<PAGE> 1
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 YEAR ENDED DECEMBER 31, 1997 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 of (I.R.S. Employer Identification
Incorporation or Organization) Number)
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, 1998, there were issued and outstanding 416,452 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 16, 1998, was $8,261,269.
Transitional Small Business Disclosure Format (check one): YES NO X
----- -----
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE> 2
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, 1997, the majority of the Company's assets consisted of the
investment in the Bank. At December 31, 1997, the Company, on an unconsolidated
basis, had total assets of $7.7 million and stockholders' equity of $7.6
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 $565 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. 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, 1997, the Bank
had total consolidated assets of $82.5 million, total deposits of $65.0 million,
FHLB advances of $6.7 million, and stockholders' equity of $7.2 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 counties in
Illinois contiguous to Boone and Winnebago Counties. Management believes that
its offices
<PAGE> 3
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 December, 1997, the unemployment rate was 4.2% for
the Rockford metropolitan statistical area, which includes Boone, Winnebago and
Ogle Counties, compared to 4.4% 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, 1997, the Bank's gross loan portfolio totalled $55.0 million, of
which $32.7 million, or 59.4%, were one- to four-family residential mortgage
loans held for investment. At December 31, 1997, $10.6 million, or 19.3%, 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, 1997 consisted
of $10.0 million of multi-family, commercial real estate, and other mortgage
loans and mortgage loans held for sale, representing 18.2% 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 $12.3 million, or 22.4%, of gross loans at December 31, 1997.
2
<PAGE> 4
Analysis of Loan and Mortgage-Backed Securities Portfolios. The following
table sets forth the composition of the Bank's loan portfolio, including loans
held for sale, and the mortgage-backed securities portfolio, in dollar amounts
and in percentages of the respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
1997 1996
------------------------ --------------------------
Amount Percent Amount Percent
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
First mortgage loans:
1-4 family residential .................................... $ 28,511 51.78% $ 52,417 70.22%
1-4 family residential, purchased ......................... 4,224 7.67 7,792 10.44
Held for sale ............................................. 2,352 4.27 -- 0.00
Other ..................................................... 7,651 13.90 5,279 7.07
---------- ------------ ----------- ------------
Total first mortgage loans .............................. 42,738 77.62 65,488 87.73
Other loans ................................................. 12,324 22.38 9,157 12.27
---------- ------------ ----------- ------------
Total loans receivable .................................. 55,062 100.00% 74,645 100.00%
============ ============
Less:
Undisbursed loan proceeds ................................. -- 197
Unearned discounts, premiums and deferred loan
origination fees, net ................................... 59 165
Allowance for loan losses ................................. 531 468
---------- -----------
Total loans receivable, net ............................. $ 54,472 $ 73,815
========== ===========
Mortgage-backed securities:
FHLMC ..................................................... -- --% -- --%
FNMA ...................................................... -- -- -- --
GNMA ...................................................... -- -- -- --
Collateralized mortgage obligations ....................... -- -- -- --
---------- ------------ ------------ ------------
Total mortgage-backed securities ........................ -- --% -- --%
========== ============ ============
Premiums and discounts, net ............................... --
---------- ------------
Total mortgage-backed securities, net ................... -- --
========== ============
Mortgage-backed securities available for sale (at fair value):
FHLMC ..................................................... -- --% $ 1,094 11.97%
FNMA ...................................................... -- -- 1,751 19.17
GNMA ...................................................... 1,625 100.00 4,282 46.87
Collateralized mortgage obligations ....................... -- -- 2,009 21.99
---------- ------------ ------------ ------------
Total mortgage-backed securities available for sale ..... $ 1,625 100.00% $ 9,136 100.00%
========== ============ ============ ============
Mortgage-backed securities held to maturity (at amortized cost):
FHLMC ..................................................... -- --% $ -- --%
FNMA ...................................................... 236 27.76 271 26.06
GNMA ...................................................... -- -- -- --
Collateralized mortgage obligations ....................... 614 72.24 769 73.94
Total mortgage-backed securities held to maturity ....... 850 100.00% 1,040 100.00%
============ ============
Premiums and discounts, net ............................... 14 17
---------- ------------
Total mortgage-backed securities
held to maturity, net ................................. $ 864 $ 1,057
========== ============
</TABLE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1995 (1) 1994 (2)
-------------------------- ---------------------
Amount Percent Amount Percent
------------ ------------ ------------ -------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
First mortgage loans:
1-4 family residential ..................................... $ 37,536 73.52% $ 35,529 75.69%
1-4 family residential, purchased .......................... 1,605 3.14 1,848 3.94
Held for sale .............................................. 390 0.76 777 1.65
Other ...................................................... 4,960 9.71 3,191 6.80
------------ ------------ ----------- -------
Total first mortgage loans ............................... 44,491 87.14 41,345 88.08
Other loans .................................................. 6,567 12.86 5,594 11.92
------------ ------------ ----------- -------
Total loans receivable ................................... 51,058 100.00% 46,939 100.00%
============ =======
Less:
Undisbursed loan proceeds .................................. 252 216
Unearned discounts, premiums and deferred loan
origination fees, net .................................... 246 252
Allowance for loan losses .................................. 330 310
------------ -----------
Total loans receivable, net .............................. $ 50,230 $ 46,161
============ ===========
Mortgage-backed securities:
FHLMC ...................................................... $ -- --% $ -- --%
FNMA ....................................................... -- -- -- --
GNMA ....................................................... -- -- -- --
Collateralized mortgage obligations ........................ -- -- -- --
------------ ------------ ----------- -------
Total mortgage-backed securities ......................... -- --% -- --%
============ =========== =======
Premiums and discounts, net ................................ -- --
------------ -----------
Total mortgage-backed securities, net .................... $ -- $ --
============ ===========
Mortgage-backed securities available for sale (at fair value):
FHLMC ...................................................... $ 832 9.76% $ -- --%
FNMA ....................................................... 1,295 15.20 --
GNMA ....................................................... 4,376 51.36 --
Collateralized mortgage obligations ........................ 2,018 23.68 -- --
------------ ------------ ----------- -------
Total mortgage-backed securities available for sale ...... $ 8,521 100.00% $ -- --%
============ ============ =========== =======
Mortgage-backed securities held to maturity
(at amortized cost):
FHLMC ...................................................... 135 10.41% $ 889 8.55%
FNMA ....................................................... 302 23.28 1,767 17.01
GNMA ....................................................... -- -- 4,790 46.11
Collateralized mortgage obligations ........................ 860 66.31 2,943 28.33
------------ ------------ ----------- -------
Total mortgage-backed securities held to maturity ........ 1,297 100.00% 10,389 100.00%
============ =======
Premiums and discounts, net ................................ 21 307
------------ -----------
Total mortgage-backed securities
held to maturity, net .................................. $ 1,318 $ 10,696
============ ===========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------
1993
-----------------------------
Amount Percent
------------ ---------
<S> <C> <C>
(Dollars in Thousands)
First mortgage loans:
1-4 family residential ..................................... $ 26,608 62.85%
1-4 family residential, purchased .......................... 2,202 5.20
Held for sale .............................................. 8,443 19.95
Other ...................................................... 619 1.46
------------ ------------
Total first mortgage loans ............................... 37,872 89.46
Other loans .................................................. 4,462 10.54
------------ ------------
Total loans receivable ................................... 42,334 100.00%
============
Less:
Undisbursed loan proceeds .................................. 495
Unearned discounts, premiums and deferred loan
origination fees, net .................................... 196
Allowance for loan losses .................................. 343
------------
Total loans receivable, net .............................. $ 41,300
============
Mortgage-backed securities:
FHLMC ...................................................... $ 1,036 10.21%
FNMA ....................................................... 2,087 20.56
GNMA ....................................................... 4,320 42.56
Collateralized mortgage obligations ........................ 2,708 26.67
------------ ------------
Total mortgage-backed securities ......................... 10,151 100.00%
============
Premiums and discounts, net ................................ 285
------------
Total mortgage-backed securities, net .................... $ 10,436
============
Mortgage-backed securities available for sale (at fair value):
FHLMC ...................................................... $ -- --%
FNMA ....................................................... -- --
GNMA ....................................................... -- --
Collateralized mortgage obligations ........................ -- --
------------ ------------
Total mortgage-backed securities available for sale ...... $ -- --%
============ ============
Mortgage-backed securities held to maturity
(at amortized cost):
FHLMC ...................................................... $ -- --%
FNMA ....................................................... -- --
GNMA ....................................................... -- --
Collateralized mortgage obligations ........................ -- --
------------ ------------
Total mortgage-backed securities held to maturity ........ -- --%
============ ============
Premiums and discounts, net ................................ --
------------
Total mortgage-backed securities
held to maturity, net .................................. $ --
============
</TABLE>
- --------------------------
(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.
<PAGE> 5
Loan Maturity Schedule. The following table sets forth certain
information as of December 31, 1997, 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>
<CAPTION>
Beyond
Within 1-3 3-5 5-10 10-20 20
1 Year Years Years Years Years Years Total
------ ----- ----- ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans (1).................... $ 1,023 $ 5,917 $ 6,484 $ 8,527 $ 4,723 $ 16,604 $ 42,738
Other loans (2)............................. 3,334 1,835 3,223 988 2,944 -- 12,324
------- ------- -------- ------- ------- -------- ---------
Total................................... $ 4,357 $ 7,752 $ 9,707 $ 9,515 $ 7,667 $ 16,064 $ 55,062
======= ======= ======== ======= ======= ======== =========
</TABLE>
- -----------------
(1) Includes loans held for sale at market value.
(2) Within 1 year includes $754,000 in credit card receivables.
The following table sets forth the dollar amount of all gross loans at
December 31, 1997, which have predetermined interest rates and have floating or
adjustable interest rates and which are due after December 31, 1998.
<TABLE>
<CAPTION>
Fixed Adjustable Total
(In Thousands)
<S> <C> <C> <C>
First mortgage loans (1)............................. $31,071 $ 10,644 $ 41,715
Other loans.......................................... 4,987 4,003 8,990
------- --------- ----------
Total.......................................... $36,058 $ 14,647 $ 50,705
======= ========= ==========
</TABLE>
- ----------------------------
(1) Includes loans held for sale at market value.
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.
4
<PAGE> 6
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 fixed-rate mortgage loans with
terms of less than 15 years and has held for sale or sold on a non-recourse
basis fixed-rate mortgage loans with terms greater than or equal to 15 years,
subject to the Bank's interest-rate risk management policies. In 1997, a
significant portion of the company's portfolio fixed-rate mortgage loans were
sold in conjunction with the restructuring of the balance sheet (See
Management's Discussion and Analysis -- Financial Condition). 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-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 $1.2 million
in ARM loans during the year ended December 31, 1997, as compared to $4.1
million for the year ended December 31, 1996.
The Bank's current lending policy generally is to originate and retain
in its portfolio ARM loans. During the year ended December 31, 1997, the Bank
originated $1.2 million in ARM loans, and at December 31, 1997, $10.6 million,
or 19.3%, 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, 1997, such loans represented 17.9% of the Bank's mortgage loan portfolio and
13.9% 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 1998, 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 $0.5 million of commercial and multi-family real estate loans in
1997. At December 31, 1997, the Bank's commercial real estate and multi-family
real estate loan portfolio totalled $7.7 million. The largest loan at December
31, 1997 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.
5
<PAGE> 7
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
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.
The Bank began a controlled re-entry into indirect auto lending during
the year ended December 31, 1994. During 1997 the Bank increased its
participation in the indirect auto market. 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 fixed-term second
mortgage and home improvement loans. As of December 31, 1997, the Bank's
consumer and commercial loan portfolio totalled $12.3 million, or 22.4%, of the
Bank's gross loan portfolio. Of the consumer loan portfolio, home improvement,
second mortgage and home equity loans comprised $6.8 million, or 13.0%, of the
Bank's gross loan portfolio, and other loans (approximately $2.4 million of
which were secured by automobiles) comprised $6.7 million, or 12.1%, of the
Bank's gross loan portfolio.
In addition, the Bank offers unsecured consumer loans through its Visa
and MasterCard programs. 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. Such loans
made up $0.8 million or 1.4% of the gross loan portfolio as of December 31,
1997.
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
6
<PAGE> 8
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 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, 1997, the Bank had no loans in excess of its loan to one
borrower limitation. At December 31, 1997, the maximum dollar amount of loans to
one borrower that the Bank was authorized to make was $1,153,000. 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, 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. Generally 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 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 3/8% 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.
7
<PAGE> 9
At December 31, 1997, the Bank's portfolio of loans serviced for
others totalled $69.2 million. Loan servicing fees and charges for the years
December 31, 1997, 1996 and 1995 were $209,000, $198,000 and $185,000,
respectively.
The table below shows the Bank's loan originations, sales and
repayments of loans for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
----------- ------------ -----------
(In Thousands)
<S> <C> <C> <C>
Loans receivable and loans held for sale (gross):
At beginning of the period........................ $ 74,645 $ 51,058 $ 46,939
--------- ---------- ---------
Originations:
First mortgage loans:
1-4 family residential, portfolio.............. 4,234 21,797 6,466
1-4 family residential, held for sale.......... 12,502 6,492 7,650
Other.......................................... 483 1,115 1,717
--------- ---------- ---------
Total first mortgage loans................... 17,219 29,404 15,833
Other loans....................................... 10,049 6,286 6,453
--------- ---------- ---------
Total originations........................ 27,268 35,690 22,286
Principal repayments................................. (17,827) (5,350) (10,663)
Sale of first mortgage loans......................... (29,614) (6,753) (7,504)
--------- ---------- ---------
Net loan activity................................. (20,173) 23,587 4,119
--------- ---------- ---------
At end of the period................................. $ 54,472 $ 74,645 $ 51,058
========= ========== =========
</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. 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 $300,000 or less may be
approved by the Vice President of Lending. One- to four-family mortgage loans in
excess of $300,000 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
$50,000 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.
8
<PAGE> 10
Mortgage-Backed Securities. The Bank also invests in mortgage-backed
securities. At December 31, 1997, net mortgage-backed securities totalled $2.5
million, or 3.0%, of total assets consisting of $0.6 million of fixed-rate
mortgage-backed securities and $1.9 million of adjustable-rate mortgage-backed
securities. As of December 31, 1997, mortgage-backed securities were insured or
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,
1997, 1996 and 1995, the amortized cost of the Bank's net mortgage-backed
securities portfolio totalled $2.5 million, $10.2 million, and $9.8 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>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1997 1996 1995
---------- ------------ ----------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities (net):
At beginning of the period........................ $ 10,193 $ 9,839 $ 10,696
Purchases......................................... -- 1,753 137
Sales .......................................... (6,954) -- --
Principal repayments (1).......................... (736) (1,335) (818)
Unrealized loss on mortgage-backed
securities available for sale.................. (14) (64) (176)
-------- -------- --------
At end of the period.............................. $ 2,489 $ 10,193 $ 9,839
======== ======== ========
</TABLE>
- ------------
(1) Includes amortization/accretion of premiums/discounts.
9
<PAGE> 11
Set forth below is a table showing the Bank's ARM and fixed-rate
mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
1997 1996 1995
------------------- -------------------- ---------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities, net:
Adjustable rate (1) .................. $ 1,867 75.01% $ 6,995 68.63% $ 7,132 72.61%
Fixed-rate (2) ....................... 622 24.99 3,198 31.37 2,707 27.39
------- ------ ------- ------ ------- ------
Total mortgage-backed securities, net. $ 2,489 100.00% $10,193 100.00% $ 9,839 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
- ---------------------
(1) Includes CMOs with carrying value of $318,000 and $317,000 in 1996 and
1995, respectively.
(2) Includes CMOs with carrying value of $622,000, $2,778,000, and $2,883,000
in 1997, 1996 and 1995, respectively.
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 59 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 60 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, 1997, the Bank had
$41,000 in loans that were 90 days or more delinquent, of which $7,000 were
secured by one- to four-family residences, and $34,000 in consumer loans. At
December 31, 1997, 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.
10
<PAGE> 12
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, 1997, the Bank had $678,000 of loans classified as substandard,
$106,000 in loans classified as doubtful or loss, and $179,000 of loans
classified as special mention in loans 89 days or less. The Bank had $934,000 in
classified assets less than 89 days, which were delinquent at December 31, 1997.
The following table sets forth the amount of outstanding loans
classified at December 31, 1997, in each of the categories listed.
<TABLE>
<CAPTION>
At December 31, 1997
--------------------------------------------
Doubtful Special
Substandard or Loss Mention Total
----------- ------- ------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Loans delinquent 90 days or more:
Accruing....................................................... $ -- $ -- $ -- $ --
Non-accruing:
First mortgage loans:
1-4 family residential.................................... $ -- $ 7 $ -- $ 7
Other loans............................................... -- -- -- --
Other loans.................................................... 4 30 -- 34
-------- ----- ----- -------
Total.................................................. 4 37 -- 41
-------- ----- ----- -------
Total classified loans delinquent 90 days or more......... 4 37 -- 41
-------- ----- ----- -------
Loans delinquent 60-89 days:
Accruing....................................................... $ -- $ -- $ -- $ --
Non-accruing:
First mortgage loans:
1-4 family residential...................................... $ 283 $ 96 $ -- $ 379
Other loans................................................. 61 -- -- 61
Other loans.................................................... 67 10 -- 77
-------- ----- ----- -------
Total....................................................... 411 106 -- 517
-------- ----- ----- -------
Total classified loans delinquent 60-89 days................... 411 106 -- 517
-------- ----- ----- -------
Other accruing classified loans................................... -- -- 179 179
Other non-accruing classified loans............................... 267 -- 0 267
-------- ----- ----- -------
Total other classified loans................................... 267 -- 179 446
-------- ----- ----- -------
Total classified loans................................. $ 682 $ 143 $ 179 $ 1,004
======== ===== ===== =======
</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,
11
<PAGE> 13
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 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 Company streamlined its review of non-performing and delinquent
loans during 1997. Generally, loans are considered non-accrual, and therefore
non-performing, at an earlier point in the delinquency cycle under the new
review process.
The specific valuation allowances established by the Bank for different
categories of loans at the dates shown, were as follows.
<TABLE>
<CAPTION>
At December 31,
----------------------------
1997 1996 1995
----------------------------
(In Thousands)
<S> <C> <C> <C>
Mortgage loans ............................. $ - $ - $ -
Direct consumer loans ...................... 8 13 18
Indirect consumer loans .................... 2 2 9
----- ----- -----
Total .............................. $ 10 $ 15 $ 27
===== ===== =====
</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>
<CAPTION>
At December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans delinquent 90 days or more:
Accruing:
First mortgage loans:
1-4 family residential................ $ -- $ -- $ 196 $ 11 $ 126
Other loans............................. -- -- 3 4 20
-------- ------- ------- -------- -------
Total.............................. -- -- 199 15 146
-------- ------- ------- -------- -------
Non-accruing:
First mortgage loans:
1-4 family residential................ 7 113 82 74 93
Other loans........................... -- 4 -- -- --
Other loans............................. 34 27 118 40 61
-------- ------- ------- -------- -------
Total.............................. 41 144 200 114 154
-------- ------- ------- -------- -------
Loans delinquent 89 days or less:
First mortgage loans:
1-4 family residential................ 380 -- -- -- --
Other loans........................... 289 -- -- -- --
Other loans................................ 115 2 19 -- --
-------- ------- ------- -------- -------
Total non-performing loans......... 784 146 418 129 300
Total real estate owned, net of related
allowance for losses....................... -- -- -- -- --
-------- ------- ------- -------- -------
Total non-performing assets........ $ 825 $ 146 $ 418 $ 129 $ 300
======== ======= ======= ======== =======
Total non-performing loans to net loans
receivable (1)............................. 1.51% 0.20% 0.83% 0.28% 0.73%
</TABLE>
12
<PAGE> 14
<TABLE>
<S> <C> <C> <C> <C> <C>
Total non-performing loans to
total assets............................... 1.00 0.15 0.56 0.18 0.44
Total non-performing loans and REO to
total assets............................... 1.00 0.15 0.56 0.18 0.44
</TABLE>
(1) Net loans receivable includes loans held for sale.
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>
<CAPTION>
At December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans delinquent 60-89 days:
First mortgage loans:
1-4 family residential(1)............... $ 379 $ 33 $ 122 $ 143 $ 427
Other first mortgage loans.............. 61 -- -- -- --
Other loans............................. 77 31 12 15 27
-------- ------- ------- -------- -------
Total loans delinquent 60-89 days..... $ 517 $ 64 $ 134 $ 158 $ 454
======== ======= ======= ======== =======
</TABLE>
(1) Includes loans sold with recourse of $19,000 at December 31, 1994 and
$12,000 at December 31, 1993.
The following table sets forth information with respect to the Bank's
delinquent loans and other problem assets at December 31, 1997.
<TABLE>
<CAPTION>
At December 31, 1997
----------------------------
Balance Number
------- ------
(Dollars In Thousands)
<S> <C> <C>
First mortgage loans:
1-4 family residential and other:
Loans 30-59 days delinquent......................... $ 1,353 32
Loans 60-89 days delinquent......................... 379 9
Loans 90 days or more delinquent.................... 7 3
Other first mortgage loans 60-89 days delinquent.... 61 1
Other loans:
Loans 30-59 days delinquent...................... 151 22
Loans 60-89 days delinquent...................... 77 8
Loans 90 days or more delinquent................. 34 9
Real estate owned...................................... -- --
Loans to facilitate sale of real estate owned.......... -- --
-------- -------
Total delinquent loans and other problem assets........ $ 2,062 84
======== =======
</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
13
<PAGE> 15
to provide for potential losses, there can be no assurance that such losses will
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>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total net loans outstanding (1)............... $ 54,472 $ 73,815 $ 50,233 $ 46,161 $ 41,300
Average loans outstanding (1)................. 63,282 67,621 48,205 41,383 39,815
Allowance balances:
At beginning of period...................... $ 468 $ 330 $ 310 $ 343 $ 169
Provision for losses:
First mortgage loans...................... 10 72 34 1 62
Other loans............................... 78 110 5 3 117
Charge-offs:
Other loans............................... 27 44 19 38 10
Recoveries:
Other loans............................... 2 -- -- 1 5
---------- --------- --------- ---------- ---------
At end of period............................ $ 531 $ 468 $ 330 $ 310 $ 343
========== ========= ========= ========== =========
Allowance for loan losses as a percent of
total loans outstanding at end of period.... 0.97% 0.63% 0.66% 0.67% 0.83%
Net loans charged off as a percent of
average loans outstanding................... 0.04 0.07 0.04 0.09 0.01
Ratio of allowance for loan losses to total
non-performing loans at end of period....... 64.36 320.55 78.95 240.31 114.33
Ratio of allowance for loan losses to total
non-performing assets at end of period...... 64.36 320.55 78.95 240.31 114.33
</TABLE>
(1) Includes loans held for sale.
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation for loan losses by loan category for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------- ------------------------
% 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
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
First mortgage loans:
1-4 family residential .............. $132 59.45% $168 80.66% $133 76.67%
Held for sale ....................... 00 4.27 00 00 00 0.76
Other ............................... 86 13.90 40 7.07 37 9.71
Other loans ............................ 313 22.38 260 12.27 160 12.86
---- ------ ---- ------ ---- ------
Total allowance for loan losses.... $531 100.00% $468 100.00% $330 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
14
<PAGE> 16
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 16.21% for December 1997 exceeded the 4% 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, 1997, the Bank had securities (including FHLB stock) in the aggregate amount
of $17.4 million with a market value of $17.5 million. At December 31, 1997, the
Bank's securities portfolio consisted of $10.8 million of U.S. Government and
federal agency obligations, an increase of $6.8 million since December 31, 1996.
The Bank also invests in ARM mutual funds which invest in FNMA, FHLMC and other
federal agency obligations. At December 31, 1997, the Bank had invested $0.2 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. 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."
15
<PAGE> 17
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, 1997, the market value of the Company's securities
portfolio, including FHLB stock and certificates of deposit, was approximately
$17.5 million.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------
1997 1996 1995
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Securities available for sale (at fair value)
U.S. Treasury notes............................. $ 2,245 $ 502 $ 1,610
FHLB structured notes........................... 477 458 3,990
Other government agency notes................... 8,073 3,074 3,315
FNMA common stock............................... 68 45 37
AMF ARM Mutual Fund (1)......................... 193 181 171
HBI Equity Trust (2)............................ 191 269 129
Corporate debt securities....................... 1,783 250 252
Commercial paper................................ 1,477 -- --
Securities held to maturity (at amortized cost):
U.S. Treasury notes............................. $ -- $ -- $ --
FHLB structured notes........................... -- -- --
Other government agency structured notes........ -- -- --
Other government agency obligations............. -- -- --
Corporate debt securities....................... -- -- --
Municipal securities............................ -- 78 81
Certificates of deposit............................ 2,099 -- 200
FHLB stock......................................... 910 1,148 481
--------- -------- ---------
Total investments............................ $ 17,516 $ 6,005 $ 10,266
========= ======== =========
</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.
16
<PAGE> 18
SECURITIES PORTFOLIO MATURITIES.
The following table sets forth the scheduled maturities, amortized cost and
market values and weighted average yields for the Bank's investment portfolio
and FHLB Stock at December 31, 1997.
<TABLE>
<CAPTION>
At December 31, 1997
---------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years Beyond Ten Years
------------------- ------------------ ------------------ ------------------
Weighted Weighted Weighted Weighted
Market Average Market Average Market Average Market Average
Value Yield Value Yield Value Yield Value Yield
--------- --------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Securities available for sale:
U.S. Treasury notes .......... $ 2,245 5.79% $ -- -- $ -- -- $ -- --
FHLB structured notes ........ -- -- 477 4.55% -- -- -- --
Other government agency ...... 3,199 5.68% 3,264 6.32% 402 6.02% 1,208 6.86%
FNMA common stock ............ -- -- -- -- -- -- -- --
AMF ARM Fund ................. -- -- -- -- -- -- -- --
HBI Equity Trust ............. -- -- -- -- -- -- -- --
Corporate debt securities (1) 1,251 6.16% 531 6.25% -- -- -- --
Commercial paper (2) ........... 1,478 5.91% -- -- -- -- -- --
--------- --------- --------- ---------
Total securities
available for sale ........ 8,173 5.82% 4,272 6.11% 402 6.02% 1,208 6.86%
--------- --------- --------- ---------
<CAPTION>
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- -------- ---------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to maturity .... -- -- -- -- -- -- -- --
--------- --------- --------- ---------
Certificates of deposit ........ 1,999 6.15% 100 6.85% -- -- -- --
FHLB stock ..................... -- -- -- -- -- -- -- --
--------- --------- --------- ---------
Total securities ............... $ 10,172 $ 4,372 $ 402 $ 1,208
========= ========= ========= =========
<CAPTION>
At December 31, 1997
---------------------------------------------
Total Investment Securities
---------------------------------------------
Average Weighted
Life in Amortised Market Average
Years Cost Value Yield
------- --------- ------- --------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Securities available for sale:
U.S. Treasury notes ............ 0.68 $ 2,241 $ 2,245 5.79%
FHLB structured notes .......... 2.28 500 477 4.55%
Other government agency ........ 3.63 8,056 8,073 6.14%
FNMA common stock .............. -- 4 68 --
AMF ARM Fund ................... -- 193 193 5.86%
HBI Equity Trust ............... -- 105 191 --
Corporate debt securities (1) .. 1.20 1,782 1,783 6.18%
Commercial paper (2) ........... 0.26 1,478 1,477 5.91%
------- -------
Total securities
available for sale ............ 2.45(3) 14,359 14,507 6.01%(4)
------- -------
<CAPTION>
Average Weighted
Life in Carrying Market Average
Years Value Value Yield
------- ------- ------ --------
<S> <C> <C> <C> <C>
Securities held to maturity .... -- -- -- --
------- -------
Certificates of deposit ........ -- 2,099 2,099 6.13%
FHLB stock ..................... -- 910 910 7.00%
------- -------
Total securities ............... $17,368 $17,516
======= =======
</TABLE>
(1) Includes corporate debt securities issued by U.S. Steel Corporation
($250,000 in book value and $250,000 in market value), Lehman Brothers
Corporation ($498,000 in book value and $499,000 in market value), Lockheed
Martin Corporation ($503,000 in book value and $503,000 in market value)
and Commonwealth Edison Corporation ($531,000 in book value and $531,000 in
market value).
(2) Includes commercial paper issued by Paine Webber Group ($988,000 in book
value and $988,000 in market value) and AT&T Capital ($489,000 in book
value and $490,000 in market value).
(3) Includes only U.S. Government and agency obligations and structured notes;
corporate and commercial paper; the AMF ARM Mutual Fund is a daily
investment deposit, FHLB Stock, HBI Equity Trust, and FNMA Common Stock do
not have fixed maturities.
(4) The weighted average yield does not include the FNMA Common Stock and HBI
Equity Trust.
17
<PAGE> 19
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 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>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1996 1995
-------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Deposits........................................... $ 296,079 $ 252,238 $ 130,730
Withdrawals........................................ 297,384 255,617 127,030
---------- --------- ---------
Net increase (decrease) before interest credited. (1,305) (3,379) 3,700
Interest credited.................................. 3,017 2,987 2,733
---------- --------- ---------
Net increase (decrease) in deposit accounts...... $ 1,712 $ (392) $ 6,433
========== ========= =========
</TABLE>
18
<PAGE> 20
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>
<CAPTION>
Balance Balance
at % at %
December 31, of Total Incr. December 31, of Total Incr.
1997 Deposits (Decr.) 1996 Deposits (Decr.)
----------- -------- ------- ------------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Club accounts....................... $ 26 0.04% $ (4) $ 30 0.05% --
Non-interest-bearing NOW accounts... 4,371 6.47 2,696 1,675 2.54 (458)
NOW accounts........................ 4,826 7.14 (87) 4,913 7.46 (455)
Passbook accounts................... 8,739 12.94 (61) 8,800 13.37 (681)
Money market deposit accounts....... 6,760 10.01 (293) 7,053 10.71 (199)
Certificates of deposit which mature:
within 12 months................ 20,058 29.69 (3,686) 23,744 36.06 (1,740)
within 12-36 months............. 22,251 32.94 12,686 9,565 14.53 2,523
beyond 36 months................ 519 0.77 (9,539) 10,058 15.28 618
------- -------- ------ ------- -------- -------
Total......................... $67,550 100.00% $1,712 $65,838 100.00% $ (392)
======= ======== ====== ======= ======== =======
<CAPTION>
Balance Balance
at % at
December 31, of Total Incr. December 31,
1995 Deposits (Decr.) 1994
------------ --------- ------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Club accounts....................... $ 30 0.05% $ -- $ 30
Non-interest-bearing NOW accounts... 2,133 3.22 580 1,553
NOW accounts........................ 5,368 8.11 (23) 5,391
Passbook accounts................... 9,481 14.31 (1,717) 11,198
Money market deposit accounts....... 7,252 10.95 2,537 4,715
Certificates of deposit which mature:
within 12 months................ 25,484 38.48 3,824 21,660
within 12-36 months............. 7,042 10.63 (3,193) 10,235
beyond 36 months................ 9,440 14.25 4,425 5,015
------- ------- ------- --------
Total......................... $66,230 100.00% $ 6,433 $ 59,797
======= ======= ======= ========
</TABLE>
19
<PAGE> 21
Deposit Portfolio. Deposit accounts in the Bank as of December 31,
1997, were represented by the various types of deposit programs described below.
<TABLE>
<CAPTION>
Weighted Percent
Average of Total
Interest Account Deposit
Rate Term Deposits Balances Accounts
-------- ---- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
0.00% None Non-interest-bearing NOW accounts $ 4,371 6.47%
1.00 None NOW accounts 4,826 7.14
1.75 None Passbook and club accounts (1) 8,765 12.98
4.21 None Money market deposit accounts 6,760 10.01
Certificates of Deposit (1)
---------------------------
4.72 1-5 months Fixed term, fixed-rate 453 0.67
4.61 6-11 months Fixed term, fixed-rate 6,201 9.18
5.14 12-17 months Fixed term, fixed-rate 4,599 6.80
5.00 18 months Fixed term, variable rate 119 0.18
4.16 18-23 months Fixed term, fixed-rate 40 0.06
4.59 24-29 months Fixed term, fixed-rate 310 0.46
4.61 30-35 months Fixed term, fixed-rate 2,163 3.20
6.02 36-47 months Fixed term, fixed-rate (3) 7,488 11.09
4.83 48-51 months Fixed term, fixed-rate 14 0.02
6.67 60 months Fixed term, fixed-rate 12,452 18.43
or greater
5.73 Various Negotiated Jumbo (3) 8,989 13.31
------ -------- -------
4.36% (2) $ 67,550 100.00%
====== ======== =======
</TABLE>
- ------------------
(1) IRA accounts are generally offered throughout all terms stated above with a
balance outstanding of $7.7 million.
(2) Includes the effect of non-interest-earning demand accounts totalling
$4.4 million.
(3) With respect to $8.0 million in deposit amounts, includes a one-time
option to increase rate within the 36 month term.
Certificates of Deposit by Rates. The following table sets forth the
certificates of deposit classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
---- ---- ----
Rates: (In Thousands)
- ------
<S> <C> <C> <C>
3.99% or less...................................... $ 211 $ 3,274 $ 4,010
4.00% - 5.99%...................................... 25,593 24,084 17,149
6.00% - 7.99%...................................... 16,976 15,861 20,610
8.00% - 8.75%...................................... 48 148 197
---------- --------- ---------
Total........................................... $ 42,828 $ 43,367 $ 41,966
========== ========= =========
</TABLE>
20
<PAGE> 22
Certificates of Deposit Maturity Schedule. The following table sets
forth the amount and maturities of certificates of deposit at December 31, 1997.
<TABLE>
<CAPTION>
Amount Due
---------------------------------------------------------------------------
One Year 1-2 2-3 3-4 4-5 Five and more
or Less Years Years Years Years Years Total
------- ----- ----- ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Rate
3.99% or less....................... $ 211 -- -- -- -- -- $ 211
4.00 - 5.99%........................ 17,811 4,857 2,045 537 343 -- 25,593
6.00 - 7.99%........................ 2,036 2,583 11,248 981 128 -- 16,976
8.00 - 8.75%........................ -- -- -- -- 48 -- 48
------- ------- -------- ------- ------- ------- --------
Total............................ $20,058 $ 7,440 $ 13,293 $ 1,518 $ 519 $ -- $ 42,828
======= ======= ======== ======= ======= ======= ========
</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, 1997.
<TABLE>
<CAPTION>
Maturity Period Amount
--------------- ------
(In Thousands)
<S> <C>
Three months or less.......................................... $ 2,643
Over three through six months................................. 3,265
Over six through 12 months.................................... 300
Over 12 months................................................ 2,781
-------
Total................................................... $ 8,989
=======
</TABLE>
- --------------
(1) With respect to $8.0 million in deposit amounts, includes one-time option to
increase rate within the 36 month term.
Securities with a net amortized cost of $8.2 million were pledged to
secure certain deposit accounts in excess of federal deposit insurance limits at
December 31, 1997. Of the $9.0 million of large certificates of deposit, $4.6
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, 1997, the Bank had $6.7
million in advances from the FHLB.
21
<PAGE> 23
FHLB ADVANCES. The following table sets forth certain information
regarding FHLB advances taken by the Bank during the periods indicated.
<TABLE>
<CAPTION>
During the Year Ended December 31,
---------------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Weighted average rate paid......................... 6.03% 5.84% 6.24%
Maximum balance.................................... $ 21,450 $ 23,150 $ 3,500
Average balance (1)................................ 12,515 13,746 503
</TABLE>
- -----------------
(1) Calculated using average daily balances.
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, 1997, FFSI had $766,154 in total assets, $31,190 in
total liabilities and $734,964 in stockholders' equity. For the years ended
December 31, 1997, 1996 and 1995, FFSI had net income of $3,985, $6,104 and
$10,725, respectively. There has been no lending activity between FFSI and the
Bank for the years ended December 31, 1997, 1996 and 1995.
PERSONNEL. As of December 31, 1997, the Bank had 28 full-time
employees, 9 part-time employees and 3 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 the Bank report their income on a calendar
year basis using the accrual method of accounting and are subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.
In August 1996, legislation was enacted that repeals the reserve method
of accounting used by many thrifts to calculate their bad debt reserve for
federal income tax purposes. As a result, the Bank is required to recapture that
portion of the reserve that exceeds the amount which could have been deducted
under the experience method for post-1987 tax years, and now account for bad
debts for federal income tax purposes on the same basis as commercial banks. The
recapture will occur over a six-year period beginning in 1998 since the
institution meets certain residential lending requirements. The legislation did
not have a material impact on the Company or the Bank.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amounts of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses
22
<PAGE> 24
on loans (Excess), such Excess may not, without adverse tax consequences, be
utilized for the payment of cash dividends or other distributions to a
shareholder (including distributions on redemption, dissolution, or liquidation)
or for any other purpose (except to absorb bad debt losses). As of December 31,
1997, the Company's Excess for tax purposes totaled approximately $1.2 million.
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.
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 1997 was approximately $9,000.
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, 1997 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
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. It requires that
all items that are required
23
<PAGE> 25
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 requires that
public business enterprises report financial and descriptive information about
reportable operating segments and report selected information about operating
segments in interim financial reports issued to shareholders. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years is to be
restated.
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
September 1997. 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, 1997, was $31,000.
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.
24
<PAGE> 26
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, 1997, First Federal's lending limit under this restriction was $1.2
million. The Bank is in compliance with the loans-to-one-borrower limit.
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
25
<PAGE> 27
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.
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, 1997, the Bank had
$228,000 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, 1997, the Bank had tangible capital of $7.2 million, or
8.6% of adjusted total assets, which is approximately $6.0 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including 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, 1997,
First Federal had no intangibles which were subject to these tests.
At December 31, 1997, First Federal had core capital equal to $7.2
million, or 8.6% of adjusted total assets, which is $4.7 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
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<PAGE> 28
December 31, 1997, First Federal had no capital instruments that qualify as
supplementary capital and $521,000 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, 1997.
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, 1997, First Federal had total capital of $7.7 million
(including $7.2 million in core capital) and risk-weighted assets of $49.9
million (including $2.7 million in converted off-balance sheet assets); or total
capital of 15.4% of risk-weighted assets. This amount was $3.7 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.
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<PAGE> 29
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").
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
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<PAGE> 30
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 specified liquid assets equal to a monthly
average of not less than a specified percentage (currently 4%) of its net
withdrawable deposit accounts plus 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. Penalties may be imposed upon institutions for violations of
either liquid asset ratio requirement. At December 31, 1997, First Federal was
in compliance with these requirements, with an overall liquid asset ratio of
16.21% and a short-term liquid assets ratio of 13.09%.
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.
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<PAGE> 31
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, 1997, the Bank maintained 73.7% 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. The OTS assesses the CRA performance of a savings institution under
lending, service and investment tests, and based on such assessment, assigns 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.
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<PAGE> 32
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."
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, 1997, 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."
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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, 1997, First Federal had $.9 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 dividends on FHLB stock have averaged 6.5% and were 6.8% for 1997.
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
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, 1997, dividends paid by the FHLB of
Chicago to the Bank totaled $66,000, which constitute a $9,000 increase from the
amount of dividends received in 1996.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below is information, as of December 31, 1997, 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>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Steven C. Derr 49 President and Chief Executive Officer
Patricia J. McCoy 45 Secretary
Keith D. Hill 26 Treasurer, Chief Financial Officer
Donald J. Kucera 59 Vice President
Robert W. Opperman 36 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.
<TABLE>
<CAPTION>
Net Book Value
of Property or
Date of Leasehold
Leased or Originally acquired Lease Improvements
Location Owned or Leased Expiration At 12/31/97
- -------- --------- ------------------- ---------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
Full Service Offices
121 East Locust Street
Belvidere, Illinois 61008 Owned 1965 -- $ 537
1021 North State Street
Belvidere, Illinois 61008 Leased (1) 1978 December 31, 1998 (1) 346
Full Service Office under
Construction (2)
7077 Perry Creek Parkway
Rockford, Illinois 61107 Owned 1996 -- 952
Administrative Office
217 South State Street
Belvidere, Illinois 61008 Leased 1991 April 26, 1998 56
</TABLE>
- ------------------------
(1) Leased from FFSI, the Bank's wholly owned subsidiary.
(2) Land purchased for future full service Branch.
(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)
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<PAGE> 35
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, 1997.
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 1997 to a
vote of security holders.
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<PAGE> 36
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
From its initial public offering on October 1, 1993 until March 16,
1998, the Company traded on the NASDAQ Small Cap Market under the symbol FFBI.
More restrictive listing requirements implemented in 1998 required the Company
to delist from the Nasdaq Small Cap Market. As of March 17, 1998, the Company
trades on the Over the Counter Bulletin Board system under the symbol FFBI. The
following table sets forth the high and low sales price for the periods
indicated. These prices do not represent actual transactions and do not include
retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter............................... $16.50 $15.50 $16.25 $15.50
Second Quarter.............................. 18.75 15.50 16.25 15.50
Third Quarter............................... 19.50 18.13 16.13 15.50
Fourth Quarter.............................. 21.00 19.00 16.00 15.50
</TABLE>
At December 31, 1997, the Company had 180 holders of record of its common stock
and, the Company estimates, approximately 300 to 325 beneficial owners of its
common stock. The Company paid no cash dividends on its common stock during 1997
and 1996.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
The Bank invests primarily in one-to four-family mortgage loans, 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, gains on sales of loans and sales of non-insured deposit
products, and non-interest expense, such as compensation and benefits, occupancy
and equipment, data processing, federal deposit insurance premiums, loan
origination and servicing, marketing expenses, professional fees, and other
operating expenses.
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<PAGE> 37
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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
The following discussion reviews the Company's financial condition and results
of operations and should be read in conjunction with the Consolidated Financial
Statements under Item 7 of this filing. When used in this filing 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. Factors
which could have a material adverse affect on the operations and future
prospects of the Company and the subsidiaries include, but are not limited to,
changes in: interest rates; general economic conditions; legislative/regulatory
changes; monetary and fiscal policies of the U.S. Government, including
policies of the U.S. Treasury and the Federal Reserve Board; the quality and
composition of the loan or securities portfolios; demand for loan products;
deposit flows; competition; demand for financial services in the Company's
market areas; and accounting principles, policies, and guidelines. 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.
FINANCIAL CONDITION
During the second quarter of 1997, the Company took actions to restructure its
balance sheet for the purposes of reducing interest rate risk, improving the
Company's net interest margin through the redeployment of funds, and
diversifying the Company's balance sheet. As a result of those actions, the
Company realized losses totaling $286,000 net of taxes during the period. The
restructuring included the sale of substantially all of the Company's fixed rate
one- to four-family mortgage loans and the majority of its mortgage-backed
securities and collateralized mortgage-backed obligations. In addition, $7.5
million in fixed rate, fixed term FHLB advances were prepaid.
At December 31, 1997, total assets of the Company were $82.7 million as compared
to $94.5 million at December 31, 1996, a decrease of $11.8 million or 12.5%.
Interest-earning deposits held in other financial institutions increased $2.9
million to $4.1 million at December 31, 1997 from $1.2 million at December 31,
1996. Securities available for sale and held to maturity increased $9.6 million,
or 198.7%, to $14.5 million at December 31, 1997 from $4.9 million at December
31, 1996. The increase in available for sale securities was the result of the
balance sheet restructuring in which assets were sold in the amount of $26.6
million, while FHLB advances in the amount of $13.8 million were repaid
throughout the course of 1997. The excess proceeds were invested in short term
securities and certificates of deposit for future deployment in the loan
portfolio. Mortgage-backed securities available for sale and held to maturity
decreased $7.7 million, or 75.6%, to $2.5 million at December 31, 1997. The
primary reason for the decrease was the sale of $7.0 million of mortgage-backed
securities in conjunction with restructuring the balance sheet. The Company held
first mortgage loans for sale at December 31, 1997 totaling $2.4 million
compared to none at December 31, 1996. Net mortgage loan originations in the
held for sale portfolio were $12.2 million for the year ended December 31, 1997,
as compared to $6.5 million for the year ended December 31, 1996. Proceeds from
the sales of loans held for sale were $9.9 million for the year ended December
31, 1997, as compared to $6.9 million for the year ended December 31, 1996. The
increases reflect the development of a favorable rate environment during 1997 in
addition to the resumption of the sale of 15 year fixed rate mortgage loans.
Loans receivable decreased $21.7 million, or 29.4%, to $52.1 million at December
31, 1997, from $73.8 million at December 31, 1996. The primary event driving
this decrease was the aforementioned sale of a major portion of the Company's
fixed rate mortgage loan portfolio. Fixed rate mortgage loans with a carrying
value of $20.0 million were sold thereby reducing loans receivable
substantially. In addition, scheduled payments and prepayments on portfolio
loans accelerated in the low interest rate environment present during 1997. As
rates declined through the year, borrowers owning adjustable rate and balloon
loans sought to refinance into low fixed rate, fixed term loan products.
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<PAGE> 38
Much of the Company's remaining one- to four-family mortgage portfolio consisted
of loans of this nature. Partially offsetting the decrease in mortgage loans,
the Company's consumer and commercial loan holdings grew by $3.2 million, or
34.6%, during 1997, to $12.3 million. The Company has been able to pursue its
strategy of diversifying the loan portfolio as a result of attracting lending
staff with experience in many areas of lending.
As the Company has diversified into higher yielding lending products such as
consumer and commercial loans, non-performing assets have increased to $825,000
at December 31, 1997 from $143,000 at December 31, 1996. In addition to the
higher concentration of non-mortgage loans in the loan portfolio, the Company
streamlined its review of non-performing and delinquent loans during 1997.
Generally, loans are considered non-accrual, and therefore non-performing, at an
earlier point in the delinquency cycle under the new review process. Total
non-performing assets represented 1.00% of assets at December 31, 1997, as
compared to 0.15% of assets at December 31, 1996. The increase is the result of
the portfolio composition shift, the implementation of more stringent evaluation
criteria of delinquent loans during 1997 and a general acceptance of bankruptcy
by borrowers nationwide as evidenced by the record number of filings in 1997.
The Company had no real estate owned at December 31, 1997 and 1996.
Premises and equipment increased $0.5 million or 36.4% to $1.9 million at
December 31, 1997 from $1.4 million at December 31, 1996. The increase relates
to the construction of the Company's newest full-service facility in Rockford,
Illinois which is scheduled to open in the Spring of 1998. The facility is the
Company's first de novo branch since 1976.
Deposit accounts increased $1.8 million, or 2.7%, to $67.6 million at December
31, 1997, from $65.8 million at December 31, 1996. Increases in
non-interest-bearing deposits outpaced the decrease in certificates of deposit
during 1997. Certificates of deposit were de-emphasized for the purpose of
market share acquisition as the Company focused on the acquisition of demand
deposits. The Company implemented a Totally Free Checking campaign in its market
during the first quarter of 1997 in an effort to recapture market share and
increase cross sales opportunities. At December 31, 1997, advances from the FHLB
of Chicago totaled $6.7 million compared to $20.5 million outstanding at
December 31, 1996. In addition to the $7.5 million in advances repaid as a
result of the balance sheet restructuring program, scheduled maturities of $6.3
million reduced the outstanding advances.
Stockholders' equity totaled $7.6 million, or 9.23% of total assets, at December
31, 1997, an increase of $0.3 million. Net income of $0.1 million, increases in
the market value of securities available for sale of $0.2 million, the release
of earned ESOP shares and the amortization of stock benefit plans of $0.1
million were partially offset by repurchases of treasury stock of $0.2 million
as the Company repurchased an additional 9,727 shares of stock in the open
market during 1997.
RESULTS OF OPERATIONS-YEAR ENDED DECEMBER 31, 1997
GENERAL.
Net income for the year ended December 31, 1997 was $124,000, as compared to a
net loss of $158,000 for the year ended December 31, 1996. Exclusive of the
aforementioned one time charges related to restructuring the Company's balance
sheet and one time charges related to the Company's core processing vendor
conversion of $52,000 net of tax, net income would have been $462,000 for the
year ended December 31, 1997. One time charges in 1996 related to the
disposition of low yielding securities and the Federal Deposit Insurance
Corporation's Savings Association Insurance Fund ("FDIC SAIF") assessment, which
totaled $551,000. After adjusting for these non-recurring events, earnings for
the year ended December 31, 1997 increased 17.6% to $462,000 from $393,000 for
the year ended December 31, 1996.
INTEREST INCOME. Total interest income decreased $0.1 million or 1.0%, to $6.3
million for the year ended December 31, 1997, from $6.4 million for the year
ended December 31, 1996. A decrease in average earning assets of $3.2 million,
or 3.7%, to $84.9 million for the year ended December 31, 1997 from $88.1
million for the year ended December 31, 1996 was partially offset by a 21 basis
point increase in the yield on earning assets to 7.47% for the year ended
December 31, 1997 from 7.26% for the year ended December 31, 1996. Yield
increases were the result of several factors including: i.) the diversification
in the loan portfolio from mortgages to higher yielding consumer and commercial
loans; ii.) the reinvestment of securities sales proceeds from 1996 into fixed
rate securities with higher
37
<PAGE> 39
coupons than the disposed adjustable rate securities; and iii.) teaser rates
expiring on the credit card portfolio in the first quarter of 1997. The volume
driven decrease in total interest income was most notable in first mortgage
loans where average balances decreased $6.8 million to $53.0 million primarily
as the result of the sale of $20.0 million in fixed rate mortgage loans as a
component of restructuring the balance sheet. The Company also recorded a
significant volume-driven decrease in interest income as much of the Company's
mortgage-backed securities holdings were liquidated in conjunction with the
restructuring. The loan portfolio continued its pattern of diversification at an
accelerated pace in 1997 as significant mortgage-related holdings were divested
and personnel with diversified lending backgrounds were added. As a result,
interest income on first mortgage loans decreased $453,000 while interest income
on other loans increased $298,000.
INTEREST EXPENSE. Total interest expense for the year ended December 31, 1997
remained unchanged at $3.8 million. A decrease in interest on FHLB advances and
savings accounts was partially offset by an increase in interest on certificates
of deposit. The decrease in interest on FHLB advances for the year ended
December 31, 1997 was the result of lower average balances as $7.5 million in
FHLB advances were repaid during the balance sheet restructuring. The decrease
in interest expense on savings accounts was the result of a 25 basis point
reduction in rates at the beginning of 1997 as market conditions were favorable
for this pricing structure. Partially offsetting the aforementioned decreases
was an increase in the interest expense on certificates of deposit of $64,000
primarily as a result of higher average balances.
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, 1997, unchanged from
December 31, 1996. Effectively, volume driven decreases were substantially
offset by yield/cost driven increases. The Company's net interest spread
increased 10 basis points to 2.61% for the year ended December 31, 1997 from
2.51% for the same period in 1996. Additionally the Company's net interest
margin increased 6 basis points to 3.05% for the year ended December 31, 1997
from 2.99% for the year ended December 31, 1996.
PROVISION FOR LOSS ON LOANS. The Company recorded a provision for loss on loans
of $88,000 for the year ended December 31, 1997, a decrease of $94,000, or
51.6%, from $182,000 for the year ended December 31, 1996. Much of the 1996
provision was driven by the Company's diversification into credit card lending.
During 1997, provisions for losses on credit card receivables were reduced as
average outstanding receivables decreased and chargeoffs registered less than
0.25% of average balances for the year.
NON-INTEREST INCOME. Non-interest income increased $199,000, or 216.3%, to
$291,000 for the year ended December 31, 1997, from $92,000 for the year ended
December 31, 1996. Exclusive of non-recurring losses on sales of securities of
$240,000 and $415,000 during 1997 and 1996, respectively, and non-recurring
losses on sales of loans in 1997 of $157,000, non-interest income increased
$181,000 or 35.7%. Losses on sales of securities and loans during 1997 were the
result of the aforementioned balance sheet restructuring plan while the 1996
securities losses were the result of the sale of dual index floating rate agency
notes purchased in 1993. The $181,000 recurring non-interest income increase was
primarily the result of the gain on the maturity of a unit investment trust of
$69,000, the increase in gains on sales of loans of $46,000 and a $35,000
increase in fees on deposit accounts as the Totally Free Checking program
increased fee income opportunities.
NON-INTEREST EXPENSE. Non-interest expense decreased $0.2 million, or 6.7%, to
$2.6 million for the year ended December 31, 1997, from $2.8 million for the
year ended December 31, 1996. Exclusive of the $417,000 FDIC SAIF assessment in
1996, and core data processing conversion charges of $79,000 in 1997,
non-interest expense increased $0.1 million, or 6.3%. Among the increases in
non-interest expense were compensation and benefits increases of $153,000 as a
result of year over year staffing level increases and mortgage loan origination
activity, increases in other expenses of $87,000 relating to prepayment of FHLB
advances, operational costs of increased transaction account volumes and the
deployment of automated teller machines, a $45,000 increase in marketing and
promotion driven by direct mail marketing campaigns and a $44,000 increase in
occupancy and equipment as the Company's commitment to technological
improvements continued in 1997. Partially offsetting some of the aforementioned
increases in non-interest expense was a $123,000 decrease in federal deposit
insurance premiums as the FDIC SAIF was recapitalized in 1996 and assessment
rates were subsequently reduced as well as $71,000 decrease in loan origination
and servicing primarily as commissions paid on loans originated declined due to
the volume decreases from 1996 to 1997.
38
<PAGE> 40
INCOME TAXES. For the year ended December 31, 1997, income tax expense was
$48,000 compared to an income tax benefit of $102,000 for the year ended
December 31, 1996. The increase from 1996 to 1997 in income tax provision
resulted from the increase in net income before taxes of $432,000, to $172,000
for the year ended December 31, 1997, from ($260,000) for the year ended
December 31, 1996.
YEAR 2000. In 1997, the Company began the process of assessing its data
processing systems' abilities to adequately handle date sensitive information
leading up to and following January 1, 2000. Financial institutions, such as the
Company, are particularly affected by the ability of computers and software to
read dates properly. Little internal programming outside of off-the-shelf word
processing and spreadsheet documents is undertaken internally by the Company.
However, the Company is heavily reliant upon its data processing service bureau
and other vendors of ancillary systems to achieve compliance with their various
products. The Company's exposure from commercial customers is limited due to the
small base of commercial borrowers the Company currently serves. With regard to
systems compliance, the Company has identified and contacted the vendors it
deals with to determine the status of their product's compliance or schedule to
achieve compliance. Management has designated a committee to track the progress
of year 2000 compliance of vendors and to identify those products that may need
to be replaced in the event the vendor falls behind their remediation schedule
or notifies the Company of the intent not to make the product compliant. The
Board of Directors is updated on a quarterly basis of the status of the
committee and the project. Based on responses received to date, the Company
believes that its vendors are actively addressing the year 2000 problem. Testing
of systems and hardware compliance is expected to be performed by current staff
and costs associated with replacement of software and hardware are not expected
to have a material impact on the Company's financial position or its results of
operations.
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, 1997, the Bank was in compliance with these capital
requirements, summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Percent
of Adjusted
Amount Assets
------ ------
<S> <C> <C>
Tangible Capital $7,159 8.63%
Tangible Capital Requirement 1,244 1.50%
------ -----
Excess $5,915 7.13%
====== =====
Core Capital $7,159 8.63%
Tangible Capital Requirement 2,488 3.00%
------ -----
Excess $4,671 5.63%
====== =====
Total Risk-Based Capital $7,668 15.38%
Risk-Based Capital Requirement 3,988 8.00%
------ -----
Excess $3,680 7.38%
====== =====
</TABLE>
39
<PAGE> 41
The differences between the Bank's stockholders' equity calculated in accordance
with generally accepted accounting principles (GAAP) and regulatory capital at
December 31, 1997 are summarized as follows (in thousands):
<TABLE>
<S> <C>
GAAP Capital $7,190
Net Unrealized Gain on Securities Available for Sale (31)
------
Total Tangible and Core Capital 7,159
General Loan Loss Allowances 521
Excess Mortgage Servicing Rights (12)
------
Total Risk-Based Capital $7,668
======
</TABLE>
As a result of the issuance of regulations by the OTS regarding regulatory
restrictions and enforcement actions 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 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 regulation was modified in 1997
to expand the eligibility of certain assets for treatment as liquid assets and
to allow the use of actual quarter end net deposit and short term borrowings as
the base upon which the percentage is calculated in an effort to streamline the
regulation. Additionally the required ratio was lowered to 4.0%, its statutory
minimum. The Bank's liquidity ratio was 16.2% at December 31, 1997 and 6.2% at
December 31, 1996. The increase in liquidity is the result of restructuring the
balance sheet. The exchange of long term fixed rate mortgages for short term
liquid securities in addition to the reduction in short term borrowings resulted
in a higher liquidity ratio.
The Company's most liquid assets are cash and cash 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, 1997, cash and
cash equivalents totaled $4.8 million, as compared to $1.7 million at December
31, 1996.
Net cash used in operating activities for the year ended December 31, 1997
consisted primarily of origination of mortgage loans of $12.2 million, which was
partially offset by the proceeds from sales of loans held for sale, net of
origination fees and principal collected of $9.9 million.
Net cash provided by investing activities for the year ended December 31, 1997
consisted primarily of the sale of mortgage loans of $19.7 million, the sales of
mortgage-backed securities of $7.0 million and maturities and calls of
securities available for sale and certificates of deposit of $7.1 million, net
principal repayments on loans of $3.7 million and principal repayments on
mortgage-backed securities of $0.7 million partially offset by purchases of
securities
40
<PAGE> 42
available for sale and certificates of deposit of $18.8 million as well as
purchases of participations in loans of $2.2 million and additional investment
in premises and equipment, predominantly towards the new full-service facility
in Rockford, of $0.6 million.
Net cash used in financing activities for the year ended December 31, 1997, was
primarily the result of repayment of borrowings from the FHLB of $13.8 million.
Partially offsetting the borrowing repayments, was the increase in cash and cash
equivalents due to the inflow of deposits totaling $1.7 million. To a lesser
extent, the repurchase of common stock for treasury and the decrease in advanced
payments for taxes and insurance by borrowers were contributors to the net use
of cash in financing activities.
At December 31, 1997, the Company had outstanding commitments to fund loan
originations and unused lines of credit of $8.2 million and commitments to sell
mortgage loans totaling $2.7 million. 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, 1997 were $20.1 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 the level of interest rate risk
within the Company's asset and liability structure. The Company assesses
interest rate risk internally by measuring the impact positive and negative
interest rate shocks will have on both the net portfolio value and the projected
net interest income. The net portfolio value is calculated by computing the net
present value of the cash flows associated with its interest earning-assets and
interest-bearing liabilities. Assumptions are made regarding the prepayment
rates of assets and the decay rates of liabilities based on factors including
the Company's historical experience, the current interest rate environment,
embedded options within the assets and liabilities and industry estimates
produced by major broker/dealers and regulatory authorities. Management believes
the assumptions reasonably represent the anticipated amortization, maturities
and rate adjustments of the underlying assets. Decay rates of deposits are
similarly believed to reasonably represent the anticipated attrition within
those products. Although the assumptions regarding asset and liability
prepayments and decay rates are believed to be reasonable, actual results may
vary substantially due to factors beyond the Company's control.
During 1997, the Company attempted to reduce interest rate risk by: i) selling
most of the Company's fixed rate mortgage loan portfolio and reinvesting the
proceeds in short term liquid securities; ii) originating for portfolio, ARM
loans, shorter term fixed-rate loans and consumer loans and commercial loans;
iii) originating long-term fixed rate loans for sale into the secondary mortgage
market; and iv) investing in other rate sensitive assets.
The holding company does not have rate sensitive assets or liabilities
sufficient to materially impact the measurement of interest rate risk therefore
interest rate risk is measured at the subsidiary level. The following table sets
forth the Company's subsidiary Bank's net portfolio value and earnings at risk
as of December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
Change in Net Portfolio Value Net Interest Income
Interest Rates -------------------------- --------------------------
(basis points) $ Amount $ Change % Change $ Amount $ Change % Change
-------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
+400 6,243 (1,484) (19.2%) 2,796 131 4.9%
+300 6,703 (1,024) (15.3) 2,776 111 4.2
+200 7,138 (589) (8.3) 2,755 90 3.3
+100 7,478 (249) (3.3) 2,720 55 2.1
0 7,727 -- -- 2,665 -- --
-100 7,925 198 2.6 2,607 (58) (2.2)
-200 8,240 315 4.1 2,541 (124) (4.9)
-300 7,666 (61) (0.8) 2,401 (264) (9.9)
-400 7,222 (505) (6.5) 2,237 (428) (16.1)
</TABLE>
41
<PAGE> 43
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>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1997 vs. 1996
------------------------------------------------
Total
Rate/ Increase
Volume Rate Volume (Decrease)
------ ---- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
First mortgage loans (1)...................... $ (519) $ 74 $ (8) $ (453)
Other loans................................... 221 59 18 298
Securities (2)................................ 178 27 11 216
Mortgage-backed securities.................... (250) (5) 3 (252)
Interest-earning deposits..................... 51 34 42 127
--------- --------- -------- --------
Total interest-earning assets............... $ (319) $ 189 $ 66 $ (64)
========== ========= ======== =========
Interest-bearing liabilities:
Passbook accounts............................. $ (7) $ (23) $ -- $ (30)
Certificate accounts.......................... 52 12 -- 64
NOW and MMDA accounts......................... (9) 6 1 (2)
FHLB advances................................. (130) 97 (15) (48)
--------- --------- -------- --------
Total interest-bearing liabilities.......... (94) 92 (14) (16)
---------- --------- --------- ---------
Net change in interest income............... $ (225) $ 97 $ 80 $ (48)
========= ========= ======== ========
</TABLE>
- ------------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process,
and loan loss reserves, and includes loans held for sale.
(2) Includes securities available for sale, investment securities held to
maturity, and FHLB stock.
(3) Includes interest earned on Federal Home Loan Bank daily investment
deposit and certificates of deposit in other financial institutions.
42
<PAGE> 44
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 daily balances for 1997 and average month end balances for
1996. Management does not believe that the use of average monthly balances for
1996 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>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1997 1996
------------------------------------------------------------------
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)............. $ 52,960 $ 4,095 7.73% $ 59,777 $ 4,548 7.61%
Other loans.......................... 10,322 996 9.65% 7,844 698 8.90%
Securities (2)....................... 11,687 711 6.09% 8,605 496 5.77%
Mortgage-backed securities........... 6,128 368 6.00% 10,252 620 6.05%
Interest-earning deposits (3)........ 3,759 168 4.48% 1,670 41 2.46%
-------- -------- -------- --------
Total interest-earning assets...... 84,856 $ 6,338 7.47% 88,148 $ 6,403 7.26%
-------- --------
Non-interest earning assets.......... 3,405 2,761
-------- --------
Total assets....................... $ 88,261 $ 90,909
======== ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Passbook accounts.................... $ 8,966 $ 157 1.75% $ 9,332 $ 187 2.00%
Certificate accounts................. 43,476 2,490 5.73% 42,564 2,426 5.70%
NOW and MMDA accounts................ 12,219 350 2.86% 12,526 352 2.82%
FHLB advances........................ 12,515 754 6.03% 14,934 802 5.37%
-------- -------- -------- --------
Total interest-bearing liabilities. 77,176 $ 3,751 4.86% 79,356 $ 3,767 4.75%
-------- --------
Non-interest-bearing deposit accounts.. 2,520 2,563
Non-interest-bearing liabilities....... 1,041 1,236
-------- --------
Total liabilities.................. 80,737 83,155
Stockholders' equity................... 7,524 7,754
-------- --------
Total liabilities and stockholders'
equity........................... $ 88,261 $ 90,909
======== ========
Net interest income/interest rate
spread (4).............................. $ 2,587 2.61% $ 2,636 2.51%
======== ======= ======== =======
Net interest-earning assets/
net interest margin (5)................. $ 7,680 $ 8,792
======== ========
Ratio of average interest-earning assets.. 3.05% 2.99%
======= =======
to average interest-bearing liabilities. 1.10x 1.11x
======== ========
</TABLE>
- -------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process,
and loan loss reserves, and includes loans held for sale.
(2) Includes securities available for sale, investment securities held to
maturity, and FHLB stock.
(3) Includes interest earned on Federal Home Loan Bank daily investment
deposit and certificates of deposit in other financial institutions.
(4) Interest rate spread represents the difference between the average yield
on total interest-earning assets and the average cost of total
interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
43
<PAGE> 45
ITEM 7 FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP, INC.
Belvidere, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
CONTENTS
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
44
<PAGE> 46
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
First Financial Bancorp, Inc.
Belvidere, Illinois
We have audited the accompanying consolidated statements of financial condition
of First Financial Bancorp, Inc. as of December 31, 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the two-year period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Financial
Bancorp, Inc. at December 31, 1997, and the results of its operations and its
cash flows for each of the years in the two-year period ended December 31, 1997
in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 22, 1998
45
<PAGE> 47
FIRST FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
December 31, 1997
(In thousands, except per share amounts)
<TABLE>
<S> <C>
ASSETS
Cash on hand and non-interest-earning deposits $ 629
Interest-earning deposits 4,130
-----------
Total cash and cash equivalents 4,759
Securities available-for-sale 14,507
Mortgage-backed securities available-for-sale 1,625
First mortgage loans held for sale 2,352
Mortgage-backed securities held-to-maturity (fair value $835) 864
Certificates of deposit 2,099
Loans receivable, net of allowance for losses of $531 52,120
Accrued interest receivable 526
Premises and equipment 1,891
Federal Home Loan Bank stock 910
Other assets 1,029
-----------
Total assets $ 82,682
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposit accounts $ 67,550
Advances from the Federal Home Loan Bank 6,700
Advance payments by borrowers for taxes and insurance 202
Other liabilities 599
-----------
Total liabilities 75,051
Stockholders' equity
Common stock - $0.10 par value, 1,500,000 shares authorized,
509,848 shares issued 51
Additional paid-in capital 3,864
Retained earnings 5,199
Treasury stock, at cost, 94,449 shares (1,505)
Unearned employee stock ownership plan shares (41)
Unearned stock awards (25)
Net unrealized gain on securities available-for-sale,
net of income taxes of $44 88
-----------
Total stockholders' equity 7,631
-----------
Total liabilities and stockholders' equity $ 82,682
===========
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE> 48
FIRST FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997 and 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest income
First mortgage loans $ 4,095 $ 4,548
Other loans 996 698
Securities 711 496
Mortgage-backed securities 368 620
Interest-earning deposits 168 41
--------- --------
Total interest income 6,338 6,403
Interest expense
Deposit accounts 2,997 2,965
FHLB advances 754 802
--------- --------
Total interest expense 3,751 3,767
--------- --------
NET INTEREST INCOME 2,587 2,636
Provision for loan losses 88 182
--------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,499 2,454
Noninterest income
Loan servicing fees and charges 209 198
Service charge on deposit accounts 208 173
Gain (loss) on sales of loans (24) 87
Loss on sale of securities (171) (415)
Other 69 49
--------- --------
Total noninterest income 291 92
Noninterest expense
Compensation and benefits 1,270 1,117
Occupancy and equipment 307 263
Data processing 250 162
Federal deposit insurance premiums 34 574
Loan origination and servicing 71 142
Professional fees 100 94
Marketing and promotion 101 56
Other 485 398
--------- --------
Total noninterest expense 2,618 2,806
--------- --------
INCOME (LOSS) BEFORE INCOME TAXES 172 (260)
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE> 49
FIRST FINANCIAL BANCORP, INC.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Provision (benefit) for income taxes 48 (102)
--------- -------
NET INCOME (LOSS) $ 124 $ (158)
========= =======
Basic earnings (loss) per share $ .31 $ (.36)
========= =======
Diluted earnings (loss) per share $ .30 $ (.36)
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE> 50
FIRST FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997 and 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Net
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, 1996 $ 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
Purchase of treasury stock,
55,532 shares - - - (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
Net income - - 124 - - - - 124
Amortization of RRPs - - - - - 1 - 1
Exercise of stock
options, 250 shares - 7 - - - - - 7
Release of earned ESOP
shares, 6,780 shares - 60 - - 54 - - 114
Purchase of treasury stock,
9,727 shares - - - (155) - - - (155)
Increase in fair value
of securities available-
for-sale net of income
taxes of $113 - - - - - - 215 215
-------- -------- -------- -------- -------- ------- ------- ------
Balance at
December 31, 1997 $ 51 $ 3,864 $ 5,199 $ (1,505) $ (41) $ (25) $ 88 $7,631
======== ======== ======== ======== ======== ======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE> 51
FIRST FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 124 $ (158)
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 13 25
Net excess servicing fees and originated
mortgage servicing rights 34 32
Stock award plans 1 5
Employee stock ownership plan 114 107
Provision for losses on loans 88 182
(Gain) loss on sale of:
Loans 24 (87)
Securities 171 415
Premises and equipment - 10
Depreciation of premises and equipment 138 114
Originations of loans held for sale, net of
origination fees and principal collected (12,188) (6,532)
Proceeds from sales of loans held for sale 9,929 6,939
Change in:
Deferred income tax 22 (14)
Accrued interest receivable (9) (64)
Other assets (67) (364)
Other liabilities 15 38
--------- --------
Net cash (used in) provided by operations (1,591) 648
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations net of principal collected on loans 3,678 (16,374)
Purchases of:
Loan participations (2,176) (7,763)
Mortgage-backed securities available-for-sale - (1,753)
Securities available-for-sale (15,746) (4,900)
Certificates of deposit (3,098) -
Federal Home Loan Bank Stock - (667)
Proceeds from:
Sales of loans 19,685 -
Sales of securities available-for-sale 166 3,744
Sales of mortgage-backed securities available-for-sale 6,954 -
Maturities and calls of securities available-for-sale 6,050 6,050
Maturities and calls of securities held-to-maturity 75 200
Maturities of certificates of deposit 999 -
</TABLE>
(Continued)
50
<PAGE> 52
FIRST FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES (continued)
Sales of Federal Home Loan Bank stock $ 238 $ -
Sales of REO 122 -
Principal collected on mortgage-backed securities and
collateralized mortgage obligations 717 1,303
Purchases of premises and equipment (643) (709)
----------- -----------
Net cash provided by (used in) investing activities 17,021 (20,869)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 1,712 (392)
Net (decrease) increase in advances from the
Federal Home Loan Bank (13,750) 20,450
Issuance of common stock 7 68
Repurchases of common stock (155) (890)
Net (decrease) increase in advance payments by borrowers
for taxes and insurance (137) 79
----------- -----------
Net cash provided by (used in) financing activities (12,323) 19,315
----------- -----------
Net increase (decrease) in cash 3,107 (906)
Cash and cash equivalents at beginning of year 1,652 2,558
----------- -----------
Cash and cash equivalents at end of year $ 4,759 $ 1,652
=========== ===========
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 3,837 $ 3,679
Income taxes (refunded) (179) 70
Noncash items
Transfer of held for sale loans to portfolio - 41
Transfer of portfolio loans to REO 122 -
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE> 53
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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
operation 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 and commercial 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 amount 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.
(Continued)
52
<PAGE> 54
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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 determined when full payment under the loan term is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as the Company's residential mortgage, consumer, and credit card
loans and on an individual loan 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 are reported net of accumulated depreciation. Depreciation is recorded
on the straight-line and accelerated methods over the estimated useful lives of
the related assets.
Mortgage Servicing Rights: The Company allocates the cost of 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.
(Continued)
53
<PAGE> 55
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
When participating interest 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 fee 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 statements 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: The Company adopted Statement of Accounting Financial
Standards (SFAS) No. 128, "Earnings per Share", as of December 31, 1997. Basic
and diluted earnings per share are computed under this standard for the year
ended December 31, 1997. All prior amounts have been restated to be comparable.
Basic earnings per share is based on net income divided by the weighted average
number of shares outstanding during the period. Diluted earnings per share shows
the dilutive effect of additional common shares issuable under stock options and
the effect of unearned stock awards.
NOTE 2 - SECURITIES
The amortized cost and fair value of securities available-for-sale are as
follows at December 31, 1997:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury 2,241 4 - 2,245
U.S. Agency 8,556 20 26 8,550
Equity 302 150 - 452
Corporate 1,782 1 - 1,783
Commercial paper 1,478 - 1 1,477
----------- --------- --------- -----------
$ 14,359 $ 175 $ 27 $ 14,507
=========== ========= ========= ===========
</TABLE>
(Continued)
54
<PAGE> 56
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 2 - SECURITIES (Continued)
Contractual maturities of debt securities at December 31, 1997 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>
<CAPTION>
Securities
Available for-Sale
------------------
Amortized Fair
(Dollars in thousands) Cost Value
---- -----
<S> <C> <C>
Due in one year or less $ 8,170 $ 8,173
Due from one to five years 4,281 4,272
Due from five to ten years 401 402
Due after ten years 1,205 1,208
Equity securities 302 452
---------- -----------
$ 14,359 $ 14,507
========== ===========
</TABLE>
Proceeds from sales of securities available-for-sale during 1997 and 1996
were $166,000 and $3,744,000. These sales resulted in gross gains of $69,000 in
1997 and gross losses of $415,000 in 1996.
Securities with an amortized cost of $7,492,000 at December 31, 1997 were
pledged to secure certain deposit accounts in excess of federal deposit
insurance limits and 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, 1997:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale
GNMA $ 1,641 $ 9 $ 25 $ 1,625
========= ========= ========= =========
Held-to-maturity
FNMA $ 242 $ - $ 6 $ 236
Collateralized mortgage obligations 622 - 23 599
--------- --------- --------- ---------
$ 864 $ - $ 29 $ 835
========= ========= ========= =========
</TABLE>
(Continued)
55
<PAGE> 57
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 3 - MORTGAGE-BACKED SECURITIES (Continued)
Proceeds from sales of mortgage-backed securities and collateralized
mortgage obligations available-for-sale during 1997 were $6,954,000 which
resulted in gross losses of $240,000.
The carrying amount of mortgage-backed and related securities are net of
unamortized premiums of $64,000 at December 31, 1997.
Mortgage-backed securities with an amortized cost of $703,000 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, 1997 are summarized as follows (dollars in
thousands):
<TABLE>
<S> <C>
First mortgage loans
One-to-four-family residential $ 32,735
Other 7,451
-----------
Total first mortgage loans 40,186
Home equity lines of credit 4,300
Auto loans 2,442
Second mortgages 1,249
Credit card receivables 754
Other consumer loans 2,309
Commercial loans 1,470
-----------
Total loans receivable 52,710
-----------
Less:
Allowance for loan losses 531
Unearned discounts, premiums, and deferred
loan origination fees, net 59
-----------
590
-----------
$ 52,120
===========
</TABLE>
At December 31, 1997, 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 $825,000.
(Continued)
56
<PAGE> 58
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 4 - LOANS RECEIVABLE, NET (Continued)
Activity in the allowance for loan losses for the years ended December 31 is
summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
---- ----
<S> <C> <C>
Allowance for loan losses
Balance at beginning of year $ 468 $ 330
Provision charged to income 88 182
Loan charge-offs (27) (44)
Loan recoveries 2 -
------- -------
Balance at end of year $ 531 $ 468
======= =======
</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, 1997 total
$229,000.
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>
<CAPTION>
(Dollars in thousands) 1997 1996
---- ----
<S> <C> <C>
Revenues (direct)
Gain (loss) on sales of loans $ (24) $ 87
Servicing fees on loans sold 171 150
----- -----
$ 147 $ 237
===== =====
Identifiable expenses (direct)
Amortization of mortgage servicing rights $ 34 $ 32
Servicing fees on loans sold 1 1
----- -----
$ 35 $ 33
===== =====
Identifiable assets (direct)
Mortgage servicing rights $ 228 $ 102
Valuation allowance on MSR (16) (15)
----- -----
$ 212 $ 87
===== =====
</TABLE>
(Continued)
57
<PAGE> 59
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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>
<CAPTION>
(Dollars in thousands) 1997 1996
---- ----
<S> <C> <C>
Sold with recourse $ 1,234 $ 1,583
Sold without recourse 68,006 51,019
---------- -----------
$ 69,240 $ 52,602
========== ===========
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $1,429,000 and $533,000 at December 31, 1997 and 1996,
respectively.
Activity in net mortgage servicing rights for the year ended December 31 is
summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
---- ----
<S> <C> <C>
Net balance at beginning of year $ 87 $ 88
Additions 159 31
Amortization (24) (17)
Sales (9) -
Provision for impairment (1) (15)
---------- -----------
$ 212 $ 87
========== ===========
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 are summarized as follows (dollars
in thousands):
<TABLE>
<S> <C>
Land $ 684
Office buildings and improvements 591
Furniture, fixtures and equipment 1,018
Facility under construction 559
----------
2,852
Less accumulated depreciation 961
----------
$ 1,891
==========
</TABLE>
(Continued)
58
<PAGE> 60
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 7 - DEPOSIT ACCOUNTS
Deposit accounts at December 31, 1997 are summarized as follows (dollars in
thousands):
<TABLE>
<S> <C>
Non-interest-bearing demand deposit accounts $ 4,371
Interest-bearing demand deposit accounts 4,826
Passbook and club accounts 8,765
Money market demand accounts 6,760
Certificates of deposit 42,828
-----------
$ 67,550
===========
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was $8,989,000 at December 31, 1997.
At December 31, 1997, the scheduled maturities of certificates of deposit are as
follows (dollars in thousands):
<TABLE>
<S> <C>
1998 $ 20,058
1999 7,440
2000 13,293
2001 1,518
2002 and thereafter 519
-----------
$ 42,828
===========
</TABLE>
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK (FHLB)
FHLB advances at December 31, 1997 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Weighted
Interest Amount
Rate Outstanding
---- -----------
<S> <C> <C>
Advances from Federal Home Loan Bank
Fixed rate due in 1998 5.94% $ 6,700
==== =========
</TABLE>
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 of the Federal Home Loan Bank. All stock in the Federal Home Loan Bank
of Chicago is also pledged as additional collateral for advances.
(Continued)
59
<PAGE> 61
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 9 - INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31 is
summarized as follows (dollars in thousands):
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Current $ 26 $ (88)
Deferred 6 18
Change in valuation allowance 16 (32)
--------- ---------
$ 48 $ (102)
========= =========
</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>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Statutory federal income tax rate 34.0% (34.0)%
Tax exempt income and officers' life insurance (1.4) (0.2)
Other, net (5.0) (5.0)
------- --------
27.6% (39.2)%
======= ========
</TABLE>
No state income taxes were recorded in 1997 and 1996 as a result of excess
qualifying U.S. Government interest, which is tax exempt under Illinois
statutes.
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,
1997 are summarized as follows (dollars in thousands):
<TABLE>
<S> <C> <C>
Deferred tax assets
Deferred loan origination fees $ 25
Bad debt deduction 135
Deferred compensation 60
Illinois net operating loss carry forwards 54
Other 2
---------
276
Valuation allowance (54)
---------
222
Deferred tax liabilities
Unrealized gain on securities available-for-sale 44
Depreciation 30
FHLB stock dividends, net 33
Mortgage servicing rights 86
---------
193
---------
Net tax deferred assets $ 29
=========
</TABLE>
(Continued)
60
<PAGE> 62
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 9 - INCOME TAXES (Continued)
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 $1,141,000 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.
Retained earnings at December 31, 1997 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.
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 $13,000 and $9,000 in 1997 and 1996, 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 $54,000 in 1997 and
1996. Compensation expense recognized on the ESOP amounted to $114,000
and $107,000 in 1997 and 1996, respectively. Unearned ESOP shares
totaling 5,088, with a carrying amount of $41,000, is reported as a
reduction to stockholder's equity in the consolidated statement of
financial condition at December 31, 1997. The fair value of unearned
ESOP shares approximated $95,000 at December 31, 1997.
(Continued)
61
<PAGE> 63
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 10 - BENEFIT PLANS (Continued)
The ESOP shares were as follows:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Allocated 22,035
Committed to be released 6,780
Suspense shares 5,088
--------
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 the stock options will not exceed
ten years from the date of grant. 8,747 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 at 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>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
------- -----
<S> <C> <C>
Outstanding at January 1, 1996 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
Granted - -
Exercised (250) 8.000
Forfeited (1,210) 8.000
----------- -------------
Outstanding at December 31, 1997 12,514 $ 10.040
=========== =============
</TABLE>
(Continued)
62
<PAGE> 64
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 10 - BENEFIT PLANS (Continued)
Options granted and exercisable at December 31, 1997 are 11,094 at a
weighted average price of $9.35. At December 31, 1997, the range of the
exercisable price is $8.00 to $15.625 with an average remaining life of
6 years.
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 1997 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 $2,440 and
$5,580 for 1997 and 1996, 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 1996 is
estimated at $4.58 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%, expected volatility of stock price of
11.90%, an assumed forfeiture rate of 0%, and an average life of five
years.
Management recognition and retention plans and trusts:
The Company has two management recognition 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 plan
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 held by the RRPs
totaled 19,374 shares. On October 1, 1993, 18,471 shares were granted
to officers and outside directors. The cost of the awards are amortized
on the straight-line basis over the vesting terms. Compensation expense
under these plans amounted to $1,000 and $5,000 in 1997 and 1996,
respectively.
(Continued)
63
<PAGE> 65
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 11 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators for earnings per common
share computations for the years ended December 31 is presented below
(dollars and shares in thousands).
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
BASIC EARNINGS PER SHARE
Net income (loss) available to common stockholders $ 124 $ (158)
========= =========
Weighted average common shares outstanding 403 442
========= =========
BASIC EARNINGS PER SHARE .31 (.36)
========= =========
EARNINGS PER SHARE ASSUMING DILUTION
Net income (loss) available to common stockholders $ 124 $ (158)
========= =========
Weighted average common shares outstanding 403 442
Add: dilutive effect of assumed exercises:
Incentive stock options 5 5
--------- ---------
Weighted average common and dilutive
potential shares outstanding 408 447
========= =========
DILUTED EARNINGS PER SHARE 0.30 (0.36)
========= =========
</TABLE>
NOTE 12 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by the
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
judgements by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital 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.
(Continued)
64
<PAGE> 66
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 12 - REGULATORY MATTERS (Continued)
At year-end, the Bank's regulators categorized the Bank as well capitalized.
Actual capital levels (in millions) and minimum capital required levels were:
<TABLE>
<CAPTION>
Minimum Required
to Be Well
Minimum Required Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
December 31, 1997 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $ 7.7 15.4% $ 4.0 8.0% $ 5.0 10.0%
Tier 1 (core) capital (to risk-weighted
assets) $ 7.2 14.4% $ 2.0 4.0% $ 3.0 6.0%
Tier 1 (core) capital (to adjusted total
assets) $ 7.2 8.6% $ 2.5 3.0% $ 4.1 5.0%
Tier 1 capital to average assets $ 7.2 8.1% $ 3.5 4.0% $ 4.4 5.0%
Tangible capital (to adjusted total
assets) $ 7.2 8.6% $ 1.2 1.5% N/A N/A
</TABLE>
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.
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.
As part of the conversion to the stock form of ownership on October 1, 1993, 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.
(Continued)
65
<PAGE> 67
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 13 - 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, 1997 are summarized as follows (in
thousands):
<TABLE>
<S> <C>
Commitments to originate loans; rates range from 7.250% to 9.500% $ 1,692
Unused lines of credit 5,158
Standby letters of credit 146
Commitments to purchase loan participations 1,396
</TABLE>
At December 31, 1997, the Company serviced mortgage loans with unpaid principal
balances of $1,234,000 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.
NOTE 14 - 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, mortgage servicing rights, 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 portfolio loans is based on estimates of the rate the Company
would charge for similar loans at December 31, 1997 applied for the time period
until the estimated payment. The estimated fair value of loans held for
(Continued)
66
<PAGE> 68
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
sale is based on the prevailing secondary market prices for similar loans at
December 31, 1997. 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,
1997 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, 1997 for a time period until
maturity. Loan commitments are not included in the table below as their
estimated fair value is immaterial.
<TABLE>
<CAPTION>
Estimated
(Dollars in thousands) Carrying Fair
Value Value
----- -----
<S> <C> <C>
Financial instruments in assets
Cash on hand and in banks $ 4,759 $ 4,759
Securities available-for-sale 14,507 14,507
Mortgage-backed securities available-for-sale 1,625 1,625
First mortgage loans held for sale 2,352 2,366
Mortgage-backed securities 864 835
Certificates of deposit 2,099 2,101
Loans receivable, net 52,120 53,192
Federal Home Loan Bank stock 910 910
Mortgage servicing rights 212 212
Accrued interest receivable 526 526
Financial instrument liabilities
DDA, NOW, money market, and passbook savings 24,722 24,722
Certificates of deposit 42,828 43,312
FHLB advances 6,700 6,699
Accrued interest payable 144 144
</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 (originated
prior to January 1, 1995), customer goodwill, and similar items.
While the above estimates are based on management's judgement of the most
appropriate factors, there is no assurance that were the Company to have
disposed of these items on December 31, 1997, the fair values would have been
achieved, because the market value may differ depending on the circumstances.
The estimated fair values at December 31, 1997 should not necessarily be
considered to apply at subsequent dates.
(Continued)
67
<PAGE> 69
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 15 - 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:
CONDENSED BALANCE SHEET
December 31, 1997
(In thousands)
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents $ 232
Securities available-for-sale 191
Loans receivable for ESOP 61
Investment in subsidiary 7,189
Other assets 21
-----------
Total assets $ 7,694
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Other liabilities $ 63
-----------
Stockholders' equity
Common stock 51
Additional paid-in capital 3,864
Retained earnings 5,199
Treasury stock (1,505)
Other 22
-----------
Total stockholders' equity 7,631
-----------
Total liabilities and stockholders' equity $ 7,694
===========
</TABLE>
(Continued)
68
<PAGE> 70
NOTE 15 - FIRST FINANCIAL BANCORP, INC. (PARENT COMPANY) (Continued)
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest income $ 12 $ 12
Gains on sales of securities 69 -
--------- ---------
Total income 81 12
Expense
Professional fees 25 14
Other 33 31
--------- ---------
Total expense 58 45
--------- ---------
INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT) AND EQUITY
IN UNDISTRIBUTED NET INCOME (LOSS) OF SUBSIDIARY 23 (33)
Income taxes (benefit) 8 (11)
--------- ---------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED NET
INCOME (LOSS) OF SUBSIDIARY 15 (22)
Equity in undistributed net income (loss) of subsidiary 109 (136)
--------- ---------
NET INCOME (LOSS) $ 124 $ (158)
========= =========
</TABLE>
(Continued)
69
<PAGE> 71
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 15 - FIRST FINANCIAL BANCORP, INC. (PARENT COMPANY) (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 124 $ (158)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Equity in undistributed net income (loss) of subsidiary (109) 136
Gain on sales of securities available-for-sale (69) -
Decrease (increase) in other assets (7) (13)
Increase in other liabilities 44 -
--------- ---------
Net cash used in operating activities (17) (35)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale - (106)
Proceeds from sales of securities available for sale 166 -
Principal collected on loan for ESOP 54 54
--------- ---------
Net cash provided by (used in) investing activities 220 (52)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 7 68
Purchase of treasury stock (155) (890)
--------- ---------
Net cash used in financing activities (148) (822)
--------- ---------
Increase (decrease) in cash and cash equivalents 55 (909)
Cash and equivalents at beginning of year 177 1,086
--------- ---------
CASH AND EQUIVALENTS AT END OF YEAR $ 232 $ 177
========= =========
</TABLE>
70
<PAGE> 72
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, 1997 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, 1997 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 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.
71
<PAGE> 73
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
<TABLE>
<CAPTION>
Shares of
Common Stock
Beneficially
Positions Held Director Current Term Owned on the Percent
Name Age with the Company Since (1) to Expire Record Date Of Class
---- --- -------------------- --------- --------- --------------- --------
<S> <C> <C> <C> <C> <C> <C>
Douglas M. Kratz 45 Director 1997 1998 20,077 4.82%
Charles G. Popp 40 Director 1997 1998 100 *
Steven C. Derr 49 President and Chief 1995 1999 15,665(3) 3.76%
Executive Officer
Nancy Sylvester 50 Director and Chairman 1996 1999 1,218(4) *
of the Board
James V. Twyning 48 Director 1997 2000 1,093 *
Richard E. Winkelman 59 Director 1977 2000 6,387(5) 1.53%
</TABLE>
Less than 1%.
- -------------------------
*
(1) Reflects the initial appointment of Mr. Winkelman to the Board of
Directors of the Company's mutual predecessor.
(2) Includes 2,127 shares awarded, subject to restrictions, pursuant to the
Employees' Recognition Plan. Includes 6,843 shares subject to options
granted pursuant to the Incentive Stock Option Plan which are exercisable
within 60 days of the Record Date. Includes 3,570 shares allocated to Mr.
Derr's account under the ESOP.
(3) Includes 700 shares subject to options granted pursuant to the Directors'
Plan.
(4) Includes 692 shares subject to options granted pursuant to the Directors'
Plan and 420 shares awarded, subject to restrictions, pursuant to the
Directors' Recognition Plan.
The principal occupation during the past five years of each director,
nominee for director and named executive officer of the Company is set forth
below. References to the "Company" include the Company's mutual predecessor. All
directors and executive officers have held their present positions for five
years unless otherwise stated.
STEVEN C. DERR is President and Chief Executive Officer of the
Company. Mr. Derr previously served as Treasurer of the Company, and as
Secretary-Treasurer and Chief Financial Officer of the Bank. Mr. Derr began
his employment with the Bank in 1984.
NANCY K. SYLVESTER is a Rock Valley College associate professor,
Professional Registered Parliamentarian, and part owner of Jimmy's Frozen
Custard.
CHARLES G. POPP is an Attorney specializing in real estate law and a
General Partner of Strom, Sewell, Larson and Popp.
JAMES V. TWYNING is a Certified Public Accountant who is part owner and
Vice President of Northern Nationalease & Freightliner, a truck leasing firm
72
<PAGE> 74
DOUGLAS M. KRATZ is Chairman, Chief Executive Officer and Chief
Financial Officer of Financial Services Corporation of the Midwest, Rock Island,
Illinois; Secretary, Treasurer and Director of Richey Corporation, Rock Island,
Illinois; Chairman and Chief Executive Officer of Englehart Corporation,
Bettendorf, Iowa; President, Chief Executive Officer and Director of Four Bears,
Inc., Rock Island, Illinois; and Chairman and Chief Executive Officer of Brammer
Company, LLC, Davenport, Iowa. Mr. Kratz has served as director for the Company
since 1997.
RICHARD E. WINKELMAN is the former owner of Winkelman Flowers in
Belvidere, Illinois. Mr. Winkelman is semi-retired and works for a local
florist.
OWNERSHIP REPORTS BY OFFICERS AND DIRECTORS
The Common Stock of the Company is registered pursuant to Section
12(g) of the Exchange Act. The officers and directors of the Company and
beneficial owners of greater than 10% of the Company's Common Stock ("10%
beneficial owners") are required to file reports on Forms 3, 4, and 5 with the
SEC disclosing changes in beneficial ownership of the Common Stock. SEC rules
require disclosure in the Company's Proxy Statement and Annual Report on Form
10-KSB of the failure of an officer, director or 10% beneficial owner of the
Company's Common Stock to file a Form 3, 4 or 5 on a timely basis. The Company
believes that, during the fiscal year ended December 31, 1997, all filing
requirements under SEC rules applicable to the Company's officers, directors and
10% beneficial owners were complied with on a timely basis.
73
<PAGE> 75
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash compensation for the years
ended December 31, 1997, 1996, and 1995, and certain information as to the total
remuneration paid by the Bank to the named executive officers of the Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
- -------------------------------------------------------------------- -------------------------------
FISCAL
YEARS OTHER RESTRICTED
ENDED ANNUAL STOCK OPTIONS/ ALL OTHER
NAME AND DECEMBER SALARY BONUS COMPENSATION AWARD(S) SARS COMPENSATION
PRINCIPAL POSITION (1) 31, ($)(2) ($) ($)(3) ($)(4) (#)(5) PAYOUTS ($)(6)
- ---------------------- -------- ------- --- ---------- --------- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven C. Derr 1997 $78,149 $2,118 $ -- $ -- $6,843 -- $30,836
President and Chief 1996 63,080 -- 7.664 18,821 4,474 -- 24,887
Executive Officer 1995 62,061 -- 3,618 18,523 4,106 -- 18,061
</TABLE>
(1) No other executive officer received salary and bonuses that in the
aggregate exceeded $100,000 for the years ended December 31, 1997, 1996
and 1995.
(2) Amount shown is gross earnings. Includes $5,635, $4,712 and $4,158 for the
years ended December 31, 1997, 1996 and 1995, respectively, deferred by
Mr. Derr pursuant to the Bank's 401(k) Plan. Includes $2,102, $2,102 and
$2,199 for the years ended December 31, 1997, 1996 and 1995, respectively,
contributed by Mr. Derr to the Bank's Section 125 Plan.
(3) Includes directors' fees paid for attendance at Board meetings of the Bank
and the Company. The Bank and the Company provided Mr. Derr with
membership dues to certain organizations that are not included in the
summary compensation table because the aggregate amount of such benefits
does not exceed the lesser of $50,000 or 10% of such officer's
compensation.
(4) Includes 1,195 shares, 1,195 shares for Mr. Derr of Common Stock awarded
on October 1, 1993 pursuant to the Company's Recognition and Retention
Plan, which shares vested on October 1, 1996, 1995, respectively. The
value of such shares was determined by multiplying the number of shares
which became fully vested by the price of the shares of Common Stock on
October 1, 1996, 1995. The fair market value of such restricted stock on
December 31, 1997 (based on the closing price of the Common Stock as
reported on the Nasdaq Small-Cap Market) was approximately $44,401.
(5) On October 1, 1993, Mr. Derr was awarded 6,843 options to purchase shares
of the Company's common stock. The options vest in five equal annual
increments commencing on October 1, 1993 and the exercise price of such
options is $8.00, the fair market value of the underlying shares of Common
Stock on the date of grant. The options shown above represent the options
that were exercisable as of December 31, 1997.
(6) Includes $28,724, $16,026 and $10,058 allocated to Mr. Derr's account for
the years ended December 31, 1997, 1996 and 1995, respectively, under the
Bank's ESOP. Includes $2,112 $1,892 and $3,723 allocated to Mr. Derr's
account for the years ended December 31, 1996, 1995 and 1994,
respectively, under the Bank's 401(k) Plan. Includes $4,149 and $4,280 for
Mr. Derr for the years ended December 31, 1996, 1995, respectively, for
reimbursement of income taxes on the excess of the fair market value of
the vested Restricted Stock Award over the price of such shares in the
initial public offering of the Company.
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
EMPLOYMENT AGREEMENT. The Bank has entered into an employment
agreement with Steven C. Derr, President and Chief Executive Officer of the
Bank. The employment agreement is intended to ensure that the Bank will be able
to maintain a stable and competent management base. The continued success of the
Bank depends to a significant degree on the skill and competence of its
President and Chief Executive Officer.
The employment agreement provides for a three-year term. Commencing on
the first anniversary date and continuing each anniversary date thereafter, the
Board of Directors of the Bank may extend the agreement for an additional year
such that the remaining term shall be three years unless written notice of
non-renewal is given
74
<PAGE> 76
by the Board of Directors after conducting a performance evaluation of the
executive. In addition to the base salary, the agreement provides that the
executive is to receive all benefits provided to permanent full time employees
of the Bank, including among other things, disability pay, participation in
stock benefit plans and other fringe benefits applicable to executive personnel.
The agreement provides for termination by the Bank for cause at any time. In the
event the Bank chooses to terminate the executive's employment for reasons other
than for cause, or upon the termination of the executive's employment for
reasons other than a change in control, as defined, or in the event of the
executive's resignation from the Bank upon (i) failure to re-elect the executive
to his current office, (ii) a material change in the executive's functions,
duties or responsibilities, (iii) relocation of his principal place of
employment, (iv) the liquidation or dissolution of the Bank, or (v) a breach of
the agreement by the Bank, the executive or, in the event of death, his
beneficiary would be entitled to receive an amount equal to the greater of the
remaining payments, including base salary, bonuses and other payments due under
the remaining term of the agreement or three times the average of the
executive's base salary, including bonuses and other cash compensation paid, and
the amount of any benefits received pursuant to any employee benefit plans
maintained by the Bank.
If termination, voluntary or involuntary, follows a "change in control"
of the Bank or the Company, as defined in the agreement, the executive or, in
the event of death, his beneficiary, would be entitled to a payment equal to the
greater of (i) the payments due under the remaining term of the agreement or
(ii) 2.99 times his average annual compensation over the five years preceding
termination. The Bank would also continue the executive's life, health, and
disability coverage for the remaining unexpired term of the agreement to the
extent allowed by policies maintained by the Bank from time to time. Payments to
the executive under the agreement will be guaranteed by the Company in the event
that payments or benefits are not paid by the Bank.
The employment agreement provides that for a period of one year
following termination the executive agrees not to compete with the Bank or the
Company in any city, town or county in which the Bank or the Company maintains
an office or has filed an application to establish an office.
SUPPLEMENTAL EXECUTIVE AGREEMENT. The Company has entered into a
Supplemental Executive Agreement with Mr. Derr. This agreement supplements Mr.
Derr's employment agreement, which provides for a reduced severance payment in
the event benefits paid upon a Change in Control constitute "excess parachute
payments" under the Internal Revenue Code of 1986, as amended. The agreement is
designed to compensate Mr. Derr for any reduction in benefits due him under his
employment agreement and also requires the Company to pay any excise tax to
which Mr. Derr becomes subject due to the "excess parachute payments"
provisions.
DIRECTORS' COMPENSATION
In 1997, each non-employee director received $830 per month in
directors' fees, plus $630 for attendance at the Bank's annual organizational
meeting.
BENEFITS
401(k) PLAN. The Bank maintains the First of Belvidere 401(k) Profit
Sharing Plan and Trust (the "401(k) Plan"), a tax deferred compensation plan.
Under the 401(k) Plan, employees 21 years of age or older with twelve months of
service and 1,000 hours of service during that period may make pre-tax
contributions up to applicable limits under the Internal Revenue Code. Employees
are 100% vested in their contributions. The Bank may elect to make contributions
to the 401(k) Plan out of Bank profits. Discretionary employer contributions
vest at a rate of 20% per year beginning in the third year of service by an
employee.
Benefits are payable when an employee reaches age 65 or the fifth
anniversary after entering the 401(k) Plan, whichever is later. Benefits are
payable whether or not the employee continues to be employed by the Bank upon
reaching age 65. Distributions are made in a lump-sum payment or in an annuity
for the life of the
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<PAGE> 77
participant, the participant and his or her spouse, or the participant and a
designated beneficiary. Benefits are payable in the event of death, disability
or termination of a participating employee. The Bank allocated $2,112 to the
account of Mr. Derr, as a discretionary employer contribution for the plan year
ended December 31, 1997.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Bank has established an
ESOP for eligible employees. Employees with a twelve-month period of employment
with the Bank during which they worked at least 1,000 hours and who have
attained age 21 are eligible to participate.
Benefits generally become 100% vested after seven years of credited
service. Prior to the completion of three years of credited service, a
participant who terminates employment for reasons other than death, retirement
(or early retirement), or disability will not receive any benefit under the
ESOP. ESOP contributions vest at a rate of 20% per year beginning in the third
year of service by an employee. Forfeitures will be reallocated among remaining
participating employees, in the same proportion as contributions. Benefits may
be payable upon death, retirement, early retirement, disability or separation
from service. The Bank's contributions to the ESOP are not fixed, so benefits
payable under the ESOP cannot be estimated. The account of Mr. Derr received
allocations of $28,724 for the plan year ended December 31, 1997.
STOCK OPTION PLAN. The Board of Directors of the Company maintains the
1993 Incentive Stock Option Plan for officers and employees of the Bank because
it believes that stock options serve as an important means for attracting and
retaining personnel as well as rewarding employees who help the Bank achieve its
business objectives. Moreover, the exercise of stock options is beneficial to
the Bank because it provides additional capital at minimal expense.
The Board of Directors granted options (with Limited Rights) under the
Incentive Stock Option Plan at an exercise price of $8.00 per share, as follows:
options to purchase 6,843 shares of Common Stock were granted to Mr. Derr;
options to purchase an additional 26,604 shares in the aggregate were granted to
other executive officers of the Bank; and options to purchase 3,052 shares in
the aggregate were granted to other employees of the Bank. The Bank reserved
2,248 shares covered by the Stock Plan for future grant, of which 1,000 and
1,700 were granted at an exercise price of $15.625 and $15.50, respectively, on
August 15, 1995 and November 21, 1996 to employees of the Bank. Options are
exercisable in equal increments over a five year period beginning one year from
the date of grant. Options will be 100% exercisable in the event the optionee
terminates his employment due to death, disability or retirement or in the event
of a change in control of the Bank or the Company.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED IN-THE-
SHARES OPTIONS AT MONEY OPTIONS AT
ACQUIRED FISCAL YEAR-END FISCAL YEAR-END (2)
UPON VALUE ---------------- -------------------
NAME EXERCISE REALIZED (1) EXERCISABLE EXERCISABLE
---- -------- ------------ ---------------- -------------------
<S> <C> <C> <C> <C>
Steven C. Derr -- -- 6,843 $88,959
</TABLE>
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<PAGE> 78
(1) Equals the difference between the aggregate exercise price of the options
exercised and the aggregate fair market value of the shares of common
stock received upon exercise computed using the price of the Common Stock
as quoted on the Nasdaq Small-Cap Market at the time of exercise.
(2) Equals the difference between the aggregate exercise price of such options
and the aggregate fair market value of the shares of common stock that
would be received upon exercise, assuming such exercise occurred on
December 31, 1997, at which date the closing price of the Common Stock as
quoted on the Nasdaq Small-Cap Market was at $21.00.
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS. The Board of Directors of
the Company has adopted the Directors' Option Plan for directors who are not
employees of the Bank because it believes that stock options serve as an
important means for attracting and retaining qualified directors and
rewarding outside directors who help the Bank achieve its business
objectives. Moreover, the exercise of stock options is beneficial to the Bank
because it provides additional capital at minimal expense.
The Directors' Option Plan is a self-administering plan and provides
for the granting of nonstatutory options for 9,687 shares to directors who are
not officers or employees of the Bank or the Company. The exercise price of
each option granted under the Directors' Option Plan is $8.00 per share.
Options for 1,842 shares of Common Stock were awarded to Director Winkelman.
Mr. Winkelman has exercised 1,150 of the 1,842 options awarded under the
Directors' Option Plan. Ms. Sylvester was awarded 700 shares under the
Directors' Option Plan at an exercise price of $15.50 per share. 3,126 shares
covered by the Directors' Plan have been reserved for future grant.
RECOGNITION AND RETENTION PLAN FOR EMPLOYEES. The Board of Directors
of the Company has adopted the Employees' Recognition Plan as a method of
providing officers and key employees of the Bank with a proprietary interest
that is designed as a means of rewarding the service of persons who have
helped the Bank to achieve its business objectives as well as encouraging such
persons to remain with the Bank. 18,114 shares of Common Stock were purchased
by the Employees' Recognition Plan for the benefit of eligible officers and
employees. Awards are nontransferable and nonassignable and officers of the
Bank will earn (i.e., become vested in) shares of Common Stock covered by the
award at a rate of 33-1/3% per year commencing one year from the year from the
date of the award or as stipulated by the plan trustee. Awards will be 100%
vested upon termination of employment due to death, disability or retirement
of the officer or following a change in control of the Bank or the Company.
RECOGNITION AND RETENTION PLAN FOR OUTSIDE DIRECTORS. The Board of
Directors of the Company has adopted the Directors' Recognition Plan as a
method of providing directors who are not employees of the Bank with a
proprietary interest that is designed as a means of rewarding persons who
have helped the Bank to achieve its business objectives as well as
encouraging such persons to remain with the Bank. 1,260 shares of Common
Stock were purchased by the Directors' Recognition Plan for the benefit of
outside directors. Awards are nontransferable and nonassignable and outside
directors of the Bank will earn (i.e., become vested in) shares of Common
Stock covered by the award at a rate of 33-1/3% per year commencing one year
from the year from the date of the award. Awards will be 100% vested upon
termination of employment due to death, disability or retirement of the
outside director or following a change in control of the Bank or the Company.
All current awards are 100% vested.
DIRECTORS STOCK PURCHASE PROGRAM. The Company has entered into a stock
purchase program for directors of the Company whereby such persons can
designate all or a portion of their monthly directors' fees for the purchase
of additional shares of stock of the Company. The shares will be purchased
from treasury stock held by the Company, and shall be restricted pursuant to
the requirements of the SEC and appropriately legended.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
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<PAGE> 79
Persons and groups who beneficially own in excess of five percent of
the Common Stock are required to file certain reports with the Securities and
Exchange Commission ("SEC") regarding such ownership pursuant to the Securities
Exchange Act of 1934 (the "Exchange Act"). The following table sets forth, as of
December 31, 1987, the shares of Common Stock beneficially owned by directors
and nominees individually, by named executive officers individually, by
executive officers and directors as a group and by each person who was the
beneficial owner of more than five percent of the Company's outstanding shares
of Common Stock on such date.
<TABLE>
<CAPTION>
AMOUNT OF SHARES
OWNED AND NATURE PERCENT OF SHARES
NAME AND ADDRESS OF OF BENEFICIAL OF COMMON STOCK
BENEFICIAL OWNER OWNERSHIP OUTSTANDING
---------------- --------- -----------
<S> <C> <C>
DIRECTORS AND OFFICERS (1)
Steven C. Derr 15,665 3.76%
Nancy K. Sylvester 1,218 *
James V. Twyning 1,093 *
Douglas M. Kratz 20,077 4.82
Richard E. Winkelman 6,387 1.53
Charles G. Popp 100 *
All executive officers and directors
as a group (10 persons) 51,804 12.44
First Federal Savings Bank of Belvidere
Employee Stock Ownership Plan (2) 30,767 7.39
121 East Locust Street
Belvidere, Illinois 61008
S.C. Investments, L.P. (3) 21,362 5.13
Webb and O'Neill, Inc.
50 N. Brockway, Suite 3-8
P.O. Box 1186
Palatine, Illinois 60078
National City Bank (4) 33,500 8.04
National City Center
1900 East 9th Street
Cleveland, Ohio 44114-3484
</TABLE>
- --------------------
*Less than 1%.
(1) Unless otherwise indicated, includes shares held directly by the
individuals as well as by spouses, in trust and other indirect forms of
ownership over which shares the individuals effectively exercise sole
or shared voting and investment power. Includes 1,392 shares of Common
Stock which outside directors of the Company have the right to acquire
within 60 days of December 31, 1997 pursuant to the exercise of stock
options granted under the Company's
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<PAGE> 80
1993 Stock Option Plan for Outside Directors (the "Directors' Option
Plan"). Includes 420 shares awarded, subject to restrictions pursuant
to the Company's 1993 Recognition and Retention Plan for Outside
Directors (the "Directors' Recognition Plan"). Includes 8,289 shares of
Common Stock underlying options awarded to officers under the Company's
1993 Incentive Stock Option Plan (the "Incentive Stock Option Plan")
since such options are exercisable within sixty days of December 31,
1997. Includes 2,127 shares awarded, subject to restrictions, pursuant
to the Company's 1993 Recognition and Retention Plan for Employees (the
"Employees' Recognition Plan").
(2) Under the First Federal Savings Bank of Belvidere Employee Stock
Ownership Plan (the "ESOP"), shares allocated to participants' accounts
are voted in accordance with the participants' directions. Unallocated
shares held by the ESOP are voted by the ESOP Trustee in the manner
calculated to most accurately reflect the instructions it has received
from the participants regarding the allocated shares. As of December
31, 1997, 23,970 shares of Common Stock were allocated under the ESOP.
(3) The information is based upon Schedule 13G beneficial ownership report,
dated February 13, 1998, filed by S.C. Investments, L.P.
(4) The information is based upon Schedule 13G beneficial ownership report,
dated February 5, 1998, filed by National City Bank.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
requires that all loans or extensions of credit to executive officers and
directors must be made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
the general public and must not involve more than the normal risk of repayment
or present other unfavorable features. In addition, loans made to a director or
executive officer in excess of the greater of (a) $25,000 or 5% of the Bank's
capital and surplus, or (b) $500,000 must be approved in advance by a majority
of the disinterested members of the Board of Directors. All loans made by the
Bank to officers, directors, and executive officers are made in the ordinary
course of business on the same terms and conditions as the Bank would make to
any other customer in the ordinary course of business and do not involve more
than a normal risk of collectibility or present other unfavorable features. At
December 31, 1997, loans to officers, directors and their affiliates aggregated
231,609.71.
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.)
- 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.)
79
<PAGE> 81
- 10.3 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.)
- 10.3(a) Severance Agreement with Steven C. Derr, President
and Chief Executive Officer, entered into as
of December 31, 1997.
- 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)
- 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.
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<PAGE> 82
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 30, 1998 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, Chief Keith D. Hill, Treasurer
Executive Officer and Director (Principal Financial and Accounting
(Principal Executive Officer) Officer)
Date: March 30, 1998 Date: March 30, 1998
By: /s/ Douglas M. Kratz By: /s/ James V. Twyning
-------------------------------- -----------------------------------
Douglas M. Kratz, Director James V. Twyning, Director
Date: March 30, 1998 Date: March 30, 1998
By: /s/ Nancy Sylvester By: /s/ Richard E. Winkelman
-------------------------------- -----------------------------------
Nancy Sylvester, Director and Richard E. Winkelman, Director
Chairman of the Board
Date: March 30, 1998 Date: March 30, 1998
By: /s/ Charles G. Popp
--------------------------------
Charles G. Popp, Director
Date: March 30, 1998
81
<PAGE> 1
EXHIBIT 10.3(a)
<PAGE> 2
FIRST FEDERAL SAVINGS BANK
SEVERANCE AGREEMENT
This AGREEMENT is made effective as of the 31st day of December, 1997
by and between First Federal Savings Bank, a federally chartered stock savings
bank (the "Bank") and Steven C. Derr ("Employee"). Any reference herein to the
"Company" shall mean First Financial Bancorp, Inc., the stock holding company of
the Bank.
WHEREAS, Employee has agreed to serve in the position of President and
Chief Executive Officer for the Bank, a position of substantial responsibility
(the "Position");
WHEREAS, the Bank recognizes the substantial contribution Employee has
made to the Bank and will make in the Position, and wishes to protect Employee
in the Position for the period provided in this Agreement; and
NOW, THEREFORE, in consideration of the contribution of Employee, and
upon the other terms and conditions hereinafter provided, the parties hereto
agree as follows:
1. TERM OF AGREEMENT
The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of three (3) years
thereafter. During said term the Employee shall perform the normal and customary
duties associated with the Position. Commencing on the first anniversary date of
this Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the Bank ("Board") may extend this Agreement for an additional
year. The Board will conduct a performance evaluation of the Employee for
purposes of determining whether to extend this Agreement, and the results
thereof shall be included in the minutes of the Board's meeting. If Employee is
also a director then he or she shall abstain from any and all voting with
respect to the extension of the term of this Agreement. If at any time the Board
fails to extend this Agreement for an additional year, then this Agreement will
expire at the end of the then current term.
2. PAYMENTS TO EMPLOYEE UPON CHANGE IN CONTROL
(a) Upon the occurrence of a Change in Control (as herein defined) of
the Bank or the Company followed at any time during the term of this Agreement
by the voluntary or involuntary termination of Employee's employment, other than
Termination for Cause, as defined in Section 2(c), the provisions of Section 3
shall apply. Upon the occurrence of a Change in Control, Employee shall have the
right to elect to voluntarily terminate his employment at any time during the
term of this Agreement and receive the severance benefit set forth in Subsection
3(a)(i), (ii) or (iii) as applicable, unless such termination is because of
death, normal retirement, Termination for Cause or termination for Disability.
(b) A "Change in Control" of the Bank shall mean an event of a nature
that : (i) would be required to be reported in response to Item 1(a) of the
current report on Form 8-K, as in effect on the date hereof, pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii)
results in a Change in Control of the Bank or the Company within the meaning of
the Home Owners' Loan Act of 1933 and the rules and regulations promulgated by
the Office of Thrift Supervision (or its predecessor agency), as in effect on
the date hereof; or (iii) without limitation, such a change in control shall
1
<PAGE> 3
be deemed to have occurred at such time as (a) any "person" (as the term is used
in Section 13(d) and 14(d) of the Exchange Act) other than the Company is or
becomes a "beneficial owner" (as defined in Rule 13-d under the Exchange Act)
directly or indirectly, of securities of the Bank or the Company representing
25% or more of the Bank's or the Company's outstanding securities and any
securities purchased by the Bank's employee stock ownership plan and trust; or
(b) individuals who constitute the Board on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority thereof;
provided, however, that this subsection (b) shall not apply if the Incumbent
Board is replaced by the appointment by a Federal banking agency or conservator
or receiver for the Bank and provided further that any person becoming a
director subsequent to the date hereof whose election was approved by a vote of
at least two-thirds of the directors comprising the Incumbent Board, or whose
nomination for election by the Company's stockholders was approved by the same
Nominating Committee serving under an Incumbent Board, shall be, for purposes of
this clause (a), considered as though he were a member of the Incumbent Board;
or (c) a reorganization, merger, consolidation, sale of all or substantially all
the assets of the Bank or the Company or similar transaction occurs in which the
Bank or the Company is not the resulting entity and to which the Incumbent Board
does not consent; (d) a proxy statement soliciting proxies from stockholders of
the Bank, by someone other than the current management of the Bank, seeking
stockholder approval of a plan of reorganization, merger or consolidation of the
Company of the Bank or similar transaction with one or more corporations as a
result of which the outstanding shares of the class of securities then subject
to the plan or transaction are exchanged or converted into cash or property or
securities not issued by the Bank or the Company shall be distributed and the
requisite number of proxies approving such plan of reorganization, merger or
consolidation of the Company or the Bank are received and voted in favor of such
transaction; or (e) a tender offer is made for 25% or more of the voting
securities of the Bank and the shareholders owning beneficially or of record 25%
or more of the outstanding securities of the Bank have tendered or offered to
sell their shares pursuant to such tender offer and such tendered shares have
been accepted by the tender offeror.
(c) Subject to the provisions of Section 4, Employee shall not have the
right to receive termination benefits pursuant to Section 3 upon Termination for
Cause. The term "Termination for Cause" shall mean termination because of the
Employee's intentional failure to perform stated duties, personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, willful violation of any law, rule, regulation (other than
traffic violations or similar offenses) or final cease and desist order, or any
material breach of any material provision of this Agreement. In determining
incompetence, the acts or omissions shall be measured against standards
generally prevailing in the savings institution industry. Notwithstanding the
foregoing, Termination for Cause shall not be deemed to have occurred unless and
until there shall have been delivered to the Employee a copy of a resolution
duly adopted by the affirmative vote of not less than three-fourths of the
members of the Board at a meeting of the Board called and held for that purpose
(after reasonable notice in writing to Employee and an opportunity for him,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Employee was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. The
Employee shall not have the right to receive compensation or other benefits for
any period after Termination for Cause. Any stock options granted to Employee
under any stock option plan of the Bank, the Company or any subsidiary or
affiliate thereof shall not be exercised from the date of written notice to the
Employee set forth above, unless and until the matter is successfully resolved
in the Employee's favor, and such stock options shall become entirely null and
void upon the Employee's receipt of Notice of Termination for Cause.
3. TERMINATION
(a) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by the voluntary or involuntary termination of
the Employee's employment other than Termination for Cause, the Bank shall be
obligated to pay the Employee, or in the event of his subsequent
2
<PAGE> 4
death, his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay, a sum equal to the following:
(i) in the event that, during the remaining term of this
Agreement, the Employee's employment is involuntarily
terminated, the Employee shall be entitled to a sum equal to
two (2) times the Employee's Annual Compensation;
(ii) in the event that the Employee voluntarily terminates
employment following a loss of significant authority, reduction
in his annual compensation or benefits, or relocation of his
principal place of employment by more than thirty (30) miles
from its location immediately prior to the Change in Control,
the Employee shall be entitled to a sum equal to the amount to
which he would be entitled under Subsection 3(a)(i) above; and
(iii) in the event that the Employee is offered a position
following a Change in Control which is substantially comparable
in responsibility or authority, at substantially comparable
compensation and benefits, without relocation of his principal
place of employment or relocation by no greater than thirty
(30) miles from its location immediately prior to the Change in
Control, and the Employee fails or refuses to accept such
position, the Employee shall be entitled to one-half (1/2) of
the amount to which he would be entitled under Subsection
3(a)(i) above; and
(iv) in the event that the Employee is offered a position
following a Change in Control which is substantially comparable
in responsibility or authority, at substantially comparable
compensation and benefits, without relocation of his principal
place of employment or relocation by no greater than thirty
(30) miles from its location immediately prior to the Change in
Control, and the Employee accepts such position but then
voluntarily terminates his employment during the remaining term
of this Agreement, the Employee shall be entitled to a sum
equal to one-half (1/2) of the amount to which he would be
entitled under Subsection 3(a)(i) above, reduced by one-half of
the wages, salary, bonus and incentive compensation paid to the
Employee following the Change in Control,
provided, however, that in the event that the Employee voluntarily terminates
employment in accordance with Subsections 3(a)(ii), (iii), or (iv) above, and
within a one-year period of such termination becomes employed at a financial
institution or branch of a financial institution within fifty (50) miles of the
current main office of the Bank, any payments then due and owing hereunder shall
cease.
For purposes of this Agreement, "Annual Compensation" means and includes the
highest rate of monthly base salary multiplied by twelve (12) for the Employee's
service in the Position during the twelve (12) consecutive months ending
immediately before the Change in Control, which compensation is includable in
the gross income of the Employee for income tax purposes. In the event that the
Employee has not worked for the Bank in the Position for twelve (12) complete
months prior to the Change in Control, then the Employee's Annual Compensation
shall mean the average compensation, as set forth and defined above, for the
number of complete months ending immediately before the Change in Control,
multiplied by twelve (12). At the election of the Employer, any payments shall
be made in a lump sum or paid monthly over a period which would cause each
monthly installment to be approximately one-twelfth (1/12) of the Employee's
Annual Compensation. In the event no election is made within 30 days of the date
of termination of employment, payment to the Employee will be made in a lump sum
within 45 days of the date of termination of employment. Subject to the
foregoing provisions of this Subsection 3(a), such payments shall not be reduced
in the event the Employee obtains other employment following termination of
employment.
3
<PAGE> 5
(b) Upon the occurrence of a Change in Control of the Bank or the
Company followed at any time during the term of this Agreement by the Employee's
voluntary or involuntary termination of employment, other than for Termination
for Cause, the Bank shall cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank for the Employee prior to his severance. Such coverage and payments shall
cease upon expiration of six (6) months from the date of his termination.
(c) Upon the occurrence of a Change in Control, the Employee will have
such rights as specified in the Bank's or the Company's stock option plan or any
other employee benefit plan with respect to options and such other rights as may
have been granted to the Employee under such plans.
(d) Upon a Change in Control, the Employee will be entitled to the
benefits under the Bank's or the Company's Recognition and Retention Plan and
Trust Agreement for employees or any other such plan as may have been awarded to
Employee.
(e) Notwithstanding the preceding paragraphs of this Section 3, in no
event shall the aggregate payments or benefits to be made or afforded to
Employee under said paragraphs (the "Termination Benefits") constitute an
"excess parachute payment" under Section 280G of the Code or any successor
thereto, and in order to avoid such a result Termination Benefits will be
reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal to three (3) times
Employee's "base amount", as determined in accordance with said Section 280G.
The allocation of the reduction required hereby among Termination Benefits
provided by the preceding paragraphs of this Section 3 shall be determined by
the Employee.
4. NOTICE OF TERMINATION
(a) Any purported termination of this Agreement by the Bank or by
Employee shall be communicated by Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a
written notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Employee's
employment under the provision so indicated.
(b) "Date of Termination" shall mean (i) if Employee's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (ii) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall be
immediate). Except as set forth below in paragraph (c), in no event shall the
Date of Termination exceed 30 days from the date Notice of Termination is given.
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence of
a Change in Control and voluntary termination by the Employee in which case the
date of termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal there from having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Employee his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, base salary) and continue him
as a participant in all compensation, benefit and insurance plans in which he
was participating when the notice
4
<PAGE> 6
of dispute was given, until the earlier of 360 days from the date of the Notice
of Termination or the date upon which the dispute is finally resolved in
accordance with this Agreement. Amounts paid under this Section are in addition
to all other amounts due under this Agreement and shall not be offset against or
reduce any other amounts due under this Agreement. Notwithstanding the
foregoing, no compensation or benefits shall be paid to the Employee in the
event the Employee is Terminated for Cause. In the event that such Termination
for Cause is found to have been wrongful or such dispute is otherwise decided in
the Employee's favor, the Employee shall be entitled to receive all compensation
and benefits which accrued for up to a period of nine months after the
Termination for Cause.
5. SOURCE OF PAYMENTS
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank. The
Company, however, guarantees payment and provision of all amounts and benefits
due hereunder to Employee and, if such amounts and benefits due from the Bank
are not timely paid or provided by the Bank, such amounts and benefits shall be
paid or provided by the Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS
Except for the Employment Agreement entered into between the Bank and
the Executive on September 21, 1995 ("Prior Agreement") which remains in full
force and effect, this Agreement contains the entire understanding between the
parties hereto with respect to payment of severance under the circumstances
enumerated in Section 3 and supersedes any other prior employment or severance
agreement between the Bank and Employee except that any payments made under this
Agreement shall be reduced by payments made by the Bank or the Company to or on
behalf of the Executive under the Prior Agreement. This Agreement shall not
affect or operate to reduce any benefit or compensation inuring to Employee of a
kind elsewhere provided. No provision of this Agreement shall be interpreted to
mean that Employee is subject to receiving fewer benefits than those available
to him without reference to this Agreement.
7. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Employee, the Bank and their respective successors and assigns.
8. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
5
<PAGE> 7
9. REQUIRED PROVISIONS
(a) The Bank may terminate the Employee's employment at any time.
Employee shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 2(c).
(b) If the Employee is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) (36 USC 1818(e)(3)) or 8(g) (36 USC 1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, the Bank's and the Company's obligations
under this contract shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (i) pay the Employee all or part of the compensation
withheld while their contract obligations were suspended and (ii) reinstate (in
whole or in part) any of the obligations which were suspended.
(c) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (36 USC Section 1818(e)) or 8(g) (36 USC ss.1818(g)) of the Federal
Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery
and Enforcement Act of 1989, all obligations of the Bank and the Company under
this contract shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (36 USC
1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of
the Bank and the Company under this contract shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the
contracting parties.
(e) All obligations of the Bank under this contract shall be
terminated, except to the extent determined that continuation of the contract is
necessary for the continued operation of the Bank, (i) by the Director of the
Office of Thrift Supervision (the "OTS") or his or her designee at the time, the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) (36 USC Section 1823(c)) of the Federal Deposit Insurance Act, as
amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1989; or (ii) by the Director of the OTS at the time the OTS or his or her
designee approves a supervisory merger to resolve problems related to the
operations of the Bank or when the Bank is determined by the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(f) Any payments made to the Employee pursuant to this Agreement or
otherwise, are subject to and conditioned upon their compliance with 36 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
10. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
6
<PAGE> 8
11. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
12. GOVERNING LAW
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Illinois, unless
preempted by Federal law as now hereafter in effect.
13. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Employee pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank or the Company if Employee is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
14. INDEMNIFICATION
The Bank, or in lieu thereof, the Company, shall provide the Employee
(including his heirs, executors and administrators) with tail coverage under a
standard directors' and officers' liability insurance policy at its expense, or
in lieu thereof, shall indemnify the Employee (and his heirs, executors and
administrators) to the fullest extent permitted under federal law and as
provided in the Bank's Charter and Bylaws or, as to the Company, as permitted
under Delaware law, and as provided in the Company's Certificate of
Incorporation and Bylaws, against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Bank during the term of this Agreement (whether or not he
continues to be a director or officer at the time of incurring such expenses or
liabilities), such expenses and liabilities to include, but not be limited to,
judgments, court costs and attorneys' fees and the cost of reasonable
settlements.
15. SUCCESSOR TO THE BANK OR THE COMPANY
The Bank or the Company shall require any successor or assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise, to
all or substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place,
provided however that the foregoing shall not apply in the event of the
appointment of a conservator or receiver of the Bank by any federal banking
agency.
7
<PAGE> 9
16. SIGNATURES
IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement
to be executed by its duly authorized officer, and Employee has signed this
Agreement, as of the date first above written.
ATTEST: FIRST FEDERAL SAVINGS BANK
/s/ Patricia J. McCoy By: /s/ Nancy Sylvester
- ------------------------ ----------------------------
Secretary Authorized Signature
ATTEST: FIRST FINANCIAL BANCORP, INC.
/s/ Patricia J. McCoy By: /s/ Nancy Sylvester
- ------------------------ ----------------------------
Secretary Authorized Signature
WITNESS:
/s/ Patricia J. McCoy By: /s/ Steven C. Derr
- ------------------------ ----------------------------
Employee
8
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE> 2
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
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 of Illinois
Belvidere, Illinois, Inc.
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF EXPERTS AND COUNSEL
<PAGE> 2
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, 1997.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 629
<INT-BEARING-DEPOSITS> 4130
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,132
<INVESTMENTS-CARRYING> 864
<INVESTMENTS-MARKET> 835
<LOANS> 52,120
<ALLOWANCE> 531
<TOTAL-ASSETS> 82,682
<DEPOSITS> 67,550
<SHORT-TERM> 6,700
<LIABILITIES-OTHER> 801
<LONG-TERM> 0
0
0
<COMMON> 51
<OTHER-SE> 7,580
<TOTAL-LIABILITIES-AND-EQUITY> 82,862
<INTEREST-LOAN> 5,091
<INTEREST-INVEST> 1,247
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,338
<INTEREST-DEPOSIT> 2,997
<INTEREST-EXPENSE> 3,751
<INTEREST-INCOME-NET> 2,499
<LOAN-LOSSES> 88
<SECURITIES-GAINS> (171)
<EXPENSE-OTHER> 2,618
<INCOME-PRETAX> 172
<INCOME-PRE-EXTRAORDINARY> 172
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 124
<EPS-PRIMARY> .31
<EPS-DILUTED> .30
<YIELD-ACTUAL> 7.47
<LOANS-NON> 825
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 97
<ALLOWANCE-OPEN> 468
<CHARGE-OFFS> 27
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 531
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 531
</TABLE>
