SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended
December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from ------------------------ to
-----------------------
Commission File Number: 0-22394
FIRST FINANCIAL BANCORP, INC.
---------------------------------------
(Exact Name of Small Business Issuer in its Charter)
Delaware 36-3899034
- ---------------------------- ----------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Identification Number)
Organization)
121 E. Locust Street, Belvidere, Illinois 61008
- ----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(815) 544-3167
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 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 registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES /X/ NO / /
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form,
and no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [ X ]
As of February 28, 1997, there were issued and outstanding
418,488 shares of the Registrant's Common Stock. The aggregate
value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the average bid and asked
prices of the Common Stock as of March 14, 1997, was $6,250,162.
Transitional Small Business Disclosure Format (check one):
YES / / NO / X /
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal
year ended December 31, 1996 (Parts II and III).
2. Proxy Statement for the 1997 Annual Meeting of Stockholders
(Parts I and III).
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
First Financial Bancorp, Inc. (the "Company") is a Delaware
corporation organized on June 25, 1993 by First Federal Savings
and Loan Association of Belvidere (the "Mutual Association") for
the purpose of acquiring all of the capital stock of the First
Federal Savings Bank (the "Bank") issued in the conversion of the
Mutual Association from mutual to stock form (the "Conversion").
The Company is registered as a savings and loan holding company
with the Office of Thrift Supervision (the "OTS"). To date, the
Company has not engaged in any material operations other than to
hold all of the issued and outstanding stock of the Bank. See
"First Federal Savings Bank" below. At December 31, 1996, the
majority of the Company's assets consisted of the investment in
the Bank. At December 31, 1996, the Company, on an
unconsolidated basis, had total assets of $7.4 million and
stockholders' equity of $7.3 million.
The Company employs executive officers and a support staff
if and as the need arises. Such personnel are provided by the
Bank and the Company pays the Bank a management fee of $550 per
month for such services. The Company neither owns nor leases any
real property. It presently utilizes the premises, equipment and
furniture of the Bank without the direct payment of any rental
fees to the Bank. The Company's executive office is located at
121 Locust Street, Belvidere, Illinois 61008 and its telephone
number is (800) 544-3093.
First Federal Savings Bank
General. The Bank is a federally chartered savings
institution headquartered in Belvidere, Illinois. The Bank's
predecessor, the Mutual Association, was founded in July 1922 as
"Belvidere Building and Loan Association," a state-chartered
stock institution. In 1936, the Mutual Association converted to
mutual ownership under the name "Belvidere Federal Savings and
Loan Association" and received its federal mutual charter. In
1995, the Bank changed its name from "First Federal Savings Bank
of Belvidere" to "First Federal Savings Bank." The Bank conducts
business from two full-service offices located in Belvidere,
Illinois, and one loan origination office located in Rockford,
Illinois. Its deposits are insured up to the maximum allowable
amount by the Federal Deposit Insurance Corporation (the "FDIC").
The Bank is a community-oriented savings institution engaged
primarily in the business of originating one- to four-family
residential mortgage loans in its primary market area. To a
lesser extent, the Bank also originates multi-family and
commercial real estate loans and a variety of consumer loans. The
Bank also invests in various types of securities and assets that
are permissible investments for federal savings banks, including
federal funds, mortgage-backed securities, and securities issued
or guaranteed by the United States Government or agencies
thereof. The Bank funds its lending and investment activities
primarily from deposits received at its branch locations,
repayment of principal and interest on its mortgage loans, and,
by borrowings from the Federal Home Loan Bank of Chicago (the
"FHLB"). At December 31, 1996, the Bank had total consolidated
assets of $94.2 million, total deposits of $65.0 million, FHLB
advances of $20.5 million, and stockholders' equity of
$6.8 million.
Market Area. The Bank is a community-oriented savings
institution offering a variety of financial products and services
to the communities it serves. The Bank's primary market area is
Boone and Winnebago Counties, located in northern Illinois. To a
lesser extent, the Bank also originates loans in
<PAGE>
counties in Illinois contiguous to Boone and Winnebago Counties.
Management believes that its offices are located in communities
that can generally be characterized as stable residential
neighborhoods of predominately one- to four-family residences.
The Bank's principal market for deposits is concentrated in the
neighborhoods surrounding its two full service offices in
Belvidere, Illinois.
As of 1990, the aggregate population of Boone and Winnebago
Counties was approximately 284,000. As of January 1997, the
unemployment rate was 7.1% for the Rockford metropolitan
statistical area, which includes Boone, Winnebago and Ogle
Counties, compared to 5.4% nationally.
Until the early 1980's, the economy of northern Illinois
and, in particular, the greater Rockford area was typical of many
communities in the Midwest, consisting of a large agricultural
base, most employment provided by large manufacturing industries,
a large pool of skilled labor, and an extensive transportation
infrastructure to support heavy industry. Boone and Winnebago
Counties shared in the nationwide economic downturn of the early
1980's which adversely affected heavy industry. Since the early
1980's, the economy of Boone and Winnebago Counties has improved
by reducing its reliance on heavy industry and by attracting and
retaining a diverse array of industrial, retail and service
companies. Currently, manufacturing accounts for less than 34%
of employment and no single company or industry dominates
employment in the area. While no firm employs more than 3% of
the work force, there are many major companies and employers in
the Bank's market area, such as Sundstrand Corporation, Chrysler
Corporation, Camcar Textron, Dean Foods, United Parcel Service,
Motorola, five area hospitals, Champion International, Central
Rubber, Ingersoll Milling Machine, Woodward Governor Company,
Pillsbury/Green Giant, Inc., Barber-Colman Company, Amerock
Corp., Abar Ipsen, Belvedere Company, Inc., Franklin Wire Works
and Atwood Industries, Inc. Additionally, from the early 1980's,
the Chicago metropolitan market has grown westward towards the
Bank's market area.
The Bank faces significant competition in the origination of
loans from savings and loan associations, other savings banks,
mortgage banking companies, insurance companies, and commercial
banks, many of which have greater financial and marketing
resources. The Bank also faces significant competition in
attracting deposits. Historically, most direct competition for
deposits has been from savings and loan associations, savings
institutions, commercial banks and credit unions. The Bank faces
additional competition for deposits from short-term money market
funds and other corporate and government securities funds and
from other financial institutions such as brokerage firms and
insurance companies. Competition has also increased as a result
of the lifting of restrictions on the interstate operations of
financial institutions.
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio
consists primarily of conventional first mortgage loans secured
by one- to four-family residences and, to a lesser extent, multi-
family residences and commercial properties. At December 31,
1996, the Bank's gross loan portfolio totalled $74.6 million, of
which $60.2 million, or 80.7%, were one- to four-family
residential mortgage loans held for investment. At December 31,
1996, $19.0 million, or 25.5%, of the Bank's gross loan portfolio
consisted of one- to four-family mortgage loans with adjustable
interest rates.
The remainder of the Bank's mortgage loans at December 31,
1996 consisted of $5.3 million of multi-family, commercial real
estate, and other mortgage loans and mortgage loans held for
sale, representing 7.1% of gross loans. The Bank's consumer
loans consist of home improvement loans, home equity loans,
savings account loans, automobile loans, credit card loans, and
other loans that totalled $9.2 million, or 12.3%, of gross loans
at December 31, 1996.
PAGE
<PAGE>
Analysis of Loan and Mortgage-Backed Securities Portfolio.
The following table sets forth the composition of the Bank's
loan portfolios at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------
1996 1995 (1) 1994 (2) 1993 1992
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans:
1-4 family residential $ 52,417 70.22% $ 37,536 73.52% $ 35,529 75.69% $ 26,608 62.85% $ 29,486 73.14%
1-4 family residential,
purchased 7,792 10.44 1,605 3.14 1,848 3.94 2,202 5.20 2,958 7.34
Held for sale -- 0.00 390 0.76 777 1.65 8,443 19.95 2,200 5.46
Other 5,279 7.07 4,960 9.71 3,191 6.80 619 1.46 339 0.84
Total first mortgage loans 65,488 87.73 44,491 87.14 41,345 88.08 37,872 89.46 34,983 86.78
Other loans 9,157 12.27 6,567 12.86 5,594 11.92 4,462 10.54 5,330 13.22
Total loans receivable 74,645 100.00% 51,058 100.00% 46,939 100.00% 42,334 100.00% 40,313 100.00%
Less:
Undisbursed loan proceeds 197 252 216 495 217
Unearned discounts, premiums
and deferred loan origination
fees, net 165 246 252 196 251
Allowance for loan losses 468 330 310 343 169
-------- -------- -------- -------- ---------
Total loans receivable, net $ 73,815 $ 50,230 $ 46,161 $ 41,300 $ 39,676
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Mortgage-backed securities:
FHLMC -- --% $ -- --% $ -- --% $ 1,036 10.21% $ 993 15.25%
FNMA -- -- -- -- -- -- 2,087 20.56 3,514 53.99
GNMA -- -- -- -- -- -- 4,320 42.56 2,002 30.76
Collateralized mortgage
obligations -- -- -- -- -- -- 2,708 26.67 -- --
Total mortgage-backed securities -- -- -- -- -- -- 10,151 100.00% 6,509 100.00%
Premiums and discounts, net -- -- -- -- 285 233
Total mortgage-backed securities,
net -- -- -- -- $ 10,436 $ 6,742
Mortgage-backed securities available
for sale (at fair value):
FHLMC $ 1,094 11.97% $ 832 9.76% $ -- --% $ -- --% $ -- --%
FNMA 1,751 19.17 1,295 15.20 $ -- -- $ -- -- $ -- --%
GNMA 4,282 46.87 4,376 51.36 $ -- -- $ -- -- $ -- --%
Collateralized mortgage
obligations 2,009 21.99 2,018 23.68 $ -- -- $ -- -- $ -- --%
Total mortgage-backed securities
available for sale 9,136 00.00% $ 8,521 100.00% $ -- --% $ -- --% $ -- --%
Mortgage-backed securities held
to maturity: (at amortized cost)
FHLMC $ -- 0.00% $ 135 10.41% $ 889 -- $ -- --% $ -- --%
FNMA 271 26.06 302 23.28 1,767 -- $ -- -- $ -- --%
GNMA -- -- -- -- 4,790 -- $ -- -- $ -- --%
Collateralized mortgage obligations 769 73.94 860 66.31 2,943 -- $ -- -- $ -- --%
Total mortgage-backed securities
held to maturity 1,040 100.00% $ 1,297 100.00% 10,389 --% $ -- --% $ -- --%
Premiums and discounts, net 17 21 307
Total mortgage-backed securities
held to maturity, net $ 1,057 $ 1,318 $ 10,696 $ -- $ --
- ---------------------------------------
(1) The Company reclassified substantially all of its mortgage-backed securities to available-for-sale in
December 1995 under a window of opportunity provided under SFAS 115.
(2) The Company adopted FASB 115 "Accounting for Certain Debt and Equity Securities" as of January 1, 1994,
which resulted in the Company's classifying all mortgage-backed securities as available for sale,
held to maturity or trading.
(3) Includes $33.3 million, $3.0 million, $42.3 million and $17.9 million of mortgage-backed securities
available for sale at July 31, 1996, 1995, 1994, and 1993, respectively. See Note 2 to
Consolidated Financial Statements.
</TABLE>
PAGE
<PAGE>
Loan Maturity Schedule. The following table sets forth
certain information as of December 31, 1996, regarding the dollar
amount of gross loans maturing in the Bank's portfolio based on
their contractual terms to maturity. Demand loans and credit
card loans, loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported as due in one year
or less. All other loans are included in the period in which the
final contractual repayment is due.
<TABLE>
Within 1-3 3-5 5-10 10-20 Beyond 20
1 Year Years Years Years Years Years Total
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans $ 891 $4,219 $8,587 $11,148 $10,672 $29,971 $65,488
Other loans 2,325 2,103 1,283 3,446 -- -- 9,157
Total $3,216 $6,322 $9,870 $14,594 $10,672 $29,971 74,645
</TABLE>
The following table sets forth the dollar amount of all gross
loans at December 31, 1996, which have predetermined interest rates
and have floating or adjustable interest rates and which are due after
December 31, 1997.
<TABLE>
Fixed Adjustable Total
----------------------------------
(In Thousands)
<S> <C> <C> <C>
First mortgage loans $45,578 $19,019 $64,597
Other loans 2,161 4,671 6,832
Total 47,739 $23,690 $71,429
</TABLE>
Originating and Selling One- to Four-Family Mortgage Loans.
The Bank's primary lending activity is the origination of first
mortgage loans secured by one- to four-family residential
properties. Single family residential owner-occupied mortgage
loans are underwritten in conformity with the criteria
established by the Federal National Mortgage Association
("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC"),
the Government National Mortgage Association ("GNMA"), the
Federal Home Administration ("FHA") and the Department of
Veteran's Affairs (the "VA"), and are eligible for sale to such
agencies, with the exception of loans exceeding applicable agency
dollar limits. To a lesser extent, the Bank originates loans
secured by non-owner occupied one- to four-family residential
real estate.
One- to four-family residential mortgage loans originated by
the Bank are generally for terms ranging from three to 30 years,
amortize on a monthly basis, and have principal and interest due
each month. Such real estate loans often remain outstanding for
significantly shorter periods than their contractual terms to
maturity, particularly in a declining interest rate environment.
Borrowers may refinance or prepay loans at their option without
penalty. One- to four-family residential mortgage loans
originated by the Bank customarily contain "due-on-sale" clauses
which permit the Bank to accelerate the indebtedness of the loan
upon transfer of ownership of the mortgaged property.
Due-on-sale clauses are an important means of increasing the
interest rate on existing mortgage loans during periods of rising
interest rates.
The Bank originates fixed-rate mortgage loans amortized on a
monthly basis with principal and interest due monthly. In recent
years the Bank has generally retained in its loan portfolio only
<PAGE>
fixed-rate mortgage loans with terms of 15 years or less and has
held for sale or sold on a non-recourse basis fixed-rate mortgage
loans with terms greater than 15 years, subject to the Bank's
interest-rate risk management policies. Fixed-rate mortgage
loans with terms greater than 15 years are generally held for
sale or sold on a non-recourse basis, with servicing retained
(except for FHA and VA loans, which are sold on a servicing-
released basis).
The Bank has purchased participating interests in first
mortgage loans. Management's analysis of such loans in terms of
underwriting, collection techniques, evaluation of reserves and
delinquency status is the same as for one- to four-family
residential mortgage loans originated by the Bank. Based on the
foregoing, management of the Bank does not believe that such
participations present any materially greater risk of delinquency
than one- to four-family residential mortgage loans originated by
the Bank.
The Bank also originates ARM loans to reduce interest rate
risk. The Bank originates one- and three-year ARM loans which
adjust in relationship to U.S. Treasury rates. ARM loans are
originated with terms ranging from 15 to 30 years. Currently,
ARM loans originated by the Bank provide for maximum adjustments
of 2% per adjustment, with overall interest rate caps of 6% and
interest rate floors of 1% under the initial interest rate. The
Bank originated $4.1 million in ARM loans during the year ended
December 31, 1996, as compared to $1.8 million for the year ended
December 31, 1995.
The Bank's current lending policy is to originate and retain
in its portfolio all ARM loans. During the year ended December
31, 1996, the Bank originated $4.1 million in ARM loans, and at
December 31, 1996, $19.0 million, or 25.5%, of the Bank's gross
loan portfolio consisted of ARM loans. ARM loans generally pose
a risk that as interest rates rise, the amount of a borrower's
monthly loan payment also rises, thereby increasing the potential
for delinquencies and loan losses. At the same time, the
marketability of such loans may be adversely affected by higher
rates.
The Bank's lending policies generally limit the maximum
loan-to-value ratio on one- to four-family mortgage loans secured
by owner-occupied properties to 80% of the lesser of the
appraised value or purchase price of the property. The Bank
originates some loans with up to 97% loan-to-value ratios on
which it charges a higher effective interest rate; however, the
Bank's policy is to require private mortgage insurance on loans
with a loan-to-value ratio in excess of 80%.
Commercial Real Estate and Multi-Family Lending. The Bank
originates commercial real estate and multi-family loans on a
limited basis. At December 31, 1996, such loans represented 8.1%
of the Bank's mortgage loan portfolio and 7.1% of the Bank's
gross loan portfolio. The Bank generally does not solicit such
loans, and originates such loans selectively and on a case-by-
case basis. During 1997, the Bank plans to expand its commercial
real estate loan portfolio as a means to increase net interest
margins and overall profitability. The Bank originated
$1.1 million of commercial and multi-family real estate loans in
1996. At December 31, 1996, the Bank's commercial real estate
and multi-family real estate loan portfolio totalled
$5.3 million. The largest loan at December 31, 1996 was
$690,000.
The Bank's commercial real estate loans typically are
secured by office buildings, retail shopping stores, light
industrial/warehouse facilities and ecumenical buildings. The
Bank generally makes such loans in amounts up to 80% of the
appraised value of the property.
The Bank's multi-family loans are typically secured by
residential properties containing 6, 8 or 12 dwelling units
located in its primary market area. None of the Bank's
multifamily loans are secured by residential properties
containing more than 64 units. The Bank makes such loans in
amounts up to 80% of
<PAGE>
the appraised value of the property. The Bank generally requires
a positive cash flow on all multi-family properties. Multi-
family loans are offered with fixed or adjustable interest rates.
Fixed-rate and adjustable rate loans generally bear interest
rates which are keyed to interest rates paid on U.S. Treasury
issues.
Multi-family and commercial real estate loans generally are
for larger loan amounts and involve greater risks than one- to
four-family residential mortgage loans. Because payments on
loans secured by such properties are often dependent on the
successful operation or management of the properties, repayment
of such loans may be subject to a greater extent to adverse
conditions in the real estate market or the economy. The Bank
seeks to minimize these risks in a variety of ways, including
limiting the size of such loans and strictly scrutinizing the
financial condition of the borrower, the quality of the
collateral and the management of the property securing the loan.
The Bank obtains appraisals on each property in accordance with
applicable regulations.
Consumer, Home Equity and Other Lending. The Bank also
offers a variety of consumer loans which consist primarily of
home equity loans, but which also include home improvement loans,
installment loans secured by automobiles, savings account loans
and other secured and unsecured consumer loans.
In past years, the Bank made indirect auto loans that were
originated by local automobile dealers. The Bank had reduced its
participation in indirect auto lending in recent years due, in
part, to increased levels of delinquencies and repossessions in
indirect auto loans as compared to auto loans originated directly
by the Bank. The Bank began a controlled re-entry into indirect
auto lending during the year ended December 31, 1994. Management
of the Bank does not, however, currently anticipate that indirect
auto loans will constitute a significant part of its consumer
loan portfolio in the immediate future.
The Bank offers home equity loans which are line of credit
loans secured by a first or second mortgage on one- to
four-family, owner-occupied residential properties located in its
market area. Home equity line of credit loans are offered with
adjustable interest rates only and currently have terms of five
to twenty years. The Bank also offers fixed-rate home
improvement loans. As of December 31, 1996, the Bank's consumer
loan portfolio totalled $9.2 million, or 12.3%, of the Bank's
gross loan portfolio. Of the consumer loan portfolio, home
improvement and home equity loans comprised $5.1 million, or
6.9%, of the Bank's gross loan portfolio, and other loans
(approximately $1.4 million of which were secured by automobiles)
comprised $4.1 million, or 5.4%, of the Bank's gross loan
portfolio.
In addition, the Bank offers unsecured consumer loans
through its Visa and MasterCard programs. In 1996, the Bank
continued to expand its consumer loan portfolio by marketing
credit card loans. Management believes that these loans, which
carry a higher rate of interest, can enhance net interest income
when offered in conjunction with a prudent credit risk policy and
collection program.
Consumer loans entail greater risks than do one- to
four-family residential mortgage loans, particularly in the case
of consumer loans which are unsecured or 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, since there is a greater likelihood of damage, loss or
depreciation of the underlying collateral. Further, the
remaining deficiency in some cases does not warrant further
substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy
and insolvency laws, may limit the amount which can be recovered
on such loans. The Bank's level of consumer loan delinquencies
generally
<PAGE>
has been low. No assurance can be given, however, that the
Bank's delinquency rate on consumer loans will continue to remain
low in the future.
Loan Concentration. The Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") amended the Home
Owners' Loan Act of 1933 ("HOLA") to limit the amount of credit a
savings institution could extend to any single borrower or
related group of borrowers generally to 15% of the savings
institution's unimpaired capital and surplus. The applicable
regulations also provide that additional amounts of credit may be
extended to such borrowers, in certain circumstances, in amounts
up to 10% of the savings institution's unimpaired capital and
surplus, if such credit is secured by readily marketable
collateral, which generally does not include real estate. Loans
originated prior to the enactment of the FIRREA, however, are
deemed to comply with the limits imposed by the FIRREA if made in
accordance with the then applicable lending limits. At December
31, 1996, the Bank had no loans in excess of its loan to one
borrower limitation. At December 31, 1996, the maximum dollar
amount of loans to one borrower that the Bank was authorized to
make was $1,107,000. At that date, the largest concentration of
loans to one borrower totalled $690,000.
Loan Origination, Purchase, Sale and Servicing Activities.
Mortgage loan applications are accepted at the Bank's Locust
Street Office, at its loan origination office, and by
commissioned loan originators employed by the Bank who accept
applications from throughout the Bank's market area. The Bank
also accepts consumer loan applications at its Locust Street
office. Loans are generated through the Bank's marketing efforts,
its present customers, walk-in customers and referrals from real
estate brokers, builders, local businesses and commissioned loan
originators. The Bank generally originates one-to four-family
residential mortgage loans in conformity with FNMA, FHLMC and
other agency guidelines to facilitate the sale of fixed-rate
residential mortgage loans in the Bank's secondary mortgage
market operations. The Bank also originates loans in amounts
exceeding agency guidelines.
Each fixed-rate mortgage loan that is originated for sale is
held in the Bank's held for sale portfolio until a commitment has
been obtained from FNMA, FHLMC or another financial institution
to purchase the loan or group of loans. The Bank's loans are
sold without recourse. All ARM loans and fixed-rate loans with
terms of less than 15 years are retained in the Bank's portfolio.
Gains or losses resulting from sales of loans are recorded at the
time of sale and are determined by the difference between the net
sales proceeds and the carrying value of loans sold.
The Bank has adopted the provisions of FASB Statement
No. 122, Accounting for Mortgage Servicing Rights, as of
January 1, 1995. Under Statement 122, the Bank has capitalized
the cost of mortgage servicing rights ("MSRs") on mortgages
originated after December 31, 1994 which have been sold or
securitized. The allocation of the total cost of the mortgages
to MSRs and the mortgages (without MSRs) is based on their
relative fair values. MSRs are amortized in proportion to and
over the period of estimated net servicing income.
The gross servicing fee income from loans originated is
generally 1/4% to % of the total balance of the loan serviced.
When servicing is retained at other than a normal servicing fee,
an additional gain or loss is recognized and an excess servicing
fee receivable or payable is recorded at the time of sale based
upon the net present value of expected amounts to be received or
paid resulting from the difference between the contractual
interest rates received from the borrowers and the rate paid to
the buyer. The resulting servicing fee premium or discount is
amortized or accreted to loan servicing income over the estimated
remaining life of the loans sold.
<PAGE>
Management has not established a dollar amount for its loan
servicing portfolio. At December 31, 1996, the Bank's portfolio
of loans serviced for others totalled $52.6 million. Loan
servicing fees and charges for the years December 31, 1996, 1995
and 1994 were $198,000, $185,000 and $139,000, respectively.
<PAGE>
The table below shows the Bank's loan originations, sales
and repayments of loans for the periods indicated.
<TABLE>
Year Ended December 31,
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
Loans receivable and loans held
for sale (gross):
At beginning of period $51,058 $46,939 $42,334
Originations:
First mortgage loans:
1-4 family residential,
portfolio 21,797 6,466 13,000
1-4 family residential,
held for sale 6,492 7,650 6,034
Other 1,115 1,717 2,956
Total first mortgage loans 29,404 15,833 21,990
Other loans 6,286 6,453 5,975
Total originations 35,690 22,286 27,965
Principal repayments (5,350) (10,663) (10,704)
Sale of first mortgage loans (6,753) (7,504) (12,656)
Net loan activity 23,587 4,119 4,605
At end of the period $74,645 $51,058 $46,939
</TABLE>
Loan Approval Procedures and Authority. The Bank accepts
consumer loan applications at its Locust Street office and
mortgage loan applications at its Locust Street office and at its
loan origination office. For all loans originated by the Bank,
upon receipt of a completed loan application from a prospective
borrower, a credit report is ordered, income and certain other
information generally is verified and, if necessary, additional
financial information is required. All borrowers of one- to
four-family residential mortgage loans are qualified pursuant to
applicable agency guidelines except that the Bank may make loans
in amounts exceeding applicable agency limits. The Bank's
policies require appraisals on all real estate intended to secure
a proposed loan, which currently are performed by independent
appraisers designated and approved by the Bank. The Board
annually approves the independent appraisers used by the Bank and
reviews the Bank's appraisal policy. It is the Bank's policy to
obtain title insurance on all real estate first mortgage loans.
Borrowers must also obtain hazard insurance prior to closing.
Borrowers generally are required to advance funds on a monthly
basis together with each payment of principal and interest to a
mortgage escrow account from which the Bank makes disbursements
for items such as real estate taxes and hazard insurance
premiums.
Certain officers have authority to approve loans up to
specified dollar amounts. All one- to four-family first mortgage
loans of $207,000 or less may be approved by the Vice President
of Lending. One- to four-family mortgage loans in excess of
$207,000 must be approved by the Loan Committee. Secured and
unsecured consumer loans may be approved by the Vice President of
Lending in amounts up to $100,000 for secured and unsecured
loans. Consumer loans in excess of these amounts must be
approved by the Loan Committee. All mortgage loans and consumer
loans are ratified by the Board of Directors at its regular
monthly meetings.
Mortgage-Backed Securities. The Bank also invests in
mortgage-backed securities. At December 31, 1996, net
mortgage-backed securities totalled $10.2 million, or 10.8%, of
total assets consisting of $3.2 million of fixed-rate
mortgage-backed securities and $7.0 million of adjustable-rate
mortgage-backed securities. As of December 31, 1996, mortgage-
backed securities were insured or
<PAGE>
guaranteed by either the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA"), or
the Federal Home Loan Mortgage Corporation ("FHLMC"), or in the
case of collateralized mortgage obligations ("CMOs"), backed by
the collateral of such agencies. At December 31, 1996, 1995 and
1994, the amortized cost of the Bank's net mortgage-backed
securities portfolio totalled $10.4 million, $9.8 million, and
$10.7 million, respectively.
The Bank maintains its mortgaged-backed securities
investments in two separate portfolios, a held-to-maturity
portfolio, which consists of mortgage-backed securities purchased
with the intent to hold to maturity and an available-for-sale
portfolio, which consists of securities held for liquidity and
asset/liability management purposes. Mortgage-backed securities
in the held-to-maturity portfolio are accounted for on an
amortized cost basis and those in the available-for-sale
portfolio are accounted for on a market value basis with
unrealized profit and losses affecting stockholders' equity
pursuant to SFAS 115. Such securities are liquid and, therefore,
they are categorized as available for sale. In 1995, the Bank
reclassified substantially all of its held-to-maturity portfolio
to the available-for-sale classification, allowing for active
management of more of the Bank's portfolio.
Mortgage-backed securities typically are issued with stated
principal amounts, and the securities are backed by pools of
mortgage loans with varying interest rates and maturities. The
mortgage loans backing the mortgage-backed securities can be
either fixed-rate or ARM loans. The interest rate risk
characteristics of the underlying pool of mortgages as well as
the prepayment risk are passed on to the holder of the
mortgage-backed securities. Consequently, in a declining
interest rate environment there is a risk that mortgage-backed
securities will prepay faster than anticipated thereby adversely
affecting the yield to maturity and the related market value of
the mortgage-backed securities. Moreover, there can be no
assurance that the Bank would be able to reinvest the cash flow
from prepaid mortgage-backed securities into comparable yielding
investments. In a rising interest rate environment the value of
the mortgage-backed securities may be impaired since the risk of
default of mortgage-backed securities backed by ARM loans is
increased, and the mortgage-backed securities with fixed-rate
underlying mortgage loans will be worth less as investors seek
higher yielding investments.
Set forth below is a table showing the Bank's purchases,
sales and repayments of mortgage-backed securities for the
periods indicated.
<TABLE>
Year Ended December 31,
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities (net):
At beginning of the period $ 9,839 $10,696 $10,436
Purchases 1,753 137 1,544
Sales -- -- --
Principal repayments(1) (1,335) (818) (1,284)
Unrealized loss on mortgage-
backed securities available
for sale (64) (176) --
At end of the period $10,193 $9,839 $10,696
</TABLE>
(1) Includes amortization/accretion of premiums/discounts.
<PAGE>
Set forth below is a table showing the Bank's ARM and fixed-
rate mortgage-backed securities for the periods indicated.
<TABLE>
At December 31,
1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities, net:
Adjustable rate(1) $ 6,995 68.63% $7,132 72.61% $ 8,089 75.63%
Fixed-rate(2) 3,198 31.37 2,707 27.39 2,607 24.37
Total mortgage-backed securities,
net $10,193 100.00% $9,839 100.00% $10,696 100.00%
- -----------------------
(1) Includes CMOs with carrying value of $318,000, $317,000 and $333,000 in 1996, 1995 and 1994,
respectively.
(2) Includes CMOs with carrying value of $2.5 million, $2.6 million, and $2.6 million in 1996,
1995 and 1994, respectively.
</TABLE>
Delinquencies and Classified Assets.
Delinquent Loans. The Asset Review Committee performs a
monthly review of all delinquent loans, which is then presented
to the Board of Directors. The procedures taken by the Bank with
respect to delinquencies vary depending on the nature of the loan
and period of delinquency.
The Bank's policies generally provide that delinquent
mortgage loans be reviewed and that a written late charge notice
be mailed no later than the 15th day of delinquency. The
policies also require telephone contacts for loans more than 30
days delinquent and no later than the 40th day of delinquency to
ascertain the reasons for the delinquency and the prospects of
repayment. A second telephone contact is attempted after a loan
has been delinquent for 45 days. Face-to-face interviews and
collection notices are generally required for FHA and VA loans
more than 60 days delinquent and, on a case by case basis, for
other mortgage loans. After 90 days, the Bank will either set a
date by which the loan must be brought current, enter into a
written forbearance agreement, foreclose on any collateral or
take other appropriate action. The Bank's policies regarding
delinquent consumer loans are similar except that telephone
contacts and correspondence will generally occur after a consumer
loan is more than 15 days delinquent.
The Bank's general policy is to continue to accrue interest
on all loans 90 days past due and discontinue the accrual of
interest on a case-by-case basis. The Bank will discontinue the
accrual of interest on loans and establish a reserve upon a
determination that the loan may result in a loss. Interest on
loans contractually delinquent 90 days or more is excluded from
earnings unless, in management's judgment, collectibility is
highly probable, collection efforts are in progress, and the
loans are adequately collateralized. Property acquired by the
Bank as a result of a foreclosure on a mortgage loan is
classified as real estate owned ("REO") and is recorded at the
lower of the investment on the related loan or fair value at the
date of acquisition and carried at the lower of cost or fair
value, less selling costs. At December 31, 1996, the Bank had
$144,000 in loans that were 90 days or more delinquent, of which
$113,000 were secured by one- to four-family residences, $4,000
were secured by multi-family units, and $27,000 in consumer
loans. At December 31, 1996, the Bank had no REO.
In 1995 the Bank adopted SFAS 114, "Accounting by Creditors
for Impairment of a Loan", which was amended by SFAS 118,
"Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures". SFAS 114 requires that impaired
loans, those on which the Bank will be unable to collect all
amounts due, including principal and interest under the
contractual terms of the loan, be measured based on the present
value of expected future cash flows discounted at the loan's
effective interest rate, or at the loan's market price or the
fair value of the collateral, if the loan is collateral
dependent. SFAS 114 is applicable to all creditors and to all
loans regardless of whether they are collateralized and does
permit the collective valuation of impairment for large groups of
smaller-balance homogenous loans. The impact of adopting SFAS
114 in 1995 has not been material to the Bank since all of the
Bank's impaired loans are collateral dependent and the method of
measuring loss on these loans has not changed from the prior
year.
<PAGE>
Classified Assets. Federal regulations require 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" assets. The Bank's
classification policies provide that assets will be classified
according to OTS regulations. 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 insured
institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified as "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. Assets which do not currently expose the insured
institution to sufficient risk to warrant classification in one
of the aforementioned categories but possess weaknesses are
required to be designated "special mention" by management. As of
December 31, 1996, the Bank had $9,000 of loans classified as
substandard, $2,000 in loans classified as doubtful or loss, and
$446,000 of loans classified as special mention in loans 89 days
or less. The Bank had $457,000 in classified assets less than 89
days, which were delinquent at December 31, 1996.
PAGE
<PAGE>
The following table sets forth the amount of outstanding
loans classified at December 31, 1996, in each of the categories
listed.
<TABLE>
At December 31, 1996
Doubtful Special
Substandard or Loss Mention Total
<S> <C> <C> <C> <C>
Loans delinquent 90 days or more:
Accruing:
First mortgage loans:
1-4 family residential $ -- $-- $ -- $ --
Other loans -- -- -- --
Other loans -- -- -- --
Total -- -- -- --
Non-accruing:
First mortgage loans:
1-4 family residential $113 $-- $ -- $113
Other loans 6 -- -- 6
Other loans 15 13 -- 28
Total 134 13 -- 147
Total classified loans delinquent
90 days or more 134 13 -- 147
Loans delinquent 60-89 days:
Accruing:
First mortgage loans:
1-4 family residential $ -- $-- $ -- $ --
Other loans -- -- -- --
Other loans -- -- -- --
Total -- -- -- --
Total classified loans delinquent
60-89 days -- -- -- --
Non-accruing:
First mortgage loans:
1-4 family residential $ -- $-- $ -- $ --
Other loans -- -- -- --
Other loans -- -- 30 30
Total -- -- 30 30
Total classified loans delinquent
60-89 days -- -- 30 30
Other accruing classified loans 2 1 416 419
Other non-accruing classified loans 7 1 -- 8
Total other classified loans 9 2 416 427
Total classified loans $143 $15 $446 $604
</TABLE>
The Bank's policies provide that the Board of Directors
review a report of all classified assets on a monthly basis and
that such classified asset reports be provided to the OTS on a
quarterly basis. When the Bank determines that an asset should
be classified, it generally does not establish a specific
allowance for such asset unless it determines that a loss on such
asset is evident. The Bank may increase, however, its general
valuation allowance in an amount deemed prudent. General
valuation 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. The Bank's
policies provide for the establishment of a specific allowance
equal to 100% of each asset classified as "loss" or to charge-off
such amount. A savings institution's determination as to the
classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the
establishment of additional general or specific loss allowances.
The Bank reviews the problem loans in its portfolio on a
<PAGE>
monthly basis to determine whether any loans require
classification in accordance with applicable regulations and
believes its classification policies are consistent with OTS
policies.
The specific valuation allowances established by the Bank
for different categories of loans at the dates shown, were as
follows.
<TABLE>
At Ended December 31,
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
Mortgage loans $ -- $ -- $ --
Direct consumer loans 13 18 8
Indirect consumer loans 2 9 9
Total $ 15 27 $ 17
</TABLE>
Delinquent Loans and Non-Performing Assets. The following
table sets forth information regarding delinquent loans, other
non-accruing loans, and REO at the dates indicated. As of the
dates indicated, the Bank did not have any material restructured
loans within the meaning of SFAS 15, as amended by SFAS 114.
<TABLE>
At December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Loans delinquent 90 days or more:
Accruing:
First mortgage loans:
1-4 family residential(1) $ -- $ 196 $ 11 $ 211 $ 211
Other loans -- 3 4 20 25
Total -- 199 15 146 236
Non-accruing:
First mortgage loans:
1-4 family residential(1) $ 113 $ 82 $ 74 $ 93 $ 233
Other loans 4 -- -- -- --
Total 144 200 114 154 303
Loans delinquent 89 days or less:
Other loans: 2 19 -- -- --
Total non-performing loans 146 418 129 300 539
Total real estate owned, net of related
allowance for losses -- -- -- -- 61
Total non-performing assets $ 146 $ 418 $ 129 $ 300 $ 600
Total non-performing loans to net
loans receivable(2) 0.20% 0.83% 0.28% 0.73% 1.36%
Total non-performing loans to
total assets 0.15 0.56 0.18 0.44 0.83
Total non-performing loans and
REO to total assets 0.15 0.56 0.18 0.44 0.92
</TABLE>
(1) Includes loans sold with recourse of $45,000 at December 31, 1993.
(2) Net loans receivable includes loans held for sale.
<PAGE>
Delinquent Loans. The following table sets forth
information with respect to loans delinquent 60-89 days in the
Bank's loan portfolio at the dates indicated.
<TABLE>
At December 31, 1996
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Loans delinquent 60-89 days:
First mortgage loans:
1-4 family residential(1) $33 $122 $143 $427 $460
Other loans 31 12 15 27 50
Total loans delinquent
60-89 days $64 $134 $158 $454 $510
- --------------------
(1) Includes loans sold with recourse of $19,000 at December 31, 1994, $12,000 at December 31,
1993 and $47,000 at December 31, 1992.
</TABLE>
The following table sets forth information with respect to
the Bank's delinquent loans and other problem assets at December
31, 1996.
<TABLE>
At December 31, 1996
Balance Number
(Dollars In Thousands)
<S> <C> <C>
First mortgage loans:
1-4 family residential:
Loans 30-59 days delinquent $1,159 57
Loans 60-89 days delinquent 33 1
Loans 90 days or more delinquent 117 3
Other loans:
Loans 30-59 days delinquent 49 8
Loans 60-89 days delinquent 31 3
Loans 90 days or more delinquent 27 8
Real estate owned -- --
Loans to facilitate sale of real estate
owned -- --
Total delinquent loans and other problem
assets $1,146 80
</TABLE>
Allowance for Loan Losses. An allowance for loan losses is
maintained at a level considered adequate to absorb future loan
losses. Management of the Bank, in determining the provision for
loan losses, considers the risks inherent in its loan portfolio
and changes in the nature and volume of its loan activities,
along with the general economic and real estate market
conditions. The Bank utilizes a two tier approach:
(i) identification of problem loans and the establishment of
specific loss allowances on such loans; and (ii) establishment of
general valuation allowances on the remainder of its loan
portfolio of which credit cards and other credit lines are
reserved against the total credit lines. The Bank maintains a
loan review system which allows for a periodic review of its loan
portfolio and the early identification of potential problem
loans. Such system takes into consideration, among other things,
delinquency status, size of loans, type of collateral and
financial condition of the borrowers. Specific loan loss
allowances are established for identified loans based on a review
of such information and/or appraisals of the underlying
collateral. Although the Bank maintains its allowance for losses
on loans at a level which it considers to be adequate to provide
for potential losses, there can be no assurance that such losses
will
<PAGE>
not exceed the estimated amounts or that the Bank will not be
required to make additions to the allowance for losses on loans
in the future. Future additions to the Bank's allowance for loan
losses and any changes in the related ratio of the allowance for
loan losses to non-performing loans are dependent upon the
economy, changes in real estate values and interest rates, the
view of the regulatory authorities toward adequate reserve
levels, and inflation.
Analysis of the Allowance for Loan Losses. The following
table sets forth information with respect to the Bank's allowance
for loan losses at or for the dates indicated.
<TABLE>
At December 31,
1996 1995 1994 1993 1992
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total net loans outstanding(1) $73,815 $50,233 $46,161 $41,300 $39,676
Average loans outstanding(1) 67,621 48,205 41,383 39,815 42,483
Allowance balances:
At beginning of period $ 330 $ 310 $ 343 $ 169 $ 121
Provision for losses:
First mortgage loans 72 34 1 62 18
Other loans 110 5 3 117 78
Charge-offs:
First mortgage loans -- -- -- -- --
Other loans 44 19 38 10 56
Recoveries:
First mortgage loans -- -- -- -- --
Other loans -- -- 1 5 8
At end of period $ 468 $ 330 $ 310 $ 343 $ 169
Allowance for loan losses as a
percent of total loans outstanding
at end of period 0.63% 0.66% 0.67% 0.83% 0.43%
Net loans charged off as a percent of
average loans outstanding 0.07 0.04 0.09 0.01 0.11
Ratio of allowance for loan losses to
total non-performing loans at end of
period 320.55 78.95 240.31 114.33 31.35
Ratio of allowance for loan losses to
total non-performing assets at end of
period 320.55 78.95 240.31 114.33 28.17
- -------------------------
(1) Includes loans held for sale.
</TABLE>
<PAGE>
Allocation of Allowance for Loan Losses. The following
table sets forth the allocation for loan losses by loan category
for the periods indicated.
<TABLE>
At December 31,
1996 1995 1994
--------------------- ---------------------- ----------------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
First mortgage loans:
1-4 family residential $168 80.66% $133 76.67% $136 79.63%
Held for sale -- -- -- 0.76 -- 1.65
Other 40 7.07 37 9.71 -- 6.80
Other loans 260 12.27 160 12.86 174 11.92
Total allowance for
loan losses $468 100.00% $330 100.00% $310 100.00%
</TABLE>
Securities Activities. Federally chartered savings
institutions have the authority to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of
various federal agencies, certain certificates of deposit of
insured associations 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.
Additionally, the Bank must maintain minimum levels of
investments that qualify as liquid assets under OTS regulations.
Historically, the Bank has maintained liquid assets above the
minimum OTS requirements, and its average liquidity ratio of
6.16% for December 1996 exceeded the 5% regulatory liquidity
requirement. The Bank believes that its average level of liquid
assets is adequate to meet its normal daily activities.
The securities policy of the Bank established by the Board
of Directors attempts to provide and maintain liquidity, generate
a favorable return on securities without incurring undue interest
rate and credit risk, and complement the Bank's lending
activities. The Bank's policies generally limit securities to
investments qualifying as eligible securities under OTS
regulations. At December 31, 1996, the Bank had securities
(including FHLB stock) in the aggregate amount of $6.0 million
with a market value of $6.0 million. At December 31, 1996, the
Bank's securities portfolio consisted of $4.0 million of U.S.
Government and federal agency obligations, a decrease of
$5.5 million since December 31, 1995. The decrease in U.S.
Government and federal agency obligations resulted from sales of
and maturities in the respective issues and the reinvestment of
these funds into the mortgage loan portfolio. The Bank also
invests in ARM mutual funds which invest in FNMA, FHLMC and other
federal agency obligations. At December 31, 1996, the Bank had
invested $845,000 in ARM mutual funds. The value of the ARM
mutual funds fluctuates with changes in the value of the
underlying securities. However, the Bank believes that the risk
of loss on these securities is minimal given the type of
securities underlying the ARM mutual funds. The Bank maintains
its securities in two separate portfolios, a held-to-maturity
portfolio, which consists of securities purchased with the intent
to hold to maturity and an available-for-sale portfolio, which
consists of securities held for liquidity and asset/liability
management purposes. Securities in the held-to-maturity
portfolio are accounted for on an amortized cost basis and those
in the available-for-sale portfolio are accounted for on a market
value basis with unrealized profits and losses affecting
stockholders' equity pursuant to SFAS 115. Such securities are
liquid and therefore they are categorized as available for sale.
<PAGE>
In 1995 the Bank reclassified substantially all of its held-to-
maturity portfolio to the available-for-sale classification,
allowing for active management of more of the Bank's portfolio.
For information regarding the Bank's mortgage-backed
securities portfolio see "-Lending Activities-Mortgage-Backed
Securities."
Securities Portfolio. The following table sets forth the
carrying value of the Company's securities portfolio, including
FHLB stock, at the dates indicated. At December 31, 1996, the
market value of the Company's securities portfolio, including
FHLB stock, was approximately $6.0 million.
<TABLE>
Year Ended December 31,
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
Securities available for sale
(at fair value)
U.S. Treasury notes $ 502 $ 1,610 $ 1,822
FHLB structured notes 458 3,990 987
Other government agency notes 3,074 3,315 934
FNMA common stock 45 37 22
AMF ARM Mutual Fund(1) 181 171 157
HBI Equity Trust(2) 269 129 93
Corporate debt securities 250 252 00
Securities held to maturity
(at amortized cost):
U.S. Treasury notes $ -- $ -- $ 500
FHLB structured notes -- -- 4,460
Other government agency structured
notes -- -- 250
Other government agency obligations -- -- 1,000
Corporate debt securities -- -- 249
Municipal securities 78 81 --
Certificates of deposit -- 200 --
FHLB stock 1,148 481 440
Total investments $ 6,005 $ 10,266 $ 10,914
</TABLE>
- ----------------------------
(1) AMF ARM Mutual Fund is managed by Asset Management Fund for
Financial Institutions, Inc.
(2) HBI Equity Trust is managed by Howe Barnes Investments, Inc.
PAGE
<PAGE>
<TABLE>
Securities Portfolio Maturities. The following table sets forth the scheduled
maturities, amortized cost, market values and weighted average yields for the Bank's
investment portfolio and FHLB stock at December 31, 1996.
At December 31, 1996
One Year or Less One to Five Years Five to Ten Years Beyond Ten Years Total Investment Securities
Weighted Weighted Weighted Weighted Average Weighted
Market Average Market Average Market Average Market Average Life in Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Years Value Value Yield
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury
Notes $ 502 6.81% $ -- --% $ -- --% $ -- --% 0.33 $ 500 $ 502 6.81%
FHLB structured
notes -- -- 458 4.81 -- -- -- -- 3.28 500 458 4.81
Other government
agency 845 5.37 2,034 6.10 -- -- 195 7.38 3.00 3,094 3,074 5.98
FNMA common stock -- -- -- -- -- -- -- -- -- 4 45 --
AMF ARM Fund -- -- -- -- -- -- -- -- -- 182 181 6.08
HBI Equity Trust -- -- -- -- -- -- -- -- -- 202 269 --
Corporate debt
securities(1) -- -- 250 6.50 -- -- -- -- 1.54 250 250 6.50
Total securities
available for
sale 1,347 5.91% 2,742 5.92% -- -- 195 7.38% 2.64(2) 4,732 4,779 5.99%(3)
Weighted Weighted Weighted Weighted Average Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Life in Amortized Market Average
Cost Yield Cost Yield Cost Yield Cost Yield Years Costs Value Yield
-----------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U.S. Treasury
notes -- --% -- -- -- --% -- --% -- -- -- --%
FHLB structured
notes -- -- -- -- -- -- -- -- -- -- -- --
Other government
agency -- -- -- -- -- -- -- -- -- -- -- --
Corporate debt
securities(1) -- -- -- -- -- -- -- -- -- -- -- --
Municipal
securities 78 4.11% -- --% -- --% -- --% 0.75 78 78 4.11%
Total
securities held
to maturity 78 4.11% -- -- -- -- -- -- 0.75 78 78 4.11%
Certificates
of deposit -- -- -- -- -- -- -- -- -- -- -- --
FHLB stock -- -- -- -- -- -- -- -- -- 1,148 1,148 7.00%
Total
securities $1,425 $2,742 -- $195 $5,958 $6,005
<PAGE>
(1) Includes corporate debt securities issued by U.S. Steel Corporation ($250,000 in book value and $250,000 in market value).
(2) Includes only U.S. Government and agency obligations and structured notes; the AMF ARM Mutual Fund is a daily investment
deposit, FHLB Stock, HBI Equity Trust, and FNMA Common Stock do not have fixed maturities.
(3) The weighted average yield does not include the FNMA Common Stock and HBI Equity Trust.
</TABLE>
Sources of Funds.
General. Deposits are the major source of the Bank's funds
for investment and lending purposes. In addition to deposits,
the Bank derives funds from the amortization and prepayment of
mortgage-backed securities and loans, the maturity of investment
securities, proceeds from the sales of loans, operations and
advances from the FHLB. Scheduled principal repayments on
mortgage-backed securities and loans are a relatively stable
source of funds, while deposit inflows and outflows and loan
prepayments are influenced significantly by general interest
rates and market conditions.
Deposits. The Bank offers a variety of deposit accounts
having a range of interest rates and terms. The Bank's deposits
consist of passbook savings, NOW, money market and certificate
accounts. The Bank also offers its depositors Individual
Retirement Accounts ("IRAs"). The flow of deposits is influenced
significantly by general economic conditions, changes in money
market rates, prevailing interest rates and competition. The
overall amount of deposit accounts held by the Bank, however, has
not fluctuated significantly. The Bank's deposits are obtained
primarily from the areas in which its offices are located. The
Bank relies primarily on customer service and long-standing
relationships with customers to attract and retain these
deposits. Certificate accounts in excess of $100,000 are not
actively solicited by the Bank nor does the Bank use brokers to
obtain deposits. Further, the Bank developed strategies which
focused on pricing and retention in certain areas of the deposit
base. Management constantly monitors the Bank's deposit
accounts, for activity, type of account and total balances,
competition rates, and the Bank's cost of funds, adjusting
accordingly. Based on historical experience, management believes
it will retain a large portion of such accounts upon maturity.
Deposit Activity. The following table sets forth the dollar
change in deposit accounts of the Bank for the periods indicated.
<TABLE>
Year Ended December 31,
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
Deposits $252,238 $130,730 $113,901
Withdrawals 255,617 127,030 115,778
Net increase (decrease) before interest
credited (3,379) 3,700 (1,877)
Interest credited 2,987 2,733 2,121
Net increase (decrease) in deposit accounts $(392) $ 6,433 $ 244
</TABLE>
PAGE
<PAGE>
Deposit Flow. The following table sets forth the change in
dollar amount of deposit accounts in the various types offered
by the Bank between the dates indicated.
<TABLE>
Balance at % Balance at % Balance at % Balance at
December 31, of Total Incr. December 31, of Total Incr. December 31, of Total Incr. December 31,
1996 Deposits (Decr.) 1995 Deposits (Decr.) 1994 Deposits (Decr.) 1993
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Club
accounts $ 30 0.05% -- $ 30 0.05% -- $ 30 0.05% $ (7) $ 37
Non-
interest
bearing
NOW
accounts 1,675 2.54 (458) 2,133 3.22 580 1,553 2.60 (1,507) 3,060
NOW
accounts 4,913 7.46 (455) 5,368 8.11 (23) 5,391 9.01 17 5,374
Passbook
accounts 8,800 13.37 (681) 9,481 14.31 (1,717) 11,198 18.73 (767) 11,965
Money
market
deposit
accounts 7,053 10.71 (199) 7,252 10.95 2,537 4,715 7.88 (1,302) 6,017
Certificates of deposit which mature:
within 12
mos. 23,744 36.06 (1,740) 25,484 40.35 3,824 21,660 36.22 2,150 19,510
within 12-
36 mos. 9,565 14.53 2,523 7,042 8.76 (3,193) 10,235 17.12 902 9,333
beyond 36
mos. 10,058 15.28 618 9,440 14.25 4,425 5,015 8.39 758 4,257
Total $65,838 100.00% (392) $62,230 100.00% $6,433 $59,797 100.00% $ 244 $59,553
</TABLE>
PAGE
<PAGE>
Deposit Portfolio. Deposit accounts in the Bank as of
December 31, 1996, were represented by the various types of
deposit programs described below.
<TABLE>
Weighted Percent
Average of Total
Interest Account Deposit
Rate Term Deposits Balances Accounts
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C<
0.00% None Non-interest bearing NOW accounts $ 1,675 2.54%
1.00 None NOW accounts 4,913 7.47
2.00 None Passbook and club accounts(1) 8,830 13.41
4.12 None Money market deposit accounts 7,053 10.71
Certificates of Deposit(1)
4.90 1-5 mos. Fixed term, fixed-rate 520 0.79
4.94 6-11 mos. Fixed term, fixed-rate 10,803 16.41
5.21 12-17 mos. Fixed term, fixed-rate 4,335 6.59
5.14 18 mos. Fixed term, fixed-rate 114 0.17
3.75 18-23 mos Fixed term, fixed-rate 36 0.05
4.00 24-29 mos. Fixed term, fixed-rate 294 0.45
6.06 30 mos. Fixed term, fixed-rate 1,167 1.77
4.25 30-35 mos. Fixed term, fixed-rate 1,805 2.74
5.93 36-47 mos.(3)Fixed term, fixed-rate 3,590 5.45
4.67 48-51 mos. Fixed term, fixed-rate 13 0.02
6.66 60 mos. or
greater Fixed term, fixed-rate 13,213 20.07
5.64 Various(3) Jumbo 7,477 11.36
4.35%(2) $ 65,838 100.00%
- ---------------
(1) IRA accounts are generally offered throughout all terms stated above with a balance
outstanding of $7,624,792 (in actual dollars).
(2) Includes the effect of non-interest-earning demand accounts totalling $1.675 million.
(3) With respect to $3.647 million in deposit amounts, includes a one-time option to increase
rate within the 36 month term.
</TABLE>
Certificates of Deposit by Rates. The following table sets forth
the certificates of deposit classified by rates as of the dates
indicated.
<TABLE>
Year Ended December 31,
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
Rates:
3.99% or less $ 3,274 $ 4,010 $ 7,194
4.00%-5.99% 24,084 17,149 21,277
6.00%-7.99% 15,861 20,611 7,119
8.00%-8.75% 148 197 1,320
Total $43,367 $41,966 $36,910
</TABLE>
<PAGE>
Certificates of Deposit Maturity Schedule. The following
table sets forth the amount and maturities of certificates of
deposit at December 31, 1996.
<TABLE>
One Year 1-2 2-3 3-4 4-5 Five and more
or Less Years Years Years Years Years Total
<S> <C> <C> <C> <C> <C> <C> <C>
Rate:
3.99% or less $ 3,250 $ 24 $ -- $ -- $ -- $ -- $ 3,274
4.00-5.99% 18,412 2,008 2,900 168 596 -- 24,084
6.00-7.99% 2,009 2,043 2,590 8,125 978 116 15,861
8.00-8.15% 73 -- -- 11 -- 64 148
Total $23,744 $4,075 $5,490 $8,304 $1,574 $ 180 $43,367
</TABLE>
Large Certificates of Deposit. The following table
indicates the amount of the Bank's certificates of deposit of
$100,000 or more by time remaining to maturity at December 31,
1996.
<TABLE>
Maturity Period Amount
(In Thousands)
<C> <C>
Three months or less $2,736
Over three through six months 2,693
Over six through 12 months 506
Over 12 months 1,542
Total $7,477(1)
- ------------------
(1) With respect to $0.521 million in deposit amounts, includes a
one-time option to increase rate within the 36 month term.
</TABLE>
Investment and mortgage-backed securities with a net
amortized cost of $6.7 million were pledged to secure certain
deposit accounts in excess of federal deposit insurance limits at
December 31, 1996. Of the $7.5 million of large certificates of
deposit, $4.7 million are from one large municipal depositor.
Borrowings. Deposits are the Bank's primary source of
funds. The Bank also obtains advances from the FHLB. Such
advances are made pursuant to several different credit programs,
each of which has its own interest rate, range of maturities and
collateral requirements. The maximum amount that the FHLB will
advance to member institutions, including the Bank, for purposes
other than meeting withdrawals, fluctuates from time to time in
accordance with the policies of the FHLB System and the Federal
Housing Finance Board. The maximum amount of FHLB advances to a
member institution generally is reduced by borrowings from any
other source. At December 31, 1996, the Bank had $20.5 million
in advances from the FHLB.
FHLB Advances. The following table sets forth certain
information regarding FHLB advances taken by the Bank during the
periods indicated.
<TABLE>
Year Ended December 31,
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
Weighted average rate paid 5.84% 6.24% 4.94%
Maximum balance $23,150 $3,500 $3,000
Average balance(1) 13,746 503 732
- -------------------
(1) Calculated using average daily balances.
</TABLE>
<PAGE>
Subsidiary Activities. First Financial Services of
Belvidere, Illinois, Inc. ("FFSI"), a wholly owned subsidiary of
the Bank, administers and sells, on an agency basis, mortgage-
related insurance products such as mortgage life insurance,
credit life insurance and disability insurance. FFSI also sells
on an agency basis a variety of annuity products, principally to
customers of the Bank. In May 1994, FFSI hired additional staff
to expand its sales of annuity and insurance products in its
market area. FFSI owns the full service office at 1021 North
State Street and leases this office to the Bank. The Bank
manages the operations of FFSI and receives $900 per month for
such management services.
At December 31, 1996, FFSI had $762,952 in total assets,
$31,972 in total liabilities and $730,980 in stockholders'
equity. For the years ended December 31, 1996, 1995 and 1994,
FFSI had net income of $6,104, $10,725 and $16,678, respectively.
There has been no lending activity between FFSI and the Bank for
the years ended December 31, 1996, 1995 and 1994.
Personnel. As of December 31, 1996, the Bank had 26
full-time employees, 7 part-time employees and 2 full-time
commissioned loan originators. The employees are not represented
by a collective bargaining unit, and the Bank considers its
relationship with its employees to be good.
Federal and State Taxation.
General. The Company and its subsidiary file a consolidated
federal income tax return on a December 31, calendar year basis.
Consolidated returns have the effect of eliminating intercompany
distributions, including dividends, from the computation of
consolidated taxable income for the taxable year in which the
distributions occur. The following discussion of tax matters is
intended only as a summary and does not purport to be a
comprehensive description of all tax rules applicable to the Bank
or the Company.
Federal Taxation.
Tax Bad Debt Reserves. Savings institutions such as the Bank
that meet certain definitional tests relating to the composition
of assets and other conditions prescribed by the Internal Revenue
Code of 1986 (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 for "non-qualifying loans" is
computed under the experience method. For tax years beginning
before December 31, 1995, the amount of the bad debt reserve
deduction for "qualifying real property loans" (generally loans
secured by improved real estate) may be computed under either the
experience method or the percentage of taxable income method
(based on an annual election). If a saving association elected
the latter method, it could claim, each year, a deduction based
on a percentage of taxable income, without regard to actual bad
debt experience.
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.
Under recently enacted legislation, the percentage of
taxable income method has been repealed for tax years beginning
after December 31, 1995. The Bank will continue to be permitted
to use the experience method. The Bank will be required to
recapture (i.e., take into income) over a six-year period its
applicable excess reserves, i.e, the balance of its reserves for
losses on qualifying loans and nonqualifying loans, as of
September 30, 1996, over the greater of (a) the balance of such
reserves as of December 31, 1987 (pre-1988 reserves) or (b) in
the case of a bank which is not a "large" association, an amount
that would have been the balance of such reserves as of September
30, 1996, had the bank always computed the additions to its
reserves using the experience method. Postponement of the
recapture is possible for a two-year period if an institution
meets a minimum level of mortgage lending for 1996 and 1997. As
of December 31, 1995, the Bank's bad debt reserve subject to
recapture over a six-year period totaled approximately $206,000.
If an institution ceases to qualify as a "bank" (as defined
in Code Section 581), the pre-1988 reserves and the supplemental
reserve are restored to income beginning in the tax year the
institution no longer qualifies as a bank. The balance of the
pre-1988 reserves are also subject to recapture in the case of
certain excess distributions to (including distributions on
liquidation and dissolution), or redemptions of, shareholders.
Corporate Alternative Minimum Tax. The Bank is subject to
the corporate alternative minimum tax ("AMT") which is imposed to
the extent it exceeds the Bank's regular income tax for the year.
The alternative minimum tax will be imposed at the rate of 20% of
a specially-computed tax base ("AMTI"). Included in the base
will be a number of preference items, including the following:
interest on certain tax-exempt bonds issued after August 7, 1986;
and for years beginning after, an amount equal to 75% of the
amount by which the savings institution's "adjusted current
earnings" (as specially defined) exceeds its taxable income with
certain adjustments, including the addition of preference items.
In addition, for purposes of the new alternative minimum tax, the
amount of alternative minimum taxable income that may be offset
by net operating losses is limited to 90% of alternative minimum
taxable income. In addition, for taxable years beginning after
1986, the Bank is subject to an environmental tax equal to 0.12%
of the excess of AMTI (with certain modifications) over $2.0
million dollars.
Distributions. The rules described above requiring the
recapture of a portion of the tax bad debt reserves in the event
the institution fails to meet the 60% asset test have been
repealed for tax years beginning after December 31, 1995.
However, the above rules that require the recapture of the
reserve upon certain distributions to shareholders continue to
apply to the portion of the reserve contained in the base year
reserves preserved by the new law. In addition, this portion of
the reserve must be recaptured into taxable income evenly over a
period of six years if the Bank ceases the business of banking.
The portion of the reserve contained in the base year reserves of
the Bank that are preserved by the new law total approximately
$1.2 million.
<PAGE>
State and Local Taxation.
The Company and its subsidiaries currently file consolidated
Illinois income tax returns. For Illinois income tax purposes, a
savings institution's income is presently taxed at a rate of
7.3%. For these purposes, "net income" generally means federal
taxable income, subject to certain adjustments (including the
addition of interest income on State and municipal obligations
and the exclusion of interest income on United States Treasury
obligations). The exclusion of income on United States Treasury
obligations has the effect of reducing significantly the Illinois
taxable income of savings institutions.
As a Delaware business corporation, the Company (on an
unconsolidated basis) will be required to file annual returns and
pay annual fees and an annual franchise tax to the State of
Delaware. These taxes are based on the total authorized shares
of the Company. The Company currently has 1.75 million shares of
stock authorized (1.5 million shares of common stock and 250,000
shares of preferred stock). The Delaware franchise tax for 1996
was approximately $7,000.
The Company also is subject to an annual franchise tax and
fees from the State of Illinois. These taxes are based on the
total shares issued. The total franchise tax paid by the Company
for the year ended December 31, 1996 was approximately $4,000.
Neither the Company nor the Bank has had an audit by the
Internal Revenue Service or the Illinois Department of Revenue
within the past five years, with the exception of a sales and
usage tax audit conducted by the Illinois Department of Revenue.
Recent Accounting Developments
The Company has adopted the provisions of FASB Statement No.
122, "Accounting for Mortgage Servicing Rights", as of January 1,
1995. Under Statement 122, the Company has capitalized the cost
of mortgage servicing rights ("MSRs") on mortgages originated
after December 31, 1994 which have been sold or securitized. The
allocation of the total cost of the mortgages to MSRs and the
mortgages (without MSRs) is based on their relative fair values.
MSRs are amortized in proportion to and over the period of
estimated servicing income. Under Statement 122, the Company
capitalized an additional $31,000 of MSRs in 1996, which
increased gains on sales of loans by $31,000 in 1996.
The FASB has issued Statement No. 123, "Accounting for
Stock-based Compensation", which establishes financial accounting
and reporting standards for stock-based compensation plans,
including stock options, other stock awards, and employee stock
purchase plans. Under Statement 123, the accounting for stock
compensation awards is based on the fair value of the award on
the date of grant. Statement 123 allows an employer to continue
to account for stock-based employee compensation under current
accounting standards which recognize compensation cost for the
intrinsic value of the stock at the grant date, which generally
results in no compensation for most fixed stock-option plans. If
Statement 123 is adopted, an entity is required to use the fair
value method prescribed by Statement 123 to account for all of
its stock-based compensation plans, and may not switch back to
the old rules. Statement 123 is effective for fiscal years
beginning after December 15, 1995, and early adoption is
permitted. Statement 123 will have no material effect on the
Company's financial statements since management does not
anticipate adopting the fair value method, and therefore,
Statement 123 will extend only to financial statement
disclosures.
In June 1996, the FASB released SFAS No. 125, "Accounting
for Transfers and Extinguishments of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities.
SFAS No. 125 requires a consistent application of a financial
components approach that focuses on control. Under that
approach, after the transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred and derecognizes liabilities when
extinguished. SFAS No. 125 also supersedes SFAS No. 122 and
requires that servicing assets and liabilities be subsequently
measured by amortization in proportion to and over the period of
estimated net servicing income or loss and requires assessment
for asset impairment or increases obligation based on their fair
values. SFAS No. 125 applies to transfers and extinguishments
occurring after December 31, 1996 and early or retroactive
application is not permitted. Because the volume and variety of
certain transactions will make it difficult for some entities to
comply, some provisions have been delayed by SFAS No. 127.
Management anticipates that the adoption of SFAS No. 125 will not
have a material impact on the financial condition or operations
of the Bank.
In March 1997, the accounting requirements for calculating
earnings per share were revised. Basic earnings per share for
1997 and later will be calculated solely on average common shares
outstanding. Diluted earnings per share will reflect the
potential dilution of stock options and other common stock
equivalents. All prior calculations will be restated to be
comparable to the new methods. As the Company has not had
significant dilution from stock options, the new calculation
methods will not significantly affect future base earnings per
share and diluted earnings per share.
<PAGE>
REGULATION
General
First Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full
faith and credit of the United States Government. 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 Chicago and is subject to certain limited
regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). As the holding company of the
Bank, the Company also is subject to federal regulation and
oversight. The purpose of the regulation of the Company and
other holding companies is to protect subsidiary savings
institutions. 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.
Certain of these regulatory requirements and restrictions
are discussed below or elsewhere in this document.
Federal Regulation of Savings Institutions
The OTS has extensive authority over the operations of
savings institutions. 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 as of December 1995.
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. All savings institutions
are subject to a semi-annual assessment, based upon the savings
institution's total assets, to fund the operations of the OTS.
The Bank's OTS assessment for the year ended December 31, 1996,
was $27,000.
The OTS also has extensive enforcement authority over all
savings institutions and their holding companies, including 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 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 institutions in loans
secured by non-residential real property may not exceed 400% of
total capital, except with approval of the OTS. Federal savings
institutions are also generally authorized to branch nationwide.
The Bank is in compliance with the noted restrictions.
The Bank's general 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
December 31, 1996, First Federal's lending limit under this
restriction was $1.1 million. The Bank is in compliance with the
loans-to-one-borrower limit.
<PAGE>
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. A failure to submit a plan or to comply with an approved
plan will subject the institution to further enforcement action.
The OTS and the other federal banking agencies have also proposed
additional guidelines on asset quality and earnings standards.
No assurance can be given as to whether or in what form the
proposed regulations will be adopted.
Insurance of Accounts and Regulation by the FDIC
The Bank's deposits are currently insured by the Savings
Association Insurance Fund (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 U.S. 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 and loan
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 or is engaging in unsafe or
unsound practices, or is in an unsafe or unsound condition.
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 based upon their level of capital and supervisory
evaluation. Under the system, institutions classified as well
capitalized (i.e., a core capital ratio of at least 5%, a ratio
of core capital to risk-weighted assets of at least 6% and a
risk-based capital ratio of at least 10%) and considered healthy
would pay the lowest premium while institutions that are less
than adequately capitalized (i.e., a core capital or core capital
to risk-based capital ratios of less than 4% or a risk-based
capital ratio of less than 8%) and considered of substantial
supervisory concern would 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
semi-annual 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.
In September 1996, Congress enacted legislation to
recapitalize the SAIF by a one-time assessment on all SAIF-
insured deposits held as of March 31, 1995. The assessment was
65.7 basis points per $100 in deposits, payable on November 30,
1996. For the Bank, the assessment was $417,000 (or $276,000 when
adjusted for taxes), based on the Bank's deposits on March 31,
1995 of $63.5 million. In addition, beginning January 1, 1997,
pursuant to the legislation, interest payments on FICO bonds
issued in the late 1980's by the Financing Corporation to
recapitalize the now defunct Federal Savings and Loan Insurance
Corporation will be paid jointly by BIF-insured institutions and
SAIF-insured institutions. The FICO assessment will be 1.29 basis
points per $100 in BIF deposits and 6.44 basis points per $100 in
SAIF deposits. Beginning January 1, 2000, the FICO interest
payments will be paid pro-rata by banks and thrifts based on
deposits (approximately 2.4 basis points per $100 in deposits).
The BIF and SAIF will be merged on January 1, 1999, provided the
bank and saving association charters are merged by that date. In
that event, pro-rata FICO sharing will begin on January 1, 1999.
Under the legislation, the Bank anticipates that its annual FICO
assessment for 1997 will be approximately $42,000.
Regulatory Capital Requirements
Federally insured savings institutions, such as the Bank,
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 institutions. 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
institutions 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 and originated
mortgage servicing rights, must be deducted from tangible capital
for calculating compliance with the requirement. At December 31,
1996, the Bank had $94,000 in mortgage servicing rights which
were considered intangible assets.
The OTS regulations establish special capitalization
requirements for savings institutions 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
institution's level of ownership. For excludable subsidiaries
the debt and equity investments in such subsidiaries are deducted
from assets and capital.
At December 31, 1996, the Bank had tangible capital of
$6.9 million, or 7.33% of adjusted total assets, which is
approximately $5.5 million above the minimum requirement of 1.5%
of adjusted total assets in effect on that date.
<PAGE>
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 a limited amount of purchased credit card
relationships. As a result of the prompt corrective action
provisions discussed below, however, a savings institution 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 December 31, 1996, First
Federal had no intangibles which were subject to these tests.
At December 31, 1996, First Federal had core capital equal
to $6.9 million, or 7.33% of adjusted total assets, which is $4.1
million above the minimum leverage ratio requirement of 3% as in
effect on that date.
The OTS risk-based requirement requires savings
institutions 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.
The OTS is also authorized to require a savings institution to
maintain an additional amount of total capital to account for
concentration of credit risk and the risk of non-traditional
activities. At December 31, 1996, First Federal had no capital
instruments that qualify as supplementary capital and $453,000 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 and
reciprocal holdings of qualifying capital instruments. The Bank
had no such exclusions from capital and assets at December 31,
1996.
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 the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings
institution with more than normal interest rate risk exposure to
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 exposure is a measure of the potential decline
in the net portfolio value of a savings institution, 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 provides for a two quarter
lag between calculating interest rate risk and recognizing any
deduction from capital. The rule will not become effective until
the OTS evaluates the process by which savings institutions may
appeal an interest rate risk deduction determination. It is
uncertain as to when this evaluation may be completed. Any
savings institution with less than $300 million in assets and a
total risk weighted capital ratio in excess of 12% is exempt from
this requirement unless the OTS determines otherwise.
On December 31, 1996, First Federal had total capital of
$7.4 million (including $6.9 million in core capital) and risk-
weighted assets of $51.5 million (including $2.6 million in
converted off-balance
<PAGE>
sheet assets); or total capital of 14.32% of risk-weighted
assets. This amount was $3.3 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
institutions 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 risk-based capital ratio or an 8% risk-based capital
ratio). Any such institution 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 institutions.
As a condition to the approval of the capital restoration
plan, any company controlling an undercapitalized institution
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 institution 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 institution. An institution
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 institutions. In addition, the
OTS must appoint a receiver (or conservator with the concurrence
of the FDIC) for a savings institution, with certain limited
exceptions, within 90 days after it becomes critically
undercapitalized. Any undercapitalized institution 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
institution 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.
The imposition by the OTS or the FDIC of any of these
measures on First Federal may have a substantial adverse effect
on the Bank's operations and profitability. The Company
shareholders do not have preemptive rights, and therefore, if the
Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution
in the percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions or requirements
on institutions with respect to their ability to pay dividends or
make other distributions of capital. OTS regulations prohibit an
institution from declaring or paying any dividends or from
repurchasing any of its stock if, as a result, the regulatory
capital of the institution 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
institutions, 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").
<PAGE>
Generally, Tier 1 institutions, which are institutions 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 institution'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. The Bank 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 institutions 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, the Bank 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 institution
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 institutions 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 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 institution 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. The Bank qualifies for
Tier 1.
Liquidity
All savings institutions, 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." 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 institutions. At the present time,
the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain
time deposits, certain bankers acceptances and short-term United
States Treasury obligations) currently must constitute at least
1% of the institution's
<PAGE>
average daily balance of net withdrawable deposit accounts and
current borrowings. Penalties may be imposed upon institutions
for violations of either liquid asset ratio requirement. At
December 31, 1996, First Federal was in compliance with both
requirements, with an overall liquid asset ratio of 6.16% and a
short-term liquid assets ratio of 7.6%.
Accounting
An OTS policy statement applicable to all savings
institutions clarifies and re-emphasizes that the investment
activities of a savings institution 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 institutions, including the Bank, are required
to meet a qualified thrift lender ("QTL") test. Under the QTL
test, a savings association is required to maintain at least 65%
of its "portfolio assets" (total assets less (i) specified liquid
assets up to 20% of total assets, (ii) intangibles, including
goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily
residential mortgages and related investments, including certain
mortgage-backed and related securities on a monthly basis in 9
out of every 12 months. A savings institution that fails the QTL
test must either convert to a bank charter or operate under
certain restrictions. As of December 31, 1996, the Bank
maintained 90.9% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test.
Community Reinvestment Act
Under the Community Reinvestment Act (the "CRA"), as
implemented by OTS regulations, a savings institution has a
continuing and affirmative obligation, consistent with its safe
and sound operation, 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 its
examination of a savings institution, 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 by such institution. The CRA rating system
identifies four levels of performance that may describe an
institution's record of meeting community needs: outstanding,
satisfactory, needs to improve and substantial non-compliance.
The CRA also requires all institutions to make public disclosure
of their CRA ratings. The CRA regulations were recently revised.
Effective July 1, 1997, the OTS will assess the CRA performance
of a savings institution under lending, service and investment
tests, and based on such assessment, will assign an institution
in one of the four above-referenced ratings. The Bank received a
"satisfactory" CRA rating under the current CRA regulations in
its most recent federal examination by the OTS.
Transactions with Affiliates
Generally, transactions between a savings institution or its
subsidiaries and its affiliates are required to be on terms as
favorable to the institution as transactions with non-affiliates.
In addition, certain of these transactions, such as loans to an
affiliate, are restricted to a percentage of the institution's
capital. Affiliates of the Bank include the Company and any
company which is under common control with the Bank. In
addition, a savings institution may not lend to any affiliate
engaged in activities not permissible for a bank holding company
or acquire the securities of most affiliates. The Bank's
subsidiaries are not deemed affiliates, however; the OTS has the
discretion to treat subsidiaries of savings institutions as
affiliates on a case by case basis.
Certain transactions with directors, officers or 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 institution 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 holding companies and
their non-savings institution subsidiaries which also permits the
OTS to restrict or prohibit activities that are determined to be
a serious risk to the subsidiary savings institution.
As a unitary savings institution holding company, the
Company generally is not subject to activity restrictions. If
the Company acquires control of another savings institution as a
separate subsidiary, it would become a multiple savings
institution holding company, and the activities of the Company
and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings institution) would become subject to such
restrictions unless such other institutions 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 institution
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 institution holding company. See "--
Qualified Thrift Lender Test."
<PAGE>
The Company must obtain approval from the OTS before
acquiring control of any other SAIF-insured institution. Such
acquisitions are generally prohibited if they result in a
multiple savings institution holding company controlling savings
institutions 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 institution.
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 December 31,
1996, 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 institutions are authorized to borrow from the
Federal Reserve Bank "discount window," but Federal Reserve Board
regulations require institutions 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 Chicago, which is
one of 12 regional FHLBs, that administers the home financing
credit function of savings institutions. 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 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 Chicago. At December 31, 1996,
First Federal had $1.1 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 6.26% and
were 6.81% for 1996.
Under federal law the FHLBs are required to provide funds
for the resolution of troubled savings institutions 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
<PAGE>
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 December 31, 1996, dividends paid by the
FHLB of Chicago to the Bank totaled $57,000, which constitute a
$26,000 increase from the amount of dividends received in 1995.
Executive Officers of the Registrant
Listed below is information, as of December 31, 1996,
concerning the Registrant's executive officers. In addition, all
of the executive officers of the Registrant are officers of the
Bank holding the same position as listed below. There are no
arrangements or understandings between the Registrant and any of
persons named below with respect to which he or she was or is to
be selected as an officer.
<TABLE>
Name Age Position
<S> <C> <C>
Steven C. Derr 47 President and Chief Executive
Officer
Patricia J. McCoy 43 Secretary
Keith D. Hill 24 Treasurer, Chief Financial Officer
Donald J. Kucera 57 Vice President
</TABLE>
ITEM 2. DESCRIPTION OF PROPERTY
(a) The Bank conducts its business through two full service
offices and one loan origination office. The Bank also maintains
an administrative office for accounting functions separate from
its banking offices. The Bank purchased land in 1996 for a
future full service office.
PAGE
<PAGE>
<TABLE>
Net Book Value
of Property
Originally Date or Leasehold
Leased or acquired of Lease Improvements
Location Owned or Leased Expiration At 12/31/96
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Full Service Offices
121 East Locust Street
Belvidere, IL 61008 Owned 1965 -- $554
1021 North State Street
Belvidere, IL 61008 Leased(1) 1978 12/31/97(1) 358
Future Office Site(2)
7077 Perry Creek Parkway
Rockford, IL 61107 Owned 1996 -- 393
Loan Origination Office
4249 East State Street
Rockford, IL 61008 Leased 1991 1/31/97 9
Administrative Office
217 South State Street
Belvidere, IL 61008 Leased 1991 4/26/98 72
- ----------------------
(1) Leased from FFSI, the Bank's wholly owned subsidiary.
(2) Land purchased for future full service site.
</TABLE>
(b) Investment Policies. For a description of the
Company's and the Bank's policies (all of which may be changed
without a vote of the Company's security holders) and the
limitations on the percentage of assets which may be invested in
any one investment, or type of investment with respect to: (1)
investments in real estate or interests in real estate; (2)
investments in real estate mortgages; and (3) securities of or
interests in persons primarily engaged in real estate activities,
reference is made hereunder to the information presented above
under "Item 1. Description of Business."
(c) Description of Real Estate and Operating Data. Not
Applicable; the book value of each of the Company's properties is
less than 10% of the Company's total consolidated assets at
December 31, 1996.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank are involved in any pending
legal proceedings other than routine legal proceedings occurring
in the ordinary course of business. Such proceedings in the
aggregate are believed by management to be immaterial to the
Company's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of
fiscal 1996 to a vote of security holders.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
The "Other Shareholder Information" section which appears on
page 5 of the Registrant's Annual Report to Shareholders for the
Year Ended December 31, 1996 (the "Annual Report to
Shareholders") is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section which appears on
pages 6 through 14 of the Registrant's Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements together with the
report thereon of accountant dated January 24, 1997, appearing on
pages 15 through 40 of the Registrant's Annual Report to
Shareholders for the Year Ended December 31, 1996 are
incorporated by reference hereunder.
With the exception of the aforementioned information and the
information incorporated in Items 5, 6 and 7, the Registrant's
Annual Report to Shareholders for the Year Ended December 31,
1996 is not to be deemed filed as part of this report.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On January 4, 1996, the Audit Committee of the Board of
Directors of the Company determined to dismiss the firm of
Lindgren, Callihan, Van Osdol & Co., Ltd. ("Lindgren") as
independent certified public accountants of the Company,
effective on February 15, 1996.
During the two years ended December 31, 1996, and from
December 31, 1996 through the date of this filing, Lindgren's
reports did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. During such periods, there
have been no disagreements between the Company and Lindgren on
any matter of accounting principles or practice, financial
statement disclosure, or auditing scope or procedure, which
disagreements would have caused Lindgren to make reference to the
subject matter of such disagreements in connection with its
report. During such periods, Lindgren did not advise the Company
of any of the following matters:
1. That the internal controls necessary for the Company to
develop reliable financial statements did not exist;
2. That information had come to Lindgren's attention that
had lead it to no longer be able to rely on management's
representations, or that had made it unwilling to be associated
with the financial statements prepared by management;
3. That there was a need to expand significantly the scope
of the audit of the Company or that information had come to
Lindgren's attention that if further investigated (i) may
materially impact the fairness or reliability of either a
previously issued audit report or underlying financial
statements, or the financial statements issued or to be issued
covering the fiscal periods subsequent to the date of the most
recent financial statements covered by an audit report (including
information that may prevent it from rendering an unqualified
audit report on those financial statements), or (ii) may cause it
to be unwilling to rely on management's representation or be
associated with the Company's financial statements and that, due
to its dismissal, Lindgren did not so expand the scope of its
audit or conduct such further investigation; or
4. That information had come to Lindgren's attention that
it had concluded materially impacted the fairness or reliability
of either (i) a previously issued audit report or the underlying
financial statements, or (ii) the financial statements issued or
to be issued covering the fiscal period subsequent to the date of
the most recent financial statements covered by an audit report
(including information that, unless resolved to the accountant's
satisfaction, would prevent it from rendering an unqualified
audit report on those financial statements), or that, due to its
dismissal, there were no such unresolved issues as of the date of
its dismissal.
Lindgren has furnished a letter to the SEC stating that it
agrees with the above statements, which letter is filed herewith
as Exhibit 16.
The Audit Committee of the Board of Directors of the Company
engaged the firm of Crowe, Chizek and Company LLP as independent
certified accountants for the Company, effective upon the
dismissal of Lindgren.
During the two years ended December 31, 1996 and from
December 31, 1996 through the date of this filing, neither the
Company nor anyone on its behalf had consulted Crowe, Chizek and
Company LLP with respect to any accounting or auditing issues
involving the Company. That is, there were no discussions
<PAGE>
with the Company regarding the application of accounting
principles to a specified transaction, the type of audit opinion
that might be rendered on the financial statements or any related
item.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
Information concerning Directors of the Registrant is
incorporated herein by reference from the Registrant's definitive
Proxy Statement dated March 17, 1997 (the "Proxy Statement"),
specifically the section captioned "Proposal I-Election of
Directors." In addition, see Item 1. "Executive Officers of the
Registrant" for information concerning the Company's executive
officers.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is
incorporated herein by reference from the Registrant's Proxy
Statement, specifically the sections captioned "Proposal I-
Election of Directors-Executive Compensation," "-Directors'
Compensation," and "-Benefits."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information concerning security ownership of certain owners
and management is incorporated herein by reference from the
Registrant's Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning relationships and transactions is
incorporated herein by reference from the sections captioned
"Proposal I-Election of Directors-Transactions with Certain
Related Persons" contained in the Registrant's Proxy Statement.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) The following exhibits filed as a part of this
Form 10-KSB are as follows:
-- 3.1 Certificate of Incorporation of First
Financial Bancorp, Inc. (Incorporated by reference to Exhibit
3.1 of the Registrant's Registration Statement on Form S-1, as
amended, No. 33-65110.)
-- 3.2 Bylaws of First Financial Bancorp, Inc.
(Incorporated by reference to Exhibit 3.2 of the Registrant's
Registration Statement on Form S-1, as amended, No. 33-65110.)
-- 4 Common Stock Certificate of First
Financial Bancorp, Inc. (Incorporated by reference to Exhibit 4
of the Registrant's Registration Statement on Form S-1, as
amended, No. 33-65110.)
<PAGE>
-- 10.1 Incentive Stock Option Plan
(Incorporated by reference to Exhibit 10.1 of the Registrant's
Registration Statement on Form S-1, as amended, No. 33-65110.)
-- 10.2 Outside Directors Stock Option Plan
(Incorporated by reference to Exhibit 10.2 of the Registrant's
Registration Statement on Form S-1, as amended, No. 33-65110.)
-- 10.3 Employment Agreement with Steven C.
Derr, President and Chief Executive Officer (Incorporated by
reference to Exhibit 10.3 of the Registrant's Annual Report on
Form 10-KSB, filed on March 29, 1996.)
-- 10.4 Recognition and Retention Plan and Trust
for Employees (Incorporated by reference to Exhibit 10.4 of the
Registrant's Registration Statement on Form S-1, as amended, No.
33-65110.)
-- 10.5 Recognition and Retention Plan and Trust
for Outside Directors (Incorporated by reference to Exhibit 10.5
of the Registrant's Registration Statement on Form S-1, as
amended, No. 33-65110.)
-- 10.6 Employee Severance Compensation Plan
(Incorporated by reference to Exhibit 10.6 of the Registrant's
Registration Statement on Form S-1, as amended, No. 33-65110.)
-- 10.7 Employee Stock Ownership Plan
(Incorporated by reference to Exhibit 10.7 of the Registrant's
Registration Statement on Form S-1, as amended, No. 33-65110.)
-- 10.8 Executive Salary Continuation Agreement
with Steven C. Derr, President and Chief Executive Officer.
(Incorporated by reference to Exhibit 10.8 of the Registrant's
Annual Report on Form 10-KSB, filed on March 29, 1996.)
-- 10.9 Supplemental Executive Agreement with
Steven C. Derr, President and Chief Executive Officer.
(Incorporated by reference to Exhibit 10.9 of the Registrant's
Annual Report on Form 10-KSB filed on March 29, 1996.)
-- 13 1996 Annual Report to Stockholders
-- 16 Letter on Change in Certifying
Accountant
-- 21 Subsidiaries of the Registrant
-- 23 Consents of experts and counsel
-- 27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the
last quarter of the period covered by the
report.
<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.
FIRST FINANCIAL BANCORP, INC.
Date: March 29, 1997 By: /s/ Steven C. Derr
-----------------------------------
Steven C. Derr
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Steven C. Derr By: /s/ Keith D. Hill
------------------------- ------------------------------
Steven C. Derr, President, Keith D. Hill, Treasurer
Chief Executive Officer (Principal Financial and
Accounting Officer)
(Principal Executive Officer)
Date: March 29, 1997 Date: March 29, 1997
By: /s/ Morton I. Silver By: /s/ Jack R. Manley
------------------------- ------------------------------
Morton I. Silver, Director Jack R. Manley, Director
Date: March 29, 1997 Date: March 29, 1997
By: /s/ Nancy J. Sylvester By: /s/ Richard E. Winkelman
------------------------- ------------------------------
Nancy J. Sylvester, Director Richard E. Winkelman, Director
and Chairman of the Board
Date: March 29, 1997 Date: March 29, 1997
<PAGE>
COMPANY PROFILE
First Financial Bancorp, Inc., is the holding company for its
primary subsidiary, First Federal Savings Bank, and began
operations on October 1, 1993 as a result of the conversion of
First Federal Savings and Loan Association of Belvidere from a
mutual savings and loan association to a stock savings bank.
First Federal Savings Bank, a federally chartered stock savings
bank, was originally established in 1922 as Belvidere Building
and Loan.
First Federal Savings Bank provides a range of community oriented
financial services, including deposit accounts and a variety of
mortgage and consumer products. The Bank's primary market
consists of Boone and Winnebago counties. Expanded services are
offered through a wholly-owned financial service, First Financial
Services of Belvidere Illinois, Inc., which provides annuity and
insurance products on an agency basis as well as property
management of the Bank's 1021 North State Street office
facilities.
First Federal Savings Bank provides financial services from two
locations in Belvidere and has a mortgage loan origination office
located in Rockford, Illinois.
The common stock of First Financial Bancorp, Inc. trades under
the symbol "FFBI" on the Nasdaq "Small Cap" market.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial Highlights 1
Letter to Shareholders 2
Directors and Officers 4
Other Information 5
Management's Discussion and Analysis 6
Average Balance Sheets 13
Rate/Volume Analysis 14
Consolidated Financial Statements 15
Notes to Consolidated Financial Statements 20
Independent Auditor's Report 40
</TABLE>
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
At and for the Years Ended December 31, 1996 1995 1994 1993
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Selected Financial Data:
Total assets $ 94,515 $ 74,874 $ 71,165 $ 67,441
Loans receivable and held for sale, net 73,815 50,233 46,161 41,300
Investment securities (1) 6,005 10,266 10,914 13,867
Mortgage-backed securities 10,193 9,839 10,696 10,436
Interest-earning deposits 1,190 2,164 1,395 6
Deposit accounts 65,838 66,230 59,797 59,553
Federal Home Loan Bank advances 20,450 0 3,000 0
Stockholders' equity 7,325 7,872 7,650 7,073
Selected Operating Data:
Total interest income 6,403 5,258 4,676 4,688
Total interest expense 3,767 2,797 2,190 2,446
Net interest income 2,636 2,461 2,486 2,242
Provision for loss on loans 182 39 4 179
Total non-interest income 92 782 403 825
Total non-interest expense 2,806 2,520 2,329 2,139
Income/(loss) before income taxes (260) 684 556 749
Income taxes (102) 36 (16) 253
Net income/(loss) (158) 648 572 496
Selected Financial Ratios and Other Data:
Return on average assets -0.17% 0.88% 0.84% 0.75%
Return on average stockholders' equity -2.04 8.05 7.81 10.95
Average stockholders' equity to average
assets 8.53 10.94 10.70 6.85
Stockholders' equity to total assets 7.75 10.51 10.75 10.49
Net interest spread 2.51 2.88 3.27 3.04
Net interest margin 2.99 3.44 3.74 3.49
Non-interest income to average assets 0.10 1.06 0.59 1.25
Non-interest income to average assets
plus average loans sold to others 1.94 1.95 1.85 1.86
Non-performing loans to total loans 0.20 0.82 0.28 0.73
Non-performing loans to total assets 0.15 0.56 0.18 0.44
Allowance for loan losses to
non-performing loans 320.55 78.95 240.31 114.33
Allowance for loan losses to
non-performing assets 30.55 78.95 240.31 114.33
Average interest-earning assets to
average interest-bearing liabilities 111.08 114.34 114.45 111.70
Total loan originations $ 39,355 $ 22,286 $ 27,965 $ 46,862
Number of deposit accounts 9,533 10,338 10,495 11,025
Mortgage loans serviced for others $ 52,602 $ 55,754 $ 56,142 $ 52,18
Facilities
Full-service offices 2 2 2 2
Loan origination offices 1 1 1 1
Book value per share $ 17.24 $ 16.68 $ 15.74 $ 14.60
Earnings/(loss) per share $ (0.35) $ 1.37 $ 1.23 $ N/A
Shares outstanding 424,876 471,896 485,974 484,338
(1) Includes FHLB stock and trading account securities.
(N/A) The information is not applicable as the conversion was completed on October 1, 1993.
</TABLE>
<PAGE>
To Our Shareholders:
On behalf of the Board of Directors, management and staff, I am
proud to present the 1996 Annual Report of First Financial
Bancorp, Inc. In 1996, our Company completed its third year of
operations as a public company.
The first year of our strategic plan was fruitful but not without
some disappointment. The Company's assets grew $19.6 million to
$94.5 million at December 31, 1996 from $74.9 million at December
31, 1995, the greatest single year of such growth in our 74-year
history. Although our net earnings were not what we expected,
"seeds" were planted that are expected to create long term value
for the Company and our shareholders.
The Company ended 1996 with a net loss from operations of
$158,000. Management recognizes the need to improve earnings and
it has considered and will continue to consider plans which will
build long term value for the community and shareholders rather
than focus on short term unsustainable gains. In that regard, I
would like to review with you the factors that contributed to
this loss.
The majority of our loss is attributable to four factors.
The first factor was the $417,000 special assessment from the
FDIC to recapitalize the Savings Association Insurance Fund.
This was a direct charge against our 1996 expenses. Our future
FDIC premiums have been reduced from 23 basis points to 6.3 basis
points and are expected to remain at that level until January 1,
1999 at which time the funds are expected to be merged and the
premiums reduced even further. However, our actual future
deposit premium rates will be dependent upon the industry being
able to maintain the required statutory reserve levels for FDIC
insured deposits.
The second factor was the restructuring of the Company's
investment portfolio which resulted in the sale of some low
yielding investments at a $415,000 loss. The proceeds from this
restructuring were deployed into higher-yielding assets over the
last quarter of 1996 and into 1997.
The third factor was the implementation of a new credit card
program that was introduced in May 1996. First Federal entered
the market with a special introductory rate on its card through
February 1, 1997 in order to build the card base and lending
volumes. This special introductory rate reduced earnings on the
outstanding loans during this initial period but did help us in
quickly building the balances that are expected to contribute to
the program's success as we go forward. By December 31, 1996,
the Bank had in excess of 350 cards issued with an aggregate
outstanding credit line of $2.7 million and some $1.0 million in
unpaid balances. In addition, the Bank took a conservative view
of this new program and established loss reserves of some
$109,000 against this portfolio. Future growth in this portfolio
is not expected to reach the level experienced in 1996 reducing
the need to continue adding loss reserves at the 1996 rate.
The fourth factor was the Company's investment in technology
which is expected to reduce overhead, increase the Bank's
operating efficiencies and improve our competitiveness. In
February 1996 the Bank implemented a check imaging technology
through a third party which has improved the efficiencies of our
checking operation and the quality of the checking product for
our customer. In July 1996 the Bank implemented computer output
to laser disk (COLD) technology which has reduced our research
efforts and has increased our response time to customer
inquiries. In December 1996 the Bank installed its first ATM, a
drive-up unit at its main office facility. In each of these
investments, volumes and activities have exceeded our initial
expectations. We expect to continue seeing the payback of these
investments.
Although the Company recorded a loss from operations, it did
initiate some important plans and programs that are expected to
positively impact future operations. The Bank has strengthened
its leadership by bringing in new management members who have
extensive experience in such areas as marketing, funds
acquisition management, lending operations, and branch management
and is in the process of hiring a manager with more diverse
lending experience. In 1996, the Company started its transition
into a sales culture. During 1997, the Company will continue
these efforts with the focus on the total financial services
relationship. The Bank has also added some experienced and
talented members to its board of directors in hiring Nancy
Sylvester, a Management Consultant who is also an Associate
Professor of Communications at Rock Valley College and a
Professional Registered Parliamentarian, James Twining, a
Certified Public Accountant who is part owner and Vice President
of Northern Nationalease, a truck leasing firm, and Charles Popp,
who is an Attorney specializing in real estate law.
Throughout 1996 our Company continued its focus on enhancing the
value of your investment through two stock buy-back programs in
which a total of 55,532 shares was repurchased in an effort to
improve the Company's return-on-average equity and other
performance ratios as well as to increase book value per share.
Our Company is committed to focusing its efforts on serving the
financial needs of the residents in Boone and Winnebago counties
and the surrounding market areas. As a way of furthering that
effort the Bank purchased property on the eastern edge of
Rockford, Illinois in an area of high growth and intends to open
a full service facility in the Fall of 1997 which will provide us
the opportunity to grow our deposit and consumer loan market
share to a size which will complement our existing share of the
Rockford mortgage market. The Bank also implemented a free
checking program in February 1997 that will assist in the further
building of our core deposit base.
We enter 1997, celebrating our 75th year of operations,
anticipating that Congress will reach a decision on the unified
banking charter. We feel that we are positioning our Company to
be able to positively respond to the probable outcome of this
issue. I feel confident that our team is ready to charge forward
to strengthen our foundation and to build a company that provides
quality service and financial products for our community and long
term value for our shareholders.
We thank our customers for the opportunity to service their
financial needs, our staff for their commitment to make our
Company a success, and most of all to you, our shareholders, for
your continuing support.
Steven C. Derr
President
Chief Executive Officer
<PAGE>
DIRECTORS AND OFFICERS
First Financial Bancorp, Inc. and First Federal Savings Bank
BOARD OF DIRECTORS
Steven C. Derr Chief Executive Officer
Jack R. Manley Part owner of Manley Motor Sales
Morton I. Silver Owner of Louis Silver Scrap Iron & Metal
Company
Nancy K. Sylvester Rock Valley College Associate Professor,
Professional Registered Parlimentarian,
Part owner of Jimmy's Frozen Custard
Richard E. Winkelman Chairman of the Board, Semi-retired and
former owner of Winkelman Flowers
First Financial Bancorp, Inc.
OFFICERS
Steven C. Derr President, Chief Executive Officer
Keith D. Hill Treasurer, Chief Financial Officer
Donald J. Kucera Vice President
Patricia J. McCoy Secretary
First Federal Savings Bank
OFFICERS
Steven C. Derr President, Chief Executive Officer
Keith D. Hill Treasurer, Chief Financial Officer
Donald J. Kucera Vice President of Marketing & Funds
Acquisition
Patricia J. McCoy Secretary
First Financial Services of Belvidere Illinois, Inc.
*DIRECTORS AND OFFICERS
*Steven C. Derr President, Chief Executive Officer
Keith D. Hill Treasurer
Donald J. Kucera Vice President
*Jack R. Manley
*Nancy K. Sylvester
*Richard E. Winkelman Secretary
<PAGE>
OTHER INFORMATION
Stock Listing Information. The common stock of the Company is
traded on the National Association of Securities Dealers
Automated Quotation (NASDAQ) "Small Cap" market system under the
symbol "FFBI", and listed in some newspapers under the
abbreviation "FtFnBcp".
Price Range of Common Stock. The stock price ranged from $15.50
to $16.25 per share during 1996. At December 31, 1996, the price
of a common share was $15.88. The table below shows the range of
high and low bid prices. These prices do not represent actual
transactions and do not include retail markups, markdowns or
commissions.
<TABLE>
1996 1995
High Low High Low
------------------------------------
<S> <C> <C> <C> <C>
First Quarter $16.00 $15.50 $13.25 $11.97
Second Quarter 16.00 15.50 15.00 13.25
Third Quarter 16.25 15.50 15.25 15.00
Fourth Quarter 16.25 15.00 15.25 15.00
</TABLE>
Annual Meeting of Shareholders. The Annual Meeting of
Shareholders of First Financial Bancorp, Inc. will be held at
2:00 p.m. April 16, 1997 in the Meeting Room at the Ida Public
Library, 320 North State Street, Belvidere, Illinois 61008. All
shareholders are invited to attend.
Annual Report on Form 10-KSB and Investor Information. A copy of
the Company's annual report on Form 10-KSB, filed with the
Securities and Exchange Commission, and additional information
may be obtained without charge after March 31, 1997 by contacting
First Financial Bancorp, Inc., Keith D. Hill, Chief Financial
Officer, 121 East Locust Street, Belvidere, Illinois 61008, (800)
544-3093, toll free number.
Stock Transfer Agent. The Company's transfer agent is the
Registrar and Transfer Company, which maintains all stockholder
records. Inquiries regarding stock transfer, registration,
address changes or lost certificates should be directed to First
Financial Bancorp, Inc., C/O Registrar and Transfer Company,
Investor Relations, 10 Commerce Drive, Cranford, New Jersey
07016, (800) 368-5948.
Corporate Office.
First Financial Bancorp, Inc., 121 East Locust Street, Belvidere,
Illinois 61008.
Special Corporate Counsel - Washington, D.C.
Luse Lehman Gorman Pomerenk & Schick, 5335 Wisconsin Ave. N.W.,
Suite 400, Washington, D.C. 20015.
General Corporate Counsel - Belvidere, Illinois.
Strom Sewell Larson & Popp, 215 South State Street, Belvidere,
Illinois 61008
General Corporate Counsel - Rockford, Illinois.
Schlueter Ecklund Olson Barrett & Mayfield, 4023 Charles Street,
Rockford, Illinois 61108.
Independent Auditors.
Crowe, Chizek and Company LLP, One Mid America Plaza, P.O Box
3697, Oak Brook, IL 60522-3697.
First Federal Savings Bank.
Main Office, 121 East Locust Street, Belvidere, Illinois 61008.
Branch Office, 1021 North State Street, Belvidere, IL 61008.
Mortgage Origination Office, 4249 East State St., Rockford, IL
61108.
First Financial Services of Belvidere Illinois, Inc.
121 East Locust Street, Belvidere, Illinois 61008.
<PAGE>
FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
First Financial Bancorp, Inc. (the "Company") completed its
initial offering of common stock on October 1, 1993, in
connection with the simultaneous conversion of First Federal
Savings and Loan Association of Belvidere, a federally chartered
mutual savings and loan association to First Federal Savings Bank
(the "Bank"), a federally chartered stock savings bank.
The Company is headquartered in Belvidere, Illinois, and its
principal business currently consists of the operations of its
wholly-owned subsidiary, First Federal Savings Bank. The Company
had no operations prior to October 1, 1993, and accordingly the
results of operations prior to this date reflect only those of
the Bank and its subsidiary.
The Bank is a community-oriented savings bank offering
traditional deposit and loan products through its two full
service offices in Belvidere and its loan origination office in
Rockford, Illinois.
The Bank invests primarily in one-to four-family mortgage loans
and, to a lesser extent, multi-family and commercial real estate
loans, consumer loans, and mortgage-backed securities, U.S.
Government and federal agency securities and other marketable
securities. The Bank also originates one-to four-family mortgage
loans for sale, generally retaining the servicing rights.
The Company's results of operations are primarily dependent on
the Bank. The Bank's primary source of earnings is its net
interest income, which is the difference between interest income
on interest-earning assets and interest expense on interest-
bearing liabilities. The results of operations are also affected
by non-interest income, such as mortgage loan servicing fees,
charges on deposit accounts, and gains on sales of loans, and
non-interest expense, such as compensation and benefits,
occupancy and equipment, data processing, federal deposit
insurance premiums, loan origination and servicing, professional
fees, and other operating expenses.
The Bank has a wholly-owned subsidiary, First Financial Services
of Belvidere Illinois, Inc., which offers annuities and insurance
products on an agency basis at the Bank's full service locations.
When used in this Annual Report and in future filings by the
Company with the Securities and Exchange Commission, 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 "are
expected to", "estimate", " is anticipated", "project", "will
continue", "will likely result" 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,
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 below 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.
The following discussion reviews the Company's financial
condition and results of operations and should be read in
conjunction with the Consolidated Financial Statements included
in this Annual Report.
<PAGE>
FINANCIAL CONDITION
At December 31, 1996, total assets of the Company were $94.5
million as compared to $74.9 million at December 31, 1995, an
increase of $19.6 million or 26.2%. Interest-earning deposits
held in other financial institutions decreased $1.0 million to
$1.2 million at December 31, 1996, from $2.2 million at December
31, 1995. Securities available for sale and held to maturity
decreased $4.9 million, or 50.4%, to $4.9 million at December 31,
1996. Mortgage-backed securities available for sale and held to
maturity increased $0.4 million, or 3.6%, to $10.2 million at
December 31, 1996. The Company held no first mortgage loans for
sale at December 31, 1996, down from $0.4 million at December 31,
1995. Net mortgage loan originations in the held for sale
portfolio were $6.5 million for the year ended December 31, 1996,
as compared to $7.5 million for the year ended December 31, 1995.
Proceeds from the sales of loans held for sale were $6.9 million
for the year ended December 31, 1996, as compared to $7.6
million for the year ended December 31, 1995. The decreases
reflect the retention of more of the Company's originations into
its portfolio.
Loans receivable increased $24.0 million, or 48.1%, to $73.8
million at December 31, 1996, from $49.8 million at December 31,
1995. The increase is attributable to several factors including:
i) the net increase of $6.2 million in purchased adjustable rate
mortgage loans in addition to the net increase of $2.5 million in
Company originated adjustable rate mortgage loans; ii) a net
increase of $7.8 million in balloon mortgage loans; iii) a net
increase of $4.8 million in fixed rate mortgage loans in the
Company's portfolio; iv) the continued success of the Company's
home equity program which garnered an additional $1.4 million in
balances during 1996; and v) the introduction of the Company's
credit card product, primarily to its existing customer base,
which resulted in the acquisition of balances in excess of $1.0
million by December 31, 1996.
At the same time loans receivable increased, total non-performing
assets decreased $272,000 to $149,000 at December 31, 1996, from
$418,000 at December 31, 1995. Total non-performing assets
represented 0.15% of assets at December 31, 1996, as compared to
0.56% of assets at December 31, 1995. The decrease is the result
of more strict collection efforts during the early stages of the
delinquency process . The Company had no real estate owned at
December 31, 1996 and 1995.
Deposits decreased $0.4 million, or 0.6%, to $65.8 million at
December 31, 1996, from $66.2 million at December 31, 1995. The
slight decrease resulted from more aggressive competition in the
Company's market for core deposit relationships. The Company
developed a program to combat this trend during the last quarter
of 1996 and will be introducing Totally Free Checking in its
market during the first quarter of 1997 in an effort to recapture
market share, increase fee income, and increase cross sales
opportunities. The lack of growth in deposit balances during
1996 necessitated the use of borrowings from the Federal Home
Loan Bank ("FHLB") of Chicago to fund the growth in the lending
portfolio. At December 31, 1996, advances from the FHLB of
Chicago totaled $20.5 million compared to no such outstanding
advances at December 31, 1995.
Stockholders' equity totaled $7.3 million, or 7.75% of total
assets, at December 31, 1996, a decrease of $547,000. Two
primary factors leading to this decrease were the repurchase of
55,532 common shares of stock under two separate repurchase plans
during 1996 and the net operating loss of $158,000 for the year.
Partially offsetting those decreases was the decrease in the net
unrealized loss on investments available for sale, the exercise
of 8,512 stock options throughout the year and the effects of
amortization of the ESOP and MRP plans on the respective contra-
equity accounts.
RESULTS OF OPERATIONS-YEAR ENDED DECEMBER 31, 1996
General. Net loss for the year ended December 31, 1996 was
$158,000, as compared to net income of $648,000 for the year
ended December 31, 1995. In 1996, the Company recorded expenses
in the amount of $276,000, net of taxes, for a one-time special
assessment on thrift deposits, as the Company's subsidiary's
deposits are insured by the FDIC Savings Association Insurance
Fund ("SAIF"). Although the assessment constitutes 42.4% of the
prior year's net income, FDIC insurance premiums will be reduced
in future years to $0.063 per $100.00 in assessable deposits,
versus the $0.23 per $100.00 in assessable deposits the Bank had
paid in recent years. The 1996 net loss also included
<PAGE>
losses of $275,000, net of tax, on the sales of securities.
Management disposed of low yielding securities acquired prior to
and shortly after the time of conversion in 1993 which had
maturities ranging from 1996 to 2008. Net income also included
$140,000 for the year ended December 31, 1995 as a benefit to the
provision for income taxes for a reduction of income taxes
previously accrued for deductions claimed on the Bank's 1991
federal income tax return, but not recognized for financial
reporting purposes. Exclusive of the aforementioned items, net
of tax effects, net income decreased $88,000, to $393,000 for
the year ended December 31, 1996 from $481,000 for the year ended
December 31, 1995.
Interest Income. Total interest income increased $1.1 million,
or 21.8%, to $6.4 million for the year ended December 31, 1996,
from $5.3 million for the year ended December 31, 1995. The
increase resulted from a 23.4% increase in average interest-
earning assets to $88.1 million from $71.4 million. Partially
offsetting the increase was the decrease in average yield on such
assets to 7.26% for the year ended December 31, 1996, from 7.36%
for the year ended December 31, 1995. The yield decrease is
reflective of the origination and purchase of adjustable rate
mortgage loans which carried discounted initial rates as well as
a shift in the composition of the consumer portfolio towards home
equity loans and the introduction of a credit card product with a
discounted initial rate. Increases in interest income were
greatest in the first mortgage loan portfolio where there was a
$1.1 million increase to $4.5 million for the year ended December
31, 1996, from $3.4 million for the year ended December 31, 1995.
Increased average balances during 1996 were offset by a lower
average yield due to the aforementioned adjustable rate lending
products. Interest income on other loans also increased for the
year ended December 31, 1996 by $111,000, or 18.9%, to $698,000
for the year ended December 31, 1996, from $587,000 for the year
ended December 31, 1995 as the average balances for 1996 exceeded
1995 levels and average yields decreased due to the
aforementioned portfolio composition changes. Interest income on
mortgage-backed securities, investment securities, and interest-
earning deposits decreased $96,000, or 7.7%, to $1,157,000 for
the year ended December 31, 1996, from $1,253,000 for the year
ended December 31, 1995. An overall decrease in average balances
on these assets in 1996 from 1995 more than offset the overall
increase in average yield of 25 basis points to 5.64% for the
year ended December 31, 1996, from 5.39% for the year ended
December 31, 1995.
Interest Expense. Total interest expense for the year ended
December 31, 1996 increased $1.0 million to $3.8 million from
$2.8 million for the year ended December 31, 1995. Much of the
increase was attributable to the increase in average balances for
the year, particularly in borrowings as the average balance of
FHLB advances increased $14.4 million, to $14.9 million for the
year ended December 31, 1996, from $0.5 million for the year
ended December 31, 1995. The need to use advances to fund growth
resulted in an additional $771,000 in interest expense on
borrowings as the average balances increased and interest expense
registered $802,000 for the year ended December 31, 1996 compared
to $31,000 for the year ended December 31, 1995. In addition to
higher cost of borrowings, increased interest cost in certificate
accounts was experienced with costs of 5.70% for the year ended
December 31, 1996, up from 5.66% for the year ended December 31,
1995 as well as increased average balances of $42.6 million for
the year ended December 31, 1996, from $40.7 million for the year
ended December 31, 1995.
Net Interest Income. The Company's net interest income before
provision for loss on loans was $2.6 million for the year ended
December 31, 1996, an increase of $0.1 million from $2.5 million
for the year ended December 31, 1995. The increase was primarily
the result of increased average interest-earning assets outpacing
the decrease in the net interest spread for the year ended
December 31, 1996 compared to the year ended December 31, 1995.
A decrease in the spread between incremental funding costs and
incremental earnings on new earning assets resulted in a
compression of the Company's net interest margin of 45 basis
points to 2.99% for the year ended December 31, 1996, from 3.44%
for the year ended December 31, 1995.
Provision for Loss on Loans. The Company recorded a provision
for loss on loans of $182,000 for the year ended December 31,
1996, an increase of $143,000, or 366.7%, from $39,000 for the
year ended December 31, 1995. The increase is primarily
reflective of the change in the composition and risk
characteristics of the Company's portfolio as the Company added
credit card receivables totaling $1.0 million and continued to
increase home equity lending.
Non-Interest Income. Non-interest income decreased $690,000, or
88.2%, to $92,000 for the year ended December 31, 1996, from
$782,000 for the year ended December 31, 1995. The decrease
primarily related to i) net losses on sales of securities of
$415,000 in the year ended December 31, 1996 versus no such
losses in 1995; ii) life insurance
<PAGE>
proceeds of $193,000 in the 1995 period on a policy the Company
held on its then President, David L. Beasley who passed away on
April 4, 1995; and iii) a decrease in the profit on sales of
first mortgage loans of $70,000 as the Company retained more of
its loan originations for its portfolio in 1996. Excluding the
securities losses and insurance proceeds, non-interest income
decreased $82,000.
Non-Interest Expense. Non-interest expense increased $0.3
million, or 11.3%, to $2.8 million for the year ended December
31, 1996, from $2.5 million for the year ended December 31, 1995.
The largest single item within that increase was the FDIC SAIF
assessment which was $417,000. Passage of the SAIF legislation
should enable the Company to realize significant deposit
insurance savings in coming years as the rates decrease.
Occupancy and equipment expenses increased $50,000 to $263,000
for the year ended December 31, 1996, from $213,000 for the year
ended December 31, 1995. The increase in occupancy costs
reflects the investments in technology and the remodeling of
customer service areas within the Company's main office during
1996. Loan origination and servicing expenses increased $65,000
as a result of commissions on increased loan production volumes.
Partially offsetting the aforementioned increases was a decrease
in compensation and benefits of $330,000, to $1.1 million for the
year ended December 31, 1996, from $1.4 million for the year
ended December 31, 1995. $208,000 of this decrease relates to
benefits accrued to Mr. Beasley's estate upon his death in April
1995. Much of the balance of the decrease relates to decreased
expenses under benefits plans.
Income Taxes. For the year ended December 31, 1996, income tax
expense was ($102,000) compared to income tax expense of $36,000
for the year ended December 31, 1995. The provision for income
taxes in 1995 included a benefit of $140,000 for reductions of
income taxes previously accrued for deductions claimed on the
Bank's 1991 federal income tax return, but not recognized for
financial reporting purposes. The tax benefit was recorded in
1995 only after the statute of limitations had expired on the
1991 return. The decrease from 1995 to 1996 in income tax
provision resulted from the decrease in net income before taxes
of $944,000 to ($260,000) for the year ended December 31, 1996
from $684,000 for the year ended December 31, 1995.
REGULATORY CAPITAL REQUIREMENTS
The Bank currently exceeds all regulatory capital requirements by
a significant margin. Current federal regulations require
savings institutions to maintain a minimum regulatory tangible
capital ratio equal to 1.5% of total adjusted assets, a minimum
3.0% leverage (core capital) ratio and an 8.0% risk-based capital
ratio.
At December 31, 1996, the Bank was in compliance with these
capital requirements, summarized as follows (dollars in
thousands):<PAGE>
<TABLE>
Percent
of Adjusted
Amount Assets
<S> <C> <C>
Tangible Capital $6,926 7.33%
Tangible Capital Requirement 1,519 1.50%
Excess $5,407 5.83%
Core Capital $6,926 7.33%
Tangible Capital Requirement 3,039 3.00%
Excess $3,887 4.33%
Total Risk-Based Capital $7,379 14.32%
Risk-Based Capital Requirement 4,120 8.00%
Excess $3,259 6.32%
</TABLE>
The differences between the Bank's stockholders' equity
calculated in accordance with generally accepted accounting
principles (GAAP) and regulatory capital at December 31, 1996 are
summarized as follows (in thousands):
<TABLE>
<S> <C>
GAAP Capital $6,758
Net Unrealized Loss on Securities
Available for Sale 171
Excess Mortgage Servicing Rights (3)
Total Tangible and Core Capital 6,926
General Loan Loss Allowances 453
Total Risk-Based Capital $7,379
</TABLE>
As a result of the issuance of regulations by the OTS regarding
regulatory restrictions and enforcement action against savings
institutions deemed to be "undercapitalized," defined as having
total risk-based capital of less than 8.0% or leverage or core
capital of less than 4.0%, the minimum core capital ratio
requirement has been effectively raised to 4.0%. In addition, on
August 23, 1993, the OTS issued a final rule for calculating an
interest rate risk component that would be incorporated into the
OTS regulatory capital rule. Under the OTS rule, only savings
institutions with "above normal" interest rate risk exposure
would be required to maintain additional capital. That dollar
amount of capital would be in addition to an institution's
existing risk-based capital requirement. Savings institutions
with assets less than $300 million and risk-based capital ratios
in excess of 12.0% will not normally be subject to this new
requirement unless they exhibit instances of above normal
interest rate risk which would be of concern to the OTS. The
Bank has been formally advised by the OTS that it is exempt from
this requirement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, principal
and interest payments on loans and mortgage-backed securities,
the maturity of investment securities, custodial balances held
for investors on serviced loans, proceeds from loan sales and, to
a lesser extent, advances from the Federal Home Loan Bank of
Chicago. While scheduled repayments and maturities on loans,
mortgage-backed securities and investment securities are
predictable sources of funds, deposit flows and mortgage
prepayments are influenced significantly by general interest
rates, economic conditions and competition.
Regulations of the OTS require that the Bank maintain a minimum
ratio of liquid assets. This requirement is based upon a
percentage of the average daily balance of net deposits and short
term borrowings. The current ratio is 5.0%, as compared to the
Bank's liquidity ratio of 6.16% at December 31, 1996 and 14.4% at
December 31, 1995. The decrease in liquidity is the result of
the reduction in the Company's available for sale portfolio and
the level of collateralization the Company has to secure deposits
in excess of FDIC insured amounts for public entities.
The Company's most liquid assets are cash and equivalents, which
include investments and highly liquid, short-term investments.
The levels of these assets are dependent on the Company's
operating, financing, lending and investing activities during any
given period. At December 31, 1996, cash and cash equivalents
totaled $1.7 million, as compared to $2.6 million at December 31,
1995.
Net cash provided by operating activities for the year ended
December 31, 1996 consisted primarily of proceeds from sales of
loans held for sale of $6.9 million, which was offset by the
origination of loans held for sale, net of origination fees and
principal collected of $6.5 million.
Net cash used in investing activities for the year ended December
31, 1996 consisted primarily of loan originations net of
principal collected on loans of $16.4 million and purchased whole
loans of $7.8 million and securities and mortgage-backed
securities of $6.7 million, partially offset by the combined
effects of calls, maturities and sales of securities of $10.0
million and principal collected on mortgage-backed securities of
$1.3 million. Also contributing to the net cash used was the $0.7
million in purchases of premises and equipment as the Company
continued to invest in equipment to improve productivity and
enhance customer service as well as purchasing a parcel of land
in an
<PAGE>
expanding section of Rockford, Illinois for the establishment of
a de novo branch facility in the future. The Company received
notification dated October 23, 1996 that the OTS has no
objections to the establishment of such a branch.
Net cash provided by financing activities for the year ended
December 31, 1996, was primarily the result of net borrowings
from the FHLB of $20.5 million. Partially offsetting the inflow
of borrowings, was the decrease in cash and equivalents due to
the outflow of deposits totaling $0.4 million and the repurchase
of common stock for the treasury of $0.9 million. Common stock
purchases resulted in the increase of treasury shares of 55,523
shares which was a key component in increasing book value per
share to $17.24 per share at December 31, 1996 from $16.68 per
share at December 31, 1995. Management firmly believes stock
repurchases, to the extent allowable, are an excellent method of
enhancing shareholder value.
At December 31, 1996, the Company had outstanding commitments to
fund loan originations and unused lines of credit of $5.8 million
and no commitments to sell fixed rate mortgage loans. The
Company anticipates that it will have sufficient funds available
to meet its current loan origination commitments. Certificates
of deposit which are scheduled to mature in one year or less from
December 31, 1996 were $23.7 million. Management believes that a
significant portion of such deposits will remain with the
Company.
ASSET/LIABILITY MANAGEMENT
The Company manages its assets and liabilities to control the
impact of changing interest rates on its net interest margin and
to limit interest rate risk. One of the methods used in managing
assets and liabilities is examining the extent to which they are
"interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap". An asset or liability is said to
be interest rate sensitive within a specific time period if it
will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing within a
specific time period and the amount of interest-bearing
liabilities maturing or repricing within that same time period.
A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. Accordingly, during a period of
rising interest rates, an institution with a positive gap
position would be in a better position to invest in higher
yielding assets which, consequently, may result in the yield on
its assets increasing at a pace more closely matching the
increase in the cost of its interest-bearing liabilities than if
it had a negative gap. During a period of falling interest
rates, an institution with a positive gap position would tend to
have its assets repricing at a faster rate than one with a
negative gap which, consequently, may lend to restrain the growth
of net interest margin.
The Company has attempted to reduce interest rate risk by i)
originating for portfolio, ARM loans, shorter term fixed-rate
loans and consumer loans; ii) purchasing adjustable rate mortgage
loans; iii) originating long-term fixed rate loans for sale into
the secondary mortgage market; and iv) investing in other rate
sensitive assets. At December 31, 1996, total cumulative
interest-bearing liabilities maturing or repricing within three
years exceeded total cumulative interest-earning assets maturing
or repricing within the same time period by $9.6 million,
representing a cumulative gap ratio of negative 10.16%. Also at
December 31, 1996 total cumulative interest-bearing liabilities
maturing or repricing within one year or less were exceeded by
total cumulative interest-earning assets maturing or repricing
within the same time period by $2.0 million, representing a
cumulative gap ratio of a negative 2.07%. Management generally
attempts to limit its three year gap position from a negative
10.00% to a positive 10.00%.
The following table sets forth the amounts of interest-earning
assets and interest-bearing liabilities outstanding at December
31, 1996, which are anticipated by the Company, based upon
certain assumptions, to mature or reprice in the future periods
shown. The data reflects estimated prepayment and withdrawal
rates on assets and liabilities based on the Company's
assumptions and historical performance. Management believes
these assumptions to be reasonable, although actual prepayments
of assets and liabilities may vary substantially.
<PAGE>
<TABLE>
Amounts Maturing or Repricing at December 31, 1996
6 Months 6 Months
Gap Table or Less to 1 Year 1-3 Years 3-5 Years 5-10 Years 10-20 Years 20+ Years Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
First mortgage loans (1) 11,330 14,408 19,683 8,539 12,368 6,177 2,585 75,000
Other loans 7,165 767 873 110 3 -- -- 8,918
Investment securities(2) 5,621 826 748 -- -- -- -- 7,195
Total interest-earning assets 24,116 16,001 21,304 8,649 12,371 6,177 2,585 91,201
Total interest-earning
assets, net (2) 24,116 16,001 21,304 8,649 12,371 6,177 2,585 91,203
Interest-bearing liabilities
Passbook accounts 884 884 3,531 3,531 -- -- -- 8,830
NOW accounts 1,474 1,474 1,965 -- -- -- -- 4,913
Money market demand accounts 2,116 2,116 2,821 -- -- -- -- 7,053
Certificate accounts 17,771 5,607 9,931 9,878 180 -- -- 43,367
Borrowed funds 7,750 2,000 10,700 -- -- -- -- 20,450
Total interest-bearing
liabilities 29,995 12,081 28,98 13,409 180 -- -- 84,613
Interest sensitivity gap (5,879) 3,920 (7,664) (4,760) 12,191 6,177 2,585 6,590
Interest sensitivity gap
to total assets -6.22% 4.15% -8.09% -5.04% 12.90% 6.54% 2.74% 6.97%
Cumulative interest
sensitivity gap (5,879) (1,959) (9,603) (14,363) (2,172) 4,005 6,590 6,590
Cumulative interest
sensitivity gap to
total assets -6.22% -2.07% -10.16% -15.20% -2.30% 4.25% 6.97% 6.97%
Ratio of interest-earning
assets to interest-
bearing liabilities 80.40% 132.45% 73.59% 64.50% 66872.78% -- -- 107.79%
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities 80.40% 95.34% 86.48% 82.99% 97.43% 104.73% 107.79% 107.79%
- -------------------------------
(1) Includes mortgage-backed securities, collateralized mortgage obligations, and loans held for sale,
net of loans in process, loan discounts and loan loss reserves.
(2) Includes investments held to maturity, investments available for sale, and interest-earning deposits.
</TABLE>
<PAGE>
AVERAGE BALANCE SHEETS
The following table sets forth certain information relating to
the Company's average balance sheets and reflects the average
yield on assets and the average cost of liabilities for the
periods indicated. Average balances are derived from average
month end balances. Management does not believe that the use of
average monthly balances instead of average daily balances has
caused any material differences in the information presented.
The yields and costs include fees that are considered adjustments
to yields. No tax equivalent adjustments were made. Non-accrual
loans have been included in the tables as loans carrying a zero-
yield.
<TABLE>
Year Ended December 31,
1996 1995
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
First mortgage loans (1) $59,777 $ 4,548 7.61% $42,388 $ 3,418 8.06%
Other loans 7,844 698 8.90% 5,817 587 10.10%
Mortgage-backed securities 10,252 620 6.05% 10,350 608 5.87%
Investment securities (2) 8,605 496 5.77% 10,906 574 5.26%
Interest-earning deposits 1,670 41 2.46% 1,986 71 3.61%
Total interest-earning assets 88,148 $ 6,403 7.26% 71,447 $ 5,258 7.36%
Non-interest-earning assets 2,761 2,110
Total assets $90,909 $73,557
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Passbook accounts $ 9,332 $ 187 2.00% $10,589 $ 213 2.01%
Certificate accounts 42,564 2,426 5.70% 40,665 2,304 5.66%
NOW and MMDA accounts 12,526 352 2.82% 10,754 249 2.32%
FHLB advances 14,934 802 5.37% 479 31 6.55%
Total interest-bearing liabilities 79,356 $ 3,767 4.75% 62,487 $ 2,797 4.48%
Non-interest-bearing deposit accounts 2,563 2,015
Non-interest-bearing liabilities 1,236 1,005
Total liabilities 83,155 65,507
Stockholders' equity 7,754 8,050
Total liabilities and stockholders'
equity $90,909 $73,557
Net interest income/interest rate spread (3) $ 2,636 2.51% $2,461 2.88%
Net interest-earning assets/net interest
margin (4) $ 8,792 $8,960
Ratio of average interest-earning assets 2.99% 3.44%
to average interest-bearing liabilities 1.11x 1.14x
- -----------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process, and loan loss reserves, and includes
loans held for sale.
(2) Includes investments available for sale, investments held to maturity, and FHLB stock.
(3) Interest rate spread represents the difference between the average yield on total interest-earning assets
and the average cost of total interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.
</TABLE>
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth certain information relating to
the Company's changes in interest income and interest expense for
the periods indicated. For each category of interest-earning
assets and interest-bearing liabilities, information is provided
on changes attributable to (i) changes in average volume (changes
in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes
in rate-volume (changes in rate multiplied by the change in
average volume); and (iv) the net change.
<TABLE>
Year Ended December 31,
1996 vs. 1995
Total
Rate/ Increase
Volume Rate Volume (Decrease)
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
First mortgage loans (1) $1,402 $ 70 $(342) $1,130
Other loans 205 3 (97) 111
Mortgage-backed securities (6) 2 16 12
Investment securities (2) (121) (2) 45 (78)
Interest-earning deposits (11) (2) (17) (30)
Total interest-earning assets $1,468 $ 71 $(395) $1,145
Interest-bearing labilities:
Passbook accounts $ (25) $ (1) $ 0 $ 26
Certificate accounts 108 8 6 122
NOW and MMDA accounts 41 4 58 103
FHLB advances 947 41 (217) 771
Total interest-bearing liabilities 1,071 52 (153) 970
Net change in interest income $ 397 $ 19 $(242) $ 175
- -------------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process, and loan loss reserves,
and includes loans held for sale.
(2) Includes investments available for sale, investments held to maturity and FHLB stock.
</TABLE>
<PAGE>
FIRST FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
December 31, 1996
<TABLE>
(In Thousands)
<S> <C>
ASSETS
Cash on hand and non-interest-earning deposits $ 462
Interest-earning deposits 1,190
Total cash and cash equivalents 1,652
Securities available-for-sale 4,779
Mortgage-backed securities available-for-sale 9,136
Securities held-to-maturity (fair value of $78) 78
Mortgage-backed securities held-to-maturity (fair value
of $1,010) 1,057
Loans receivable, net of allowance for losses of $468 73,815
Accrued interest receivable 517
Premises and equipment 1,386
Federal Home Loan Bank stock 1,148
Other assets 947
Total assets $ 94,515
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposit accounts $ 65,838
Advances from Federal Home Loan Bank 20,450
Advance payments by borrowers for taxes and insurance 339
Other liabilities 563
Total liabilities 87,190
Commitments and contingencies (Note 12)
Stockholders' equity
Common stock - $0.10 par value, 1,500,000 shares authorized,
509,598 shares issued 51
Additional paid-in capital 3,797
Retained earnings, substantially restricted 5,075
Treasury stock, at cost, 84,722 shares (1,350)
Unearned employee stock ownership plan shares (95)
Unearned stock awards (26)
Net unrealized loss on securities available-for-sale,
net of income tax benefit of $69 (127)
Total stockholders' equity 7,325
Total liabilities and stockholders' equity $ 94,515
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
FIRST FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
December 31, 1996 and 1995
<TABLE>
1996 1995
<S> <C> <C>
Interest income
First mortgage loans $ 4,548 $ 3,418
Other loans 698 587
Mortgage-backed securities 620 608
Securities 496 574
Interest-earning deposits 41 71
Total interest income 6,403 5,258
Interest expense
Deposit accounts 2,965 2,766
FHLB advances 802 31
Total interest expense 3,767 2,797
Net interest income 2,636 2,461
Provision for loss on loans 182 39
Net interest income after provision for loss on loans 2,454 2,422
Noninterest income
Loan servicing fees and charges 198 185
Service charges on deposit accounts 173 168
Gain on sales of loans 87 157
Loss on sales of securities (415) --
Death benefits from officers' life insurance -- 193
Other 49 79
Total noninterest income 92 782
Noninterest expense
Compensation and benefits 1,117 1,447
Occupancy and equipment 263 213
Data processing 162 146
Federal deposit insurance premiums 574 142
Loan origination and servicing 142 77
Professional fees 94 116
Other 454 379
Total noninterest expense 2,806 2,520
Income (loss) before income taxes (260) 684
Income taxes (benefit) (102) 36
Net income (loss) $ (158) $ 648
Primary earnings (loss) per share $ (0.35) $ 1.37
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996 and 1995
<TABLE>
Net
Unrealized
Loss on
Additional Unearned Unearned Securities
Common Paid-in Retained Treasury ESOP Stock Available-
Stock Capital Earnings Stock Shares Awards for-Sale Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1995 $ 48 $ 3,486 $4,585 $ (20) $ (224) $ (93) $ (132) $ 7,650
Net income - - 648 - - - - 648
Amortization of RRPs - 19 - - - 62 - 81
Exercise of stock
options, 13,518 shares 2 147 - - - - - 149
Release of earned ESOP
shares, 6,780 shares - 25 - - 75 - - 100
Purchase of treasury
stock, 27,596 shares,
at cost - - - (440) - - - (440)
One-time reclassifi-
cation of securities
available-for-sale,
net of income taxes
of $250 - - - - - - (484) (484)
Increase in fair value
of securities availa-
ble-for-sale, net of
income taxes of $87 - - - - - - 168 168
Balance,
December 31, 1995 50 3,677 5,233 (460) (149) (31) (448) 7,872
Net loss - - (158) - - - - (158)
Amortization of RRPs - - - - - 5 - 5
Exercise of stock
options, 8,512 shares 1 67 - - - - - 68
Release of earned ESOP
shares, 6,780 shares - 53 - - 54 - - 107
<PAGE>
Purchase of treasury
stock, 55,532 shares,
at cost - - - (890) - - - (890)
Increase in fair value
of securities available-
for-sale, net of income
taxes of $166 - - - - - - 321 321
Balance at
December 31, 1996 $ 51 $ 3,797 $5,075 $(1,350) $ (95) $ (26) $ (127) $ 7,325
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE
<PAGE>
FIRST FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996 and 1995
(In Thousands)
<TABLE>
1996 1995
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (158) $ 648
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Amortization of:
Premiums, discounts, and deferred fees on
loans and securities 25 14
Net excess servicing fees and originated
mortgage servicing rights 32 19
Stock award plans 5 62
Employee stock ownership plan 89 113
Provision for losses on loans 182 39
Federal Home Loan Bank stock dividends - (7)
(Gain) loss on sale of:
Loans (87) (157)
Securities 415 -
Premises and equipment 10 -
Depreciation of premises and equipment 114 85
Originations of loans held for sale, net of
origination fees and principal collected (6,532) (7,509)
Proceeds from sales of loans held for sale 6,939 7,572
Change in:
Deferred income tax (4) (40)
Accrued interest receivable (64) 6
Other assets (374) (50)
Other liabilities 56 37
Net cash provided by operating activities 648 832
Cash flows from investing activities
Loan originations net of principal collected on loans (16,374) (4,068)
Purchases of:
Whole loan participations (7,763) -
Mortgage-backed securities held-to-maturity - (137)
Mortgage-backed securities available-for-sale (1,753) -
Securities held-to-maturity - (282)
Securities available-for-sale (4,900) (2,442)
Federal Home Loan Bank stock (667) (34)
Proceeds from:
Sales of securities available-for-sale 3,744 -
Maturities and calls of securities available-for-sale 6,050 2,600
Maturities and calls of securities held-to-maturity 200 500
Principal collected on mortgage-backed securities and
collateralized mortgage obligations 1,303 782
Purchase of premises and equipment (709) (192)
Net cash used in investing activities (20,869) (3,273)
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996 and 1995
(In Thousands)
<TABLE>
1996 1995
<S> <C> <C>
Cash flows from financing activities
Net increase (decrease) in deposit accounts $ (392) $ 6,433
Net increase (decrease) in advances from the
Federal Home Loan Bank 20,450 (3,000)
Issuance of common stock 68 109
Repurchase of common stock (890) (440)
Net increase (decrease) in advance payments by borrowers
for taxes and insurance 79 (2)
Net cash provided by financing activities 19,315 3,100
Net increase (decrease) in cash and cash equivalents (906) 659
Cash and cash equivalents at beginning of year 2,558 1,899
Cash and cash equivalents at end of year $ 1,652 $ 2,558
Supplemental disclosures of cash flow information
Cash paid for
Interest $ 3,679 $ 2,766
Income taxes 70 195
Noncash items
Transfer of securities held-to-maturity to securities
available-for-sale - 14,640
Transfer of held for sale loans to portfolio 41 391
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting
policies used by First Financial Bancorp, Inc. (Company) in the
preparation of the accompanying consolidated financial
statements.
Description of the Business: First Financial Bancorp, Inc. is
the holding company for its wholly-owned subsidiary, First
Federal Savings Bank (Bank), a federally chartered stock savings
bank, and its principal business is the operations of the Bank.
The Bank's operations consist principally of originating and
servicing residential first mortgage loans secured by properties
in northern Illinois from its facilities in Belvidere and
Rockford, Illinois. In addition, the Bank provides consumer
banking services. The Bank also offers brokerage and insurance
services through its wholly-owned subsidiary, First Financial
Services of Belvidere, Illinois, Inc. Substantially all of the
Bank's income and assets are derived from these activities,
conducted primarily with customers located in northern Illinois.
Principles of Consolidation: The accompanying consolidated
financial statements include the accounts of the Company, and the
accounts of the Bank and its wholly-owned subsidiary. All
significant intercompany transactions and balances have been
eliminated in consolidation.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those
estimates. The collectibility of loans, fair values of financial
instruments, and status of contingencies are particularly subject
to change.
Cash and Cash Equivalents: For the purpose of the statement of
cash flows, cash and cash equivalents include cash on hand,
amounts due from banks, and interest-earning deposits with
original maturities of three months or less. Net cash flows are
reported for customer loan and deposit transactions and interest-
bearing deposits with other banks.
Securities: Securities are classified as held-to-maturity when
the Company has the positive intent and management has the
ability to hold those securities to maturity. Accordingly, they
are stated at cost, adjusted for amortization of premiums and
accretion of discounts. All other securities are classified as
available-for-sale since the Company may decide to sell those
securities in response to changes in market interest rates,
liquidity needs, changes in yields or alternative investments and
for other reasons. These securities are carried at fair value
with unrealized gains and losses charged or credited, net of
income taxes, to a valuation allowance included as a separate
component of stockholders' equity. Realized gains and losses on
disposition are based on the net proceeds and the adjusted
carrying amounts of the securities sold, using the specific
identification method.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Held for Sale: Loans held for sale are reported at the
lower of cost, less applicable deferred loan fees or estimated
fair value in the aggregate.
Loans Receivable, Net: Loans receivable, net are reported at the
principal balance outstanding, net of deferred loan fees and
costs, loans in process, the allowance for loan losses, unearned
discounts, and charge-offs.
Loan fees and certain direct origination costs are deferred, and
the net deferred fee or cost is recognized as an adjustment to
yield using the level-yield method over the life of the loans.
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.
Because of uncertainties inherent in the estimation process,
management's estimation of credit losses inherent in the loan
portfolio and the related allowance may change materially in the
near term. Allocations of the allowance may be made for specific
loans, but the entire allowance is available for any loans 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 a similar nature such as the Company's
residential mortgage, consumer, and credit card loans and on an
individual loans basis for other loans. If a loan is impaired, a
portion of the allowance is allocated so that the loan is
reported, net, at the present value of estimated future cash
flows using the loan's existing rate, or loan's market price or
the fair value of the collateral, if the loan is collateral
dependent. Loans are evaluated for impairment when payments are
delayed, typically 90 days or more, or when the internal grading
system indicates a doubtful classification.
Premises and Equipment: Land is carried at cost. Bank premises,
furniture, and equipment is reported net of accumulated
depreciation. Depreciation is accumulated on the straight-line
and accelerated methods over the estimated useful lives of the
related assets.
Mortgage Servicing Rights: The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 122, "Accounting for
Mortgage Servicing Rights", as of January 1, 1995. Subsequent to
adopting this statement, the Company has allocated the cost of
the mortgage servicing rights (MSR) on mortgages originated which
have been sold. The allocation of the total cost of the
mortgages to MSR and the mortgages (without MSR) is based upon
their relative fair values. Servicing rights are then expensed
in proportion to, and over the period of, estimated net servicing
revenues. Impairment is evaluated based upon the fair value of
the rights. Any impairment is reported as a valuation allowance.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
When participating interests in mortgages sold have an average
contractual interest rate, adjusted for normal servicing fees,
that differs from the agreed yield to the purchaser, gains or
losses are recognized equal to the present value of such
differential over the estimated remaining life of such loans.
The resulting excess "servicing fees receivable" or "deferred
servicing revenue" is amortized in proportion to and over the
period of estimated net servicing income.
Employee Stock Ownership Plan (ESOP): Unearned ESOP shares are
reported as a reduction of stockholders' equity in the
consolidated statement of financial condition. As ESOP shares
are committed to be released, unearned ESOP shares are credited,
and compensation is charged, and the amount of the charge is
based on fair values of the committed-to-be-released shares. For
purposes of computing net income per share, ESOP shares that have
been committed to be released are considered outstanding.
Income Taxes: The provision for income taxes is based on an
asset and liability approach. The asset and liability approach
requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and
liabilities.
Earnings per Share: Earnings per share of common stock is based
on weighted-average outstanding shares during the year plus
dilutive common stock equivalents using the treasury stock
method. The weighted average number of shares outstanding for
computing primary earnings per share were 447,158 and 473,921 for
the years ended December 31, 1996 and 1995, respectively. Fully
diluted earnings per share is not presented as it is not
materially different from primary earnings per share for the
Company.
NOTE 2 - SECURITIES
The amortized cost and fair value of securities available-for-
sale and held-to-maturity are as follows at December 31, 1996:
<TABLE>
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available-for-sale
U.S. Treasury $ 500 $ 2 $ - $ 502
U.S. Agency 3,594 4 66 3,532
Equity 388 108 1 495
Corporate 250 - - 250
$ 4,732 $ 114 $ 67 $ 4,779
Held-to-maturity
Municipal $ 78 $ - $ - $ 78
$ 78 $ - $ - $ 78
</TABLE>
<PAGE>
NOTE 2 - SECURITIES (Continued)
Contractual maturities of debt securities at December 31, 1996
were as follows. Actual maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
Securities Securities
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 78 $ 78 $ 1,347 $ 1,347
Due from one to five years - - 2,797 2,742
Due after ten years - - 200 195
Equity securities - - 388 495
$ 78 $ 78 $ 4,732 $ 4,779
</TABLE>
Proceeds from sales of securities available-for-sale during 1996
were $3,744,000 which resulted in gross losses of $415,000.
Securities with an amortized cost of $1,200,000 at December 31,
1996 were pledged to secure certain deposit accounts in excess of
federal deposit insurance limits and for other purposes.
NOTE 3 - MORTGAGE-BACKED SECURITIES
The amortized cost and fair value of mortgage-backed securities
available-for-sale and held-to-maturity are as follows at
December 31, 1996:
<TABLE>
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available-for-sale
FHLMC $ 1,121 $ - $ 27 $ 1,094
FNMA 1,824 - 73 1,751
GNMA 4,362 5 85 4,282
Collateralized mortgage
obligations 2,070 - 61 2,009
$ 9,377 $ 5 $ 246 $ 9,136
Held-to-maturity
FNMA $ 278 $ - $ 8 $ 270
Collateralized mortgage
obligations 779 - 39 740
$ 1,057 $ - $ 47 $ 1,010
</TABLE>
<PAGE>
NOTE 3 - MORTGAGE-BACKED SECURITIES (Continued)
The carrying value of mortgage-backed and related securities are
net of unamortized premiums of $266,000 and unaccreted discounts
of $33,000 at December 31, 1996.
Mortgage-backed securities with an amortized cost of $5,667,000
were pledged to secure certain deposit accounts in excess of
federal deposit insurance limits and for other purposes.
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable at December 31, 1996 are summarized as follows
(dollars in thousands):
<TABLE>
<S> <C>
First mortgage loans
One-to-four-family residential $ 60,209
Other 5,279
Total first mortgage loans 65,488
Home equity lines of credit 4,703
Credit card receivables 1,006
Other lines of credit 286
Auto loans 1,360
Other consumer loans 1,802
Total loans receivable 74,645
Less:
Loans in process 197
Allowance for loan losses 468
Unearned discounts, premiums, and
deferred loan origination fees, net 165
830
$ 73,815
</TABLE>
At December 31, 1996, the Company has no loans that were
classified as impaired. The principal balance of loans for which
the accrual of interest had been discontinued totaled $143,000.
<PAGE>
NOTE 4 - LOANS RECEIVABLE, NET (Continued)
Activity in the allowance for loan losses for the years ended
December 31 is summarized as follows:
<TABLE>
(Dollars in thousands) 1996 1995
<S> <C> <C>
Allowance for loan losses
Balance at beginning of year $ 330 $ 310
Provision charged to income 182 39
Loan charge-offs (44) (19)
Loan recoveries - -
Balance at end of year $ 468 $ 330
</TABLE>
Loans are made, in the normal course of business, to executive
officers and directors of the Company. The terms of these loans,
including interest rates and collateral, are similar to those
prevailing for comparable transactions and management believes
these loans do not involve more than the normal risk of
collectibility. Loans outstanding to related parties at
December 31, 1996 total $105,000.
NOTE 5 - SECONDARY MORTGAGE MARKET OPERATIONS
The Company's financial data with respect to its secondary
mortgage market operations at and for the years ended December 31
is summarized as follows:
<TABLE>
(Dollars in thousands) 1996 1995
<S> <C> <C>
(Dollars in thousands) 1996 1995
Revenues (direct)
Gain on sales of loans $ 87 $ 138
Reduction in unrealized loss
on loans held for sale - 19
Servicing fees on loans sold 150 155
$ 237 $ 312
Identifiable expenses (direct)
Amortization of mortgage servicing
rights $ 32 $ 19
Servicing fees on loans sold 1 2
$ 33 $ 21
Identifiable asset (direct)
Mortgage servicing rights $ 87 $ 88
</TABLE>
<PAGE>
NOTE 5 - SECONDARY MORTGAGE MARKET OPERATIONS (Continued)
Mortgage loans serviced for others are not included in the
accompanying consolidated statement of financial condition.
Mortgage loans serviced are primarily for Federal Home Loan
Mortgage Corporation and Federal National Mortgage Association.
The unpaid principal balances on these loans at December 31 are
summarized as follows:
<TABLE>
(Dollars in thousands) 1996 1995
<S> <C> <C>
Sold with recourse $ 1,583 $ 2,122
Sold without recourse 51,019 53,632
$ 52,602 $ 55,754
</TABLE>
Custodial escrow balances maintained in connection with the
foregoing loan servicing were $533,000 and $685,000 at December
31, 1996 and 1995, respectively.
Activity in net mortgage servicing rights for the years ended
December 31 is summarized as follows:
<TABLE>
(Dollars in thousands) 1996 1995
<S> <C> <C>
Net balance at beginning of year $ 88 $ 24
Adoption of SFAS No. 122 - 78
Additions 31 5
Amortization (17) (19)
Provision for impairment (15) -
Net balance at end of year $ 87 $ 88
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1996 are summarized as
follows (dollars in thousands):
<TABLE>
<S> <C>
Land $ 684
Office buildings and improvements 786
Furniture, fixtures, and equipment 771
2,241
Less accumulated depreciation 855
$ 1,386
</TABLE>
<PAGE>
NOTE 7 - DEPOSIT ACCOUNTS
Deposit accounts at December 31, 1996 are summarized as follows
(dollars in thousands):
<TABLE>
<S> <C>
Negotiable orders of withdrawal (NOW) accounts
Non-interest-bearing $ 1,675
Interest-bearing 4,913
Passbook and club accounts 8,830
Money market deposit accounts 7,053
Certificates of deposit 43,367
$ 65,838
</TABLE>
The aggregate amount of jumbo certificates of deposit with a
minimum denomination of $100,000 was $7,477,000 at December 31,
1996.
At December 31, 1996, the scheduled maturities of certificates of
deposit are as follows:
<TABLE>
<S> <C>
1997 $ 23,744
1998 4,075
1999 5,490
2000 8,304
2001 and thereafter 1,754
$ 43,367
</TABLE>
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK (FHLB)
FHLB advances at December 31, 1996 are summarized as follows
(dollars in thousands):
<TABLE>
Weighted
Interest Amount
Rate Outstanding
<S> <C> <C>
Advances from Federal Home Loan
Bank
Fixed rate due in
1997 5.70% $ 8,000
1998 6.00 10,700
Variable rate
Open line 6.94 1,750
5.96% $ 20,450
</TABLE>
<PAGE>
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK (FHLB) (Continued)
The Company adopted a collateral pledge agreement and agreed to
keep on hand, free of all other pledges, liens, and encumbrances,
first mortgages with unpaid principal balances aggregating no
less than 167% of the outstanding secured advances from the
Federal Home Loan Bank. All stock in the Federal Home Loan Bank
of Chicago is also pledged as additional collateral for advances.
NOTE 9 - INCOME TAXES
The provision (benefit) for income taxes for the years ended
December 31 is summarized as follows (dollars in thousands):
<TABLE>
1996 1995
<S> <C> <C>
Current $ (88) $ 76
Deferred 18 (42)
Change in valuation allowance (32) 2
$ (102) $ 36
</TABLE>
A reconciliation of income taxes computed at the statutory
federal income tax rate to actual income taxes recorded above for
the years ended December 31 is summarized as follows:
<TABLE>
1996 1995
<S> <C> <C>
Statutory federal income tax rate (34.0)% 34.0%
Credit for reduction of taxes previously
accrued for deductions claimed on
the prior federal income tax returns
of the Bank - (20.5)
Tax-exempt income and officers'
life insurance (.2) (8.4)
Other, net (5.0) 0.2
(39.2)% 5.3%
</TABLE>
No state income taxes were recorded in 1996 and 1995 as a result
of excess qualifying U.S. government interest, which is tax-
exempt under Illinois statutes.
<PAGE>
NOTE 9 - INCOME TAXES (Continued)
The provision for income taxes for the year ended December 31,
1995 includes credits of $140,000 for a reduction of income taxes
previously accrued for deductions claimed in prior federal income
tax returns filed by the Bank. These deductions were not
recognized for financial reporting purposes, since the deductions
were based upon issues that had not yet been settled by the IRS
in tax court. The tax credits, along with credits for interest
previously accrued on the prior tax return of $27,000 for the
year ended December 31, 1995, were recorded in income only after
the statute of limitations had expired on the prior returns.
The tax effects of existing temporary differences that give rise
to significant portions of the deferred tax assets and deferred
tax liabilities at December 31, 1996 are summarized as follows
(dollars in thousands):
<TABLE>
<S> <C>
Deferred tax assets
Unrealized loss on securities available-for-sale $ 69
Deferred loan origination fees 38
Bad debt deduction 104
Deferred compensation 69
Unrealized gain on loans held for sale 12
Illinois net operating loss carryforwards 38
330
Valuation allowance (38)
292
Deferred tax liabilities
Depreciation 26
FHLB stock dividends, net 33
Mortgage servicing rights 36
Other 33
128
Net deferred tax assets $ 164
</TABLE>
Management has recorded a valuation allowance to reduce deferred
tax assets to the amount which it estimates will be realized.
The Illinois net operating losses of approximately $814,000
expire in years 2000 through 2011.
The Bank has qualified under provisions of the Internal Revenue
Code which permit it to deduct from taxable income a provision
for bad debts which differs from the provision charged to income
on the financial statements. Tax legislation passed in August
1996 now requires all thrift institutions to deduct a provision
for bad debts for tax purposes based on actual loss experience
and recapture the excess bad debt reserve accumulated in the tax
years after 1987. The related amount of deferred tax liability
which must be recaptured is $172,000 and is payable over a six-
year period beginning no later than 1998. Retained earnings at
December 31, 1996 includes approximately $1,181,000, consisting
of bad debt deductions accumulated prior to 1987, for which no
deferred federal income tax liability has been recognized.
<PAGE>
NOTE 10 - BENEFIT PLANS
Profit-sharing plan:
The Company has a profit-sharing plan which meets the
qualifications of Section 401(k) of the Internal Revenue Code
(Code). Under the Plan, employees 21 years of age or older with
one year of service and 1,000 hours of service during that period
may make pre-tax contributions up to applicable limits under the
Code. Employees are 100% vested in their contributions.
Contributions by the Company are discretionary. Discretionary
employer contributions vest at a rate of 20% per year beginning
on the third year of service by an employee. Contributions
totaled $9,000 and $41,000 in 1996 and 1995, respectively.
Employee stock ownership plan:
The Company has an employee stock ownership plan (ESOP) that
covers employees 21 years of age or older with one year of
service and 1,000 hours of service during that period. The ESOP
borrowed $271,000 from the Company to purchase 33,903 shares of
the Company's stock at $8.00 per share on October 1, 1993. The
Company has agreed to make scheduled contributions to the ESOP
sufficient to service the amount borrowed by the ESOP.
Contributions made to the ESOP totaled $64,000 in 1996 and 1995.
Compensation expense recognized on the ESOP amounted to $107,000
and $113,000 in 1996 and 1995, respectively. Unearned ESOP
shares totaling 11,868, with a carrying amount and approximate
fair value of $95,000 and $188,000, respectively, are reported as
a reduction of stockholders' equity in the consolidated statement
of financial condition at December 31, 1996.
The ESOP shares were as follows:
<TABLE>
1996
<S> <C>
Allocated 15,255
Committed to be released 6,780
Suspense shares 11,868
Total 33,903
</TABLE>
Stock option plans:
The Company has two stock option plans which grant options
to individuals to purchase common stock of the Company at a price
equal to the fair market value at the date of grant, subject to
the terms and conditions of the plans. The term of stock options
will not exceed ten years from the date of grant.
<PAGE>
NOTE 10 - BENEFIT PLANS (Continued)
38,747 shares have been authorized under the incentive stock
option plan for employees, and the options are exercisable on a
cumulative basis in equal installments at a rate of 20% per year
commencing one year from the date of grant. On October 1, 1993,
36,499 options were granted under the plan to employees at an
exercise price of $8.00 per share. 9,687 shares have been
authorized under the stock option plan for outside directors, and
the options are exercisable on the date of grant. On October 1,
1993, 5,861 options were granted under the plan to outside
directors at an exercise price of $8.00 per share. During 1995
and 1996, additional options were granted to employees under the
plan. Information about option grants are as follows:
<TABLE>
Weighted
Average
Number of Exercise
Options Price
<S> <C> <C>
Outstanding at January 1, 1995 39,130 $ 8.000
Granted 1,000 15.625
Exercised (13,518) 8.000
Forfeited (168) 8.000
Outstanding at December 31, 1995 26,444 8.290
Granted 2,400 15.500
Exercised (8,512) 8.000
Forfeited (6,358) 8.000
Outstanding at December 31, 1996 13,974 $ 9.830
</TABLE>
Options granted and exercisable at December 31, 1996 are 10,245
at a weighted average price of $9.06.
The Company accounts for its stock option plan under Accounting
Principle Board Opinion (APBO) No. 25, "Accounting for Stock
Issued to Employees". Accordingly, no compensation expense has
been recognized for the 1996 stock option plan in the financial
statements. Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock Based Compensation", became
effective for the first time in 1996. This statement prescribes
new methods for determining compensation expense under stock
option plans, but allows corporations to use APBO No. 25 if they
provide pro forma information computed under the new standard.
Had compensation cost been computed under the methodology
contained in SFAS No. 123, net income would have been reduced by
approximately $5,580 and $916 for 1996 and 1995, respectively,
with no effect on earnings per share. In future years, the pro
forma effect of not applying the standard is expected to increase
as additional options are granted. The weighted average fair
value of the options granted during 1995 and 1996 is estimated at
$4.49 and $4.58, respectively, on the date of grant using the
Black-Scholes option value model with the following assumptions:
dividend yield of 0, a risk free interest rate of 6.5%, an
assumed forfeiture rate of 0%, and an average life of five years.
<PAGE>
NOTE 10 - BENEFIT PLANS (Continued)
Management recognition and retention plans and trusts:
The Company has two management recognition and retention
plans and trusts (RRPs) as a method of providing officers and
outside directors with a proprietary interest in the Company.
Such awards are to be earned by the individuals, subject to terms
of the RRPs. Stock awarded under the plans will vest on a
cumulative basis in equal installments at a rate of 33-1/3% per
year commencing one year from the date of grant or as specified
by plan trustees. The number of shares purchased by the RRPs
totaled 19,374 shares. On October 1, 1993, 18,471 shares were
granted to officers and outside directors. The costs of the
awards are amortized on the straight-line basis over their three-
year terms. Compensation expense under these plans amounted to
$9,000 and $81,000 in 1996 and 1995, respectively.
Salary continuation agreements:
The Company has entered into approved non-qualified,
unfunded salary continuation agreements with two key executives,
which provide for benefits upon retirement at age 65 or
thereafter. The present value of the estimated liability under
these agreements will be accrued over the remaining periods of
active employment. To provide for the repayment of these
deferred compensation benefits, the Company has purchased life
insurance policies covering the key executives. The proceeds of
cash surrender value of the policies are targeted to provide the
benefits under the deferred compensation agreements. The Company
is the owner and beneficiary of these policies which provide for
death benefits totaling $1,016,000. The cash surrender value of
the policies was approximately $63,000 at December 31, 1996. In
1995, the Company recognized $193,000 in net death benefits on a
policy covering its then president and C.E.O., David L. Beasley.
The estimated liability under these agreements totaled $177,000
at December 31, 1996. Compensation expense under these
agreements amounted to $(21,000) and $183,000 in 1996 and 1995,
respectively. The 1996 expense was reduced by $32,000 due to the
reversal of an accrued liability for two employees no longer with
the Company. The 1995 expense includes a charge of $164,000 to
recognize the Company's liability under the plan to Mr. Beasley's
beneficiary as the benefits became fully vested upon his death.
NOTE 11 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements
administered by federal regulatory agencies. Capital adequacy
guidelines and prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain off-
balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject
to qualitative judgments by regulators about components, risk
weightings, and other factors, and the regulators can lower
classifications in certain cases. Failure to meet various
capital
<PAGE>
NOTE 11 - REGULATORY MATTERS (Continued)
requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five
classifications, including well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized,
and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are
limited, as is asset growth and expansion, and plans for capital
restoration are required. The minimum requirements are:
<TABLE>
Capital to Risk- Tier 1 Capital
Weighted Assets to Adjusted
Total Tier 1 Total Assets
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
/TABLE
<PAGE>
At year-end, the Bank was categorized as well capitalized.
Actual capital levels (in millions) and minimum required levels
were:
<TABLE>
Minimum Required
to be Well
Minimum Required Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
1996
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $7.4 14.3% $4.1 8.0% $5.2 10.0%
Tier 1 (core) capital (to risk-weighted
assets) $6.9 13.4% $2.1 4.0% $3.1 6.0%
Tier 1 (core) capital (to adjusted total
assets) $6.9 7.3% $2.8 3.0% $4.7 5.0%
Tier 1 capital to average assets $6.9 7.6% $3.6 4.0% $4.5 5.0%
Tangible capital (to adjusted total
assets) $6.9 7.3% $1.4 1.5% N/A N/A
</TABLE>
On October 1, 1993, the Bank converted from a federally-chartered
mutual savings and loan association to a federally-chartered
stock savings bank subsidiary of First Financial Bancorp, Inc.
(Company), a newly formed and registered savings bank holding
company. The Company issued 484,338 shares of common stock at
$8.00 per share. The net proceeds, after deducting conversion
expenses of $401,000, were $3,473,000 and were recorded as common
stock and additional paid-in capital in the consolidated
statement of financial condition. The Company used $2,200,000 of
the net proceeds to acquire all the common stock of the Bank.
<PAGE>
NOTE 11 - REGULATORY MATTERS (Continued)
Federal regulations require the Bank to comply with a Qualified
Thrift Lender (QTL) test which requires that 65% of assets be
maintained in housing-related finance and other specified assets.
IF the QTL test is not met, limits are placed on growth,
branching, new investments, FHLB advances, and dividends, or the
institution must convert to a commercial bank charter.
Management considers the QTL test to have been met.
As part of the conversion, the Bank established a liquidation
account for the benefit of eligible depositors as of December 31,
1992, the eligibility record date, who continue to maintain
deposits in the Bank after the conversion. The initial balance
of the liquidation account was equal to the retained earnings of
the Bank as of December 31, 1992. In the unlikely event of a
complete liquidation of the Bank, each eligible account holder
would receive from the liquidation account, a liquidation
distribution based on their proportionate share of the then total
remaining qualifying deposits, prior to any distribution with
respect to the Bank's capital stock.
<PAGE>
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK,
COMMITMENTS, AND CONTINGENCIES
The Company is a party to financial instruments with off-balance-
sheet risk in the normal course of business to meet the financing
needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments
include commitments to extend credit and previously approved
unused lines of credit. Those instruments involve, to varying
degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the statement of financial condition.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and previously approved unused lines
of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for loans
recorded in the statement of financial condition. Financial
instruments whose contract amounts represent credit risk at
December 31, 1996 are summarized as follows (in thousands):
<TABLE>
<S> <C>
Commitment to originate loans; rates range
from 7.375% to 8.305% $ 648
Unused lines of credit 5,120
Standby letters of credit 32
</TABLE>
<PAGE>
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK,
COMMITMENTS, AND CONTINGENCIES (Continued)
At December 31, 1996, the Company serviced mortgage loans with
unpaid principal balances of $1,583,000 which were sold under
agreements for which the buyers have recourse options. The
Company does not anticipate any significant losses as a result of
these agreements.
The deposits of savings institutions are presently insured by the
Savings Association Insurance Fund (SAIF), which, along with the
Bank Insurance Fund (BIF), is one of the two insurance funds
administered by the Federal Deposit Insurance Corporation (FDIC).
Due to the inadequate capitalization of SAIF, a recapitalization
plan was signed into law on September 30, 1996 which required a
special assessment of approximately .65% of all SAIF-insured
deposit balances as of March 31, 1995. The Bank's assessment of
approximately $417,000 is reflected in the 1996 statement of
income.
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Corporations are required to disclose fair value information
about their financial instruments. SFAS No. 107 defines the fair
value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale. The
methods and assumptions used to determine fair values for each
class of financial instruments are presented below:
The estimated fair value for cash and cash equivalents, interest-
bearing deposits with financial institutions, Federal Home Loan
Bank stock, accrued interest receivable, NOW, money market and
savings deposits, short-term borrowings, and accrued interest
payable are considered to approximate their carrying values. The
estimated fair value for securities available-for-sale and
securities held-to-maturity are based on quoted market values for
the individual securities or for equivalent securities. The
estimated fair value for loans is based on estimates of the rate
the Company would charge for similar loans at December 31, 1996
applied for the time period until estimated payment. The
estimated fair value of certificates of deposit is based on
estimates of the rate the Company would pay on such deposits at
December 31, 1996 applied for the time period until maturity.
The estimated fair value of Federal Home Loan Bank advances is
based on the estimate of the rate the Company would pay for such
advances at December 31, 1996 for a time period until maturity.
Loan commitments are not included in the table below as their
estimated fair value is immaterial.
<PAGE>
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
Approximate Estimated
Carrying Fair
(Dollars in thousands) Value Value
<S> <C> <C>
Financial Instrument Assets
Cash on hand and in banks $ 1,652 $ 1,652
Securities available-for-sale 4,779 4,779
Securities held-to-maturity 78 78
Mortgage-backed securities available-for-sale 9,136 9,136
Mortgage-backed securities held-to-maturity 1,057 1,010
Loans receivable, net 73,815 74,005
Federal Home Loan Bank stock 1,148 1,148
Accrued interest receivable 517 517
Financial Instrument Liabilities
NOW, money market, and passbook savings 22,471 22,471
Certificates of deposit 43,367 43,992
Advances from Federal Home Loan Bank 20,450 20,481
Accrued interest payable 230 230
</TABLE>
Other assets and liabilities of the Company that are not defined
as financial instruments such as property and equipment, are not
included in the above disclosures. Also not included are
nonfinancial instruments typically not recognized in financial
statements such as loan servicing rights, customer goodwill, and
similar items.
While the above estimates are based on management's judgment of
the most appropriate factors, there is no assurance that were the
Company to have disposed of these items on December 31, 1996, the
fair values would have been achieved, because the market value
may differ depending on the circumstances. The estimated fair
values at December 31, 1996 should not necessarily be considered
to apply at subsequent dates.
<PAGE>
NOTE 14 - FIRST FINANCIAL BANCORP, INC. (PARENT COMPANY)
Presented below are the parent company's condensed balance sheet,
condensed statements of income, and condensed statements of cash
flows:
<TABLE>
CONDENSED BALANCE SHEET
December 31, 1996
(In thousands)
<S> <C>
ASSETS
Cash and cash equivalents $ 177
Securities available-for-sale 269
Loans receivable for ESOP 119
Investment in subsidiary 6,740
Other assets 34
Total assets $ 7,339
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Other liabilities $ 14
Stockholders' equity
Common stock 51
Additional paid-in capital 3,797
Retained earnings 5,075
Treasury stock (1,350)
Other (248)
Total stockholders' equity 7,325
Total liabilities and
stockholders' equity $ 7,339
</TABLE>
<PAGE>
NOTE 14 - FIRST FINANCIAL BANCORP, INC. (PARENT COMPANY)
(Continued)
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1996 and 1995
(In thousands)
<TABLE>
1996 1995
<S> <C> <C>
Income
Dividends from subsidiary $ - $ 488
Interest income 12 15
Other - 9
Total income 12 512
Expense
Professional fees 14 34
Other 31 39
45 73
Income (loss) before income tax benefit
and equity in undistributed net income
of subsidiary (33) 439
Income tax benefit (11) (17)
Income (loss) before equity in
undistributed net income of subsidiary (22) 456
Equity in undistributed net income (loss)
of subsidiary (136) 192
Net income (loss) $ (158) $ 648
</TABLE>
<PAGE>
NOTE 14 - FIRST FINANCIAL BANCORP, INC. (PARENT COMPANY)
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996 and 1995
(In thousands)
<TABLE>
1996 1995
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (158) $ 648
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities
Equity in undistributed net income of subsidiary 136 (192)
Accretion of discounts on investment securities -
Increase (decrease) in other assets (13) 3
Increase (decrease) in other liabilities - 3
Net cash (used in) provided by operating
activities (35) 462
Cash flows from investing activities
Purchases of securities available-for-sale (106) -
Proceeds from sales of securities available-for-sale -
Proceeds from maturities of securities available-for-sale -
Principal collected on loan for ESOP 54 51
Net cash (used in) provided by investing activities (52) 51
Cash flows from financing activities
Net proceeds from sale of common stock - -
Proceeds from exercised stock options 68 108
Purchase of treasury stock (890) (440)
Net cash used in financing activities (822) (332)
Increase (decrease) in cash and cash equivalents (909) 181
Cash and cash equivalents at beginning of year 1,086 905
Cash and cash equivalents at end of year $ 177 $ 1,086
</TABLE>
<PAGE>
FIRST FINANCIAL BANCORP, INC.
Belvidere, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT AUDITORS 1
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION 2
CONSOLIDATED STATEMENTS OF INCOME 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
First Financial Bancorp, Inc.
Belvidere, Illinois
We have audited the accompanying consolidated statement of
financial condition of First Financial Bancorp, Inc. as of
December 31, 1996, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then
ended. 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 audit. The
consolidated statements of income, stockholders' equity, and cash
flows for the year ended December 31, 1995 of First Financial
Bancorp, Inc. were audited by other auditors whose report dated
January 26, 1996 included an explanatory paragraph which
described the changes in accounting for mortgage servicing rights
in 1995, as described in Note 1 to the consolidated financial
statements.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of First Financial Bancorp, Inc. at December
31, 1996, and the results of their operations and their cash
flows for the year then ended in conformity with generally
accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 24, 1997
<PAGE>
January 8, 1997
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have reviewed and agree with the comments in Item 4 of the
Form 8-K of First Financial Bancorp, Inc. dated January 4, 1996.
LINDGREN, CALLIHAN, VAN OSDOL
& CO., LTD.
Rockford, IL
cc: Mr. Steven C. Derr
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
Parent Subsidiary State of Incorporation
<S> <C> <C>
First Financial Bancorp, Inc. First Federal Savings Bank United States
First Federal Savings Bank First Financial Services Illinois
of Belvidere,
Illinois, Inc.
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
First Financial Bancorp, Inc.
We consent to the incorporation by reference in this Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on December 30, 1993 of our report on the financial
statements included in the Form 10-KSB of First Financial
Bancorp, Inc. for the year ended December 31, 1996.
Crowe, Chizek and Company LLP
Oak Brooks, Illinois
March 20, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 462
<INT-BEARING-DEPOSITS> 1190
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13915
<INVESTMENTS-CARRYING> 1135
<INVESTMENTS-MARKET> 1088
<LOANS> 73815
<ALLOWANCE> 468
<TOTAL-ASSETS> 94515
<DEPOSITS> 65838
<SHORT-TERM> 9750
<LIABILITIES-OTHER> 94515
<LONG-TERM> 10700
<COMMON> 51
0
0
<OTHER-SE> 7274
<TOTAL-LIABILITIES-AND-EQUITY> 97143
<INTEREST-LOAN> 5246
<INTEREST-INVEST> 1157
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6403
<INTEREST-DEPOSIT> 2965
<INTEREST-EXPENSE> 3767
<INTEREST-INCOME-NET> 2454
<LOAN-LOSSES> 182
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2806
<INCOME-PRETAX> (260)
<INCOME-PRE-EXTRAORDINARY> (260)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (158)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
<YIELD-ACTUAL> 7.33
<LOANS-NON> 144
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 240
<ALLOWANCE-OPEN> 330
<CHARGE-OFFS> 44
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 468
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 468
</TABLE>
