FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------- -------
Commission File No. 0-20380
-------
FIRST FEDERAL BANCORP, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1341110
---- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
505 Market Street
Zanesville, Ohio 43701
----------------- -----
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (740) 588-2222
As of July 31, 2003, the latest practicable date, 3,218,695 shares of
the registrant's common stock, no par value, were issued and
outstanding.
Transitional Small Business Disclosure Format:
Yes [ ] No [X]
Page 1 of 12 Pages
1
FIRST FEDERAL BANCORP, INC.
INDEX
-----
PART I FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Controls and Procedures
PART II OTHER INFORMATION 10
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 11
Certifications 12
2
PART I
------
ITEM 1.
FINANCIAL INFORMATION
---------------------
First Federal Bancorp, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
At June 30 At Sept. 30
2003 2002
---- ----
ASSETS (unaudited)
-----------
<s> <c> <c>
Cash and amounts due from banks $ 6,822,534 $ 4,723,753
Interest-bearing demand deposits 1,500,000 1,500,000
------------ ------------
Cash and cash equivalents $ 8,322,534 $ 6,223,753
Interest-bearing deposits 1,596,000 698,000
Investment securities held to maturity
(Fair value - $9,081,422 in 6/03 and
$10,236,000 in 9/02) 9,034,364 10,110,104
Loans receivable, net of losses of
$1,591,000 and $1,688,000 202,167,778 195,525,552
Federal Home Loan Bank stock 4,735,700 4,591,300
Premises and equipment 6,768,910 7,163,805
Interest receivable 1,329,954 1,265,491
Other assets 1,159,998 873,305
------------ ------------
Total Assets $235,115,238 $226,451,310
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $164,253,314 $157,687,991
Short-term FHLB advances 7,385,000 2,778,000
Long-term debt 39,929,200 42,941,048
Interest payable 271,468 347,682
Other liabilities 1,563,875 1,402,318
------------ ------------
Total Liabilities $213,402,857 $205,157,039
------------ ------------
COMMITMENTS AND CONTINGENCIES
Stockholders' Equity
Preferred stock: $100 par value; 1,000,000 shares
authorized; no shares issued and outstanding
Common stock: no par value; 9,000,000 shares authorized;
3,303,400 shares issued; 3,218,695 shares outstanding at
6/03 and 3,263,165 at 9/02 $ 3,823,153 $ 3,823,153
Retained earnings 18,523,363 17,751,308
Treasury shares, 84,705 shares at 6/03 and 40,235 at 9/02, at cost (634,135) (280,190)
------------ ------------
Total Stockholders' Equity $ 21,712,381 $ 21,294,271
------------ ------------
Total Liabilities and Stockholders' Equity $235,115,238 $226,451,310
See Notes to the Condensed Consolidated Financial Statements.
3
First Federal Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
June 30 June 30
------- -------
2003 2002 2003 2002
---- ---- ---- ----
<s> <c> <c> <c> <c>
INTEREST INCOME
Loans receivable $ 3,348,724 $ 3,628,761 $10,162,855 $11,535,227
Investment securities 101,417 147,593 374,263 496,468
Deposits with financial institutions 13,264 11,189 31,672 38,876
----------- ----------- ----------- -----------
Total Interest Income 3,463,405 3,787,543 10,568,790 12,070,571
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 791,681 991,688 2,652,093 3,239,085
Borrowed money 514,316 679,968 1,559,320 2,142,103
----------- ----------- ----------- -----------
Total Interest Expense 1,305,997 1,671,656 4,211,413 5,381,188
----------- ----------- ----------- -----------
Net Interest Income 2,157,408 2,115,887 6,357,377 6,689,383
Provision for Loan Losses 186,281 16,457 255,652 221,491
----------- ----------- ----------- -----------
Net Interest Income After Provision
for Loan Losses 1,971,127 2,099,430 6,101,725 6,467,892
----------- ----------- ----------- -----------
INCOME
Service charges on deposit accounts 164,247 146,568 497,362 391,248
Net gains on loan sales 209,398 29,701 192,419 359,900
Other income 244,631 130,025 588,296 452,964
----------- ----------- ----------- -----------
Total other income 618,276 306,294 1,278,077 1,204,112
----------- ----------- ----------- -----------
EXPENSE
Salaries and employee benefits 1,022,198 659,298 2,489,486 2,238,698
Occupancy and equipment expense 265,176 231,661 769,993 694,246
Data processing expense 189,309 150,209 514,981 625,805
Deposit insurance expense 21,777 21,809 65,513 65,768
Advertising 113,525 94,484 295,246 267,771
Ohio franchise taxes 60,424 60,814 182,518 177,691
Other operating expenses 325,240 319,397 1,068,955 987,633
----------- ----------- ----------- -----------
Total other expenses 1,997,649 1,537,672 5,386,692 5,057,612
----------- ----------- ----------- -----------
Income Before Income Taxes 591,754 868,052 1,993,110 2,614,392
Income tax expense 203,285 304,704 686,708 916,350
----------- ----------- ----------- -----------
Net Income $ 388,469 $ 563,348 $ 1,306,402 $ 1,698,042
----------- ----------- ----------- -----------
EARNINGS PER SHARE
Basic $ .12 $ .17 $ .40 $ .53
----------- ----------- ----------- -----------
Diluted $ .12 $ .17 $ .39 $ .51
----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
Basic 3,218,695 3,245,989 3,237,021 3,180,299
----------- ----------- ----------- -----------
Diluted 3,333,350 3,376,424 3,353,731 3,348,350
----------- ----------- ----------- -----------
DIVIDENDS DECLARED PER SHARE $ .055 $ .050 $ .165 $ .14
----------- ----------- ----------- -----------
See Notes to the Condensed Consolidated Financial Statements.
4
First Federal Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
-----------------
June 30
-------
OPERATING ACTIVITIES: 2003 2002
---- ----
<s> <c> <c>
Net Income $ 1,306,402 $ 1,698,042
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 255,652 221,491
Depreciation and amortization 470,544 498,163
Investment securities accretion, net 145,050 147,525
FHLB stock dividend (144,400) (162,900)
Net change in
Mortgage loans held for sale 0 590,795
Other assets and other liabilities (129,320) (563,929)
----------- -----------
Net Cash Provided by Operating Activities 1,903,928 2,429,187
----------- -----------
INVESTING ACTIVITIES:
Net change in interest-bearing deposits (1,396,679) 598,000
Purchase of securities held to maturity (6,655,523) (5,227,002)
Proceeds from maturities of securities held to maturity 8,084,894 5,216,728
Net change in loans (7,543,884) 5,531,847
Purchase of premises and equipment (75,649) (900,843)
Proceeds from sales and payments received on real estate
owned and repossessed assets 646,006 417,161
----------- -----------
Net Cash (Used) Provided by Investing Activities (6,940,835) 5,635,891
----------- -----------
FINANCING ACTIVITIES:
Net change in
Deposits 6,565,322 8,478,104
Advance payments by borrowers for taxes and insurance (136,498) (113,537)
Short-term borrowings 4,607,000 (21,484,000)
Proceeds of long-term debt 8,000,000 11,000,000
Repayment of long-term debt (11,011,847) (6,011,159)
Cash dividends (531,271) (464,864)
Treasury shares purchased (360,548) (108,330)
Proceeds from exercise of options 3,530 393,127
----------- -----------
Net Cash (Used) Provided by Financing Activities 7,135,688 (8,310,659)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,098,781 (245,581)
----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,223,753 6,496,134
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,322,534 $ 6,250,553
----------- -----------
See Notes to the Condensed Consolidated Financial Statements.
5
FIRST FEDERAL BANCORP, INC.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
---------------------
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and the
instructions to Form 10-QSB. The Form 10-QSB does not include all the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
Only material changes in financial condition and results of operations are
discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The consolidated balance sheet as of September 30, 2002 has been derived
from the audited consolidated balance sheet as of that date.
In the opinion of management, the Consolidated Financial Statements contain
all adjustments necessary to present fairly the financial condition of
First Federal Bancorp, Inc. ("Bancorp"), as of June 30, 2003, and September
30, 2002, and the results of its operations for the three and nine months
ended June 30, 2003, and 2002, and its cash flow for the nine months ended
June, 2003 and 2002. The results of operations for the interim periods
reported herein are not necessarily indicative of results of operations to
be expected for the entire year.
2. Commitments
-----------
Outstanding commitments to originate mortgage loans and to sell mortgage
loans were $4,443,340 and $2,830,840 respectively, at June 30, 2003, and
$2,147,875 and $751,100 respectively at September 30, 2002.
3. Earnings Per Common Share
-------------------------
Basic earnings per share are 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.
4. Allowance for Losses on Loans
-----------------------------
Because some loans may not be repaid in full, an allowance for loan losses
is recorded. Increases to the allowance are recorded by a provision for
loan losses charged to expense. Estimating the risk of loss and the amount
of loss on any loan is necessarily subjective. Accordingly, the allowance
is maintained by management at a level considered adequate to cover
probable losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific
borrower situations, including their financial position and collateral
values, and other factors and estimates which are subject to change over
time. While management may periodically allocate portions of the allowance
for specific problem loan situations, the whole allowance is available for
any loan charge-offs that occur. A loan is charged-off by management as a
loss when deemed uncollectible, although collection efforts continue and
future recoveries may occur.
Loans are considered impaired if full principal or interest payments are
not anticipated. Impaired loans are carried at the present value of
expected cash flows discounted at the loan's effective interest rate or at
the fair value of the collateral if the loan is collateral dependent. A
portion of the allowance for loan losses may be allocated to impaired
loans.
Smaller-balance, homogeneous loans are evaluated for impairment in total.
Such loans include residential first mortgage loans secured by one- to
four-family residences, residential construction loans, and automobile,
home equity and second mortgage loans. Mortgage loans secured by other
properties are evaluated individually for impairment. When analysis of
borrower operating results and financial condition indicates that
underlying cash flows of the borrower's business are not adequate to meet
its debt service requirements, the loan is evaluated for impairment. Loans
are generally moved to nonaccrual status when 90 days or more past due.
These loans are often also considered impaired. Impaired loans, or
portions thereof, are charged-off when deemed uncollectible. The nature of
disclosures for impaired loans is considered generally comparable to prior
nonaccrual and renegotiated loans and nonperforming and past-due asset
disclosures. The Savings Bank had no loans meeting the definition of
impaired during the quarter ended June 30, 2003, and the year ended
September 30, 2002.
6
5. Stock Options
-------------
Bancorp accounts for its stock option plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the
underlying common stock on the grant date. The following table illustrates
the effect on net income and earnings per share if the company had applied
the fair value provisions of FASB Statement No. 123, Accounting for Stock
Based Compensation, to stock-based employee compensation.
Three Months Ended Nine Months Ended
------------------ -----------------
June 30 June 30
------- -------
2003 2002 2003 2002
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net Income, as reported $ 388,469 $ 563,348 $1,306,402 $1,698,042
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes 0 (52,333) (65,376) (110,005)
---------- ---------- ---------- ----------
Pro forma net income $ 388,469 $ 511,015 $1,241,026 $1,588,037
---------- ---------- ---------- ----------
Earnings Per Share:
Basic - as reported $ .12 $ .17 $ .40 $ .53
---------- ---------- ---------- ----------
Basic - pro forma $ .12 $ .16 $ .38 $ .50
---------- ---------- ---------- ----------
Diluted - as reported $ .12 $ .17 $ .39 $ .51
---------- ---------- ---------- ----------
Diluted - pro forma $ .12 $ .15 $ .37 $ .47
---------- ---------- ---------- ----------
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- -------
First Federal Bancorp, Inc. ("Bancorp"), is a savings and loan holding
company that wholly owns First Federal Savings Bank of Eastern Ohio (the
"Savings Bank"). The Savings Bank is engaged in the savings and loan
business primarily in Central and Eastern Ohio. The Savings Bank is a
member of the Federal Home Loan Bank ("FHLB") of Cincinnati, and the
deposit accounts in the Savings Bank are insured up to the applicable
limits by the Federal Deposit Insurance Corporation in the Savings
Association Insurance Fund ("SAIF").
Note Regarding Forward-Looking Statements
- -----------------------------------------
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Savings Bank's operations and
the Savings Bank's actual results could differ significantly from those
discussed in the forward-looking statements. Some of the factors that
could cause or contribute to such differences are discussed herein, but
also include changes in the economy and interest rates in the nation and
the Savings Bank's market area generally.
Some of the forward-looking statements included herein are the
statements regarding the following:
1. Management's determination of the amount of loan loss
allowance;
2. Management's belief that deposits will increase during the
remaining fiscal year 2003;
3. Management's anticipation that loan demand will remain stable,
but that the mortgage loan portfolio will decrease if lower
interest rates make adjustable mortgages, which are held in
portfolio rather than being sold, less attractive;
4. Management's anticipation that advances from the FHLB will
increase to fund loan originations;
5. Management's anticipation that adjustable-rate loans will
reprice lower in fiscal year 2003 if interest rates remain
relatively stable or decrease; and
6. Legislative changes with respect to the activities of financial
institutions.
7
Changes in Financial Condition from September 30, 2002 to June 30, 2003
- -----------------------------------------------------------------------
Total consolidated assets of Bancorp increased by $8.7 million, or 3.83%,
from $226.5 million at September 30, 2002, to $235.1 million at June 30,
2003. The increase is due primarily to an increase of $6.6 million in
loans receivable.
Total liquidity (consisting of cash and amounts due from depository
institutions, interest-bearing deposits in other banks, and investment
securities) was $19.0 million at June 30, 2003, which is an increase of
$1.9 million from September 30, 2002. The OTS requires savings
associations to maintain a sufficient level of investments in specified
types of liquid assets intended to provide a source of relatively liquid
funds upon which the Savings Bank may rely if necessary to fund deposit
withdrawals and other short-term funding needs. The liquidity of the
Savings Bank, defined as adjusted liquid assets divided by deposits (not
including jumbo certificates due in one year or less), was 8.20% at June
30, 2003 and 6.86% at September 30, 2002. Funds are available through FHLB
advances to meet the Savings Bank's liquidity needs.
The loans receivable balance increased $6.6 million for the nine-month
period. The increase in loans receivable was comprised of an increase in
residential real estate loans of $5.2 million, a $4.4 million increase in
non-residential real estate loans and commercial loans, and a $1.3 million
increase in home equity loans, offset by a $4.3 million decrease in
consumer automobile loans. The increase in residential loans was due to
the financing of a group of non-owner occupied real estate loans and
increased emphasis on financing residential variable rate loans. The
increase in non-residential and commercial loans is due to increased
emphasis by the Savings Bank on this type of lending. The decrease in
consumer auto loans was due to a decreased volume in loans originated due
to lack of demand.
As of June 30, 2003, the Savings Bank had long- and short-term borrowed
funds from the FHLB in the amount of $39.9 million and $7.4 million,
respectively, at a weighted average rate of 4.64%. Long-term FHLB advances
decreased $3.0 million from $42.9 million and short-term FHLB advances
increased $4.6 million from September 30, 2002. As of June 30, 2003, the
Savings Bank had a borrowing limit of $75.4 million at the FHLB. The limit
is collateralized by one-to-four and multi-family mortgage loans. The net
increase in FHLB advances of $1.6 million was due to the use of funds for
increased loan originations. Deposits increased by $6.6 million, or 4.16%,
from $157.7 million at September 30, 2002, to $164.3 million at June 30,
2003. The increase in savings was in various checking and larger minimum
balance savings accounts. Management believes that deposits will increase
during the remaining fiscal year 2003 but that it may be necessary to fund
the anticipated steady loan demand with further advances from the FHLB. No
assurance can be provided, however, that deposits will increase, that the
loan portfolio will decrease as lower interest rates make adjustable
mortgages, which are held in portfolio rather than being sold, less
attractive or that loan demand will remain stable. Deposit levels and loan
demand are affected by national, as well as local, interest rates, the
attractiveness of alternative investments and other national and local
economic circumstances.
The Board of Directors approved a stock repurchase program in June 2002 for
up to 5% of First Federal's outstanding common shares. There were 3,292,455
common shares outstanding at June 30, 2002. Shares may be purchased
periodically during the two years in the market and the number of shares
purchased and the price paid will depend upon availability, prevailing
market prices and other pertinent considerations. The repurchase program
will utilize liquid funds of First Federal Bancorp. As of June 30, 2003,
the company had repurchased 74,700 shares at an average price of $7.55 per
share pursuant to this program.
The Savings Bank is subject to regulatory capital requirements established
by the Office of Thrift Supervision ("OTS"). The Savings Bank's capital
ratios were as follows at June 30, 2003.
Amount Percent of
(In Thousands) Assets
-------------- ----------
<s> <c> <c>
Actual Tangible Capital $17,553 7.42%
Required Tangible Capital 3,548 1.50%
------- -----
Excess Tangible Capital $14,005 5.92%
Actual Core Capital $17,553 7.42%
Required Core Capital (1) 9,463 4.00%
------- -----
Excess Core Capital $ 8,090 3.42%
Actual Risk Based Capital $18,899 10.75%
Required Risk Based Capital 14,069 8.00%
------- -----
Excess Risk Based Capital $ 4,830 2.75%
8
<FN>
- --------------------
<F1> Although the general required minimum core capital is 4.00%, savings
associations that meet certain requirements may be permitted to
maintain minimum core capital of 3.00%.
</FN>
Management is not aware of any proposed regulations or recommendations by
the OTS that, if implemented, would have a material effect upon the Savings
Bank's capital.
Comparison of Operating Results for the Three- and Nine-Month Periods Ended
- ---------------------------------------------------------------------------
June 30, 2003, and 2002
- -----------------------
Net income for the three- and nine-month periods ended June 30, 2003 was
approximately $388,000 and $1.3 million compared to $563,000 and $1.7
million for the same periods ending June 30, 2002. The most significant
changes for the comparative three-month periods were the $41,500 increase
in net interest income, a $169,000 increase in the provision for loans
losses, the $312,000 decrease in noninterest income, a decrease of $101,000
in federal income tax expense, and the increase of $460,000 in noninterest
expenses. The most significant changes for the comparative nine-month
periods were the $332,000 decrease in net interest income, a $34,000
increase in the provision for loans losses, the $74,000 increase in
noninterest income, the increase of $329,000 in noninterest expenses, and a
decrease of $230,000 in federal income tax expense.
Net Interest Income
- -------------------
Net interest income before provision for loan losses increased $41,500 for
the comparative three-month periods and decreased $332,000 for the
comparative nine-month periods. Total interest income decreased $324,000
for the three-month period and $1.5 million for the nine-month period ended
June 30, 2003, compared to the same period in 2002, but was partially
offset by a decrease of interest expense of $366,000 and $1.2 million for
the same period. Total interest income decreased primarily due to a
decrease in the interest rate on loans receivable and the reduction in the
average loan portfolio balance outstanding. The average balance
outstanding of loans receivable decreased $2.1 million to $195.7 million at
June 2003, compared to $197.8 million at June 2002. Total interest expense
decreased due to the reduction in interest rates paid on deposits and due
to the shift in savings to lower yielding accounts from certificates since
June 30, 2002.
The majority of the loans in the Savings Bank's portfolio are adjustable-
rate mortgage loans whose interest rates fluctuate with market interest
rates. With the recent lowering of rates, many loan customers have chosen
fixed-rate loans over adjustable-rate loans. This has resulted in selling
more loans in the secondary market versus keeping the loans in the Savings
Bank's portfolio. If interest rates remain relatively stable or decrease
during fiscal year 2003, the adjustable-rate mortgage loan portfolio will
reprice at lower rates, due to the rapid decrease in interest rates, while
rising interest rates could result in upward adjustments to the interest
rates on those loans. No assurance can be provided with respect to which
direction interest rates will move. Interest rates are affected by
general, local and national economic conditions, the policies of various
regulatory authorities and other factors beyond the control of the Savings
Bank.
Nonperforming and Delinquent Loans and Allowance for Loan Losses
- ----------------------------------------------------------------
Total nonaccrual loans and accruing loans that are 90 days past due were
$474,000 at June 30, 2003, which represents .23% of total loans. This was
an increase of $39,000 from September 30, 2002.
There were no loans that are not currently classified as nonaccrual, 90
days past due or restructured but which may be so classified in the near
future because management has concerns as to the ability of the borrowers
to comply with repayment terms.
The Savings Bank maintains an allowance for losses on loans. The allowance
for losses on loans was $1,591,000 at June 30, 2003, compared to $1,688,000
at September 30, 2002. During the nine-month periods ended June 30, 2003,
and June 30, 2002, the Savings Bank recorded recoveries of $139,373 and
$36,929 and charge-offs of $492,384 and $220,810 respectively. The
provisions for loan losses during the nine-month periods ended June 30,
2003, and 2002, were $255,652 and $221,491 respectively.
Noninterest Income and Expense
- ------------------------------
The federal income tax provision decreased $101,416 for the three-month
period and $229,642 for the nine-month period ended June 30, 2003, compared
to the same period in 2002 due to a decrease in pre-tax net income for the
period.
Total noninterest income increased $312,000 for the three-month period and
$74,000 for the nine-month period ended June 30, 2003, compared to the same
period in 2002. There was an increase in the gain on the sale of loans of
$180,000 for the three-month period due to the increased originations of
loans for sale and a decrease of $167,000 for the nine-month period ended
June 30, 2003. Service charges on deposit accounts increased $17,000 and
9
$106,000 for the three- and nine-month periods ended June 30, 2003. Other
fee income increased $115,000 and $212,000 for the three- and nine-month
periods ended June 30, 2003.
Total noninterest expenses increased $460,000 for the quarter ended June
30, 2003, and increased $329,000 for the nine months ended June 30, 2003
compared to the same period in 2002. Salaries and benefits increased
$363,000 and $251,0000 primarily due to the $314,000 one-time additional
expense to fund the termination of the defined benefit plan. The remaining
increase was the result of normal pay increases offset by decreased
incentive pay in the three-and nine-month period ended June 2003 compared
to the three-and nine-month period ended June 30, 2002. Data processing
costs increased $39,000 for the three-month period ended June 30, 2003 and
decreased $111,000 for the nine-month period ended June 30, 2003 primarily
due to not having the additional costs associated with changing our core
processor in November 2001. Other operating expenses increased $6,000 and
$81,000 for the three- and nine-month periods ended June 30, 2003, due to
increased operating costs and professional fees.
Impact of Inflation and Changing Prices
- ---------------------------------------
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles
("GAAP"), which require the measurement of financial position and results
of operations in terms of historical dollars without considering changes in
relative purchasing power of money over time because of inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of the Savings Bank are monetary in nature. As a result,
interest rates have a more significant impact on the Savings Bank's
performance than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
Critical Accounting Policies
- ----------------------------
The accounting and reporting policies of the Savings Bank are in accordance
with accounting principles generally accepted in the United States and
conform to general practices within the banking industry. The Savings
Bank's significant accounting policies are described in detail in the notes
to the Bancorp's consolidated financial statements for the year ended
September 30, 2002. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. The financial position and results of operations
can be affected by these estimates and assumptions and are integral to the
understanding of reported results. Critical accounting policies are those
policies that management believes are the most important to the portrayal
of the Savings Bank's financial condition and results, and they require
management to make estimates that are difficult, subjective, or complex.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses provides coverage for probable losses
inherent in the Savings Bank's loan portfolio. Management evaluates the
adequacy of the allowance for loan losses each quarter based on changes, if
any, in underwriting activities, the loan portfolio composition (including
product mix and geographic, industry or customer-specific concentrations),
trends in loan performance, regulatory guidance and economic factors. This
evaluation is inherently subjective, as it requires the use of significant
management estimates. Many factors can affect management's estimates of
specific and expected losses, including volatility of default
probabilities, rating migrations, loss severity and economic and political
conditions. The allowance is increased through provisions charged to
operating earnings and reduced by net charge-offs.
The Savings Bank determines the amount of the allowance based on relative
risk characteristics of the loan portfolio. The allowance recorded for
commercial loans is based on reviews of individual credit relationships and
an analysis of the migration of commercial loans and actual loss
experience. The allowance recorded for homogeneous consumer loans is based
on an analysis of loan mix, risk characteristics of the portfolio, fraud
loss and bankruptcy experiences, and historical losses, adjusted for
current trends, for each homogeneous category or group of loans. The
allowance for loan losses relating to impaired loans is based on the loan's
observable market price, the collateral for certain collateral-dependent
loans, or the discounted cash flows using the loan's effective interest
rate.
Regardless of the extent of the Savings Bank's analysis of customer
performance, portfolio trends or risk management processes, certain
inherent but undetected losses are probable within the loan portfolio. This
is due to several factors including inherent delays in obtaining
information regarding a customer's financial condition or changes in their
unique business conditions, the judgmental nature of individual loan
evaluations, collateral assessments and the interpretation of economic
trends. Volatility of economic or customer-specific conditions affecting
the identification and estimation of losses for larger non-homogeneous
credits and the sensitivity of assumptions utilized to establish allowances
for homogenous groups of loans are among other factors. The Savings Bank
estimates a range of inherent losses related to the existence of these
exposures. The estimates are based upon
10
the Savings Bank's evaluation of imprecision risk associated with the
commercial and consumer allowance levels and the estimated impact of the
current economic environment.
Mortgage Servicing Rights
- -------------------------
Mortgage servicing rights ("MSRs") associated with loans originated and
sold, where servicing is retained, are capitalized and included in other
intangible assets in the consolidated balance sheet. The value of the
capitalized servicing rights represents the present value of the future
servicing fees arising from the right to service loans in the portfolio.
Critical accounting policies for MSRs relate to the initial valuation and
subsequent impairment tests. The methodology used to determine the
valuation of MSRs requires the development and use of a number of
estimates, including anticipated principal amortization and prepayments of
that principal balance. Events that may significantly affect the estimates
used are changes in interest rates, mortgage loan prepayment speeds and the
payment performance of the underlying loans. The carrying value of the MSRs
is periodically reviewed for impairment based on a determination of fair
value. For purposes of measuring impairment, the servicing rights are
compared to a valuation prepared based on a discounted cash flow
methodology, utilizing current prepayment speeds and discount rates.
Impairment, if any, is recognized through a valuation allowance and is
recorded as amortization of intangible assets.
Effect of Accounting Changes
- ----------------------------
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which amends SFAS No. 121 by
addressing business segments accounted for as a discontinued operation
under Accounting Principles Board Opinion No. 30. This Statement is
effective beginning July 1, 2002. The effect of this Statement on the
financial position and results of operations of the Company is not
material.
The FASB also recently issued SFAS No. 145 and SFAS No. 146. SFAS 145
covers debt extinguishments and leases, and made some minor technical
corrections. Gains and losses on extinguishments of debt, always treated
as an extraordinary item under a previous standard, will no longer be
considered extraordinary, except under very limited conditions. If a
capital lease is modified to an operating, it will be treated as a sale-
leaseback instead of a new lease. SFAS No. 146 covers accounting for costs
associated with exit or disposal activities, such as lease termination
costs or employee severance costs. The Statement replaces Emerging Issues
Task Force (EITF) 94-3, and is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. It requires these
costs to be recognized when they are incurred rather than at date of
commitment to an exit or disposal plan. The Company does not expect the
effect of adoption of these Standards to be material.
On November 25, 2002, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others (FIN No. 45) which expands on the accounting guidance of
Statements No. 5, 57 and 107 and incorporates without change the provisions
of FASB Interpretation No. 34, which is being superseded.
FIN No. 45, which is applicable to public and non-public entities, will
significantly change current practice in the accounting for, and disclosure
of, guarantees. Each guarantee meeting the characteristics described in FIN
No. 45 is to be recognized and initially measured at fair value, which will
be a change from current practice for most entities. In addition,
guarantors will be required to make significant new disclosures, even if
the likelihood of the guarantor making payments under the guarantee is
remote, which represents another change from current general practice.
FIN No. 45's disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002, while the
initial recognition and initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002.
The Company has changed its method of accounting and financial reporting
for standby letters of credit by adopting the provisions of FIN No. 45
effective January 1, 2003. There was no material impact of the adoption on
the financial statements.
ITEM 3. CONTROLS AND PROCEDURES.
- ---------------------------------
The registrant's principal executive officer and principal financial
officer have concluded, based upon their evaluation of the registrant's
disclosure controls and procedures, that the registrant's disclosure
controls and procedures were effective as of June 30, 2003. There was no
change in the registrant's internal control over financial reporting during
the quarter ended June 30, 2003, that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
11
PART II
OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
On June 20, 2003, Mark and Mindy Mumford filed a purported
class action in the United States District Court for the
Southern District of Ohio, Eastern Division, against First
Federal Savings Bank of Eastern Ohio ("First Federal"). The
complaint alleges violations of the Electronic Funds Transfer
Act and the Ohio Revised Code and breaches of various duties in
connection with an electronic transfer of funds from the
plaintiffs' account and returned check charges. The plaintiffs
seek unquantified damages, litigation costs and attorney fees
on behalf of all consumers who at any time after June 22, 2002,
had or will have a deposit account with First Federal to or
from which electronic transfers are or can be made and from
which an unauthorized electronic transfer was or may be made.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable
ITEM 5. OTHER INFORMATION
-----------------
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Exhibit 31.1 Rule 13a-14(a)/15b Certification
Exhibit 31.2 Rule 13a-14(a)/15b Certification
Exhibit 32.1 Certification Pursuant to18 U.S.C. Section 1350 -
President and Chief Executive Officer
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350 -
Chief Financial Officer
Exhibit 99.1 Safe Harbor Under the Private Securities
Litigation Reform Act of 1995
Form 8-K was filed on April 24,2003 relating to a press release
on April 23, 2003.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 2003 By: /s/ J. William Plummer
-----------------------
J. William Plummer
President
Date: August 13, 2003 By: /s/ Connie Ayres LaPlante
--------------------------
Connie Ayres LaPlante
Chief Financial Officer
12