FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 0-20380
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FIRST FEDERAL BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1341110
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
505 Market Street
Zanesville, Ohio 43701
- --------------------- ----------
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (740) 588-2222
As of January 31, 2004, the latest practicable date, 3,263,181 shares of the
registrant's common stock, no par value, were issued and outstanding.
Transitional Small Business Disclosure Format:
Yes No X
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1
FIRST FEDERAL BANCORP, INC.
INDEX
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PART I FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to 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
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ITEM 1. FINANCIAL INFORMATION
---------------------
First Federal Bancorp, Inc.
CONSOLIDATED BALANCE SHEETS
At Dec. 31 At Sept. 30
2003 2003
---------- -----------
(unaudited)
<s> <c> <c>
ASSETS
Cash and amounts due from banks $ 4,948,139 $ 3,123,216
Interest-bearing demand deposits 1,500,000 1,500,000
------------ ------------
Cash and cash equivalents $ 6,448,139 $ 4,623,216
Interest-bearing deposits 2,193,000 2,193,000
Investment securities held to maturity
(Fair value - $8,483,000 in 12/03 and
$8,498,000 in 9/03) 8,466,586 8,470,324
Loans receivable, net of losses of
$1,611,000 and $1,509,000 212,033,699 205,475,995
Federal Home Loan Bank stock 4,831,600 4,783,400
Premises and equipment 6,998,886 7,113,867
Interest receivable 1,163,314 1,148,254
Other assets 739,172 719,596
------------ ------------
Total Assets $242,874,396 $234,527,652
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $165,895,950 $164,447,049
Short-term FHLB advances 12,775,000 6,360,000
Long-term debt 39,921,001 39,925,131
Interest payable 265,140 273,951
Other liabilities 1,753,591 1,443,641
------------ ------------
Total Liabilities $220,610,682 $212,449,772
============ ============
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; 3,261,481
shares outstanding at 12/03 and 3,260,681 at 9/03 $ 3,823,153 $ 3,823,153
Retained earnings 18,764,452 18,584,939
Treasury shares, 41,919 shares
at 12/03 and 42,719 at 9/03, at cost (323,891) (330,212)
------------ ------------
Total Stockholders' Equity $ 22,263,714 $ 22,077,880
------------ ------------
Total Liabilities and Stockholders' Equity $242,874,396 $234,527,652
============ ============
See Notes to the Consolidated Financial Statements.
3
First Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
December 31
------------------------
2003 2002
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(unaudited)
<s> <c> <c>
INTEREST INCOME
Loans receivable $3,194,643 $3,448,031
Investment securities 92,225 146,413
Deposits with financial institutions 14,236 10,072
---------- ----------
Total Interest Income 3,301,104 3,604,516
---------- ----------
INTEREST EXPENSE
Deposits 715,906 978,268
Borrowed money 534,009 553,773
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Total Interest Expense 1,249,915 1,532,041
---------- ----------
Net Interest Income 2,051,189 2,072,475
Provision for Loan Losses 223,333 75,522
---------- ----------
Net Interest Income After Provision
for Loan Losses 1,827,856 1,996,953
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NONINTEREST INCOME
Service charges on deposit accounts 198,130 173,774
Net gains (losses) on loan sales 94,812 (50,906)
Other income 221,133 183,581
---------- ----------
Total Noninterest Income 514,075 306,449
---------- ----------
NONINTEREST EXPENSES
Salaries and employee benefits 792,741 751,695
Occupancy and equipment expense 282,855 248,542
Data processing expense 172,103 159,594
Deposit insurance expense 21,599 21,849
Advertising 90,539 76,449
Ohio franchise taxes 60,261 61,094
Other operating expenses 345,290 330,778
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Total Noninterest Expenses 1,765,388 1,650,001
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Income Before Income Taxes 576,543 653,401
Income tax expense 199,212 225,614
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Net Income $ 377,331 $ 427,787
========== ==========
EARNINGS PER SHARE
Basic $ .12 $ .13
---------- ----------
Diluted $ .11 $ .13
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WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
Basic 3,260,864 3,263,201
---------- ----------
Diluted 3,366,832 3,386,133
---------- ----------
DIVIDENDS DECLARED PER SHARE $ .06 $ .055
---------- ----------
See Notes to the Consolidated Financial Statements.
4
First Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
December 31
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2003 2002
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(unaudited)
<s> <c> <c>
OPERATING ACTIVITIES:
Net Income $ 377,331 $ 427,787
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 223,333 75,522
Depreciation and amortization 157,836 147,885
Investment securities accretion, net 50,569 39,369
FHLB stock dividend (48,200) (52,000)
Net change in
Mortgage loans held for sale 0 0
Other assets and other liabilities 132,327 201,886
----------- -----------
Net Cash Provided by Operating Activities 893,196 840,449
----------- -----------
INVESTING ACTIVITIES:
Net change in interest-bearing deposits 0 0
Purchase of securities held to maturity (1,577,988) (1,123,010)
Proceeds from maturities of securities held to maturity 1,531,156 1,130,675
Net change in loans (6,839,487) 2,304,086
Purchase of premises and equipment (42,854) (63,619)
Proceeds from sales and payments received on real estate
owned and repossessed assets 58,450 156,278
----------- -----------
Net Cash Provided (Used) by Investing Activities (6,870,723) 2,404,410
----------- -----------
FINANCING ACTIVITIES:
Net change in
Deposits 1,448,901 3,488,740
Advance payments by borrowers for taxes and insurance 134,174 143,757
Short-term borrowings 6,415,000 (1,128,000)
Proceeds of long-term debt 0 0
Repayment of long-term debt (4,130) (5,003,890)
Cash dividends (195,689) (179,580)
Treasury shares purchased 0 (120,450)
Proceeds from exercise of options 4,194 2,508
----------- -----------
Net Cash Provided (Used) by Financing Activities 7,802,450 (2,796,915)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,824,923 447,944
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,623,216 6,223,753
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,448,139 $ 6,671,697
=========== ===========
See Notes to the Consolidated Financial Statements.
5
FIRST FEDERAL BANCORP, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
---------------------
The accompanying unaudited 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, 2003 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 December 31, 2003, and September
30, 2003, and the results of its operations for the three months ended
December 31, 2003, and 2002, and its cash flows for the three months ended
December, 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 $713,905 and $111,920, respectively, at December 31, 2003 and
$1,910,662 and $719,743 respectively at September 30, 2003.
3. Earnings Per Common Share
-------------------------
Basic earnings per share is based upon the weighted-average number of common
shares outstanding during the period. Diluted earnings per common share
include the dilutive effect of additional potential common shares issuable
under stock option plans. The computations are as follows:
Three Months Ended
December 31
----------------------
2003 2002
---- ----
<s> <c> <c>
Weighted-average common shares outstanding (basic) 3,260,864 3,263,201
Dilutive effect of assumed exercise of stock options 105,968 122,932
--------- ---------
Weighted-average common shares outstanding (dilutive) 3,366,832 3,386,133
========= =========
Options to purchase 51,055 and 49,607 shares of common stock with respective
weighted-average exercise prices of $9.91 and $9.66 were outstanding at
December 31, 2003 and 2002, respectively, but were excluded from the
computation of common share equivalents for the three month periods then
ended, because the exercise prices were greater than the average market
price of the common shares.
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
6
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 December 31, 2003 and the year ended September 30, 2003.
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
December 30
--------------------
2003 2002
---- ----
<s> <c> <c>
Net Income, as reported $377,331 $427,787
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes 6,120 4,787
-------- --------
Pro forma net income $371,211 $423,000
======== ========
Earnings Per Share:
Basic - as reported $ .12 $ .13
-------- --------
Basic - pro forma $ .11 $ .13
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Diluted - as reported $ .11 $ .13
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Diluted - pro forma $ .11 $ .12
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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:
7
1. Management's determination of the amount of loan loss allowance;
2. Management's belief that deposits will increase during fiscal
year 2004;
3. Management's anticipation that loan demand will remain stable,
but that the mortgage loan portfolio may decrease as 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
decrease as savings increase during fiscal year 2004;
5. Management's anticipation that adjustable-rate loans will
reprice lower in fiscal year 2004 if interest rates remain
relatively stable or decrease;
Changes in Financial Condition from September 30, 2003 to December 31, 2003
- ---------------------------------------------------------------------------
Total consolidated assets of Bancorp increased by $8.4 million, or 3.56%,
from $234.5 million at September 30, 2003, to $242.9 million at December 31,
2003. The increase is due primarily to an increase of $6.5 million in loans
receivable and an increase of $1.8 million in cash and cash equivalents.
Total liquidity (consisting of cash and amounts due from depository
institutions, interest-bearing deposits in other banks, and investment
securities) was $17.1 million at December 31, 2003, which is an increase of
$1.8 million from September 30, 2003. 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 5.08% at December 31, 2003 and 5.13% at
September 30, 2003. Funds are available through FHLB advances to meet the
Savings Bank's liquidity needs.
The loans receivable balance increased $6.5 million for the three-month
period. The increase in loans receivable was comprised of an increase in
residential real estate loans of $6.3 million, a $1.6 million decrease in
consumer automobile loans, a $900,000 increase in non-residential real
estate loans and commercial loans and a $900,000 increase in consumer line
of credit loans. The increase in residential loans was due to the general
increase in the market on rates charged for fixed-rate loans. This resulted
in fewer loans sold in the secondary market as more customers opted for
variable rate loans. As part of the Saving Bank's interest rate management
variable rate loans are kept in the loan portfolio. The decrease in consumer
auto loans was due to a decreased volume in loans originated due to lack of
demand and competition with the auto manufacturers' zero percent interest
programs.
As of December 31, 2003, the Savings Bank had long- and short-term borrowed
funds from the FHLB in the amount of $39.9 million and $12.8 million,
respectively, at a weighted average rate of 4.22%. Long-term FHLB advances
remained stable at $39.9 million and short-term FHLB advances increased $6.4
million from September 30, 2003. As of December 31, 2003, the Savings Bank
had a borrowing limit of $78.8 million at the FHLB. The limit is
collateralized by one-to-four and multi-family mortgage loans. The net
increase in FHLB advances of $6.4 million was due to the growth of the loan
portfolio exceeding the growth in deposits. Deposits increased by $1.5
million, or .88%, from $164.4 million at September 30, 2003, to $165.9
million at December 31, 2003. The increase in savings was due to a $1.2
million increase in various checking accounts and a $300,000 increase in
certificate accounts. Management believes that deposits will increase during
fiscal year 2004 and that FHLB advances will decrease as savings balances
increase. No assurance can be provided, however, that deposits will increase
and that the loan portfolio and loan demand may decline. 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 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 December 31, 2003.
Amount Percent of
(In Thousands) Assets
-------------- ----------
<s> <c> <c>
Actual Tangible Capital $17,710 7.31%
Required Tangible Capital 3,632 1.50%
------- -----
Excess Tangible Capital $14,078 5.81%
Actual Core Capital $17,710 7.31%
Required Core Capital (1) 9,685 4.00%
------- -----
Excess Core Capital $ 8,025 3.31%
Actual Risk Based Capital $19,075 10.51%
Required Risk Based Capital 14,517 8.00%
------- -----
Excess Risk Based Capital $ 4,558 2.51%
<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>
8
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-Month Periods Ended
- -----------------------------------------------------------------
December 31, 2003, and 2002
- ---------------------------
Net Interest Income
- -------------------
Net interest income before provision for loan losses decreased $21,000 for
the comparative three-month periods. Total interest income decreased
$303,000 for the three-month period ended December 31, 2003, compared to the
same period in 2002, but was partially offset by a decrease of interest
expense of $282,000. Total interest income decreased primarily due to a
decrease in the interest rate earned on loans receivable and the reduction
in auto-loan portfolio balance. Total interest expense decreased due to the
reduction in interest rates paid on deposits and FHLB advances since
December 31, 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 lower 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 2004, the adjustable-rate mortgage loan portfolio will reprice
at lower 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
$806,000 at December 31, 2003, which represents .38% of total loans. This
was an increase of $159,000 from December 31, 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 $1,611,000 at December 31, 2003, compared to
$1,619,000 at December 31, 2002. During the three-month periods ended
December 31, 2003, and December 31, 2002, the Savings Bank recorded
recoveries of $33,000 and $77,000 and charge-offs of $154,000 and $222,000,
respectively. The provisions for loan losses during the three-month periods
ended December 31, 2003, and 2002, were $223,300 and $75,500 respectively.
Noninterest Income and Expense
- ------------------------------
The federal income tax provision decreased $26,400 for the three-month
period ended December 31, 2003, compared to the same period in 2002 due to a
decrease in pre-tax net income for the period.
Total noninterest income increased $208,000 for the three-month period ended
December 31, 2003, compared to the same period in 2002. There was an
increase in the gain on the sale of loans of $146,000 for the three-month
period ended December 31, 2003, due to the recording of $98,000 for the
reversal of prior impairment of mortgage servicing rights. Most refinances
in the low rate environment are completed and therefore fewer loans are
paying-off, which has increased the value of the remaining mortgage
servicing rights yet to be amortized. Service charges increased $24,000 due
to a bounce-guard protection program for checking accounts, and other income
increased $38,000 for the three-month period ended December 31, 2003 due to
increase servicing fees on previous loans sold and prepayment penalties and
miscellaneous fees on auto loans.
Total noninterest expenses increased $115,000 for the quarter ended December
31, 2003, compared to the same period in 2002. Salaries and benefits
increased $41,000 as a result of increased accrual for incentive pay, normal
pay increases and the addition of staff for a loan production office in the
three-month period ended December 2003 compared to the three-month period
ended December 31, 2002. Data processing costs increased $12,500 due to
increased costs at the service bureau and the additional services of on-line
banking, check imaging and free bill-pay. Occupancy expense increased
$34,000 due to the remodeling of a current branch and the additional
operational expenses of a new loan production office in the Columbus Ohio
area. Other operating expenses increased $14,000 due to additional
consulting, accounting and legal fees for the three-month period ended
December 31, 2003.
Off-Balance Sheet Arrangement
- -----------------------------
Bancorp had no off-balance sheet arrangements as of December 31, 2003.
9
Critical Accounting Policies
- ----------------------------
The accounting and reporting policies of Bancorp are in accordance with
accounting principles generally accepted in the United States and conform to
general practices within the banking industry. Bancorp's significant
accounting policies are described in detail in the notes to Bancorp's
consolidated financial statements for the year ended September 30, 2003. 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 Bancorp'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 First Federal'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.
First Federal 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 First Federal'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. First Federal estimates a range of inherent
losses related to the existence of these exposures. The estimates are based
upon First Federal'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
- ----------------------------
There were no additional disclosures since the 10-KSB dated September 30,
2003.
Impact of Inflation and Changing Prices
- ---------------------------------------
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles
("GAAP"), which require the measurement of financial position and results of
operations in terms of historical dollars without considering changes in
relative purchasing power of money over time because of inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of First Federal are monetary in nature. As a result, interest
rates have a more significant impact on First Federal's performance than the
effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods
and services.
10
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 December 31, 2003. There was no change in
the registrant's internal control over financial reporting during the
quarter ended December 31, 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
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ITEM 1. LEGAL PROCEEDINGS
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Not applicable
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER OF
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PURCHASES OF EQUITY SECURITIES
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Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not applicable
ITEM 5. OTHER INFORMATION
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Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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Exhibit 3.1 Articles of Incorporation The Articles of Incorporation
of First Federal Bancorp, of First Federal Bancorp,
Inc. Inc. ("Bancorp"), filed as
Exhibit 4a(1) to Bancorp's
Registration Statement on
Form S-8 filed with the
Securities and Exchange
Commission ("SEC") on
February 1, 1994 (the
"1994 S-8"), are incorporated
herein by reference.
Exhibit 3.2 Amendment to the Articles The Amendment to the Articles
of Incorporation of First of Incorporation of Bancorp,
Federal Bancorp, Inc. filed as Exhibit 4a(1) to the
1994 S-8, is incorporated
herein by reference.
Exhibit 3.3 Amended and Restated Code The Code of Regulations of
of Regulations of First Bancorp filed as Exhibit A
Federal Bancorp, Inc. to Bancorp's Definitive Proxy
Statement, filed with the SEC
on January 7, 2003, is
incorporated herein by
reference.
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 November 20, 2003 relating to a press release
on November 20, 2003.
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SIGNATURES
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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: February 13, 2004 By: /s/ J. William Plummer
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J. William Plummer
President
Date: February 13, 2004 By: /s/ Connie Ayres LaPlante
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Connie Ayres LaPlante
Chief Financial Officer
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