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, 2004
[ ] 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, 2004, the latest practicable date, 3,286,221 shares of the
registrant's common stock, no par value, were issued and outstanding.
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
----- -----
Transitional Small Business Disclosure Format:
Yes No X
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Page 1 of 13 Pages
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 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 12
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 13
2
PART I
------
ITEM 1. FINANCIAL INFORMATION
---------------------
First Federal Bancorp, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
At June 30 At Sept. 30
2004 2003
---------- -----------
(unaudited)
<s> <c> <c>
ASSETS
Cash and amounts due from banks $ 6,446,063 $ 3,123,216
Interest-bearing demand deposits 1,500,000 1,500,000
------------ ------------
Cash and cash equivalents $ 7,946,063 $ 4,623,216
Interest-bearing deposits 2,693,000 2,193,000
Investment securities held to maturity
(Fair value - $7,854,000 in 6/04 and
$8,498,000 in 9/03) 7,914,299 8,470,324
Loans receivable, net of losses of
$1,827,000 and $1,509,000 225,856,836 205,475,995
Federal Home Loan Bank stock 4,928,100 4,783,400
Premises and equipment 6,759,465 7,113,867
Interest receivable 1,142,620 1,148,254
Other assets 956,994 719,596
------------ ------------
Total Assets $258,197,377 $234,527,652
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $178,775,217 $164,447,049
Short-term FHLB advances 15,877,000 6,360,000
Long-term debt 38,912,553 39,925,131
Interest payable 251,856 273,951
Other liabilities 1,467,761 1,443,641
------------ ------------
Total Liabilities $235,284,387 $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; 3,286,221
shares outstanding at 6/04 and
3,260,681 at 9/03 $ 3,823,153 3,823,153
Retained earnings 19,222,937 18,584,939
Treasury shares, 17,179 shares at
6/04 and 42,719 at 9/03, at cost (133,100) (330,212)
------------ ------------
Total Stockholders' Equity $ 22,912,990 $ 22,077,880
------------ ------------
Total Liabilities and
Stockholders' Equity $258,197,377 $234,527,652
============ ============
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
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
<s> <c> <c> <c> <c>
INTEREST INCOME
Loans receivable $3,277,731 $3,348,724 $ 9,780,808 $10,162,855
Investment securities 85,197 101,417 263,116 374,263
Deposits with financial institutions 16,899 13,264 46,766 31,672
---------- ---------- ----------- -----------
Total Interest Income 3,379,827 3,463,405 10,090,690 10,568,790
---------- ---------- ----------- -----------
INTEREST EXPENSE
Deposits 752,899 791,681 2,183,674 2,652,093
Borrowed money 497,375 514,316 1,542,366 1,559,320
---------- ---------- ----------- -----------
Total Interest Expense 1,250,274 1,305,997 3,726,040 4,211,413
---------- ---------- ----------- -----------
Net Interest Income 2,129,553 2,157,408 6,364,650 6,357,377
Provision for Loan Losses 228,884 186,281 522,380 255,652
---------- ---------- ----------- -----------
Net Interest Income After Provision
for Loan Losses 1,900,669 1,971,127 5,842,270 6,101,725
---------- ---------- ----------- -----------
INCOME
Service charges on deposit accounts 207,870 164,247 573,816 497,362
Net gains on loan sales 23,328 209,398 239,960 192,419
Other income 179,812 244,631 574,670 588,296
---------- ---------- ----------- -----------
Total other income 411,010 618,276 1,388,446 1,278,077
---------- ---------- ----------- -----------
EXPENSE
Salaries and employee benefits 732,669 1,022,198 2,259,040 2,489,486
Occupancy and equipment expense 249,526 265,176 796,815 769,993
Data processing expense 171,761 189,309 506,801 514,981
Deposit insurance expense 24,473 21,777 68,285 65,513
Advertising 72,565 113,525 272,783 295,246
Ohio franchise taxes 60,325 60,424 180,636 182,518
Other operating expenses 366,608 325,240 1,137,503 1,068,955
---------- ---------- ----------- -----------
Total other expenses 1,677,927 1,997,649 5,221,863 5,386,692
---------- ---------- ----------- -----------
Income Before Income Taxes 633,752 591,754 2,008,853 1,993,110
Income tax expense 218,617 203,285 693,364 686,708
---------- ---------- ----------- -----------
Net Income $ 415,135 $ 388,469 $ 1,315,489 $ 1,306,402
========== ========== =========== ===========
EARNINGS PER SHARE
Basic $ .13 $ .12 $ .40 $ .40
---------- ---------- ----------- -----------
Diluted $ .12 $ .12 $ .39 $ .39
---------- ---------- ----------- -----------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
Basic 3,286,214 3,218,695 3,271,363 3,237,021
---------- ---------- ----------- -----------
Diluted 3,376,195 3,333,350 3,371,231 3,353,731
---------- ---------- ----------- -----------
DIVIDENDS DECLARED PER SHARE $ .060 $ .055 $ .180 $ .165
---------- ---------- ----------- -----------
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
-----------------
2004 2003
---- ----
<s> <c> <c>
OPERATING ACTIVITIES:
Net Income $ 1,315,489 $ 1,306,402
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 522,380 255,652
Depreciation and amortization 468,227 470,544
Investment securities accretion, net 112,775 145,050
FHLB stock dividend (144,700) (144,400)
Net change in
Mortgage loans held for sale 0 0
Other assets and other liabilities (117,109) (129,320)
------------ ------------
Net Cash Provided by Operating Activities 2,157,062 1,903,928
------------ ------------
INVESTING ACTIVITIES:
Net change in interest-bearing deposits (500,000) (1,396,679)
Purchase of securities held to maturity (4,745,393) (6,655,523)
Proceeds from maturities of securities held to maturity 5,188,643 8,084,894
Net change in loans (21,059,767) (7,543,884)
Purchase of premises and equipment (113,825) (75,649)
Proceeds from sales and payments received on real
estate owned and repossessed assets 156,548 646,006
------------ ------------
Net Cash (Used) Provided by Investing Activities (21,073,794) (6,940,835)
------------ ------------
FINANCING ACTIVITIES:
Net change in
Deposits 14,328,168 6,565,322
Advance payments by borrowers for taxes and insurance (112,630) (136,498)
Short-term borrowings 9,517,000 4,607,000
Proceeds of long-term debt 0 8,000,000
Repayment of long-term debt (1,012,578) (11,011,847)
Cash dividends (590,033) (531,271)
Treasury Shares Purchased (4,505) (360,548)
Proceeds from exercise of options 114,157 3,530
------------ ------------
Net Cash (Used) Provided by Financing Activities 22,239,579 7,135,688
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,322,847 2,098,781
------------ ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 4,623,216 6,223,753
============ ============
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,946,063 $ 8,322,534
============ ============
See Notes to the Condensed 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 June 30, 2004, and September
30, 2003, and the results of its operations for the three and nine months
ended June 30, 2004, and 2003, and its cash flows for the nine months ended
June, 2004 and 2003. Those adjustments consist only of normal recurring
adjustments. 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 $2,672,725 and $259,500, respectively, at June 30, 2004 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 Nine Months Ended
June 30 June 30
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
<s> <c> <c> <c> <c>
Weighted-average common shares outstanding (basic) 3,286,214 3,218,695 3,271,363 3,237,021
Dilutive effect of assumed exercise of stock options 89,981 114,655 99,868 116,710
--------- --------- --------- ---------
Weighted-average common shares outstanding (dilutive) 3,376,195 3,333,350 3,371,231 3,353,731
========= ========= ========= =========
Options to purchase 50,885 and 49,485 shares of common stock with
respective weighted-average exercise prices of $9.91 and $9.66 were
outstanding at June 30, 2004 and 2003, respectively, but were excluded from
the computation of common share equivalents for the three and nine- 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.
6
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, 2004 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 Nine Months Ended
June 30 June 30
-------------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net Income, as reported $415,135 $388,469 $1,315,489 $1,306,402
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes 5,619 0 16,858 65,376
-------- -------- ---------- ----------
Pro forma net income $409,516 $388,469 $1,298,631 $1,241,026
======== ======== ========== ==========
Earnings Per Share:
Basic - as reported $ .13 $ .12 $ .40 $ .40
-------- -------- ---------- ----------
Basic - pro forma $ .12 $ .12 $ .40 $ .38
-------- -------- ---------- ----------
Diluted - as reported $ .12 $ .12 $ .39 $ .39
-------- -------- ---------- ----------
Diluted - pro forma $ .12 $ .12 $ .39 $ .37
-------- -------- ---------- ----------
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.
7
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; and
2. 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 June 30, 2004
- -----------------------------------------------------------------------
Total consolidated assets of Bancorp increased by $23.7 million, or 10.09%,
from $234.5 million at September 30, 2003, to $258.2 million at June 30,
2004. The increase is due primarily to an increase of $20.4 million in
loans receivable and a $3.3 million increase in total liquidity.
Total liquidity (consisting of cash and amounts due from depository
institutions, interest-bearing deposits in other banks, and investment
securities) was $18.6 million at June 30, 2004, which is an increase of
$3.3 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 7.01% at June 30, 2004 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 $20.4 million for the nine-month
period. The increase in loans receivable was comprised of an increase in
residential real estate loans of $10.0 million, a $5.0 million increase in
consumer automobile loans, a $2.5 million increase in non-residential real
estate loans and commercial loans, and a $2.9 million increase in home
equity loans and other consumer 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. The increase in non-
residential and commercial loans is due to increased emphasis by the
Savings Bank on this type of lending. The increase in consumer auto loans
was due to lower interest rates offered.
As of June 30, 2004, the Savings Bank had long- and short-term borrowed
funds from the FHLB in the amount of $38.9 million and $15.9 million,
respectively, at a weighted average rate of 3.97%. Long-term FHLB advances
decreased $1.0 million from $39.9 million and short-term FHLB advances
increased $9.5 million from September 30, 2003. As of June 30, 2004, the
Savings Bank had a borrowing limit of $83.5 million at the FHLB. The
advances are collateralized by one-to-four and multi-family mortgage loans.
The net increase in FHLB advances of $8.5 million was due to the growth of
the loan portfolio exceeding the growth in deposits. Deposits increased by
$14.3 million, or 8.71%, from $164.4 million at September 30, 2003, to
$178.8 million at June 30, 2004. The increase in savings was comprised of
an $11.6 million increase in jumbo deposits, which are $100,000 or more per
account, from national sources, a $ 3.9 million increase in various
checking accounts and a decrease of $.6 million in certificate accounts.
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, 2004.
Amount Percent of
(In Thousands) Assets
-------------- ----------
<s> <c> <c>
Actual Tangible Capital $18,119 7.02%
Required Tangible Capital 3,869 1.50%
------- -----
Excess Tangible Capital $14,250 5.52%
Actual Core Capital $18,119 7.02%
Required Core Capital (1) 10,319 4.00%
------- -----
Excess Core Capital $ 7,800 3.02%
Actual Risk Based Capital $19,639 10.14%
Required Risk Based Capital 15,501 8.00%
------- -----
Excess Risk Based Capital $ 4,138 2.14%
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, 2004, and 2003
- -----------------------
Net Interest Income
- -------------------
Net interest income before provision for loan losses decreased $27,900 for
the comparative three-month periods and increased $7,300 for the
comparative nine-month periods. Total interest income decreased $83,000 for
the three-month period and $478,000 for the nine-month period ended June
30, 2004, compared to the same periods in 2003, but was partially offset by
a decrease of interest expense of $55,700 and $485,000 for the same
periods. Total interest income decreased primarily due to a decrease in the
interest rate on loans receivable. 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, 2003.
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 lower interest rates, many loan customers have chosen fixed-
rate loans over adjustable-rate loans. This has resulted in selling more
loans in the secondary market rather than 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, 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
$1.1 million at June 30, 2004, which represents .55% of total loans. This
was an increase of $297,000 from June 30, 2003.
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 $1,827,000 at June 30, 2004, compared to $1,509,000
at September 30, 2003. During the nine-month periods ended June 30, 2004,
and June 30, 2003, the Savings Bank recorded recoveries of $73,332 and
$139,373 and charge-offs of $277,711 and $492,384 respectively. The
provisions for loan losses during the nine-month periods ended June 30,
2004, and 2003, were $522,380 and $255,652 respectively.
Noninterest Income and Expense
- ------------------------------
The federal income tax provision increased $15,332 for the three-month
period and $6,656 for the nine-month period ended June 30, 2004, compared
to the same period in 2003 due to an increase in pre-tax net income for the
period.
Total noninterest income decreased $207,000 for the three-month period and
increased $110,000 for the nine-month period ended June 30, 2004, compared
to the same period in 2003. There was a decrease in the gain on the sale of
loans of $186,000 for the three-month period due to the decreased
originations of loans for sale and an increase of $47,500 for the nine-
month period ended June 30, 2004, primarily due to the recording of the
recovery of mortgage servicing rights impairment on loans that were sold in
the secondary market. Service charges on deposit accounts and other fee
income increased $44,000 and $76,000 for the three- and nine-month periods
ended June 30, 2004. Other income decreased $65,000 and $13,000 for the
three- and nine-month periods ended June 30, 2004. In the June 2003 quarter
the sale of a former office building resulting in a gain on sale of
$50,000. No such sale occurred in 2004.
Total noninterest expenses decreased $320,000 for the quarter ended June
30, 2004, and decreased $165,000 for the nine months ended June 30, 2004
compared to the same period in 2003. Salaries and benefits decreased
$290,000 and $230,0000 primarily due to not having to record the $314,000
one-time additional expense to fund the termination of the defined benefit
plan that was needed in 2003. The decrease was offset by an increase in
salaries as a result of normal pay increases in the three-and nine-month
period ended June 2004 compared to the three-and
9
nine-month period ended June 30, 2003. Data processing costs decreased
$17,000 and $8,000 for the three- and nine-month periods ended June 30,
2004. Other operating expenses increased $41,000 and $69,000 for the three-
and nine-month periods ended June 30, 2004, due to increased costs for
professional fees and increased cost of supplies for the new free
checking/savings programs.
Off-Balance Sheet Arrangement
- -----------------------------
Bancorp had no off-balance sheet arrangements as of June 30, 2004 that have
or are reasonably likely to have a current or future effect on Bancorp's
financial condition, changes in financial condition, revenue or expenses,
results of operations, liquidity, capital expenditures or capital resources
that is material to investors.
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
10
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 annual report on Form 10-KSB
for the fiscal year ended 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.
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, 2004. There was no
change in the registrant's internal control over financial reporting during
the quarter ended June 30, 2004, 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 alleged
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. First Federal and the Mumfords have
executed a settlement agreement, which has been presented to the
court for stipulation and order of dismissal. The terms of the
settlement are not material to Bancorp.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF
------------------------------------------------------------
EQUITY SECURITIES
-----------------
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
--------------------------------
(a) Exhibits
Exhibit 2 Agreement and Plan of Merger Agreement and Plan of Merger
is incorporated herein by
reference to Exhibit 2 to the
Report on Form 8-K filed by
Bancorp with the Securities
and Exchange Commission (the
"SEC") on August 5, 2004.
Exhibit 3.1 Articles of Incorporation The Articles of Incorporation
of First Federal Bancorp, Inc.
of First Federal Bancorp, 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 of The Amendment to the Articles
Incorporation of First Federal of Incorporation filed as
Bancorp, Inc. of Bancorp, Exhibit 4a(1) to the 1994 S-8,
is incorporated herein by
reference.
Exhibit 3.3 Amended and Restated Code of The Code of Regulations of
Regulations of First Federal filed as Exhibit A to Bancorp's
Bancorp, Inc. Bancorp Definitive Proxy Statement,
filed with the SEC on January
7, 2003, is incorporated herein
by reference.
Exhibit 10 Agreement Not to Compete Agreement Not to Compete
Between First Federal Bancorp, Between First Federal Bancorp,
Inc. First Federal Savings Inc. First Federal Savings Bank
Bank of Eastern Ohio and of Eastern Ohio and J. William
J. William Plummer Plummer effective May 19, 2004 is
hereby attached as Exhibit 10.
12
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
(b) Reports on Form 8-K
A Form 8-K was filed on July 28, 2004 relating to a press release on July
27, 2004, reporting quarterly earnings.
A Form 8-K was filed on August 5, 2004 relating to a press release on
August 3, 2004 announcing execution of a merger agreement.
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 12, 2004 By: /s/ J. William Plummer
----------------------------
J. William Plummer
President
Date: August 12, 2004 By: /s/ Connie Ayres LaPlante
----------------------------
Connie Ayres LaPlante
Chief Financial Officer