties and equipment, net ......... $2,433,618 $1,860,331
========== ==========
</TABLE>
(Continued)
34.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 6 - LOAN SERVICING
Mortgage loans serviced for others are not reported as assets. These loans
totaled $60,082,329 and $32,418,955 at June 30, 1998 and 1997.
Activity for capitalized mortgage servicing rights included in other assets was
as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Beginning of year .................... $ 138,656
Additions ............................ 341,554 $ 146,745
Amortized to expense ................. (55,921) (8,089)
--------- ---------
End of year .......................... $ 424,289 $ 138,646
========= =========
</TABLE>
NOTE 7 - DEPOSITS
Deposits consisted of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Noninterest-bearing demand deposits ...... $ 1,500,731 $ 1,033,148
NOW and money market accounts ............ 36,842,486 34,029,482
Savings deposits ......................... 21,305,979 21,307,244
Time deposits ............................ 70,437,499 64,176,205
------------ ------------
$130,086,695 $120,546,079
============ ============
</TABLE>
The aggregate amount of deposits with a minimum denomination of $100,000 was
$15,724,499 and $16,984,405 at June 30, 1998 and 1997.
At June 30, 1998, scheduled maturities of certificates of deposit are as
follows:
Year ended June 30, 1999 $45,702,615
2000 16,885,897
2001 7,489,565
2002 114,723
2003 238,493
Thereafter 6,206
-----------
$70,437,499
===========
(Continued)
35.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 8 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current ........................... $1,166,249 $ 828,892 $ 888,892
Tax effect of vesting RRP
shares and exercise of
nonqualified stock options ...... 141,568 24,902 23,704
Deferred .......................... 110,933 92,731 81,554
---------- ---------- ----------
Total income tax provision ........ $1,418,750 $ 946,525 $ 994,150
========== ========== ==========
</TABLE>
The differences between the financial statement provision and amounts computed
by applying the statutory federal income tax rate of 34% to income before taxes
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income tax computed at the
statutory federal rate ...... $ 1,287,900 $ 891,453 $ 905,226
Add (subtract) tax effect of
ESOP deduction ........... 131,385 51,004 28,795
Other .................... (535) 4,068 60,129
----------- ----------- -----------
Total income tax provision .... $ 1,418,750 $ 946,525 $ 994,150
=========== =========== ===========
</TABLE>
The tax effects of principal temporary differences and the resulting deferred
tax assets and liabilities that comprise the net deferred tax balance are as
follows at June 30:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Items giving rise to deferred tax assets:
Deferred loan fees .............................. $ 66,415 $ 68,225
Recognition and retention plan .................. 10,355
Accrued vacation ................................ 10,636 7,087
Accelerated ESOP expense ........................ 4,716 6,159
Allowance for loan losses less than tax reserve . 7,877
Unrealized loss on securities available for sale 40,359
Items giving rise to deferred tax liabilities:
FHLB stock dividend ............................. (181,317) (145,821)
Franchise taxes ................................. (37,467) (32,180)
Depreciation .................................... (1,391) (11,771)
Allowance for loan losses more than tax reserve . (18,767)
Mortgage servicing rights ....................... (144,258) (47,143)
Unrealized gains on securities available for sale (31,217)
--------- ---------
Net deferred tax liability ................. $(306,006) $(123,497)
========= =========
</TABLE>
(Continued)
36.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 8 - INCOME TAXES (Continued)
Prior to the enactment of legislation discussed below, thrifts which met certain
tests relating to the composition of assets had been permitted to establish
reserves for bad debts and to make annual additions thereto which could, within
specified formula limits, be taken as a deduction in computing taxable income
for federal income tax purposes. The amount of the bad debt reserve deduction
for "nonqualifying loans" was computed under the experience method. The amount
of the bad debt reserve deduction for "qualifying real property loans" could be
computed under either the experience method or the percentage of taxable income
method, based on an annual election.
In August 1996, legislation was enacted that repeals the reserve method of
accounting used by many thrifts to calculate their bad debt reserve for federal
income tax purposes. Therefore, small thrifts such as the Bank must recapture
that portion of the reserve that exceeds the amount that could have been taken
under the experience method for tax years beginning after December 31, 1987. The
legislation also requires thrifts to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995. The recapture will occur over a six-year period, the
commencement of which will be delayed until the first taxable-year beginning
after December 31, 1997, provided the institution meets certain residential
lending requirements. At June 30, 1998, the Bank had approximately $631,000 in
bad debt reserves subject to recapture for federal income tax purposes. The
deferred tax liability related to the recapture has been previously established.
In fiscal 1998, no bad debt reserves were recaptured as the Bank met the
residential lending requirements.
Retained earnings at June 30, 1998 and 1997 includes approximately $2,300,000
for which no provision for federal income taxes has been made. This amount
represents the tax bad debt reserve at June 30, 1988, which is the end of the
Bank's base year for purposes of calculating the bad debt deduction for tax
purposes. If this portion of retained earnings is used in the future for any
purpose other than to absorb bad debts, the amount used will be added to future
taxable income. The unrecorded deferred tax liability on the above amount was
approximately $782,000.
(Continued)
37.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 9 - ADVANCES FROM FEDERAL HOME LOAN BANK
The Company had the following outstanding Federal Home Loan Bank ("FHLB")
advances at June 30:
<TABLE>
<CAPTION>
--------------------------1998--------------------------
Interest
Amount Rate Maturity
<S> <C> <C> <C>
Mortgage Matched Advance, (monthly
principal and interest payment of
$16,255) fixed rate $ 1,459,659 6.20% June 2008
Mortgage Matched Advance (monthly
principal and interest payment of
$16,048) fixed rate 1,463,049 6.00 July 2008
Libor Index Advance, variable rate 2,000,000 5.66 June 2000
Libor Index Advance, variable rate 2,000,000 5.70 June 2001
Regular Fixed Rate 5,000,000 6.10 November 1999
----------------
$ 11,922,708
================
<CAPTION>
---------------------------1997-------------------------
Interest
Amount Rate Maturity
<S> <C> <C> <C>
Mortgage Matched Advance, (monthly
principal and interest payment of
$16,255) fixed rate $ 1,560,786 6.20% June 2008
Mortgage Matched Advance (monthly
principal and interest payment of
$16,048) fixed rate 1,564,520 6.00 July 2008
Libor Index Advance, variable rate 2,000,000 5.69 June 1998
Libor Index Advance, variable rate 2,000,000 5.74 June 2001
Cash Management Advance, variable rate 7,500,000 5.75 July through
September 1997
Regular Fixed Rate 200,000 6.35 August 1997
Regular Fixed Rate 450,000 6.45 January 1998
Regular Fixed Rate 5,000,000 6.10 November 1999
Short Term Fixed Rate 1,500,000 5.60 August 1997
----------------
$ 21,775,306
================
</TABLE>
(Continued)
38.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 9 - ADVANCES FROM FEDERAL HOME LOAN BANK (Continued)
At June 30, 1998, scheduled principal payments on FHLB advances are as follows:
1999 $ 216,403
2000 7,229,978
2001 2,244,406
2002 259,740
2003 276,035
Thereafter 1,696,146
----------------
$ 11,922,708
================
All advances are collateralized by the Company's FHLB stock and residential
mortgage loans totaling $17,884,000 and $32,663,000 at June 30, 1998 and 1997.
NOTE 10 - COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-
SHEET RISK
Various contingent liabilities are not reflected in the consolidated financial
statements, including claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
effect on the Company's financial condition or results of operations.
Some financial instruments are used in the normal course of business to meet the
financing needs of customers and to reduce exposure to interest rate changes.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. These involve, to varying degrees,
credit and interest-rate risk more than the amounts reported in the financial
statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans. The amount of
collateral obtained, if deemed necessary, on extension of credit is based upon
management's credit evaluation and generally consists of residential or
commercial real estate.
(Continued)
39.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 10 - COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-
SHEET RISK (Continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
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 used, the total commitments do not necessarily represent
future cash requirements. Standby letters of credit and financial guarantees
written are conditional commitments to guarantee a customer's performance to a
third party.
As of June 30, 1998 and 1997, variable rate commitments to make loans or fund
outstanding lines of credit amounted to approximately $12,313,000 and
$9,467,000, respectively, and fixed rate commitments amounted to $3,789,000 and
$2,231,000, respectively. The interest rates on variable rate commitments ranged
from 6.50% to 12.00% and interest rates on fixed rate commitments ranged from
6.25% to 15.00% at June 30, 1998. The interest rates on variable rate
commitments ranged from 6.75% to 11.50% and interest rates on fixed rate
commitments ranged from 7.00% to 12.50% at June 30, 1997. Since loan commitments
may expire without being used, the amounts do not necessarily represent future
cash commitments.
NOTE 11 - FDIC INSURANCE
Included in insurance expense in the Consolidated Statements of Income for the
year ended June 30, 1997 is $670,623 for a special assessment resulting from
legislation passed and enacted into law on September 30, 1996 to recapitalize
the Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation. Thrifts such as the Bank paid a one-time assessment in November
1996 of $0.657 for each $100 in deposits as of March 31, 1995. Because of the
recapitalization, the Bank began paying lower deposit insurance premiums in
January 1997.
NOTE 12 - EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established an Employee Stock Ownership Plan ("ESOP") for the
benefit of employees who have completed at least one year of service and 1,000
hours of work. Contributions under the ESOP are conditioned upon the ESOP being
qualified under Sections 401 and 501 of the Internal Revenue Code of 1986, as
amended (the "Code"). Wood Bancorp, Inc. has received a favorable determination
letter dated June 19, 1995, from the Commissioner of the Internal Revenue
Service.
(Continued)
40.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 12 - EMPLOYEE STOCK OWNERSHIP PLAN (Continued)
To fund the plan, the ESOP borrowed $746,200 from the Company for the purposes
of purchasing 209,868 shares of stock at $3.56 per share of the Company.
Principal and interest payments on the loan are due in annual installments
beginning June 1994, with the final payments of principal and accrued interest
being due and payable at maturity, which is June 2000. Interest is payable
during the term of the loan at a fixed rate of 6%. The loan is collateralized by
the shares of the Company's common stock purchased with the proceeds. The shares
purchased with the loan proceeds are held in a suspense account for allocation
among participants as the loan is repaid. As payments are made and the shares
are released from the suspense account, such shares will be validly issued,
fully paid and nonassessable. Shares will be allocated among participants based
on all taxable compensation and any amount of compensation contributed to the
Bank's cafeteria plan.
Shares pledged as collateral are reported as unearned ESOP shares in the
Consolidated Balance Sheets. As shares are released from collateral, the Company
reports compensation expense equal to the current market price of the shares and
the shares become outstanding for earnings-per-share computations. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings, while
dividends on unallocated ESOP shares are recorded as a reduction of debt. ESOP
compensation expense was $489,726, $257,432 and $197,310 for 1998, 1997 and
1996.
The ESOP shares were as follows at June 30:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Allocated shares ............................. 128,108 97,900
Shares committed to be released .............. 28,730 30,208
Unreleased shares ............................ 53,030 81,760
-------- --------
Total ESOP shares ........................ 209,868 209,868
======== ========
Fair value of unreleased shares .............. $848,496 $735,840
======== ========
</TABLE>
NOTE 13 - STOCK OPTION AND INCENTIVE PLAN
The Company sponsors a shareholder approved stock option plan that authorizes
the Stock Option Committee of the Board of Directors to grant options to
directors, officers and employees of the Company or its subsidiaries. A total of
299,812 common shares, as adjusted for stock splits, were reserved for issuance
under the Plan. Options may be granted at a price not less than fair market
value at the date of grant. Options are subject to a five-year vesting schedule
for those granted to employees and a four-year vesting schedule for those
granted to non-employee directors.
(Continued)
41.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 13 - STOCK OPTION AND INCENTIVE PLAN (Continued)
Information about options granted is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
July 1 243,363 $ 3.74 244,064 $ 3.56 251,843 $ 3.56
Options granted 3,375 18.80 9,375 8.27 5,625 5.38
Options forfeited 2,998 3.56 7,425 4.94
Options exercised 20,650 3.99 7,078 3.56 5,979 3.56
------- ------- -------
Options outstanding
June 30 226,088 3.94 243,363 3.74 244,064 3.56
======= ======= =======
Options exercisable 187,631 149,139 103,734
Remaining shares
available for grant 40,017 43,392 49,769
</TABLE>
The following table summarized information about stock options outstanding at
June 30, 1998:
<TABLE>
<CAPTION>
Number Weighted Average Number
Outstanding Remaining Exercisable
Exercise Price at June 30, 1998 Contractual Life at June 30, 1998
- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
$ 3.56 215,213 5.25 years 187,631
8.27 7,500 8.25 --
18.80 3,375 9.50 --
</TABLE>
SFAS No. 123, effective for fiscal years beginning after December 15, 1995,
requires pro form disclosures for companies not adopting its fair value
accounting method for stock-based compensation. Accordingly, the following pro
forma information presents net income and earnings per share had the fair value
method been used to measure compensation cost for stock option plans. No
compensation expense was recognized for years ended June 30, 1998 and 1997.
<PAGE>
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net income as reported ..................... $2,369,190 $1,675,395
Pro forma net income ....................... 2,364,267 1,672,852
Basic earnings per share as reported ....... 0.91 0.62
Pro forma basic earnings per share ......... 0.91 0.62
Diluted earnings per share as reported ..... 0.86 0.59
Pro forma diluted earnings per share ....... 0.86 0.59
</TABLE>
(Continued)
42.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 13 - STOCK OPTION AND INCENTIVE PLAN (Continued)
The following table presents the fair value of options granted using the
Black-Scholes options pricing model, along with the assumptions used in the
computation:
<TABLE>
<CAPTION>
Fair Value Risk-Free Expected Expected
Date of Grant of Options Interest Rate Life Dividends
------------- ---------- ------------- ---- ---------
<S> <C> <C> <C> <C>
January 1998 $ 6.88 5.52% 10 years 1.80%
October 1996 2.75 6.65 10 2.74
</TABLE>
NOTE 14 - RECOGNITION AND RETENTION PLAN
The Bank adopted a Recognition and Retention Plan ("RRP") as a means of
providing directors and certain key employees of the Bank with an ownership
interest in the Company in a manner designed to reward and retain such directors
and key employees. The Company initially awarded 106,718 shares out of its
authorized but unissued shares at the conclusion of the Conversion. The shares
vested at a rate of 20% per year with the first installment vesting six months
after the completion of the Conversion and each additional installment vesting
on each subsequent anniversary of such date. All shares in the initial award are
vested at June 30, 1998. The Company awarded an additional 2,812 shares on
October 1, 1996. These shares vest at a rate of 20% per year on each of the
first five anniversaries of the date of the award. Compensation expense related
to the plan was $15,743, $34,864 and $58,784 for the years ended June 30, 1998,
1997 and 1996. The unamortized unearned compensation value of the RRP is shown
as a reduction to shareholders' equity in the Consolidated Balance Sheets.
NOTE 15 -REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory actions that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about the Bank's components, risk weightings and other factors. At June 30, 1998
and 1997 management believes the Company and the Bank comply with all regulatory
capital requirements. Based on the Bank's computed regulatory capital ratios,
the Bank is considered well capitalized under the Federal Deposit Insurance Act
at June 30, 1998.and 1997. Management believes no conditions or events have
occurred after June 30, 1998 that would cause the Bank's capital category to
change.
(Continued)
43.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 15 -REGULATORY MATTERS (Continued)
At June 30, 1998 and 1997, the Bank's actual capital levels and minimum required
levels were:
<TABLE>
<CAPTION>
To Be Adequately Minimum Required
Capitalized Under To Be Well Capitalized
Prompt Corrective Under Prompt Corrective
Actual Action Regulations Action Regulations
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
1998
Total capital (to risk weighted assets) ........ $14,493 13.45% $ 8,618 8.00% $10,772 10.00%
Tier 1 (core) capital (to risk weighted assets) 13,871 12.88 4,309 4.00 6,463 6.00
Tier 1 (core) capital (to adjusted total assets) 13,871 8.47 6,548 4.00 8,185 5.00
Tangible capital (to adjusted total assets) .... 13,871 8.47 2,455 1.50 N/A
1997
Total capital (to risk weighted assets) ........ $14,554 15.20% $ 7,658 8.00% $ 9,573 10.00%
Tier 1 (core) capital (to risk weighted assets) 14,041 14.67 3,829 4.00 5,744 6.00
Tier 1 (core) capital (to adjusted total assets) 14,041 8.71 4,834 3.00 8,056 5.00
Tangible capital (to adjusted total assets) .... 14,041 8.71 2,417 1.50 N/A
</TABLE>
In addition to certain federal income tax considerations, OTS regulations impose
limitations on the payment of dividends and other capital distributions by
savings associations. Under OTS regulations applicable to converted savings
associations, the Bank is not permitted to pay a cash dividend on its common
shares if its regulatory capital would, as a result of payment of such
dividends, be reduced below the amount required for the Liquidation Account, or
below applicable regulatory capital requirements prescribed by the OTS.
OTS regulations applicable to all savings and loan associations provide that a
savings association which immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution (including a dividend) has
total capital (as defined by OTS regulations) that is equal to or greater than
the amount of its capital requirements is generally permitted without OTS
approval (but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half of the amount by which its total capital
to assets ratio exceeded its required capital to assets ratio at the beginning
of the calendar year, or (2) 75% of its net earnings for the most recent
four-quarter period. Savings associations that meet the capital requirements but
have been notified by the OTS that they are in need of more than normal
supervision will be subject to restrictions on dividends. A savings association
that fails to meet current minimum capital requirements is prohibited from
making any capital distributions without the prior approval of the OTS.
The Bank currently meets all of its capital requirements and, unless the OTS
determines that the Bank is an institution requiring more than normal
supervision, the Bank may pay dividends in accordance with the foregoing
provisions of OTS regulations.
(Continued)
44.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Wood Bancorp, Inc. is as follows at June 30:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
1998 1997
------------ ------------
<S> <C> <C>
Assets
Cash ......................................................... $ 5,348,130 $ 3,066,707
Interest-bearing time deposits in other financial institutions 99,000 99,000
Securities available for sale ................................ 2,154,730 2,033,443
Mortgage-backed and related securities available for sale .... 571,765 599,973
Loan receivable from subsidiary .............................. 213,200 319,800
Investment in subsidiary ..................................... 14,099,806 14,021,379
Other assets ................................................. 68,348 26,424
------------ ------------
Total assets ............................................. $ 22,554,979 $ 20,166,726
============ ============
Liabilities and Shareholders' Equity
Other liabilities ............................................ $ 4,000 $ 1,146
Common stock ................................................. 31,071 16,573
Additional paid-in capital ................................... 11,412,177 10,884,182
Retained earnings ............................................ 14,294,514 12,805,953
Treasury stock ............................................... (3,033,704) (3,130,066)
Unearned employee stock ownership plan shares ................ (198,442) (301,741)
Unearned recognition and retention plan shares ............... (15,234) (30,977)
Unrealized gain (loss) on available for sale securities, net . 60,597 (78,344)
------------ ------------
Total liabilities and shareholders' equity ............... $ 22,554,979 $ 20,166,726
============ ============
</TABLE>
(Continued)
45.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
For the years ended June 30, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest income
Dividends from subsidiary .................. $ 3,000,000 $ 5,000,000
Securities ................................. 118,734 $ 116,740 113,119
Mortgage-backed and related securities ..... 32,740 37,836 38,575
Loan to subsidiary ......................... 19,454 25,939 32,423
Other interest income ...................... 8,640 6,703 23,227
----------- ----------- -----------
Total interest income ................. 3,179,568 187,218 5,207,344
Operating expenses ............................. 71,466 89,967 96,272
----------- ----------- -----------
Income before income taxes and equity in
undistributed earnings of subsidiary ..... 3,108,102 97,251 5,111,072
Income tax expense ............................. 36,750 33,100 37,750
----------- ----------- -----------
Income before equity in undistributed
earnings of subsidiary ................... 3,071,352 64,151 5,073,322
(Distributions in excess of earnings)
equity in undistributed earnings
of subsidiary ............................ (702,162) 1,611,244 (3,405,043)
----------- ----------- -----------
Net income ..................................... $ 2,369,190 $ 1,675,395 $ 1,668,279
=========== =========== ===========
</TABLE>
(Continued)
46.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended June 30, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income ................................... $ 2,369,190 $ 1,675,395 $ 1,668,279
Adjustments to reconcile net income to net
cash from operating activities:
Distributions in excess of earnings
(equity in undistributed earnings)
of subsidiary .......................... 702,162 (1,611,244) 3,405,043
Principal repayments on loan to ESOP ..... 106,600 106,600 106,600
Net accretion ............................ (130) (186) (726)
Change in
Other assets ........................ (36,174) 147,628 (80,267)
Other liabilities ................... 2,854 (433,698) 374,839
----------- ----------- -----------
Net cash from operating activities ....... 3,144,502 (115,505) 5,473,768
Cash flows from investing activities
Purchase of interest-bearing deposits in other
financial institutions ..................... (63) (98,937)
Purchases of securities ...................... (423,141) (405,777)
Maturities of securities ..................... 300,000 800,000
Proceeds from principal payments on
mortgage-backed securities ................. 29,831 30,992 51,579
----------- ----------- -----------
Net cash from investing activities ....... (93,310) 30,929 346,865
Cash flows from financing activities
Cash dividends paid .......................... (853,027) (544,844) (336,958)
Purchase of treasury stock ................... (1,491,300) (960,925)
Proceeds from issuance of stock .............. 83,258 25,179 21,259
----------- ----------- -----------
Net cash from financing activities ....... (769,769) (2,010,965) (1,276,624)
----------- ----------- -----------
Net change in cash ........................... 2,281,423 (2,095,541) 4,544,009
Cash at beginning of period .................. 3,066,707 5,162,248 618,239
----------- ----------- -----------
Cash at end of period ........................ $ 5,348,130 $ 3,066,707 $ 5,162,248
=========== =========== ===========
</TABLE>
(Continued)
47.
<PAGE>
WOOD BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair value and the related carrying
value of the Company's financial instruments at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
-----------------1998-------------- ---------------1997----------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 5,186,582 $ 5,187,000 $ 2,914,578 $ 2,915,000
Interest-bearing time deposits in
other financial institutions 731,398 731,000 2,229,104 2,229,000
Securities available for sale 10,928,948 10,929,000 14,148,537 14,149,000
Mortgage-backed securities
available for sale 8,234,190 8,234,000 8,844,333 8,844,000
Loans, net 135,617,811 135,867,000 131,317,923 134,050,000
FHLB Stock 1,507,600 1,508,000 1,403,200 1,403,000
Accrued interest receivable 847,379 847,000 853,736 854,000
Liabilities
Demand and savings deposits (60,018,162) (60,018,000) (56,369,874) (56,370,000)
Time deposits (70,437,499) (70,850,000) (64,176,205) (64,114,000)
FHLB borrowings (11,922,708) (11,888,000) (21,775,306) (21,463,000)
Accrued interest payable (143,758) (144,000) (193,166) (193,000)
</TABLE>
The estimated fair value approximates carrying amount for all items except those
described below. Estimated fair value for securities is based on quoted market
values for the individual securities or for equivalent securities. Estimated
fair value for loans is based on the rates charged at year-end for new loans
with similar maturities, applied until the loan is assumed to reprice or be
paid. Estimated fair values for time deposits and FHLB borrowings are based on
the rates paid at year-end for similar new deposits and long-term borrowings,
applied until maturity. Estimated fair value for other financial instruments and
off-balance sheet loan commitments is considered nominal.
48.
<PAGE>
SHAREHOLDER INFORMATION
Dividends
The Board of Directors intends to continue the payment of quarterly cash
dividends, dependent on the results of operations and financial condition of the
Company, tax considerations, industry standards, economic conditions, general
business practices and other factors. The Company's ability to pay dividends is
dependent on the dividend payments it receives from the Bank, which is subject
to continued compliance with all regulatory capital requirements. See Note 15 of
the Notes to Consolidated Financial Statements for information regarding
regulatory requirements applicable to the payment of cash dividends by the Bank.
Market Information
Wood Bancorp, Inc. common stock is traded over the counter and quoted on the
Nasdaq Small-Cap Market under the symbol "FFWD". At September 4, 1998, there
were 2,684,740 shares of Wood Bancorp, Inc. common stock issued and outstanding
by 758 holders of record. The table below sets forth the high and low daily
closing price for the common stock as reported on the Nasdaq, as well as
dividends declared per share, by quarter for the last two years.
Quarter Ended High Low Dividends
- ------------- ---- --- ---------
September 30, 1996...... $ 8.33 $ 6.58 $ .05
December 31, 1996....... 9.20 8.20 .05
March 31, 1997.......... 9.20 8.40 .05
June 30, 1997........... 9.07 8.47 .05
September 30, 1997...... 14.40 9.37 .08
December 31, 1997....... 18.80 13.50 .08
March 31, 1998.......... 27.00 18.80 .085
June 30, 1998........... 20.50 15.50 .085
49.
<PAGE>
Annual Report on Form 10-KSB
A copy of Wood Bancorp, Inc.'s Annual Report on Form 10-KSB as filed with the
Securities and Exchange Commission may be obtained without charge upon written
request to David L. Nagel, Executive Vice President, Chief Financial Officer and
Secretary, 124 East Court Street, Bowling Green, Ohio 43402-2259 or by calling
(419) 352-3502.
Corporate Headquarters Market Makers
124 East Court The Ohio Company
Bowling Green, Ohio 43402-2259 Herzog, Heine, Geduld, Inc.
McDonald & Company Securities, Inc.
Registrar / Transfer Agent General Counsel
Registrar and Transfer Company Spitler, Vogtsberger & Huffman
10 Commerce Drive Bowling Green, OH
Cranford, NJ 07016
Special Counsel
Silver, Freedman & Taff, L.L.P.
Washington, DC
DIRECTORS AND EXECUTIVE OFFICERS
WOOD BANCORP, INC.
And
FIRST FEDERAL BANK
Directors
Robert E. Spitler Richard L. Gordley
Chairman of the Board of Wood President and Chief Executive Officer
Bancorp, Inc. and First Federal Bank of Wood Bancorp, Inc. and First
Partner - Law Firm of Spitler, Federal Bank
Vogtsberger & Huffman
David L. Nagel Randal R. Huber
Executive Vice President, Chief Officer and Part-Owner
Financial Officer and Secretary Huber, Harger, Welt and Smith
of Wood Bancorp, Inc. and First Insurance Agency
Federal Bank
Michael A. Miesle Dale L. Myers
Chief Executive Officer Pharmacist - Retired
Wood County Hospital
Executive Officers
Richard L. Gordley David L. Nagel
President and Chief Executive Officer Executive Vice President, Chief
Financial Officer and Secretary
David A. Weaks John H. Bick
Vice President Executive Vice President
50.
SUBSIDIARIES OF THE REGISTRANT
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
------ ---------- --------- ------------
Wood Bancorp, Inc. First Federal Bank 100% Federal
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Registration Nos. 33-86136 and 33-99026) of Wood Bancorp,
Inc. (the "Company") of our report dated July 31, 1998 appearing in this Annual
Report on Form 10-KSB of the Company for the year ended June 30, 1998.
/s/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
September 24, 1998
Columbus, Ohio
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from Form 10-KSB
for the fiscal year ended June 30, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 4,786,582
<INT-BEARING-DEPOSITS> 731,398
<FED-FUNDS-SOLD> 400,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,163,138
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 135,617,811
<ALLOWANCE> 654,350
<TOTAL-ASSETS> 166,149,645
<DEPOSITS> 130,086,695
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,589,263
<LONG-TERM> 11,922,708
31,071
0
<COMMON> 0
<OTHER-SE> 22,519,908
<TOTAL-LIABILITIES-AND-EQUITY> 166,149,645
<INTEREST-LOAN> 12,033,516
<INTEREST-INVEST> 1,302,772
<INTEREST-OTHER> 244,580
<INTEREST-TOTAL> 13,580,868
<INTEREST-DEPOSIT> 5,512,630
<INTEREST-EXPENSE> 6,501,051
<INTEREST-INCOME-NET> 7,079,817
<LOAN-LOSSES> 120,000
<SECURITIES-GAINS> 13,226
<EXPENSE-OTHER> 4,283,120
<INCOME-PRETAX> 3,787,940
<INCOME-PRE-EXTRAORDINARY> 2,369,190
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,369,190
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.86
<YIELD-ACTUAL> 4.42
<LOANS-NON> 0
<LOANS-PAST> 244,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 575,985
<CHARGE-OFFS> 53,310
<RECOVERIES> 11,675
<ALLOWANCE-CLOSE> 654,350
<ALLOWANCE-DOMESTIC> 654,530
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 91,000
</TABLE>
